Canada’s Business R&D Is One-Fifth the Size-Adjusted Global Average in Advanced Industries, New ITIF Report Reveals

WASHINGTON—Canada is lagging far behind the United States and the rest of the world in business spending on research and development (R&D) advanced sectors—five times less than the global average relative to the size of its economy—according to a new report from the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.

“Advanced, traded sectors are critical to national innovation and competitiveness, and a key indicator of strength in those sectors is the amount firms invest in R&D to produce new innovations,” said Trelysa Long, a policy analyst at ITIF who co-authored the report. “Canada has long lagged behind the United States in business R&D, even when adjusting for the size of its economy. But even more surprising is that Canada’s business R&D in these sectors is just 22 percent of the size-adjusted global average and 11 percent of the size-adjusted U.S. level.”

Using the EU Industrial R&D Investment Scoreboard, a dataset covering 90 percent of the world’s private sector R&D spending, ITIF compared U.S. and Canadian-headquartered firms’ R&D spending in nine industries that are strategically important because they are globally traded advanced-technology sectors: aerospace and defense, electronic and electrical equipment, general industrials, industrial engineering, pharmaceutical and biotechnology, software and computer services, technology and hardware equipment, alternative energy, and automobiles and parts. The report also compares U.S. and Canadian firms across all nonadvanced traded and nontraded sectors.

The report finds that in 2021, U.S. firms in advanced sectors invested approximately 103 times more in R&D than their Canadian counterparts—$529 billion and $5.2 billion, respectively—even though U.S. GDP was only 11.7 times greater than Canada’s.

Controlling for the size of their economies using an industry concentration ratio known as a location quotient (LQ), U.S. headquartered firms’ R&D spending in advanced industries rose from 80 percent above the global average in 2013 (an LQ of 1.80) to nearly 100 percent above average in 2021 (an LQ of 1.96). Meanwhile, Canadian firms’ R&D investments declined from 68 percent below the global average in 2013 (an LQ of 0.32) to 78 percent below average in 2021 (an LQ of 0.22).

Examining size-adjusted R&D in advanced sectors from 2013 to 2021, ITIF found U.S. firms’ spending stagnated or declined in seven out of nine advanced sectors: software and computer services, technology hardware and equipment, general industrials, industrial engineering, automobile and parts, electronic and electrical equipment, and alternative energy. Meanwhile, Canadian firms’ spending stagnated or declined in five advanced sectors—aerospace and defense, general industrials, technology hardware and equipment, industrial engineering, and alternative energy. However, unlike U.S. firms, Canadian firms’ spending lagged behind the global average in all sectors.

Table 1: Business R&D in nine advanced sectors relative to the global average, 2021

To address these disparities and bolster U.S. and Canada’s R&D capabilities, the report recommends that each improve their respective R&D tax credits:

▪ The Canadian R&D tax subsidy rate of 19.1 percent is slightly above the median for Organization for Economic Cooperation and Development and BRIC countries (Brazil, Russia, India, and China), while the U.S. rate of 9.5 percent is far below.

▪ The Canadian government should expand and reform its R&D credit program to make it more like the U.S. Alternative Simplified Credit.  The U.S. Congress should double the Alternative Simplified Credit rate to 28 percent and restore full expensing of R&D expenditures with states following with similar steps, promoting global competitiveness in key advanced sectors.

“R&D is a critical driver of a nation’s competitiveness in the global economy. Yet, the size-adjusted R&D of Canadian firms in all nine advanced sectors still lag behind the global average,” said ITIF President Robert D. Atkinson, who co-authored the report. “The Canadian government should reform and expand R&D tax provisions.”

Read the report.