A new report on the R&D spending of more than 600 companies reveals that a critical pillar of Canadian innovation is at a crossroads. Although R&D expenditures and research intensity of Canadian and Canadian-based firms dropped slightly in 2002, there remains remarkable strength in some sectors, providing some optimism that Canada’s innovative companies are well positioned for the next economic upturn.

Canada’s Top Corporate R&D Spenders Report 2003 contains a wealth of data on the R&D performance of 627 firms, examining their performance by several measures including sectoral breakdown, location, country of control, revenue and research intensity.

In 2002 those 627 firms invested $12.2 billion in R&D, down 8.6% from 2001 when the total was $13.4 billion. The drop in R&D expenditures occurred despite a modest 2% year-over-year increase in revenue by reporting firms, from $333.4 billion to $340.1 billion.

For a more detailed examination of performance and trends, the report breaks the field of firms into three segments or tiers according to R&D spending. The top 100 firms in Tier 1 accounted for $10.9 billion or 90% of all R&D outlays reported, while the 206 firms in Tier 2 collectively spent $1.1 billion or 9%. Tier 3 accounts for 321 companies, which spent $197 million or just 2% of the total. R&D spending declined in all tiers.

The report shows that — beyond the obvious observations such as the declining R&D performance of Nortel Network Corp or JDS Uniphase Corp — R&D spending weakness is evident in firms of all sizes but is particularly pronounced in smaller firms. The data dig deep enough, for instance, to demonstrate that the weakness in smaller firms (those spending less than $2 million on R&D) is most extreme among firms in the pharmaceuticals/biotechnology sector in British Columbia.

POSITIVE SIGNS AMIDST THE NEGATIVE NUMBERS

The report is not only the bearer of bad news. One the one hand, it details the precipitous plunge in R&D expenditures by firms in Canada’s largest single R&D sector — telecommunication/telecom equipment. But it also shows that pharmaceutical and biotechnology firms experienced year-over-year R&D growth of nearly 13% (see chart). And because of the drop in spending by telecom equipment makers and communication companies from 52% of the total in 2001 to 42% in 2002, pharma/biotech has increased its share of overall R&D spending from 11% in 2001 to 14% in 2002.

The sector with the highest rate of growth was automotive. A spectacular 60% jump in R&D spending by Magna International Inc helped push up the whole sector by 54.9% from $386.4 million to $598.5 million. Double digit increases were also registered by the transportation, environment, primary energy and aerospace sectors.

Of the 21 sectors covered by the report,12 showed R&D growth in 2002 compared to 14 sectors in 2001.

The report’s data also reveal that the Canadian-based subsidiaries of foreign firms are higher in research intensity than domestic firms. The 29 subsidiaries conducting research in Canada had a research intensity (R&D outlays as a percentage of revenue) of 5.3% compared to Canadian firms which managed 3.4%. In fact foreign firms achieved a modest increased in year-over-year research intensity, while the research intensity of Canadian firms dropped from 3.8% to 3.4% in the same period. Foreign firms account for $2.2 billion or 17.3% of the 2002 R&D total.

From a regional perspective, British Columbia experienced the highest level of research intensity at 5.8% compared to the national total of 3.6%. BC supplanted Ontario as the most research intensive province in 2002, with the latter falling to 5.5% from 6% in 2001. Quebec’s research intensity didn’t drop as much as Ontario’s, but its level is lower (2.3%). The research intensities of the other provinces are below 1% — Prairies (0.8%) and Atlantic (0.6%).

The Corporate R&D Spenders Report is published by Research Infosource, a division of The Impact Group. The Impact Group is also a majority owner of RE$EARCH MONEY.

FMI: www.researchinfosource.com

R$