Balance sheet account

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133. Since national saving increases, national wealth also increases by the amount of net investment/saving associated with R&D plus the revaluation of the capital stock of R&D. Nevertheless, the impact on sectoral and national wealth of R&D is relatively small in aggregate, though significant for certain industries.

Table 9
Balance sheet account—System of National Accounts – Total economy, additional impact, 2004

134. R&D assets amounted to $156 billion dollars by year-end 2004, with business assets accounting for just over 60% of the total (see Table 10). The stock of R&D assets accounted for 0.1% of the total wealth in the Canadian economy. However, non-structures produced capital, increase by over 30% with the addition of R&D assets into the accounts.³²

Table 10
Stock values for research and development

135. Total R&D stock values increase by $11.5 billion in 2004 with the inclusion of R&D as an asset. Net investment (Total investment minus capital consumption allowances) accounts for 59% of this increase (see Table 11). Revaluation, which generally occurs due to price changes, contributed 41% of the total. Net investment contributed just over 68% of the total change in stock values in 2001, when R&D investment was booming.

Table 11
Change in stock values

Nominal gross domestic product - Final expenditure

136. Government current expenditure decreases as a result of the change in treatment of R&D since these expenditures now move to capital investment, a final expenditure. Non-profit expenses, which are located in personal expenditure in the CSNA, decrease for the same reason. These expenditures are now capitalized.

Table 12
Final expenditures, 2004

Trade data

137. Data from this study permit the analysis of R&D trade between Canada and other countries. Throughout the time period studied (1997 to 2004), Canada consistently was a net exporter of R&D. Exports of R&D peaked in 2000 at $4.3 billion. Imports ($1.8 billion) as well as the trade balance ($2.5 billion) also reached their highest level in that year. R&D exports represent 0.6% of total exports in 2000, much less than their contribution to GDP. The vast majority (88%) of industrial R&D is intramural, or done within an organization.

Graph 4
Canada, a net exporter of research and development

Industry analysis

138. The following industry analysis is based on the total activity of R&D in the economy. In 2004, the industry that provided the largest activity as measured by fixed capital formation was communications equipment at $1.6 billion. The pharmaceutical manufacturing information and cultural service industries followed. The communications equipment industry provided the largest contribution to investment in all years but has been in sharp decline since 2001 (see Table 13). Industry data are available for both the total and additional impact on investment scenarios (see appendices 8 and 9).

Table 13
Industry share of total research and development investment

139. The total impact on an industry tends to be greater than the additional impact. The total impact includes software R&D. The share of R&D capital formation does vary depending on whether the total or additional impact is used (see Graph 5). For example, the communications equipment industry's share of total impact is lower than its additional impact suggesting it is less software intensive than other industries.

Graph 5
Industry shares of research and development capital formation, 2004

Aggregate economic activity

140. Table 14 provides summary statistics including the data for both types of impacts. In all cases, only direct measures of GDP are measured, indirect measures are not included on the impact of GDP. The numbers reflect the base case scenario of no return on own account R&D.

Table 14
Research and development summary, 1997 to 2004

141. In 2004, nominal GDP would increase by $20.4 billion or 1.6% if R&D expenditures were capitalized in the National Accounts. The impact has generally been increasing over time. GDP would increase 1.4% in 1997 and 0.9% in 1976³³ with the change in treatment. The greatest impact occurs in 2001. This corresponds with the height of the technology boom that took place in Canada, specifically in the telecommunication industry. From 1997 to 2004, additional R&D GDP grew 61% in nominal terms; higher than the 46% increase registered by the total economy. Since R&D GDP is growing more quickly than the rest of GDP, the growth rates of economy-wide GDP would increase over time, although the impact at the total level of GDP in a given year is less than 0.1%.

Graph 6
Research and development impact on Gross Domestic Product

142. When viewed from the total activity basis, the impact of R&D on the trend in the economy changes. The total activity in 2004 was $34.6 billion, 2.9% of the total economy. This value is higher than the total for the FM data (see GERD estimate in Table 14), largely as a result of the inclusion of government and non-profit CFC and due to adjustments made to international trade data.

143. Although the main focus of this study covers the years 1997 to 2004, historical estimates were calculated back to 1976. This study indicates that R&D has become increasingly important to the Canadian economy. In 1976, total R&D represented 1.5% of GDP, considerably less than the 2.9% share in 2004. This corresponds with the idea that intangible assets have become an ever more important part of a developed economy and therefore require measurement and inclusion in the core accounts.

144. An estimate was also made for the impact of capitalizing R&D on inflation-adjusted GDP. As is the case on the nominal side, GDP would rise by 1.6% in 2004.

 

³² . R&D is included in machinery and equipment for presentational purposes in the CSNA. This results in a mix of intangible R&D assets and tangible machinery and equipment assets.

³³ . A backward projection was calculated for R&D capital at the total level using total FM based R&D expenditure data.