Recovery of industrial R&D hampered by continued weakness in telecom sector

Industrial R&D spending intentions for 2005 indicate a slight year-over-year improvement of 1.6% before inflation. But expenditures remain 3.3% below the record level achieved in 2001. The continuing industrial R&D slump is attributable in large part to depressed R&D outlays by communications equipment manufacturing and semiconductor and components manufacturing industries, which remain below 2001 levels.

In 2005, total industrial R&D spending is expected to be $13.848 billion, up $218 million or 1.6% from 2004 levels. But the spending estimates pale in comparison to 2001 spending which reached $14.32 billion before falling precipitously by nearly $1 billion or 6.6% in 2002 (see chart). The data are contained in the latest report from Statistics Canada which is derived from its 2003 industrial R&D survey, capturing 2003 actual spending, preliminary figures for 2004 and spending intentions for 2005.

The communications equipment sector remains the single largest R&D spender with an estimated $1.67 billion in 2005, an amount that’s 52.5% of the $3.18 billion in outlays just four years previously. Other sectors associated with high tech fare better. The semiconductor industry is nearly back to 2001 levels with projected expenditures of $813 million, while R&D outlays by the aerospace and computer system design industries are on par to four years ago with estimated spending of $949 million and $1.1 billion respectively.

The 2005 spending intentions should be read with some caution, as they have been off the mark in several industrial sectors in the past. In its 2004 report, companies from several industries provided StatsCan with estimates and spending intentions for 2003 and 2004 R&D. For motor vehicles and parts, for instance, firms speculated that spending would be $307 million and $313 million respectively. The latest report shows that R&D spending for 2003 was actually much higher ($469 million) or 52.8%, while the estimate for 2004 is $464 million, 48.2% higher than the previous year’s projection.

NEW METHODOLOGY FOR SMALLER PERFORMERS

A wide discrepancy in the opposite direction can be found in the communication equipment industry. In 2004, the industry estimated that it would spend $1.99 billion in 2003 and $1.98 billion in 2004. Actual spending for 2003 was $1.7 billion, 14.2% lower than estimated. The industry is now estimating that it will spend $1.64 billion in 2004, compared to the estimate of 1.98 billion last year, a difference of 17%.

Part of the explanation may be due to StatsCan’s inclusion for the first time this year of projections for firms spending less than $1 million on R&D annually. StatsCan relies on administrative data for these firms from the Canada Revenue Agency, which typically take about two years between actual expenditures and their reporting by StatsCan.

Robert Schellings, manager of private sector subject matter in StatsCan’s science and innovation survey section, says the new methodology for smaller R&D performers should lessen the gap between estimates made in previous years and the subsequent reporting of actual spending.

“We’ve applied new methodology for the first time this year and we hope it will be more accurate. Time will tell,” he says.

A factor with an even greater impact on the estimation of industrial R&D spending is the industry itself. Firms develop their estimates within a specific environment that can change due to a number of factors.

“When we collect data, companies project figures at a certain point in time. Who’s to know what lies down the road,” says Schellings. “Those estimates can change quite drastically in some instances.”

The report contains data from 46 industrial sub-groups and for the first time breaks them into information and communications technology (ICT) and non-ICT categories. ICT industries account for R&D outlays of $5.25 billion or 37.9% of the 2005 total, with non-ICT industries totalling $8.6 billion or 62.1%. In the four-year period covered by the data (2001-2005), ICT R&D spending has plummeted 21.5%, despite a modest 2.0% annual increase in 2005.

Ontario and Quebec continue to dominate the industrial R&D landscape, accounting for 83.5% of all 2003 outlays. That compares to 83.1% in 2002 and 84.5% in 2001. During the above three-year period, however, Ontario’s outlays have fallen from an all-time high of $7.95 billion in 2001 to $7.1 billion in 2003. R&D expenditures in British Columbia are relatively stagnant at $1.1 billion, while Alberta has experienced an 8.5% increase between 2001 and 2003 to $779 million.

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