R&D capabilities definition. R&D capabilities is defined as the ability to restructure current knowledge and produce new knowledge. It also has been determined as a prime competence to differentiate between successful and unsuccessful firm performance.
The R&D capabilities of firms are assessed using either input-output models or process models. It is thought that as firms perform more internal R&D, their ability to absorb knowledge from these R&D activities should increase. If this assumption is correct, then the efficiency of R&D should increase as the intensity of a firm’s R&D increases. These results are theoretical. Measuring R&D efficiency for a firm is very difficult.
The SR&ED program in Canada is an incentive program designed to encourage companies to increase their R&D inputs. Currently the SR&ED program will return credits to small business corporations of up to 70% based on salary inputs. Lower percentage credits are returned to firms based on other R&D inputs, namely materials used in experimental work and subcontractors employed. These generous tax incentives show that the Government of Canada believes that Canadian firms’ R&D capabilities can be positively impacted by significantly increasing R&D inputs.
The SR&ED Program also takes a firm’s R&D capabilities into account when determining whether work performed meets the standard of qualifying work for SR&ED credits. The firm’s R&D capabilities are summarized as its scientific or technological knowledge base. Firms with more advanced R&D capabilities have higher hurdles for what constitutes a technological unknown and also what differentiates experimental work from routine work.
Incentive funding delivered under the SR&ED Program is is not earmarked or constrained as to its use within the firm. The government must believe that most firms will see increased spending on R&D capabilities as thee most advantageous use of the funds.
To get more detailed information on how the SR&ED program operates, see this article, Overview of the SR&ED Program.