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SR&ED and the Canadian Productivity Paradox

How does Canada stack up against the rest of the world?

Raising living standards and improving productivity are central goals for countries around the world. Amid the current grim international financial forecasts, governments’ strategies for fueling both short and long term growth will be critical in determining the economic well-being of their citizens. What is the Canandian government doing to help boost its rankings in this area, and how does Canada compare to the world at large?

Canada: Slow Progress

In Canada, the Organization for Economic Co-operation and Development (OECD) found that although the economy has remained comparatively robust through the global financial turbulence, Canadian productivity is showing slow growth (Financial Post).

The most recent available figures, displayed below, illustrate this reality. Canadian GDP per capita, a common measure of productivity and material well-being, is stagnating. Estimates for this year’s production and income are consistent with this trend and represent a key long-term issue for Canada’s economy. Therein lies the Canadian productivity paradox – in spite of Canada’s advantages and enormous potential, economic performance lags.

Production and Income, Economic Growth, and R&D figures for the Canadian economy

Measuring Success: Key Indicators

Improvements in productivity, a reflection in part of spending on research and development that sparks business innovation, occur through competitive pressures and effective government incentives. As a result, it is essential for the Canadian government to support sound funding programs that bolster productivity and sustain competitive advantages for Canada as it contends on the world stage (Financial Post). The OECD review holds that “government support to R&D should focus more on sharpening incentives and raising performance.”

SR&ED: Too Complex a Process?

In Canada, the Scientific Research and Experimental Development (SR&ED) program is the largest federal tax incentive that provides indirect funding for research and development work. The SR&ED process – from application to the administration of funding – can be complex, and recent reviews of this tax incentive call for simplification. This high level of complexity may mean that direct funding could more effectively increase productivity:

According to the OECD, “…the Jenkins panel recommended streamlining SR&ED, notably for small- and medium-sized firms…The government could help through co-investment funds in which private partners make the investment decisions. Following the recommendations of the Jenkins panel to leverage greater private capital and expertise by means of such co-funding, the 2012 budget boosted direct funding to the venture capital market significantly. However, the risk remains that these funds will remain forever dependent on public support” (OECD).

Despite the shift to more direct funding, the federal SR&ED program remains an important incentive that encourages Research and Development (R&D) in Canada. It offers over $4 billion dollars annually to small-, medium-, and large-sized firms that meet it’s complex criteria, which makes it amongst the most generous in the world. Combined with the generous provincial programs companies can recover up to 82% of their qualifying R&D expenses.

Looking Forward: Shifting the Productivity Paradox

Still, despite the combination of extensive indirect funding and Canada’s resource endowments, social capital, and human capital, Canadian innovation in boosting product quality and variety has lagged behind the average amongst OECD countries. The graphs below, which compare Canada’s productivity and R&D expenditure as a percentage of GDP to that of the United States, illustrate a poor Canadian performance in these respective areas.

Gross expenditure on research and development as a percentage of GDP for Canada and the United States

As the Canada moves forward, improving the current rate of efficiency in producing output is necessary if Canada wants to remain competitive in global markets. Overturning the productivity paradox requires breaking new ground on the productivity frontier. Adding value to goods and services through innovation would give Canadian companies an edge in accomplishing this task. This would ultimately drive income growth for Canadians.

The Merits of SR&ED and “Innovation” Funding

In order to overcome the productivity paradox, it is imperative that Canadian businesses not only innovate, but that they are able to do so by efficiently accessing incentives that the Scientific Research and Experimental Development program provides. Increasing participation by extending funds to all deserving parties could offer exponential returns to Canada as a result of informational spillover and public dissemination of new knowledge.

Technologies can be improved; methods can be streamlined; and discoveries can be made. Having Canadian businesses leverage SR&ED incentives could translate into an increased rate of productivity growth, a competitive portfolio of products and services, and a better educated and technologically enabled country. The benefits of state aid for R&D are real, and they exist for enterprises and individuals alike.

 

Can you solve the Productivity Paradox? Post your tips on our LinkedIn Group or leave a comment below!

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