Does Canada Have a Comparative Disadvantage in Doing R&D?
A recently released report from the C.D.Howe Institute decries the low levels of spending on R&D in Canada:
The study demonstrates that a different set of tax policies would almost surely induce more spending on R&D, and that such policies would probably be efficient. But maybe, just maybe, Canada should get out of the R&D business and try to free-ride as much as possible on the R&D carried out elsewhere. And even if Canada is unable to free ride on the R&D of others, maybe we should import rather than produce our R&D.
Whatever your reaction to this, please do not give me the tired song about how Canada needs to support R&D to maintain its competitive edge and to keep our educational system at the forefront of knowledge. We don't need a number one educational system in Canada; we have almost always recommended that our top grad students study at the best schools in the US — there's nothing wrong with out-sourcing that, too.
Addendum: I am all in favour of tax policies that promote efficiency, and if such policies happen to promote more R&D spending, so be it. My objection above is to the notion that more R&D spending in Canada is, per se, a good thing.
Despite [various forms of gubmnt] support, Canada ranks low in aggregate R&D intensity — that is, R&D as a percentage of gross domestic product. On this measure, business R&D in Canada in 2004 was 1.07 percent — below the average of 1.53 percent for OECD member countries and well below that of other Group of Seven major industrialized economies except Italy. Canada also compares poorly to Sweden, for example, which provides few direct subsidies for R&D (but has a very competitive production tax regime): business R&D as a percentage of GDP in Sweden is about double that in Canada.Why is this a problem? Why do anything? Canada also ranks low in the production of oranges. And relative to total GDP, Canada also ranks low in manufacturing. In these areas, we recognize, acknowledge, and accept that Canada has a comparative advantage in the production of other things. Why don't we do the same thing with R&D?
What to do?
The study demonstrates that a different set of tax policies would almost surely induce more spending on R&D, and that such policies would probably be efficient. But maybe, just maybe, Canada should get out of the R&D business and try to free-ride as much as possible on the R&D carried out elsewhere. And even if Canada is unable to free ride on the R&D of others, maybe we should import rather than produce our R&D.
Whatever your reaction to this, please do not give me the tired song about how Canada needs to support R&D to maintain its competitive edge and to keep our educational system at the forefront of knowledge. We don't need a number one educational system in Canada; we have almost always recommended that our top grad students study at the best schools in the US — there's nothing wrong with out-sourcing that, too.
Addendum: I am all in favour of tax policies that promote efficiency, and if such policies happen to promote more R&D spending, so be it. My objection above is to the notion that more R&D spending in Canada is, per se, a good thing.
Category: Economics, Education, International Trade Posted on
Tuesday, October 24, 2006 at 12:16am
<< main
If tax is adjusted for spending more on R&D, firms will respond to chase the tax credits, not necessarily to do more R&D, by simply designating more activities as R&D (re-drafting drawings, counting minor changes to anything, attending courses, reading books, etc.,). To correct for this, more tax inspections are required. Are they R&D related?
For years the UK has been credited with 'too much R&D spent on defence', but clsoe examination of the data reveals that included in defence R&D are all manufacturing spends on its nuclear weapons (mainly to 'bury' the data in a grand total).
For these reasons I completely agree with your assessment of Canadian obsessions with 'more R&D' - it is a media and politcians' mirage not worth chasing.