Ron Freedman

Clouds Forming on Industrial Research Horizon

By Ron Freedman

Canada’s competitive future is at risk. New data indicate that by one important measure the R&D performance of the Canadian economy has been stuck in neutral for nearly a decade and is possibly beginning to roll backwards. R&D is the wellspring of new products, services, efficiency gains and competitiveness. More research can make the economy more competitive and thereby generate more jobs, exports and wealth. So, a static or declining base of research companies should be of concern to everyone. It does not bode well for Canada’s competitive future.

Analysts often focus on the amount of money that companies spend on research as one measure of future competitiveness. (We say future competitiveness, because it takes time for research to bear fruit.) Our company uses this approach when we publish Canada’s Top 100 Corporate Spenders List each year. But seldom do analysts examine a more fundamental indicator — the number of companies that are conducting research.

One formula which would indicate a country’s business competitiveness by multiplying the number or proportion of companies performing research times the amount of research they perform. In an increasingly knowledge-intensive economy, we would want to see more companies and a higher proportion of firms undertaking R&D.

Successive federal and provincial governments have recognized this imperative and in various ways have tried to spur industrial research. Tax incentives, program spending, human resource programs and other tools are used to promote industrial research. In fact, during the 1990s the growth rate of research spending by Canadian businesses rose sharply. Canadian industry was starting from a relatively low base of research spending. Nonetheless, policymakers could take comfort in the fact that spending was on the rise. That is the good news. But what about the number of companies performing research?

Here’s where the clouds begin to form. Data from the Canada Revenue Agency and Statistics Canada indicate that through much of the 1990s — a period of rapid economic growth in Canada and abroad — the number of firms conducting research was static. Surprisingly, data indicate that the number of firms performing research in Canada in 2000 was no greater than in 1994. (Figures for 2001 indicate a sharp drop in that year, but those figures are still subject to revision — probably upwards — so they must be viewed with caution.)

So, while the economic boom of the mid-1990s was flooding the economy with new investment — especially in technology companies — and the number of business establishments doubled in just five years, there was no overall increase in the number of companies performing research. True, the core R&D performers — around 10,500 of them— were spending more on research than ever, but the number of firms was not growing. If the core had grown, then the level of industrial research spending would have increased even more than it did, which would have made Canada’s R&D performance (measured as the amount of business spending on R&D as a percent of GDP) even better than it was.

Why hasn’t the number of R&D companies grown since 1994? Certainly the conditions were right — an expanding economy, generous government R&D incentives, unprecedented private sector investment in technology companies, expansion in the number of non-profit and academic research centres, a stronger sense of business entrepreneurship, and more science and technology graduates from universities and colleges. Despite all of this the size of the corporate research community was moribund. It’s a huge puzzle, with no ready explanations.

It’s not that Canadian R&D firms were being bought up by foreigners, because unless they relocated all the Canadian R&D activity abroad (not many did), their company’s R&D activity would still show up in Canadian statistics.

It might have something to do with the structure of the economy. Most company growth is in the service sector, whereas manufacturing company growth is flat. A little-known fact is that in total, slightly more service companies undertake research than manufacturing companies. But whereas the service sector is larger than manufacturing, service sector companies have a lower overall propensity to do research than manufacturing companies. They also spend less per company on R&D. So a growing service sector doesn’t translate as readily into more R&D companies as a growing manufacturing sector.

It might also have something to do with the structure of industrial research. For a number of years some major corporations have been shuttering their large R&D facilities, which will have had some effect on the overall statistics. Alternately, it could have something to do with the changing nature of innovation within companies; maybe innovations are being acquired through the purchase of components from outside suppliers, rather than being developed in-house.

Unfortunately, we really don’t know the answer to the conundrum. The policy community hasn’t yet woken up to the fact that we have a problem. What we do know is that the economy needs more companies to be engaged in research and development, but indications are that this is not happening. If we want to boost prospects for the country’s future competitiveness we should find out why and what to do about it.

Ron Freedman is CEO of Research Info-source Inc, a partner in The Impact Group and co-publisher of RE$EARCH MONEY.