StatsCan identifies trends behind slow growth in domestic industrial R&D spending

In-house industrial R&D spending in Canada is projected to remain weak with outlays in 2019 of $18.3 billion — 2% below actual expenditures in 2016 when they totalled $18.7 billion. The drop was primarily attributed to a 5% decline in R&D capital spending, which totalled $1.1 billion in 2017.

The data are contained in a new Statistics Canada report that aims to identify the key characteristics of Canadian industrial R&D, including an increase in outsourcing to universities, an uptick in R&D performed by foreign-based firms and a slight decline in the number of people engaged in R&D.

Perhaps even more significant, Canadian businesses are selling an increasing amount of intellectual property (IP) and turning to domestic sources for a majority of IP they purchase.

Business R&D has experienced many challenges during the 21^st century, suffering high-profile setbacks: the demise of R&D giant Nortel Networks Corp; the dramatic downsizing and refocusing of BlackBerry Ltd; and the sale of several large- and mid-sized tech-based companies to foreign buyers. The result is a somewhat more balanced distribution of R&D across companies when ranked by size, with SMEs now accounting for a greater share of total spending.

Yet the setbacks have resulted in sluggish or non-existent growth in industrial R&D outlays, exacerbated by the globalization of R&D, an escalation of outsourcing and the subsequent rise of lower-cost Asian jurisdictions led by China.

The decline in in-house industrial R&D spending has been offset by the jump in R&D expenditures outsourced to other firms and post-secondary institutions. In 2017, outsourcing increased for the third year in a row, jumping 15.9% to $4.9 billion. For universities, the year-over-year increase more than doubled to $616 million.

“This trend reflects increased collaboration between the business sector and the higher-education sector, which consists of universities and hospitals,” states StatsCan in an August 26 press release. “Companies in Canada intended to continue their current level of outsourcing of R&D activities, with preliminary estimates of spending for 2018 at $3.9 billion, and intentions of spending at $4.1 billion for 2019.”

Foreign-based firms

With the historical decline of domestic in-house R&D operations, foreign-based firms are performing an increasing share of industrial R&D. As of 2017, foreign-controlled firms account for more than one-third of in-house industrial R&D spending for the fourth consecutive year, with expenditures increasing 2.8% to $7.0 billion in 2017

At the same time, the number of personnel dedicated to R&D has slipped slightly although their total wages remained unchanged. In 2017, scientists, researchers and research managers accounted for about three quarters of the 1.6% drop from 146,964 full-time equivalents to 144,570. The number of on-site contractors declined even further, dropping 11.3% to 6,048 – the third straight year of declines. On-site contractors are hired to support project-based and short-term R&D activities.

Services VS manufacturing

It’s been decades since services surpassed manufacturing as the dominant R&D in Canadian industry and the trend is continuing unabated. In 2017, service-producing industries increased their majority by 2.4% from the previous year, while manufacturing industries decreased their share of in-house R&D by 2.6%.

Unsurprisingly, 64% of personnel were employed by services-producing companies, compared to about one-third for manufacturing.

“The shift of R&D activities from manufacturing to services-producing industries reflects increases in both job creation and economic growth in Canada's services-producing industry for this time period,” states the StatsCan release.

Intellectual Property

StatsCan has found that more Canadian firms are purchasing IP from domestic versus foreign sources. Domestic IP purchases exceeded foreign purchases for the first time in 2016 and boosted that to 57.5% in 2017. With a decline in IP imports, the year-over-year increase in the net flow of IP commerce increased 86% to nearly $1.8 billion.

Sales of IP are also booming, with a record $4.2 billion of IP and technological services sold in 2017, up 7.7% from 2016.  StatsCan attributes the increase to “higher payments for packaged or off-the-shelf software” with off-the-shelf included as it’s “developed using in-house knowledge”. In contrast, Canadian firms spent $2.2 billion importing IP “mostly as a result of lower spending on patents and packaged or off-the-shelf software.”

The services-producing sector accounted for two-thirds or $1.5 billion of the total spent on IP in 2017, with original software for the majority of IP sales for the fourth year running. StatsCan concludes that the trend “indicates an increase in the commercialization of knowledge-based goods and services by Canadian companies” and coincides with a 44% decrease in IP imports in the same period.

“The dominance of the services-producing sector in both sales and purchases of IP is consistent with Canada's transition towards a services-based economy," states the release.

R$