Industrial R&D spending slumps despite vibrant economy and surging profits

Boom times in the Canadian economy have not translated into stronger industrial R&D performance, with the Top 100 Corporate R&D performers conducting 3.8% less R&D between FY05 and FY06. The R&D of those companies amounted to $11.4 billion in FY06, compared to $11.9 billion in FY05, while R&D intensity (R&D as a percentage of revenue) also slumped from 3.7% to 3.5%.

The data — compiled by Research Info-source, a sister firm to RE$EARCH MONEY — come just months after the launch of the federal S&T Strategy and reinforces the need for policies to stimulate greater corporate investment in R&D and related innovation activities.

The data were also collected prior to the steep increase in the value of the Canadian dollar, which is sure to place greater pressure on firms to seek less expensive jurisdictions for performing R&D.

"The value of the Canadian dollar swings both ways. On the one hand, it means cheaper equipment imported from abroad. The bad news is that Canada is now a more expensive place to do R&D," says Ron Freedman, CEO of Research Infosource and co-publisher of RE$EARCH MONEY.

The downturn in corporate R&D spending follows two years in which the Top 100 posted modest gains of 3.5% and 3.0%.

In the top 10 alone, seven companies posted drops in R&D expenditures ranging from 20.8% at Magna International Inc to 2.2% at Nortel Networks Corp (see chart below). On a firm-to-firm basis, one can perhaps explain the declines, but collectively sagging R&D outlays spell bad news for a nation seeking to develop a strong, knowledge-based economy.

"The new data are not encouraging. There's no indication that we are building or sustaining R&D momentum. We've flatlined," says Freedman. "You can look at individual success stories but the overall picture is simply not encouraging."

Of the 11 leading sectors included in the data, forestry and paper products and energy/oil and gas showed the largest gains, increasing 16.2% and 3.7% respectively. Other sectors registering modest gains are: computer equipment (2%), electronic parts and components (2%), pharmaceuticals and biotechnology (1.2) and software and computer services (1.1%). The other five sectors recorded negative R&D growth, led by the automotive sector (which includes only Magna) down 20.8%, followed by mining and metals (-14.6%), telecommunications services (-11.5%), aerospace (-5%), and telecommunications equipment (-2.2%).

On the regional basis, Quebec firms took the hardest hit in FY06, with a 6.3% decline in R&D outlays Ontario also suffered a 4.3% drop, followed by British Columbia which dropped 2.8%. Alberta was the only gainer in the country, with provincially based firms registering a 19.3% increase in R&D spending. There were several notable exceptions among the generally depressing data . Current Canadian high-tech darling — Research in Motion Ltd —moved from #17 to #11 with a 45.8% increase in R&D expenditures, which totalled $178.8 million. EnCana Corp also posted strong gains, increasing R&D outlays by 44.9% to $140.5 million to move up to #16 from #23.

GlaxoSmithKline also had a good year, increasing its R&D performance by 30.6% to $177 million. Other major pharmaceutical players did not fare as well. Pfizer Canada Inc dropped 26.3% to $131.8 million while Merck Frosst Canada Ltd posted a modest drop of 2.56% to $114.1 million. Less than 10 years ago, Merck was Canada's #3 corporate R&D player, with spending of $308.5 million. Once again, Apotex Inc was the largest pharmaceutical R&D spender at $178.8 million, although that represented a 2.4% drop from FY05.

Nearly all the firms with the largest increases in R&D spending were from the bottom half of the Top 100. The top gainers were led by Western Oil Sands, which jumped 347% to $25.1 million for the #76 spot. The firm with the greatest R&D intensity is Neurochem. With R&D spending of $58.6 million and revenue of $3.2 million, its R&D intensity was 1,833.7%

FMI: www.researchinfosource.com

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