Bullish attitude defies expectations

Bombardier Inc is giving Research In Motion Ltd a run for bragging rights as Canada's top corporate R&D spender, exploding from 10th to 2nd place in the ranking as it ramps up development of its C-Series mid-range jet airliners. The Top 100 R&D performing firms increased their performance by 6.1% in 2011, spending a total of $10.9 billion, up from $10.3 billion in 2010 — a powerful indication that Canadian big R&D spenders are not deterred by an uncertain economic environment.

Bombardier also restated its R&D outlays for 2010, changing its previously announced $198.8 million to $1.1 billion — a difference of $852.8 million — turning last year's dismal drop of 9.4% decline in Top 100 expenditures into a drop of less than 1%.

"We're in a more intense phase of aircraft development programs ... The research money is for the development of our aircraft programs but it's mostly for the C-30," says Isabelle Rondeau, Bombardier's director of communications. "In the first six months of 2012, we have spent $400 million in R&D on the C Series alone."

The annual ranking — produced by Research Infosource, a sister company to RE$EARCH MONEY — reveals three major R&D strengths at work: new product development activities in some parts of the manufacturing sector; continued strength in the services sector led by telecommunications; and, major increases in R&D related to natural resources, particularly oil and gas.

A regional breakdown reveals that the 13 Alberta-based companies in the Top 100 boosted R&D outlays by 33.4% — more than five times the national average — to $824.8 million or 7.6% of the Top 100 total. Oil firms Imperial Oil Ltd, Syncrude Canada Ltd and Suncor Energy increased their R&D spending by 52.3%, 24.3% and 16.7% respectively.

Ontario dominates the Top 100 ranking with 48 firms but they managed growth of just 5.4% on $5.66 billion in spending. That was higher than the 1.4% growth managed by the 25 Quebec-based firms, which spent $3.77 billion. British Columbia has 11 companies in the ranking and they cumulatively achieved 14.3% growth with $596.3 million in spending.

The leading sector remains communications and telecom equipment — long Canada's dominant R&D strength — which racked up $2.48 billion in outlays for 23% of the total. Five firms in the aerospace sector (including the high-flying Bombardier) spent $2.01 billion for 18% of the total. Next, 21 companies in the pharmaceuticals/biotechnology sector accounted for $1.27 billion for an 11.7% share, although the sector's Top 100 spending was down 8.3% from 2010.

"We were surprised. We thought companies would be less bullish," says Research Infosource president Ron Freedman. "Corporate profits are holding up but there's a lot of uncertainty that we thought would constrain companies from making investments. It's largely the case of where the total result is driven by the $100 million club, which had 24 members this year. The underlying trend is much more subdued."

The likelihood of the Top 100 companies maintaining or exceeding their 2011 performance remains in doubt, however, due to the looming economic turmoil in Europe and elsewhere, combined with the decision by the federal government to reduce tax-based incentives for corporate R&D performance.

The 2012 Budget announced decreases in the level and type of support provided through the scientific research and experimental development (SR&ED) tax incentive program. Specifically, it reduces the tax credit rate for larger R&D performers from 20% to 15%, eliminates the eligibility of capital expenses and reduces the proxy rate for overhead expenditures, with full implementation by 2014.

"The SR&ED changes will depress all decision-making, especially for multinationals. It makes it harder for these companies to convince head office to invest in Canada," says Freedman. "We have to modernize the concept of what research is."

R$