Canada must cut corporate taxes and subsidize business spending on innovation to improve the nation’s research and development performance, which is stuck in the mid-range of the world’s industrialized nations, according to a new report from the C.D. Howe Institute.

Richard Harris, Telus Professor of Economics at Simon Fraser University and Fellow-in-Residence/John Dobson Foundation Scholar in Entrepreneurship at the C.D. Howe Institute, says that increased R&D functions are an important source of capital-intensive growth “by inventing new products that are capital intensive or developing improved production processes for existing products.”

The paper’s major conclusions are that R&D performance in Canada has been weak, in part because of structural factors related to Canada’s large natural resource base and the agglomeration of manufacturing in the centre of the country.

Harris says that, while governments should not discourage this “agglomeration”, they should focus their efforts on raising business R&D spending in areas, such as Atlantic and western Canada, where it is lowest.

Significant improvements to the innovation environment, particularly those that generate new private sector jobs and enterprises, are only likely to emerge if governments provide stronger incentives for business investment, the paper adds. The paper also argues that existing federal and provincial resources aimed at supporting business sector R&D should be more focused than those provided by the existing R&D tax credit system.

Harris also notes that spillover effects of innovation improvements in the United States provide a significant benefit to Canadian businesses. He adds, however, that spillovers from defence R&D “are likely to be severely limited as long as Ottawa maintains a policy of withholding active support for Washington’s military initiatives.”