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Expert Panel Consultation Paper: Section 1

Why a Review?

Innovation by business is a vital part of maintaining a high standard of living in Canada and building Canadian sources of global advantage. The Government of Canada plays an important role in fostering an economic climate that encourages business innovation, including by providing substantial funding through tax incentives and direct program support to enhance business research and development (R&D). Despite the high level of federal support, Canada continues to lag behind other countries in business R&D expenditures (see Figure 1), and this is believed to be a significant factor in contributing to the country's weak productivity growth. Recognizing this, Budget 2010 announced a comprehensive review of federal support to R&D in order to maximize its contribution to innovation and to economic opportunities for business.

By providing background information and putting forward specific consultation questions, this paper is intended to assist public consultations undertaken by the Expert Panel on R&D. The Panel has launched a request for submissions from all interested parties through its website (www.rdreview-examenrd.ca). The deadline for submissions is February 18, 2011.

Figure 1: Business Expenditures on R&D (BERD), 20081
  GDP ($US billions, current PPP) BERD ($US billions, current PPP) BERD Intensity (BERD as % of GDP)
Canada 1,300.2 13.0 1.00%
US 14,369.4 289.1 2.01%
OECD 40,145.9 653.1 1.63%
G7 29,112.3 535.2 1.84%

Background

Defining R&D

The Frascati Manual (2002) is the basis for the OECD definition of R&D, which is said to encompass three activities: "Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view. Applied research is also original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective. Experimental development is systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed" (p. 30).

Observers have suggested that these definitions of R&D need to be updated to capture the changing nature of the Canadian economy, given the rise of the "new economy," the shift from manufacturing to service industries, and activity in the resources and energy sectors. See the text box on page 5 for the OECD definition of innovation.

Canadians enjoy an enviable standard of living, but sustaining our prosperity will depend on maintaining economic competitiveness in an increasingly challenging global context. The relaxation of trade barriers, significant advances in telecommunications, and improved transportation networks and infrastructure have created world markets for skilled workers, ideas, investment, and materials, thereby increasing competition and requiring businesses to develop new strategies to survive and prosper. Companies are re-organizing production across national boundaries and into global value chains, thus taking maximum advantage of opportunities to penetrate new growth markets. Emerging economies — notably Brazil, China, India and Russia — are leveraging their labour, resources, and creativity to challenge traditional economic leaders.

Concurrent with these developments, significant advances in areas such as advanced materials, health, environmental sciences, and information and communications technologies (ICT) are creating major opportunities for innovative applications.

Canada's ability to prosper in this context, filled with opportunity and challenge, rests on a capacity to improve productivity and business innovation — "new or better ways of doing valued things."2

However, there is some evidence to suggest that Canada is not well positioned to be an innovation leader. In-depth analyses of the Canadian economy's weak performance in business innovation and productivity growth indicate that Canadian BERD intensity — a key indicator of innovation activity — is lagging significantly behind comparator countries.3

The Canadian economy's relatively weak BERD intensity in turn influences the country's rate of productivity growth. Reflective of a long-standing problem, Canada's annual growth rate of labour productivity averaged 0.6 percent for the 2000-2009 period, which is less than half the average of 1.5 percent among member countries of the Organisation for Economic Cooperation and Development (OECD).4 In addition, relative labour productivity in Canada's business sector has fallen from approximately 93 percent of the United States (US) level in 1984 to approximately 71 percent in 2009 — a quarter-century of relative decline that cannot be explained by temporary or one-off factors.5

At the same time, as noted in Budget 2010:

The Government of Canada provides substantial support for research and development (R&D) in the education, private and not-for-profit sectors, estimated at more than $7 billion in 2009. This includes about $4 billion in direct federal support for R&D undertaken by post-secondary researchers, the private sector, not-for-profit organizations and other research performers… In addition, Canada's Scientific Research and Experimental Development Tax Incentive Program is the single largest federal program supporting business R&D in Canada, providing over $3 billion in tax assistance in 2009.6

To ensure that federal funding is yielding maximum benefits for Canadians, Budget 2010 set out a commitment to conduct a review of federal support for R&D, aimed at improving its contribution to innovation and to economic opportunities for businesses.

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The Panel's mandate

On October 14, 2010, the Government of Canada, following its Budget 2010 commitment, established an independent expert panel to lead the Review of Federal Support to R&D. Building on the foundational work of the Council of Canadian Academies (CCA) and the Science, Technology and Innovation Council (STIC), the Panel has been asked to oversee an assessment of key programs within the government's portfolio of initiatives in support of R&D. Specifically, the Panel has been asked to review three types of federal R&D initiatives:

  • Tax incentive programs such as the Scientific Research and Experimental Development (SR&ED) program.
  • Programs that support innovative business R&D, including:
    1. general support (e.g., the Industrial Research Assistance Program);
    2. sector support (e.g., the Strategic Aerospace and Defence Initiative); and
    3. regional support (e.g., the Atlantic Innovation Fund).
  • Programs that support business-focused R&D through federal granting councils and other departments and agencies, including basic research performed in universities and colleges that fosters support to business R&D (e.g., the Centres of Excellence for Commercialization and Research).

The Panel will also have the latitude to consider other federal initiatives relevant to the Review's scope. However, the Review will not include research conducted in federal laboratories to fulfill their regulatory mandates or basic research conducted in institutions of higher education that is not intended to foster support to business R&D.

Three primary questions

Reviewing federal initiatives

Consistent with its mandate, the Panel's activities may focus on any and all federal programs that have an impact on business or commercially oriented R&D. To that end, the Panel may conduct in-depth reviews of specific programs, including consideration of how they fit within the larger innovation context, which is discussed in Section 2. In undertaking this work, the Panel will take account of the important contribution of the provinces and territories to research and innovation.

The Panel has been asked to provide advice related to the following questions:

  • What federal initiatives are most effective in increasing business R&D and facilitating commercially relevant R&D partnerships?
  • Is the current mix and design of tax incentives and direct support for business R&D and business-focused R&D appropriate?
  • What, if any, gaps are evident in the current suite of programming, and what might be done to fill these gaps?

In addition, the Panel's mandate specifies that its recommendations not result in an increase or decrease to the overall level of funding required for federal R&D initiatives.

The Panel's approach

In order to provide recommendations to the government by October 2011, the Panel intends to undertake the following activities:

  • a review of previous reports related to the Panel's mandate;
  • focused research, where appropriate;
  • an assessment of specific federal initiatives that support business and commercially oriented R&D; and
  • consultations with stakeholders, including the use of tools such as a potential web survey to seek views.

For further information about the topics covered in Section 1, please refer to the Reference Documents that will posted on the Panel's website from time to time, starting in January 2011 (www.rdreview-examenrd.ca).