HESA

Higher Education Strategy Associates

Losing Count

Stop me if you’ve heard this story before: Canada is not sufficiently innovative, and part of the reason is that we don’t spend enough on research.  It’s not that we don’t spend enough on *public* research; adjusted for GDP, we actually do above-average on that.  What pulls us down is in international comparisons corporate R & D.  Our narrow-minded, short-sighted, resource-obsessed business class spends far less on R&D than its equivalents in most other country, and that is what gives us such a low overall R&D spend.

Familiar?  It should be; it’s been standard cant in Canada for a couple of decades at least.  And it gets used to argue for two very specific things.  There’s the argument which basically says “look, if private R&D is terrible, we’ll just have to make it up on the public side, won’t we?”, and where else to spend but on university research?  (Universities Canada used to make this argument quite a bit, but not so much lately AFAIK).  Then there’s the argument that says: well, since under the linear model of innovation in which public “R” leads to private “D”, the problem must be that public “R” is too theoretical on insufficiently focussed on areas of national industrial strength – and what we really need to do is make research more applied/translational/whatever.

But what if that story is wrong?

Last year, the Impact Centre at the University of Toronto put out a little-noticed paper called Losing Count. It noted a major problem related to the collection and reporting of R&D.  Starting in 1997, Statistics Canada adopted a definition of Research and Development which aligned with Canada’s tax laws.  This makes perfect sense from a reporting point of view, because it reduces the reporting burden on big corporations (they can use the same data twice).  But from a measuring Canada against other countries perspective, it’s not so good, because it means the Canadian statistics are different from those in the rest of the world.

Specifically, Canada since 1997 has under-reported Business R&D in two ways.  First, it does not report any R&D in the social sciences and humanities.  All those other OECD countries are reporting research in business, financial management, psychology, information science, etc., but we are not.  Second, work that develops or improves materials, products and processes, but that draws on existing knowledge rather than new scientific or new technological advances is not counted as Research & Development in Canada but is counted elsewhere.

How big a problem is this?  Well, one problem is that literally every time the Canada Revenue Agency tightens eligibility for tax credits, reported business R&D falls.  As this has happened a number of times over the past two decades, it may well be that our declining business R&D figures are actually a function of stricter tax laws than they are of changing business activity.  As for the difference in absolute amount being measured, it’s impossible to say.  The authors of the study took a sample of ten companies (which they recognize as not being scientific in any way) and determined that if the broader, more OECD-consistent definition were used, spending on R&D salaries would rise by a factor of three.  If that were true across the board (it probably isn’t) it would shift Canada from being one of the world’s weakest business R&D performers to one of the best.

Still, even if this particular result is not generalizable, the study remains valuable for two reasons.  First, it underlines how tough it is for statistical agencies to capture data on something as fluid and amorphous as research and development in a sensible, simple way.  And second, precisely because data is so hard to collect, international comparisons are extremely hard to make.  National data can be off by a very wide factor simply because statistical agencies make slightly different decisions about to collect data efficiently.

The takeaway is this:  the next time someone tells a story about how innovation is being throttled by lack of business spending on research (compared to say, the US or Sweden), ask them if they’ve read Losing Ground.  Because while this study isn’t the last word on the subject, it poses questions that no one even vaguely serious about playing in the Innovation space should be able to ignore.

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3 Responses to Losing Count

  1. You’ve got the wrong title in the final paragraph: Losing ground -> Losing count

  2. Dane says:

    It is not correct that all other OECD countries report R&D related to social sciences and humanities; in their own words: “A large number of countries collect data on R&D activities in the business sector for NSE only” OECD Main S&T Indicators 2016, Vol. 2, pg. 94.

  3. Bert van den Berg says:

    1) Innovation depends on many things, one of which is knowledge (generated by R&D), another is talent (also improved through R&D). Things that innovation depends on (even more) include understanding of buyers’ needs, availability of and access to suppliers, access to skilled investors, links to marketing value chains. This is why innovation marketplaces make more sense to talk about than Research and Development or Research and Innovation.

    2) While tightening SR&ED (etc.) access may be a limiting factor to some companies, the exit of major R&D performers like Nortel & the reduction of BB’s scale have to count as (more) substantial factors.

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