Archived — Research Summaries: Working Paper 2006-03: The Impact of Foreign Ownership on Aggregate R&D Intensity: A Critical Review of the Empirical Evidence

by Donald McFetridge.

Canada's relatively low business expenditures on R&D (or BERD-intensity) has been attributed to the industrial composition of the Canadian economy, the relatively small size of the domestic market and of Canadian firms and to the relatively high incidence of foreign ownership in the Canadian economy. The main objective of this study is to provide a critical review of firm- and industry-level empirical literature on the impact of industrial structure in general and foreign ownership in particular on business sector R&D performance. The paper argues that while structural explanations for Canada's relatively low BERD-intensity are not without merit, they are not entirely satisfactory. In particular, the evidence on the relationship between firm size and R&D-intensity implies that it is not so much the size of the larger firms that matters for BERD-intensity as the prevalence of firms that are too small to engage in R&D. And while foreign ownership might explain Canada's low BERD-intensity only in a trivial sense, BERD-intensity could be lower than it is now if foreign-owned firms were replaced by a combination of imports and purely domestic firms instead of domestic multi-national firms.

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