Time to Focus on Industrial Research

By Ron Freedman

Since the sluicegates opened on university research funding in 1997, the policy community has been preoccupied with measuring funding inputs and tweaking commercial outputs in the higher education sector. As a result, we have overlooked some disturbing trends under way in industry. It is time to place our focus on the health and viability of industrial research in Canada. Consider the evidence.

StatCan has just reported (Cat. 88-202-XIE, January 2005) that for 40 years — until 2002 — industrial funding of R&D grew consistently, through good times and bad (with one time-out in 1996). Adjusted for inflation, current intramural funding increased at an average annual compounded rate of 6.0% between 1981 and 2003. In 2002 there was a sudden -10.6% downturn. The inflation-adjusted downturn, a further -3.4%, continued in 2003. The projection for 2004 is for a further decline of around -3.1%.

Our own newly-released Research Info-source Inc report on industrial research spending — Canada’s Top Corporate R&D Spenders Report 2004), based on a large sample of 650+ companies — found that in FY 03:

Overall R&D spending dropped by -5.3% against a revenue increase of 2.6%. It also found that research intensity (R&D as a percent of revenues) declined by -7.7%; BERD (Business R&D as a percent of GDP) declined nationally and in 4 of 5 regions; R&D spending declined among large, medium and small firms; and spending dropped in 11 of 21 industry sectors and rose less than inflation in two others; spending dropped by -6.1% among companies with R&D of more than $100 million.

Possibly a more disturbing set of findings comes from a soon to be released Impact Group report, The Demographics of Industrial Research in Canada 1994-2000. This study contains even more evidence of industrial R&D weakness, a trend that has been entirely overlooked by the policy community. It examined the number of companies performing research in Canada over a seven-year period. It happens this was the period of the largest and most sustained economic growth in post-war history.

It found that there was zero increase in the number of firms performing research in the period. Specifically: Western Canada lost 26% of its R&D performers; Atlantic Canada lost 37% of its R&D companies; and, Ontario lost 14%. Only in Quebec did the number of companies performing research increase, by 34%. By 2000, Quebec was home to 42.8% of all R&D companies in the country; the other nine provinces shared 57.2%. The Demographics of Industrial Research found that only 16 industry sectors out of 46 increased the number of R&D performers, compared with 30 sectors that experienced a decline. Worrisome indeed was the finding that large firms seem to be abandoning R&D.

Why should we be concerned about these trends? Firstly, the declining number of R&D performers suggests that our policies and programs for supporting industrial research are not working to the degree that we think they are. The current situation — think of it as industrial R&D depopulation — developed in the context of myriad federal and provincial programs to support industrial research. If one of their objectives was to increase the number of R&D performers (or at least preserve it), then patently they have failed.

Another reason for concern is that the population of companies performing R&D is the single best measure of national industrial receptor capacity. Receptor companies are those firms that conduct research and are therefore best positioned to take research from universities or government labs and turn it into commercial products and services. The evidence strongly suggests that industrial receptor capacity is in decline everywhere in Canada, except Quebec.

Finally, a healthy economy needs increasing innovation in all industry sectors. One indicator is the number or proportion of firms doing research. From that perspective two-thirds of industries are in decline.

Why did this sharp decline in industrial research capacity take place, and why did the policy community miss the trend? Changes both in the structure of the economy and in firm behaviour are responsible. Less-than-effective industrial R&D policies and programs must take their share of the blame. So too must political leadership, which is too much focussed on how to spend national wealth and too little on how to generate wealth in the first place. And finally, business leadership played a role.

Incidentally, the downturn in industrial research is not restricted to Canada. Between 1992 and 2002 the number of R&D performers tracked by the National Science Foundation declined from 40,878 to 29,001. And, according to Technology Review, “US companies spent $190.8 billion on R&D they performed in the United States in 2002, compared with $198.5 billion spent in 2001. This $7.7 billion (3.9%) decline is the largest single-year absolute and percentage reduction in the current-dollar cost of industrial R&D performance since the survey’s inception in 1953.”. So, the downward trend could be part of a wider North American phenomenon.

During the 1990s, the policy community became mesmerized by positive statistics on the growth of business funding of R&D, expecting the trend to continue forever. As a result, we failed to recognize the underlying malaise — an eroding base of R&D performers. New reports such as those cited here suggest that there are few if any encouraging trends in Canadian industrial research.

It’s time for authorities such as the federal Advisory Council on S&T, Office of the National Science Advisor, Industry Canada, Finance Canada, Canada Revenue Agency and various provincial and regional advisory bodies to put industrial research back on the public policy agenda. We need a better understanding of how and why the underlying dynamics of industrial research are changing. And, we need to re-examine the effectiveness of federal and provincial innovation policies and programs. If we don’t, the future promises a further hollowing-out of Canada’s industrial research capacity.

Ron Freedman (ron@impactg.com) is a principal of The Impact Group, CEO of Research Infosource Inc and co-publisher of RE$EARCH MONEY.