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If, like Canada's central bankers, you believe business innovation and productivity gains are critical to Canada's economic health, then the country's latest statistics on research and development spending won't do a thing to buoy your spirits. As a nation, our R&D investment is headed in the wrong direction.

Statistics Canada reported Thursday that the country's R&D spending intentions for this year are down 0.9 per cent from last year. Spending is 1 per cent below its 2008 level, evidence that R&D still hasn't recovered from the recession. In constant (i.e. inflation-adjusted) dollars, R&D spending has fallen in five of the past six years.

This neglect in recent years has turned Canada from a middling performer to a laggard on the global stage. In 2011, Canada's R&D spending was equivalent to 1.74 per cent of the country's gross domestic product – ranking it 20th in the 34-nation Organization for Economic Co-operation and Development. A decade earlier, Canada ranked 11th, and its R&D spending was 2.09 per cent of GDP.

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Today, most of the OECD countries investing less than Canada in their R&D are either less-developed economies (e.g. Chile, Hungary, Mexico, Turkey, Poland) or those that have undergone crippling fiscal crises (e.g. Greece, Ireland, Italy, Portugal, Spain). In other words, among OECD countries that have no good excuses, Canada is very near the bottom of the pack.

Ottawa's expected R&D funding is actually up 1.3 per cent this year – barely ahead of inflation, but at least it's an increase, the government's first since 2010. The provinces' R&D funding is up 0.8 per cent. Universities have also been stepping up their research spending, with a 10-per-cent increase since 2009.

But governments and universities account for only about 40 per cent of Canada's R&D funding; the rest comes from the private sector, and that's where the big declines have been. Expected R&D investment by businesses this year is down 3 per cent from 2012, and is 7 per cent below its pre-recession level.

Since Stephen Poloz took over as Governor of the Bank of Canada midyear, senior officials at the central bank have stressed the importance of kick-starting business investment in productivity-enhancing technologies and innovations as a key element in accelerating Canada's slow-motion economic growth. More lucrative government tax incentives for R&D might help; but for business, there's an overriding lack of profit incentive right now. Canada's economy continues to operate well below its output capacity, which means businesses aren't using all their productive capacity as it is. In that scenario, trying to convince them to pour money into capital and R&D investments is a non-starter – there's no demand, so there's no payoff, at least in the near term.

Government's contributions to Canada's R&D are nevertheless below the OECD average as a percentage of GDP, and ranks only a modest 13th as a share of total R&D funding. Years of cutbacks have reduced the role of government in Canadian research, and left more of the responsibility in the hands of private interests at a time when they have had few economic motivations to step up to the plate. If there is any area where government could do more to fill a crucial gap in investing in the long-term health of the economy, you're looking at it.

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