Fact of the Week: Every Dollar Canadian Firms Invested in R&D Between 2000 and 2012 Added Another 33 Cents to the Rest of the Economy

Caleb Foote August 26, 2019
August 26, 2019

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Source: Myeongwan Kim and John Lester, “R&D Spillovers in Canadian Industry: Results from a New Micro Database,” Centre for the Study of Living Standards RR2019-02, August 2019.

Commentary: When a business makes a new discovery, it cannot capture all the profits for itself, because competitors can replicate the discovery or use it to pursue their own new research opportunities. This positive spillover effect doesn’t provide an incentive for businesses to invest in R&D, but it helps the rest of society, which is one reason why governments subsidize R&D investments. A new study used firm-level data for Canadian businesses between 2000 and 2012 to estimate the economic impact of these positive spillovers, finding that they amount to an additional 33 percent return on investment in R&D, on average. This windfall for society comes above and beyond the profits that firms themselves make from their innovations.

Large firms have a much larger proportion of spillovers at 52 percent, compared to only 19 percent for small firms. Yet small Canadian firms receive subsidies that are more than double large firms’ subsidies per dollar invested into R&D, which incentivizes small firms to invest in more marginal products. However, the study finds that large firms still create larger positive spillovers after controlling for the rate of subsidies.