Research paper probes financing challenges facing R&D-intensive firms

A new research paper from Industry Canada suggests that smaller R&D-intensive (RDI) firms have more difficulty obtaining debt financing than other companies. Using Statistics Canada data from 2004 and 2007, report author Owen Jung contends that the financing challenge face by RDI firms with less than 500 employees and $50 million in annual revenues hampers their ability to increase productivity and penetrate global markets.

The report is significant for those engaged in the policy debate over whether governments should give preference to knowledge-based, R&D-intensive firms when providing assistance to the private sector.

"Enhancing the pace of innovation development can have a profound impact on the country's wealth and prosperity," states the report. "With the rising prominence of emerging economies in the global economic landscape, improvement in Canada's productivity growth becomes increasingly imperative."

Data suggest RDI firms have a poor credit history compared to their non-RDI counterparts, and tend to have young owners with less management skills — factors that hinder their chances of securing credit. RDI firms are far more likely to be in knowledge-based industries than non-RDI firms.

The scope of the problem is exacerbated by the fact that RDI firms are more likely to have growth intentions and are more willing to share equity in the business. Ontario is particularly vulnerable as RDI firms are overrepresented in the province.

"For higher levels of R&D intensity only, the higher the R&D intensity, the greater the probability that the firm will be denied financing."

— Industry Canada research paper

Entitled Credit Conditions Faced by Small and Medium-Sized Enterprises Investing in Research and Development, the report found that RDI firms experienced an average loss of $21,000 compared to an average profit of $80,000 for non-RDI companies, making the need for obtaining credit all the more acute.

"RDI SMEs were, in general, younger and smaller than non-RDI firms, yet they were significantly more likely to engage in exporting activities and to declare growth intensions," states the report.

"Financing R&D activities is frequently a challenge not only because of the often non-trivial costs but also because such activities are inherently risky as the payoff is not guaranteed."

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