Report examines declining number of R&D performing companies during booming 1990s

Innovation policies questioned

A new study contains sobering revelations that Canada’s base of industrial R&D performers is stagnant and possibly shrinking, the result of inconsistent and ineffectual industrial policy that has failed to incent more players in the private sector to become more innovative. The decline in the number of Canadian R&D performers began in 1994 and continued through to 1999 before recovering to earlier levels (see chart) –— a period in which the economy was booming and R&D expenditures were increasing rapidly.

The report’s finding are especially troubling in light of Ottawa’s goal of placing Canada in the top five of R&D-performing nations. The target was among several established during the formative phase of Industry Canada’s innovation strategy. Now that the strategy has apparently been abandoned, the 15th to 5th objective has vanished from the current discussion and the language now foregrounds productivity, competitiveness and commercialization.

The study — entitled The Demographics of Industrial Research in Canada 1994-2000 — was produced by Ron Freedman of The Impact Group, co-publisher of RE$EARCH MONEY. The findings are based on data compiled by Statistics Canada from its annual survey of large industrial R&D performers and data from the Canada Revenue Agency for smaller R&D performers.

“The numbers are the result of all the policies and programs we’ve had to encourage R&D. They haven’t worked and therefore the people setting program policy are in a difficult position,” says Freedman. “If they acknowledge that the programs haven’t worked they have to admit defeat ...They’ve been too fixated on the R&D spending numbers. A strong economy requires more R&D spending and more R&D spenders and one without the other doesn’t get you very far.”

Between 1994 and 2000, Canada enjoyed real economic growth of 43% and the number of businesses increased by 12%. R&D spending was exploding at the tail end of an uninterrupted 40-year cycle, before imploding in the wake of the high-tech meltdown of 2000. In spite of the impressive growth, however, the number of companies performing R&D between 1994 and 1998 declined in every jurisdiction except Quebec before recovering.

Freedman says the decline varies from sector to sector and is due to different factors, but in general it is a result of the confluence of several factors. During the 1990s, mergers and acquisitions occurred in several industrial sectors including pharmaceuticals and oil and gas, leaving fewer players conducting R&D. Free trade also became a reality, making it easier for foreign firms to import directly into Canada without having to establish operations here. In addition, large corporations largely abandoned the corporate R&D model with centralized laboratories.

The result was a sharp decrease in the number of companies performing R&D — a trend that persisted until the late 1990s when government enacted changes to its tax credit regime for R&D expenditures. Firms responded and the number of R&D performers increased. The scientific research and experimental development (SR&ED) program, for instance, enacted several key changes to make it easier to use the tax credits and was actively promoted. A cottage industry of consultants grew up to assist firms in receiving SR&ED tax credits.

But an analysis of StatsCan data shows that the number of firms that consistently performed R&D is low. Between 1994 and 2000, StatsCan data captured 25,161 companies performing R&D, but more than one third did so for just one year out of the seven-year period. A further 23% conducted R&D for two years while only 9.4% of firms (1,257) performed R&D for all seven years.

“The behavior of firms is tax incentive driven,” says Freedman. “After 1999, companies were waking up to the fact that there was money to be gained from the things they were already doing, namely R&D.”

QUEBEC BUCKS TREND

Quebec’s ability to buck the trend throughout the period of decline resulted in the province increasing its overall share of R&D-performing firms over the 1994-2000 period from 32.8% to 42.8%. The number of R&D personnel employed in Quebec also experienced a significant increase over the same period, rising 45.4% from 23,720 to 34,478. Quebec’s R&D-performing firms were also more diversified, spread across more sectors than any other province. And in 35 out of 46 sectors, R&D performers actually increased, once again in contrast to the rest of Canada.

The report contends that Quebec’s performance is not exclusively due to the wide range of programs and incentives geared towards innovation. It also cites the role of governments that understood the importance of R&D to a thriving economy as well as promoting innovation programs and incentives.

“Quebec’s political leadership understood the importance of the link between research and economic prosperity and made the fiscal and programmatic tools available to pursue an ambitious industrial research agenda,” states the report. “If other provinces did not follow Quebec’s lead to the same degree, the inevitable conclusion is that the political leadership in those provinces did not embrace an innovation agenda to the same extent.”

The report goes on to add that Quebec’s superior performance was not due to a real increase in the number of R&D-performing companies, but was more a response to well publicized tax incentives that earned the province’s approach to economic growth the moniker of ‘Quebec Inc’. This is defined as a “gap-filling approach” which produces a patchwork of programs rather than an integrated whole.

The report contains a wealth of data on industrial R&D spending from many perspectives, including by province, industry sector, size of firm and between different sectors of the economy (primary, secondary and service industries).

FMI: www.impactg.com

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