Slumping telecommunications sector drags down industrial R&D spending

Guest Contributor
July 29, 2002

First decline in history of StatsCan survey

The federal government’s goal of stimulating substantially higher industrial R&D spending may be much tougher than originally envisioned if the latest projections by Statistics Canada are accurate. New data on spending intentions show that total industrial R$D expenditures could decline 6.1% this year, dropping to $11.244 billion from $11.973 billion in 2001. The decline marks the first year-over-year drop in R&D spending since the survey was initiated in the mid 1960s.

That’s the opposite direction from what’s required to move Canada into the top five R&D performing nations in 2010; one of several ambitious objectives that serve as the cornerstones of Ottawa’s innovation agenda. Industry Canada estimates that Canadian R&D investment from all sources must reach at least $48 billion by that date with private sector R&D contributing two thirds of the total.

Several factors have conspired to push down projections for 2002, the most significant being the severe telecommunications downturn that has decimated Canada’s largest R&D performer – Nortel Networks Corp. Nortel’s global R&D expenditures nosedived by nearly $1 billion in 2001 (StatsCan only captures Canadian spending) and the company’s latest quarterly data show that the rate of decline is accelerating this year (see page 7). Other telecommunications firms are also posting lower R&D spending and the telecommunications malaise is spreading to sectors such as semiconductors, other electrical components and even aerospace products and parts (see chart).

“This (survey) reflects the effect of people’s thoughts on the downturn,” says Bert Plaus, StatsCan’s chief of the science and innovation survey section. “We’re in the field right now to get next year’s intentions and the picture is not very rosy.”

The telecommunications sector is forecast to reduce its R&D spending by 23% this year, while the semiconductor industry expects R&D outlays to fall 12%. The downturn has prompted the Canadian Advanced Technology Alliance (CATA) to renew its call for the federal government to revise its scientific research and experimental development tax credit (SR&ED) program (R$, May 22/02). CATA wants the eligibility rules for SR&ED changed to allow publicly traded firms access to large pools of unused tax credits. Under existing legislation, the tax credits can only be used by these firms if they are profitable and many prominent firms are currently bleeding red ink.


The survey was conducted last summer at the height of the telecom and high tech downturn, but before the terrorist attacks on the US and the recent corporate scandals further weakened the industrial sector. While a decline in R&D expenditures is obviously cause for concern, not all accept a pessimistic interpretation of the StatsCan spending intentions for 2002.

“It’s very misleading. The survey was done when it looked like the economy was going into the tank,” says Ron Freedman, a partner with The Impact Group. “Nortel skews it but if you take telecom out of the aggregate analysis and sort the ups and downs (of each sub-sector) you’ll get a much better picture.”

The new survey adopts the North American Industrial Classification System (NAICS) for the first time, replacing the similar Standard Industrial Classification (SIC). Historical data have been reclassified to allow for comparisons to previous years.


NAICS breaks industrial R&D expenditures into six major groups and 46 sub-categories, and includes a new category — scientific research and development — within the services group. Of the six major groups — agriculture, mining, oil & gas extraction, utilities, construction, manufacturing and services — the latter two account for 96% of 2002 spending intentions. Of those groups, services, agriculture, and construction show modest year-over-year increases, while decreases are registered in utilities, mining, oil & gas extraction and manufacturing.

Manufacturing is by far the largest single category, representing 67.5% of all industrial spending intentions. It also shows the largest projected year-over-year decrease, dropping $781 million or 9.3%, from $8,375 in 2001 to $7,594 in 2002. Of the 27 sub-categories making up the manufacturing sector, 17 show mostly modest increases, compared to seven that declined and five that remained flat. Of the decliners, the drop registered by the communications equipment industry is by far the largest at $728 million, followed by semiconductor and other electrical component makers, which fell $105 million.

When those two industries are taken out of the mix, the other 44 sub-sectors for 2002 actually show a modest year-over-year increase of $104 million or $1.3%.

Of the 46 sub-sectors, 28 posted increases, compared to 11 which registered declines and seven that remained unchanged.

The year 2000 is the most recent for which solid data are available. They show that industry spent $11.5 billion, with manufacturing accounting for $8.2 billion or 71.3% of the total. That compares with 2002 intentions, when manufacturing firms plan to spend $7.6 billion or 67.5% of the total.

In 2000, the firms themselves provided $7.2 billion in funding, with foreign sources accounting for $3.5 billion or 30.5% of the total. Foreign sources have become an increasingly import source of R&D funding, and the 2000 amount represents a staggering 31.9% increase from the year before.

Foreign controlled firms accounted for 380 of the 7,896 firms included in the StatsCan survey and 30% ($3.4 billion) of the total R&D expenditures for 2000.

The number of employees engaged in R&D also increased in that year, up 5.0% from 87,846 to 92,281. The increase was almost completely accounted for by employees with bachelor’s degrees while those with master’s and doctorates declined slightly.

In addition to year-over-year data, the survey provides a five-year snapshot from 1998 to 2002. Over the longer term, the industries with the largest percentage increases are construction (73%), electrical equipment, appliances and components (67%), and pharmaceutical and medicine (65%). The strongest declines were experienced in retail trade (-35%) and other services (-28%).


Canada’s Top 21 Industrial R&D Sectors

Industry Sector2000
Communications Equipment3,2573,2322,504
Aerospace Products & Parts899936893
Semiconductor & Other Electrical Components771875770
Pharmaceuticals & Medicine707706754
Computer System Design & Related624690709
Wholesale Trade498506522
Architectural, Engineering & Related398526499
Navigational, Measuring, Medical &
Control Instruments
Scientific Research & Development324369384
Information & Cultural Industries321344348
Motor Vehicle & Parts349314323
Health Care & Social Assistance290301309
Other Chemicals266252260
Computer & Peripheral Equipment189192193
Primary Metal (non-ferrous)151190181
All Other Services177175174
Mining, Oil & Gas Extraction142158155
Finance, Insurance & Real Estate125132150
Wood Products126131129
Source: Statistics Canada Service Bulletin Vol.26, No. 4

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