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RESEARCH FUNDING - STRENGTHENING THE SOURCES OF INNOVATION HOUSE OF COMMONS STANDING COMMITTEE ON INDUSTRY REFORM PARTY MINORITY REPORT JUNE 1999

R&D in Canada: Backgrounder

Before addressing the Reform Party's recommendations to enhance R&D in Canada, it is important to place this public policy problem in its context:

• Canada trails most industrialized nations when it comes to R&D spending. In terms of R&D as a percentage of GDP, Canada ranks 16th in the world, with only 1.59% of GDP spent on R&D (Sweden ranks first with 3.59%).1 Canada ranks 11th among OECD countries in terms of gross domestic expenditure on R&D (the U.S. ranks first).2
• In terms of federal funding for biomedical, clinical and health research, Canada only spends $8.23 per capita, while the U.S. spends $66.64 per capita ($CDN).3
• In constant dollars (1992), federal spending on R&D was $3.25 billion in 1989. In 1998, that figure had dropped to $3.11 billion.4

From this information, we can quickly determine that the current government has failed to create the conditions necessary for adequate R&D spending. According to Finance Minister, Paul Martin, "there is no doubt that as a country, in terms of research and development, we are not doing what we have got to be doing," November 1998 (The Ottawa Citizen).

Regrettably, much of the time spent studying this problem in Committee was dedicated to proving that 1) R&D is profitable for Canadians and that 2) R&D must, therefore, be funded by the taxpayer. While the Reform Party supports limited and targeted federal R&D investments, we understand that enhancing R&D involves broader policy issues than this simplistic approach can accommodate.

Very little attention was paid to the following question: If R&D is profitable for Canadians, why are Canadians reluctant to make private investments in R&D activities? This is the question the Reform Party has in mind when offering the following recommendations:

Reform Party Recommendations

Lower Taxes:

• When taxes are high, less money is spent on R&D. When taxes are low, the reverse is true.
• High taxes are primarily responsible for the drain of talented and highly qualified scientists and researchers to the USA.
• Eliminating the capital gains tax will encourage venture capital investments in high-risk R&D projects.

Extend the R&D Tax Credit:

• Extending the R&D tax credit to research conducted in the social sciences and humanities would foster industry-university partnerships in this important field of study.

Protect Intellectual Property Rights:

• When companies invest in R&D they must then own the results. If the R&D paid for privately becomes public property, private companies cannot capture the full benefit of their investment.

Reduce Costly Regulations:

• Regulations, in general, cost Canadian businesses $85 billion yearly (12% of GDP). Money spent on regulatory compliance is money that cannot be directed to R&D.
• Regulations that apply directly to R&D activities must also be addressed. Internationally competitive drug approval schedules, for instance, must be established if pharmaceutical research in Canada is to flourish.

Eliminate Industrial Policies that Inhibit R&D:

• Industrial polices have unseen consequences on R&D.
• Countries with freer pricing for pharmaceuticals, for instance, have companies that spend more money on pharmaceutical R&D. This is cause to examine the PMPRB.5

Make Basic Research a Funding Priority:

• Private companies are more inclined to invest in applied research than in basic research because, due to nature of basic research, it is difficult to capture the full benefits of an investment.
• Government should only fund R&D when and where there is evidence of a less than optimal market condition that discourages this kind of investment, which is arguably the case in the area of basic research.

Improve Access to Capital:

• If the above recommendations are embraced, access to capital for R&D will radically improve.
• Create greater competition in the financial services sector.

Rahim Jaffer, MP
Official Opposition Critic of Industry

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1 World Competitiveness Yearbook - 1998 .

2 Minding our Future (Federal S&T Report 1997).

3 Coalition for Biomedical & Health Research Web site - December 1998.

4 Science Statistics, Cat. No. 88-001 XIB, July 1998 (p. 3).

5 Patricia Danzon, "Can Pharmaceutical Price Regulation and Innovation Co-Exist?", The Fraser Forum, April 1998.