GERD revisited: The state of R&D in Canada

In a recent post, I argued, by way of Paul Wells of Macleans, that Canada is falling behind both its G8 partners (G7, substracting Russia) and up-and-coming, still-developing economic powers like China, India, and Brazil in terms of investment in R&D. The quantitative basis for this assessment is a statistic known as GERD, or Gross Expenditure on Research and Development (measured as a fraction of GDP) -- hence GERD/GDP. Wells notes that Canada's GERD has been declining over the past few years and suggests that this is a serious problem. In my post, I concur.

A reader, whose comments can be read if you link to the post in question (above), argues in response that "[t]his is a misleading analysis". More, this reader calls it "dishonest". He or she notes that "[t]he only thing the GERD is saying is that R&D growth didn't keep pace with Canada's GDP growth". Indeed, Canada's GERD "was actually higher than the EU's in a straight comparison of R&D without taking it as a percent of GDP".

Fair enough. Like all statistics, GERD/GDP isn't perfect, and he or she makes some valuable points, especially in his or her follow-up comment. But let me respond:

To begin, I'm not so sure that comparing Canada to the E.U., a notoriously laborious economy, makes much sense. So we're doing better than Europe. Good for us. If Europe was truly the benchmark it once was, then fine. But it's not. The rest of the world -- which, as Thomas Friedman likes to point out, is becoming ever more flat -- is leaping ahead, and it's to these newer, more dynamic economies that we should be looking. (I'm pro-European, on the whole, but even I must acknowledge that its economy, taken aggregatively, is clunky.)

Before I go on, let's look at some actual GERD numbers:

• Israel (2001): 4.48%
• Sweden (1999): 3.78%
• Finland (2000): 3.37%
• Japan (2000): 2.98%
• United States (2000): 2.70%
• South Korea (2000): 2.68%
• Germany (2001): 2.52%
• France (2000): 2.15%
• Taiwan (2000): 2.05%
• Netherlands (1999): 2.02%
• Canada (2001): 1.93%
• United Kingdom (2000): 1.86%
• Australia (2000): 1.53%
• Ireland (1999): 1.21%
• New Zealand (1997): 1.11%
• Russia (2000): 1.09%
• Italy (1999): 1.04%
• China (2000): 1.00%
• Spain (2001): 0.96%
• Hungary (2000): 0.81%
• Poland (1999): 0.70%
• Greece (1999): 0.67%
• Turkey (1999): 0.63%
• Mexico (1999): 0.40%

Now, if nothing else, this ranking more or less matches common sense. At the top of the list are dynamic, vibrant, forward-looking, post-industrial countries/economies. Israel, for example, has invested heavily in the high-tech and defence industries, and Sweden, Finland, Japan, the U.S., and South Korea tend to be at the forefront of technological progress. At the bottom of the list are traditionally backwards countries/economies that are either making the transition from communism to capitalism (Russia, China, Hungary, Poland) or that are still quite agrarian or industrial (Spain, Greece, Turkey, Mexico). On this basis alone, GERD/GDP tells us something.

In addition, as I wrote in my reply to this reader, GERD means little if taken in absolute terms. What would it mean, for example, if a country's GERD doubled over the course of a few years if, in the same period, its GDP quadrupled? Shouldn't investment in R&D (GERD) at least keep up with GDP? Should we not expect a country with a dynamic, forward-looking economy to invest in R&D at a rate that exceeds GDP growth? Should we not expect, at the very least, GERD consistency? Canada's GDP may be going up -- and I agree that our economy has been quite good recently -- but a declining GERD/GDP means that our investment in R&D is going down relative to our overall economic performance.

Look at it this way, if I may try my hand at a layman's analogy: Let's say that my income for June was $1,000 and that during that month I spent $50 on books (consider it forward-looking intellectual development, which is why I'm not including my DVD expenditures). That would be a GERD/GDP, so to speak, of 5.00%. Now, suppose that my income for July jumps to $2,000 while my book expenditures rise to $75. In absolute terms, the GERD would show an increase of 50% ($50 to $75). Not too shabby. But my GERD/GDP would be 3.00%. One number looks good, the other not so good. One shows an increase, the other a decrease. Which one is more important? I'd say the latter -- i.e., GERD/GDP. Given the increase in my income, my book expenditures should have risen accordingly (to $100). But they didn't, which means that I'm not keeping up with past performance. Now, that $25 might have been well spent elsewhere. Perhaps I used it to pay down my debt or to buy armor to protect myself or to go to the dentist. Sure, paying down the national debt, national defence, and health-care are important issues, and they need to be addressed. But there's a trade-off. If I (or a country) spend more on, say, health care, I (or that country) will have less for intellectual development (or R&D).

Reading through the some of the literature, it's clear that GERD/GDP matters. Some Australians, for example, are deeply concerned about their country's low R&D expenditures relative to GDP -- see here. And here: "The Australian Vice-Chancellors’ Committee’s Key statistics on higher education (2001) reports that Australia’s gross expenditure on research and development of 1.49% of gross domestic product is still seriously below the OECD simple average of 1.71% and the OECD average weighted by GDP size of 2.18% of GDP... An additional investment of $US 1,017 m or an increase of 15% would be needed to bring Australia’s gross expenditure on research and development up to the OECD simple mean, and an additional $US 3,154 m or an increase of 47% would be needed to bring Australia up to the OECD mean weighted by size."

The same is true in Canada. According to Michael Volker, director of Simon Fraser's University/Industry Liaison Office, "[n]o matter which study or report you read which compares Canada’s research and development expenditures to those of other countries, the findings are usually disappointing". Referring to "the oft-cited GERD/GDP ratio," he argues that in British Columbia and Alberta "the growth in R&D expenditures and the magnitude thereof pale in relation to other jurisdictions". (See here for Volker's piece.) This assessment of poor GERD/GDP in western Canada is backed up by government research (see here). Elsewhere, the government has itself acknowledged (see here) "Canada’s backwardness with respect to the G7 countries".

Trust me, I don't like this at all. But, in the government's own words, "[t]he percentage of GDP devoted to research and development (R&D) [i.e., GERD/GDP] remains one of the most commonly used indicators to measure support for innovation". Canada may no longer be "[bringing] up the rear among industrialized countries," but we could be doing much better than we are. And we don't really need a statistic to tell us that.

Given our relatively healthy economy, as measured by GDP growth, it seems to me that we owe it to ourselves -- and, more importantly, to future generations of Canadians -- to devote a greater percentage of our GDP to R&D.