Canada’s innovation gap: policy options to increase business sector R&D

A key culprit for Canada’s lagging productivity growth is weak innovation in the business sector. Using the level of business R&D as a main indicator, I explore policy options for Canada to close its innovation gap with other countries. I first review previous research on the determinants of business R&D and highlight reasons for Canada’s lacklustre performance. I then examine the innovation system in three business R&D intensive countries (Israel, Finland, and Sweden) to gain insights on critical success factors that drive business R&D. Based on these case studies and my literature review, I draw implications for Canada through comparative analysis and propose four main policy options to increase business sector R&D. Using a set of criteria, I evaluate these options along with the status quo. The strongest option is to remove foreign investment restrictions in R&D intensive sectors.