Industrial R&D continues downward trend as continuing impact of economic crisis discourages company spending

Industrial R&D spending in Canada remains in a deep slump exacerbated by the global financial crisis and the collapse of the country's former top R&D performer, Nortel Networks Corp. Statistics Canada projects that R&D expenditures will decline to $14.8 billion in 2010, down 2.6% from the previous year, 6.2% from 2008 and 11.0% from the all-time high of $16.6 billion in 2007.

Not surprisingly, R&D in the manufacturing sector has taken the biggest hit, plummeting 21.7% since 2006. Its share of total R&D during that five-year period has declined from 53.7% to 46.8%. In the same period, services R&D increased its share from 38.7% to 45.4% despite experiencing a modest 2.2% decline between 2009 and 2010.

Telling examples of the retrenchment in industrial R&D abound with the most dramatic occurring in several key technology sectors. R&D spending by firms classified as Semiconductor and other electronic components totaled just $386 million in 2010, down 54.4% from 2006 when firms spent $847 million — a decline likely compounded by Nortel's failure. Companies in the motor vehicle and parts sector also saw a drop of nearly 50% in the same period, from $608 million in 2006 to $306 million in 2010.

Data for 2009 and 2010 are preliminary and will be finalized once complete data on smaller R&D performers are obtained from the Canada Revenue Agency, based on reporting from the scientific research and experimental development (SR&ED) tax credit program.

"The financial situation has come home to roost. The magnitude of the change in R&D expenditures is a pretty big challenge," says Ron Freedman, CEO of Research Infosource and co-publisher of RE$EARCH MONEY. "It's hard to say if R&D spending has hit bottom. R&D activities are easy to cut back on quickly but hard to re-establish so there's a lag between economic recovery and R&D recovery."

The few areas of industrial R&D that showed any recovery in spending intentions include scientific R&D equipment and wholesale trade. Utilities R&D is up marginally for 2010 ($166 million) but far from its high of $313 million in 2006.

revisions in survey

The latest StatsCan industrial R&D survey has undergone extensive revision, resulting in the findings being delayed several months. The revision in the methodology was largely prompted by changes to the forms used by Canada Revenue Agency in 2008, meaning that the nature of R&D activities and area of specialization are no longer included.

Totals for specific industrial categories are also lower than in other corporate R&D rankings, most notably Canada's Top 100 Corporate R&D Spenders list, published by Research Info-source. For instance, StatsCan reports total R&D spending intentions in the motor vehicle and parts category as $336 million for 2009, whereas the two automotive firms captured in the Top 100 ranking reported R&D expenditures of $587.3 million for the same year.

The reason, according to a StatsCan official, it that StatsCan reports only R&D performed in Canada, while Research Infosource reports global R&D spending by Canadian-based firms. That suggests that a significant portion of the $553.9 million reported by Magna International Inc is performed offshore.

In the case of pharmaceuticals and medicine, StatsCan reports spending intentions $761 million for 2009, while Rx&D reports spending of $1.3 billion. The discrepancy is due to the nature of industrial classification, with pharma R&D split over at least three categories — pharmaceutical and medicine, wholesale trade and scientific R&D services.

To provide guidance on the data, Statistics Canada has employed a qualitative rating system, giving each category a numerical rating of ‘A' (excellent) to ‘E' (use with caution). A further rating of ‘F' is used for categories deemed "to unreliable to be published". Categories with unreliable data include oil and gas extraction, wood products, paper and construction.

The full survey can be obtained at www.statcan.gc.ca/pub/88-001-x/88-001-x2010006-eng.pdf. A more detailed report will be published in 2011 including data on personnel engaged in R&D.

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