Executive summary

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It is widely recognized that the outcomes of Research and Development (R&D), similar to physical assets like machines, are used repeatedly and continuously in processes of production and therefore can generate returns over a period of time. These outcomes can also provide a store of value to those who own them. Therefore it is argued that these outcomes should be considered as assets as opposed to intermediate inputs that are used up in the period they are produced.

This study examines the impact of substantially broadening the treatment of R&D in the Canadian System of National Accounts (CSNA). This involves altering the treatment of certain R&D spending components from current expense to capital formation. Comprehensive estimates are developed for the years 1997 to 2004.

The definition of R&D used in this study is based on that of the Frascati Manual (FM) as published by the Organization for Economic Co-operation and Development (OECD). This includes freely available R&D.

Some R&D spending is already capitalized in the Canadian economic accounts (e.g., software). The paper focuses on the impacts on the economic accounts from the additional R&D capitalization but also presents the impacts from total R&D capitalization.

As measured by this report's base case, the additional R&D capitalization would raise gross domestic product (GDP) by 1.6% or $20.4 billion in 2004. Adding the impact from R&D activity already capitalized, it is estimated that the impact from total R&D capitalization is $34.6 billion of GDP in 2004 or 2.9% of total GDP.

Although the main focus of this study is the years 1997 to 2004, historical estimates were calculated back to 1976. This research 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.

As this is a preliminary study, various scenarios were calculated to indicate the possible range of impact depending on the assumptions used for valuation. For example, four scenarios for the rate of return of R&D were calculated. These scenarios resulted in the impact of R&D capital on GDP ranging up to $2.3 billion or 0.2% of the economywide GDP in 2004.