To fuel innovation, Canada needs an R&D spending target: David Watters

Canada needs a national R&D spending target and a permanent process for building a better R&D innovation system to overcome its lagging innovation performance and fuel longterm economic growth, says David Watters, president and CEO of Global Advantage Consulting Group.

Watters made the proposals during his virtual keynote address at the 20th annual Research Money conference earlier this month.

“We need to identify a target," said Watters, who provided an analysis of Canada’s R&D Innovation (RDI) system and the potential impact of Budget 2021. "If you don’t know where you’re going, you can take any road. We can’t afford to do that anymore.”

Watters’ keynote, the latest in what has become an annual highlight of the conference, asked whether the budget addresses Canada’s failures. The answer, according to Watters and Global Advantages' team of analysts, was a resounding, “No.” Budget 2021 doesn’t invest enough in R&D and in economic growth, and it lacks an RDI target, he said. Canada also lacks the structures it needs to build and implement a winning RDI strategy.

More spending needed on R&D and economic growth

Budget 2021 was massive, but how much was designated to support R&D and innovation? That figure amounts to 6 percent of the total, or $4.7 billion, according to Ömer Kaya, Vice President, Research and Development at Global Advantage — not enough to reverse the persistent decline in R&D spending over “a decade and a half of darkness,” he said. Canada’s R&D expenditures are now 36 percent below the average annual R&D spending among Organization for Economic Cooperation and Development (OECD) countries, according to the analysis. 

Canada’s RDI production system also has a dramatically different structure than its OECD competitors: In Canada, 41 percent of R&D spending is in higher education, 51 percent in the private sector and 7 percent in the public sector, according to 2019 data. In contrast, the OECD averages are: 17 percent in higher ed, 71 percent in the private sector and 10 percent in the public sector. The result is a $22 billion per year funding gap between Canada’s R&D expenditures and the OECD average, said Watters.

“Why have we structured our R&D performance system this way and if it’s not working, what are we doing to improve it?“ he asked.

Kaya also noted that more than 80 percent of Budget 2021 consists of social and consumption expenditures, such as establishing a Canada-wide child care system and providing EI and recovery benefits. Only $4.5 billion is earmarked for supporting innovation and industrial transformation. However, Kaya applauded the Budget's top-up to the Strategic Innovation Fund ($7.2 billion over 7 years) and $2.6 billion to support SMEs with digital technology adoption.

Set RDI targets

During the keynote, Watters went beyond diagnosing Canada's innovation problem to propose the establishment of an RDI spending target of 2.5 percent of GDP by 2030. (Current spending is 1.54 percent of GDP.) 

“That target would only bring us up to the OECD average, not beyond. So we would merely be recovering from the hole we’ve dug for ourselves,” said Watters, who noted that the United Kingdom, Germany and the United States have all set national targets. For example, the United Kingdom aims to increase R&D expenditures to 2.4 percent of GDP by 2027, and Germany aims to increase R&D spending to 3.5 percent of GDP by 2025. The United States is already at an all-time high of 3.075 percent of GDP (2019), and the Biden Administration has proposed a 9 percent, or $13.5 billion, increase in total federal spending for R&D (FY 2022).

Make the Economic Strategy Tables permanent

Watters also reiterated his call to make the Economic Strategy Tables (ESTs) permanent, along with the Industry Strategy Council that serves as an umbrella for the ESTs. He argued that Canada needs permanent collaborative structures to respond to rapid changes as well as emerging risks and opportunities, and to build a better R&D innovation system.

“The speed of change and the risks we’re trying to handle are so fast and so explosive that you can’t build a collaborative mechanism. You have to have it already in place,” he said.

The ESTs were announced in Budget 2017, as part of Canada’s Innovation and Skills plan, to bolster Canada’s competitiveness in six sectors by 2025, specifically, advanced manufacturing, agri-food, clean technologies, digital industries, health and biosciences and resources of the future. They were expanded in 2020 to include transportation, retail and tourism. 

The Industry Strategy Council was launched by Innovation, Science and Economic Development (ISED) in May 2020 in response to COVID-19. It serves as a forum for collaboration between industry leaders and government experts. The Council released a growth plan for a sustainable post-pandemic economic recovery last December, which Watters called excellent, adding that many of the provisions in Budget 2021 appeared to be directly link to the Council’s recommendations.

The ESTs would bring together government, industry and academia and integrate four areas of public policy: industrial strategy, trade strategy, R&D innovation strategy and skills strategy, he said. Watters mapped out a structure and an agenda for each of these groups. 

Finally, he also drove home the importance of monitoring performance. “The six previous, very weak attempts at improving our innovation system suffered from poor implementation…. We need to establish metrics for each of these ESTs to hold both the business sector and government accountable,” he said. 

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