In late May, we saw the release of the 2025 OECD Economic Survey of Canada.
Canada tends to perform very well in basic research, as illustrated by its strong research impact, which plays a key role in driving breakthrough innovations with broad industrial potential.
Low business R&D activity points to challenges in translating basic research into large scale commercial applications. This might reflect difficulties to bridge university research with business needs and to ramp up commercialisation. Canada’s promising start-ups are often acquired and developed abroad and the same goes for intellectual property products.
The report notes that production of patents in Canada has grown considerably over the past 30 years, but this growth has only had a weak impact on total factor productivity because of inventors leaving Canada, and foreign acquisition of the patents and intellectual property. The OECD Economic Survey observed “a propensity to assign Canadian-invented intellectual property to foreign firms rather than retain it for further development.”
To me, this points to an aversion to risk among companies developing promising innovations. The OECD Economic Survey notes that support for R&D by the Canadian government tends to favour small firms over larger ones. The largest government program to support R&D activities is the Scientific Research and Experimental Development (SR&ED) tax incentive.
SR&ED provides an enhanced and refundable tax credit of 35% of current expenditures to small and medium Canadian-controlled private corporations, compared to a non-refundable tax credit of 15% for larger businesses. The OECD report recommends harmonizing the programs to improve the overall effectiveness and reduce distortions, such as subsidizing investments that would have been made regardless of public support. We have all seen examples of ceremonial government cheques being handed over to companies doing things that they would (or should) be doing on their own.
For a long time, I have expressed concern that government attempts at picking winners can inevitably create more losers.
The OECD Economic Survey says there is room to improve Canada’s regulatory environment. It says Canada’s natural disadvantage – having dispersed and relatively
small markets – should be countered by ensuring regulatory barriers are as low as possible. The OECD calls for “ensuring telecommunications markets are competitive and thus providing the quality digital access that is essential to smooth business operations.”
Looking well beyond telecommunications and broadcasting, “regulation” and “regulatory” appear more than 100 times in the 136-page report [pdf, 5.5MB]. The OECD complains that Canada’s regulatory environment “poses a burden on productivity growth”.
Internal trade barriers remain significant and should be reduced more quickly. Barriers on foreign investment should be revisited. Additionally, improving mutual recognition, including on foreign credentials, of qualifications across provinces would lower internal barriers to labour market mobility.
The OECD Economic Survey suggests increasing the digital intensity of the economy, another theme you have frequently seen on these pages.
According to the OECD, “Boosting productivity requires a combination of policies, including rebalancing R&D support, reducing regulatory barriers in internal markets, enhancing competition and digitalisation of the economy, and fully utilising women’s skills.”
Along those lines, a recent post by Eric Fruits in Truth on the Market talks about the need to consider regulatory reform as a means to increase competitive intensity. “When many think about monopolies and unfair business practices, they typically picture large corporations squashing smaller rivals. But there’s another significant culprit restricting competition that gets far less attention: government regulations themselves.” His article refers to a number of areas, with headings like: The Permission-Slip Economy; The Licensing Trap; Legal Immunity for Anticompetitive Behavior; When Government Competes Unfairly; Inflating Public-Project Costs; Energy-Market Distortions; and, Agency Overreach.
As Dr. Fruits writes, “True competition policy requires treating government-created barriers with the same skepticism we apply to private anticompetitive conduct.”
In his keynote address a couple weeks ago at The 2025 Canadian Telecom Summit, CTA CEO Robert Ghiz said “it is market competition — not regulation — that drives companies to outdo one another in delivering exceptional customer service and innovative solutions.”
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