International comparisons of R&D effort: The case of the Canadian pharmaceutical industry

Abstract

The Canadian federal government, anxious to stimulate innovation, announced recently a policy objective for the economy: the attainment of industrial research expenditures reaching 1.5 percent of the gross national product. The proposed substantial increase over the current level is rationalized by comparison with economy-wide research intensities (GERD/GNP) in other OECD countries.This paper questions the economic validity and policy relevance of international aggregate comparisons. It argues that inter-country comparisons should take place at individual industry levels where technologies are similar and proposes a methodology for formulating R&D spending targets of this kind. The procedure is to estimate a model of the determinants of R&D intensity with data from several “criterion countries” and employ the results to “predict” a specific industry's research intensity in another country.In this paper such a model is formulated for the pharmaceutical industry of seven OECD countries. Plausible parameter estimates are derived and used to “forecast” the research intensity of the Canadian pharmaceutical industry. It is found that given the predominance of foreign ownership, the nature of patent protection and the level of other relevant variables in Canada, the performance of this sector is much above the OECD-derived standard; this Canadian industry presumably does not require governmental attention to its R&D activities.