State of the Nation 2008

3. Foundations for Innovation — Elements of the Innovation System

3.5 Resources for Research and Development

A commonly used measure of a country's innovation performance is the share of national R&D expenditures (gross domestic expenditures on R&D GERD) relative to the size of that country's GDP. While this is a somewhat crude measure, it is useful as a benchmark of a country's overall international standing. This measure has been used as a target by various national science, technology and innovation strategies around the world.

In 2006, R&D expenditures accounted for some 1.9 percent of Canada's GDP. This share was around 18 percent higher than the share in 1996. Over the same period, the average share of R&D expenditures in the G-7 grew from around 2 percent to around 2.2 percent. Figure 2 shows that while Canada is catching up, R&D as a share of Canadian GDP still lags behind the G-7 average, and this share is substantially behind the share in leading innovative countries such as Finland, South Korea and the U.S.17 Increasing Canada's research intensity and fostering an innovative economy will require concerted and coordinated efforts by the three principal Canadian R&D performing sectors: the private sector, the higher education sector and government. Figure 3 shows the growth of R&D spending by each of these sectors from 1997-2007.

Figure 2, on national R&D expenditures as a percentage of GDP, shows that Finland and Korea both had very strong levels of R&D/GDP growth from 1996-2006. In both of these countries, business-performed R&D as a share of GDP grew considerably over this period, contributing 75 percent and 80 percent, respectively, of the total national increase in R&D spending. In the U.S., growth in business R&D contributed to 68 percent of the total growth in R&D over this period. The story was similar in Germany, another G-7 country, where growth in business R&D accounted for 76 percent of total national R&D growth from 1996-2006. In Canada, growth in business R&D was responsible for just over half of the growth in total R&D over this period: business performance of R&D grew from just under $8 billion in 1996 to just over $14 billion in 2006.18 However, Canadian university R&D had the fastest growth rate over this period.

While R&D is used as a proxy for innovation, it does not tell the whole story. According to Statistics Canada, in 2005, 34 percent of manufacturing companies with 20 or more employees in Canada performed R&D, while more than 60 percent engaged in innovation.19 This suggests that many companies are bringing value to the market by using knowledge that does not necessarily come from R&D. Innovation strategies, therefore, should take account of knowledge gained through learning by doing and using, and through contacts and collaboration outside the firm.

17 OECD, Main Science and Technology Indicators, 2008/1.

18 Statistics Canada, CANSIM table 358-0001, Gross domestic expenditures on research and development, by science type and by funder and performer sector, Downloaded December 2008.

19 Statistics Canada, Survey of innovation, logging and manufacturing industries, percentage of innovative plants, occasional, CANSIM table 358-0062; Statistics Canada, Custom data request, Business Register enterprise counts 20 or more employees December 1997 to 2007 and Research and Development in Canadian Industry, 2008 frozen base with firms performing R&D counts to 2005.