Study captures industrial R&D’s westward shift and decline of manufacturing

Business in-house R&D spending totalled $16 billion in 2013, $700 million lower than pre-recession levels in 2007 as increases by resources-based firms failed to offset major declines in R&D outlays by Ontario-based manufacturers, according to a new report from Statistics Canada. The drop corresponded to a 21.1% reduction in the number of personnel engaged in business R&D from 167,690 to 132,330.

The decline contrasts with the gains made between 2001 and 2007 when a range of industrial sectors pushed R&D expenditures up 17.5% for the period between the telecom and dotcom bubbles and the economic recession of 2008 and 2009.

The study — Industrial Contributions to Research and Development Spending in Canada  — found that changes in the composition in industrial R&D reflect a westward shift with Alberta’s share of the national total increased from 9% to 13% during the same period as high oil and gas prices, higher heavy crude oil extraction and surging environmental concerns spurred a steep hike in related R&D spending.

That’s in sharp contrast to Ontario’s share which fell from 48% in 2007 to 44% in 2013. Up until the late 1990s, Ontario commanded a 55% share of industrial R&D, far ahead of Quebec at 30% – a portion that has remained relatively constant since then. Atlantic Canada showed a small gain in its share of overall business R&D, as did Manitoba, Saskatchewan and British Columbia.

Ontario’s business expenditures on R&D (BERD)-to-GDP ratio fell from 1.4% to 1.1% between 2007 and 2013 while Quebec’s fell from 1.7% to 1.4% in the same period. Alberta’s BERD–to-GDP remained stable at 0.6% due to hefty increases in its provincial gross domestic product.

The data underlining the westward shift in industrial R&D does not capture the recent sharp drop on commodity prices, particularly those of oil and gas that have severely impacted the economies of Alberta and (to a lesser extent) Saskatchewan. The study notes that Alberta captured a similar portion of the national total during the oil boom of the 1980s which came to an abrupt end with a similar impact to the collapse in oil prices between 2014 and 2016.

The decline in manufacturing-related R&D over the study period was felt in virtually every sector, with declines registered by businesses engaged in the manufacturing of communications equipment, semiconductors and pharmaceuticals. A notable exception is the aerospace industry where R&D spending increased. Between 2010 and 2013, manufacturing R&D declined in constant dollars by $581 million.

The study period corresponds to that of the Conservative government of Stephen Harper when the resource-based economy was afforded far more attention and support than knowledge-based industries. During that time, Canada’s largest corporate R&D spender — Nortel Networks Ltd — declared bankruptcy. Between 2000 and 2009 (the year Nortel declared bankruptcy), the telecommunication giant’s R&D expenditures plunged from nearly $6 billion to $894 million.

The study is the latest in StatsCan’s new Economic Insights series, which launched in 2016 and includes studies on the impact of falling commodity prices on real income, trends in RRSP contributions and pre-retirement withdrawals and the impact of lower earnings in Alberta on national earnings growth. The industrial R&D study was released ahead of new data that will be released later this year.