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Rewarding Innovation: Improving Federal Tax Support for Business R&D in Canada

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  • Mark Parsons

    (PricewaterhouseCoopers L.L.P.)

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    Abstract

    Business innovation is viewed by many as a solution to Canada’s ailing productivity performance. One of the more troubling aspects of Canada’s innovation track record is that businesses spend relatively little on research and development (R&D) despite having access to some of the world’s most generous R&D tax incentives. Canada’s low levels of business R&D have called into question the effectiveness of Canada’s generous R&D tax incentives, particularly the flagship federal Scientific Research and Experimental Development (SR&ED) program. A deeper analysis, however, reveals that tax incentives are effective in stimulating more R&D – that is, Canada would have lower levels of business R&D in the absence of these inducements. Instead, the root cause of Canada’s business R&D deficit appears to stem from structural aspects of the economy and, more importantly, a lack of demand-related pressure to pursue innovation.

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    File URL: http://www.cdhowe.org/pdf/Commentary_334.pdf
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    Bibliographic Info

    Article provided by C.D. Howe Institute in its journal C.D. Howe Institute Commentary.

    Volume (Year): (2011)
    Issue (Month): 334 (September)
    Pages:

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    Handle: RePEc:cdh:commen:334

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    Related research

    Keywords: Fiscal and Tax Competitiveness; Canada; research and development (R&D) incentives; Scientific Research and Experimental Development (SR&ED) program;

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    1. Griffith, Rachel & Redding, Stephen J & Van Reenen, John, 2000. "Mapping The Two Faces Of R&D: Productivity Growth In A Panel Of OECD Industries," CEPR Discussion Papers 2457, C.E.P.R. Discussion Papers.
    2. Luis H. B. Braido & Carlos E. da Costa & Bev Dahlby, 2011. "Adverse Selection and Risk Aversion in Capital Markets," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(4), pages 303-326, December.
    3. Charles I. Jones & John C. Williams, 1997. "Measuring the social return to R&D," Finance and Economics Discussion Series 1997-12, Board of Governors of the Federal Reserve System (U.S.).
    4. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, January.
    5. Richard M. Bird & Michael Smart, 2008. "The Impact on Investment of Replacing a Retail Sales Tax by a Value-Added Tax: Evidence from Canadian Experience," Working Papers Series 15, Rotman Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Jun 2008.
    6. Jungsoo Park, 2004. "International and Intersectoral R&D Spillovers in the OECD and East Asian Economies," Economic Inquiry, Western Economic Association International, vol. 42(4), pages 739-757, October.
    7. Duanjie Chen & Frank C. Lee & Jack M. Mintz, 2002. "Taxation, SMEs and Entrepreneurship," OECD Science, Technology and Industry Working Papers 2002/9, OECD Publishing.
    8. Jeffrey I. Bernstein, 1988. "Costs of Production, Intra- and Interindustry R&D Spillovers: Canadian Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 21(2), pages 324-47, May.
    9. Bronwyn H. Hall & John van Reenen, 1999. "How Effective are Fiscal Incentives for R&D? A New Review of the Evidence," NBER Working Papers 7098, National Bureau of Economic Research, Inc.
    10. Danny Leung & Césaire Meh & Yaz Terajima, 2008. "Productivity in Canada: Does Firm Size Matter?," Bank of Canada Review, Bank of Canada, vol. 2008(Autumn), pages 7-16.
    11. Andrew Sharpe, 2010. "Unbundling Canada's Weak Productivity Performance," CSLS Research Reports 2010-02, Centre for the Study of Living Standards.
    12. Brown, James R. & Martinsson, Gustav & Petersen, Bruce C., 2012. "Do financing constraints matter for R&D?," European Economic Review, Elsevier, vol. 56(8), pages 1512-1529.
    13. Aled ab Iorwerth, . "Canada’s Low Business R&D Intensity: the Role of Industry Composition," Working Papers-Department of Finance Canada 2005-03, Department of Finance Canada.
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