R&D Spillovers in Canadian Industry: Results from a New Micro Database

Business investment in research and development (R&D) makes a key contribution to rising living standards. Firms undertaking the R&D can reduce production costs and introduce new products that provide benefits to consumers that are not fully captured in selling prices. Further, it is very difficult for R&D-performing firms to prevent some of the knowledge created from leaking out or spilling over to other firms. Since firms do not take these positive spillover benefits into consideration when making investment decisions, most governments subsidize business investment in R&D with the expectation that economic performance will improve as a result. Our study confirms the existence of substantial spillover benefits from R&D performed in Canada, so government support for R&D is justified. However, we do not find any empirical evidence to support the current policy of subsidizing R&D at a higher rate when it is performed by small firms than when it is performed by large firms. We also find much lower private rate of return on R&D performed by small firms than by large firms. Subsidies appear to be playing a key role in this result