Impact of economic downturn lingers as business R&D continues to disappoint

New data from Statistics Canada show that industrial R&D spending in Canada is extending the decline that began with the onset of the 2008 economic downturn. Projections for 2010 show that companies spent an estimated $14.8 billion, down $394 million or 2.6% from 2009 and down $1.8 billion or 11% from 2007 — the year before the economic crisis began. The latest drop in business R&D spending marks the third consecutive year business R&D performance has declined, compared to a 21-year run between 1985 and 2005 when business R&D spending increased every year.

The severity of the situation is underlined by the portion of overall spending by companies as a percentage of gross expenditures on R&D (GERD) and gross domestic product. In 2001, business expenditures on R&D (BERD) totaled 1.29% of GDP and 61.7% of GERD. By 2010, those percentages had slumped to 0.9% and 50.7% respectively.

The decline is particularly pronounced in the industrial heartland of Ontario and Quebec, which accounted for the majority of the drop in spending. Between 2006 and 2008 (the most recent year for which provincial breakdowns are available), business R&D dropped from $8.2 billion to $7.6 billion in Ontario, while Quebec-based businesses reduced their R&D spending from $4.8 billion to $4.6 billion. In contrast, business R&D outlays in Alberta inched up during the same three-year period ($1.4 billion to $1.5 billion) and made gains in British Columbia ($1.4 billion to $1.5 billion).

Manufacturing R&D has been hit particularly hard, declining from $8.9 billion in 2006 to $6.9 billion in 2010. Services have held steady during the same period, managing a $354 million increase. R&D in the mining and oil and gas extraction sectors increased from $731 million in 2006 to $1.0 billion in 2008 before falling sharply in 2009 to $681 million. Data for 2010 are too unreliable to be published.

Particularly worrisome for those who see R&D spending by domestic firms as a key priority, Canadian-controlled firms account for most of the decline. Domestic companies significantly reduced R&D outlays between 2006 and 2008 by $1.4 billion, from $11.3 billion to $9.9 billion. US-based companies, however, increased their R&D expenditures in Canada from $3.2 billion to $3.6 billion, while firms controlled from other foreign countries increased R&D spending from $2 billion to $2.3 billion.

Lower spending by Canadian-controlled firms resulted in their share of overall R&D expenditures declining in several key areas. Overall, the share of R&D accounted for by domestic firms fell from 68% to 62% between 2006 and 2008. Their share of services R&D declined in the same timeframe from 72% to 62%. The largest drop was in the finance, insurance and real estate category (93% to 57%) and whole trade (38% to 24%). The share commanded by Canadian-controlled firms also fell in manufacturing (65% to 62%). There are no data for many key categories — utilities, agriculture, semiconductor and other electrical components, aerospace products and parts. StatsCan has suppressed the data to protect the confidentiality of individual firms, meaning there are too few players in those categories to provide anonymous, aggregate data.

While R&D spending by firms has dropped in recent years, the number of personnel engaged has increased, at least until 2008. For that year, there were nearly 159,000 full-time equivalent positions dedicated to R&D activities, a 15% increase from 2004, when the total stood at 138,177. The impact of the economic crisis on personnel won‘t be known until StatsCan releases that data in subsequent reports.

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