The following OECD assessment and recommendations summarise Chapter 3 of the Economic Survey of Canada 2006 published on 26 June 2006.
A more dynamic business environment would also foster greater innovation
Innovation in all its forms – product, process, organisation and marketing – is a key source of productivity growth that is most easily generated in a positive overall business environment. But some key aspects of innovation remain relatively poorly understood, making it difficult to design optimal innovation policies. Thus, more research into understanding the innovation process may provide significantly better value for money than launching costly new initiatives based on relatively weak analytical underpinnings. Particular attention could be paid to factors that spur businesses to innovate, which have received less policy attention than the supply of innovation inputs, most notably research and development (R&D). A clearly articulated and integrated national science and technology policy to steer decisions in public research is also needed.
Measures to stimulate business R&D should be re examined
Federal and provincial governments have a more generous array of tax credits and grant programmes designed to encourage business R&D expenditure than most OECD members. Nevertheless, business expenditure on R&D as a share of GDP remains lower than in many OECD countries. The Scientific Research and Experimental Development (SR&ED) investment tax credit is one of the most generous by OECD standards and is refundable for small Canadian-controlled private corporations. The preferential treatment for these businesses reinforces other policies that may discourage firms from growing, which is unfortunate because larger firms are more likely to undertake both R&D and innovation. An alternative approach of more closely targeting tax credits on R&D undertaken by new firms rather than small firms per se and on incremental R&D could be explored. But such tax credits need to be carefully designed in order to bring forth new innovation while minimising deadweight costs.
But skill levels for some Canadians still fall short of requirements for
a knowledge based economy
There is a well-established link between human capital and productivity growth, not least because it helps facilitate the diffusion of innovation outputs through the economy. Although Canada has a high share of the population with post-secondary qualifications, a lower share have degrees and especially advanced qualifications than in the United States, for example. Actual skills and competencies – what people can do – are also important. While literacy, numeracy and problem-solving skills are relatively well developed in Canada, progress is needed if the country is to achieve world-best shares of the working-age population at or above the levels deemed necessary to function successfully in a modern economy and knowledge-based society. More effective strategies are needed to lift adult literacy and general skills levels. Flexible co-financing arrangements may help to boost lifelong learning, but they should be carefully designed to minimise deadweight losses. Workplace training plays an important role in human capital development; yet it is much more likely to take place in large firms, providing another reason for removing barriers to enterprise expansion.
Adult education and training participation1
Per cent, 25 to 64 year olds, 2002
1. Using the adjusted participation rate, which measures the fraction of time an average person spends on learning activities during the year.
Source: OECD (2005), Promoting Adult Learning, OECD, Paris.
A cautious approach should be taken to perceived gaps in financing for innovation
Although Canada has one of the highest flows of venture capital investment in the OECD, rates of return on investments have been poor. This is largely attributable to the role of the Labour-Sponsored Venture Capital Corporations (LSVCCs), which ostensibly have social development objectives but also function as a tax shelter for individual savers. Their presence has lowered the average quality of deals and crowded out other venture capital funds. The tax advantage afforded to the LSVCCs should be removed so as to enable the venture capital market to play its role in innovation more effectively. More broadly, it is difficult to find evidence that access to finance is a binding constraint on innovation in Canada, and, despite claims by some lobby groups, no clear policy gap needs to be addressed.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assesment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Canada 2006 is available from:
For further information please contat the Canada Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Deborah Roseveare and Annabelle Mourougane under the supervision of Peter Jarrett.