Analysis

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Research and development (R&D) performing firms anticipate that their spending (in current dollars) on R&D will be $16.1 billion in 2009 (table 1), essentially unchanged over the previous two years. The data collection of R&D spending intentions for 2008 and 2009 began in August 2008, prior to the onset of the current global financial downturn, and continued until March 2009. It is anticipated that firms will adjust their R&D spending according to their individual responses to the global financial crisis.

In constant 2002 dollars, industrial R&D spending has yet to recover from the technology downturn of the start of the millennium which became more apparent with the 2002 industrial R&D spending (table 1).

The number of R&D performing firms continues to increase, up 66.7% from 12,087 in 2001 to 20,154 in 2006 the most recent year for which are available (table 18-2). In constant 2002 dollars, industrial R&D expenditures peaked at $14,425 million in 2001 consequently the average R&D expenditure for firms performing R&D in 2006 of $704 thousand is much lower than the average of $1.2 million for 2001.

Information and cultural industries became the most important industrial group performing R&D in Canada in 2005 taking over from communications equipment. The main components of information and cultural industries are software publishing including computer games, motion picture and sound recording, broadcasting, telecommunications including voice over Internet protocol, Internet access, publishing, broadcasting and web search portals and data processing.

The business enterprise expenditures on R&D (BERD) ratio, a ratio of total intramural business enterprise R&D expenditures divided by gross domestic product (GDP), enables countries to be compared without reference to exchange rates and other comparative valuations of currency such as purchasing power parity (PPP) dollars. The measure can also be used across time without concern for calculations of constant value versus current value dollars (table 2).

In 2007, the four OECD countries leading in the BERD/GDP ratio in ranked order were Japan (2.68), Sweden (2.66), Finland (2.51) and Korea (2.18) all well above the OECD average of 1.59. Canada’s BERD/GDP ratio was 1.05 in 2007, down from 1.19 in 2004. This ratio for the United States hit 1.93 in 2007 up from 1.79 in 2004 (table 2).

The share of R&D conducted by Canada’s business enterprise sector as a percentage of the national total gross domestic expenditures on research and development (GERD) continues to decline to 54.9% in 2008 from its peak of 61.7% in 2001 (table 3). Canada’s share of total R&D performed by this sector is, and has consistently been, lower than the OECD average (69.6% in 2007).

Research and development (R&D) concentration measures

In the late 1980s, industrial R&D performance was concentrated in a few firms – 25 firms accounted for almost half of Canada’s industrial R&D expenditures. This concentration in a few firms continues, but is weakening. In 2009, 75 firms accounted for almost half of the national industrial R&D expenditures.

Over the past decade, the share of industrial R&D performed by the manufacturing sector has declined from 68% in 2000 to 52% in 2009. Between 2000 and 2002, the R&D performance by the manufacturing sector fell from 68% to 61% of total industrial R&D performance. Since 2004 when the manufacturing sector’s share of industrial R&D performance was 54%, the rate of loss of share has slowed (table 5-1 and CANSIM table 358-0024).

When viewed by R&D expenditure size groups, industrial R&D expenditures are concentrated in firms performing at least $1 million of R&D – four-fifths of R&D expenditures fall into this group (table 5-6). Industrial R&D performed in Canada is mostly performed by Canadian-controlled companies however recently there has been a slight increase in the proportion of R&D expenditures by firms under foreign ownership outside of United States-controlled companies (table 5-4). The R&D expenditures of foreign-controlled firms are most important to industries such as mining, and pharmaceutical and medicine manufacturing (table 5-5).

Sources of funds for research and development (R&D) performance

Industrial R&D can be funded from a variety of sources, both public and private. Public sources include federal grants and contracts and provincial government sources. Private sources include the performing companies, related companies and research contracts for other companies. Other Canadian sources include private non-profit organizations, universities and individuals. Finally, industrial R&D can be financed from foreign sources, both public and private. The business enterprise sector (81%), in particular the Canadian R&D performing companies (77%), provide the majority of industrial R&D funding (tables 6-1 and 6-3).

Industrial R&D performers received 16% of their funding from foreign sources. Funds from the federal government accounted for 2% of R&D financing while the remainder came from “other” sources (table 6-3).

Industrial sectors rely in varying degrees upon different sources of funds for financing their R&D performance. Firms performing R&D in utilities (89%), and mining and oil and gas extraction (88%) depend heavily upon self-financing for their R&D performance (table 6-2).

While manufacturing (79%) and services (73%) self-finance the majority of their R&D performance, foreign sources are the second most important source of funds for these sectors (table 6-2).

Capital and current intramural expenditures on research and development (R&D)

Capital expenditures related to industrial intramural R&D expenditures generally represent about 7% of total expenditures; however extraordinary situations including starting or completing construction of new research and development facilities or test plants (table 10) will impact the share of capital expenditures over total expenditures.

Current intramural expenditures for industrial R&D include wages and salaries and other current expenditures. In recent years, on average wages and salaries represent 60% of current intramural industrial R&D expenditures (table 7-2).

Other current expenditures include supplies and materials consumed in the process of conducting R&D as well as contracts for services to carry out R&D such as drilling needed for heavy oil R&D. For example, in 2007 wages and salaries comprise one-quarter or less of current intramural expenditures in two industries: petroleum and coal products and mining and oil and gas extraction which indicates the importance of other current expenditures to these industries (table 7-2). Contracts related to conducting R&D are part of extramural R&D payments and are not included in current intramural expenditures.

Industrial research and development (R&D) personnel

In 2007, the most recent year for which counts of R&D personnel are available, 147,599 full-time equivalents (FTE) were performing tasks related to industrial R&D, a 16% increase in research effort over 2003 (127, 205) (table 11).

Professionals, researchers and managers with university degrees continue to represent six out of every ten FTE performing R&D while technicians account for three out of every ten and support staff the remaining full-time equivalent (table 12-4). The majority of R&D personnel employed in communications equipment (80.8%) and semiconductor and other electronic components (80.3%) were professionals – scientists and engineers or senior R&D administrators – indicating the requirement for highly qualified personnel in the information communication technologies sector. On the other hand, printing (60%), textiles (50.6%), furniture and related products (50.5%) and fabricated metal products (49.4%) depend upon technicians to perform their R&D (table 12-3).

Extramural research and development (R&D) expenditures

Firms can perform R&D in-house and/or they can pay another organization to undertake this specialized work. R&D payments directed outside the firm are known as extramural R&D expenditures and these payments can be attributed to firms that do not perform their own R&D. The R&D performed for these payments can be performed by other firms or in other sectors, for example the higher education sector, federal or provincial laboratories or private non-profit organizations can undertake R&D for businesses. There has been a decline of $89 million of extramural payments for R&D reported by the business enterprise sector down to an estimated $3.7 billion for 2009 (table 14-1).

Within the services sector, information and cultural industries and scientific research and development services are the two industries most involved in paying other organizations to perform their R&D. For manufacturing, the industries contracting out the most on R&D are pharmaceutical and medicine and communications equipment (table 14-1). Canadian-controlled firms were responsible for $2.7 billion or 70% of extramural R&D expenditures (table 14-2).

Industrial research and development (R&D) expenditures by province - 2007^p

Industrial R&D expenditures (in current dollars) remain concentrated in Canada’s most populous provinces: Ontario ($7.6 billion), Quebec ($4.7 billion), British Columbia ($1.7 billion) and Alberta ($1.1 billion). Together the firms performing R&D in the four Atlantic provinces spent $310 million or 2% of the national industrial R&D expenditures in current dollars (table 5-3).

In 2007, Alberta and British Columbia were the only provinces in which industrial R&D performance in the services sector exceeded the R&D performance of the manufacturing firms. The majority of industrial R&D in British Columbia (62%) was performed by the service sector in 2007. In Alberta the service sector represented one-third (33%) of industrial R&D performance just edging out mining and oil and gas extraction (30%) and manufacturing (29%) as the most important provincial industrial R&D performing sector (table 5-3).

The distribution of industrial R&D by performing sector in the Atlantic provinces, Ontario and Manitoba were similar in 2007. In Ontario, manufacturing represented 61% of the industrial R&D effort while services accounted for 37%. In Manitoba manufacturing represented two-thirds (65%) with services one-third (33%) of industrial R&D performance. For Atlantic Canada the shares of industrial R&D performance were 57% in the manufacturing sector and 35% in the services sector (table 5-3).

In Quebec, the manufacturing sector represented 49% of industrial R&D performance closely followed by the services sector at 46% (table 5-3).

Technological objectives of the research and development (R&D) expenditures

Over $1 billion of industrial R&D was related to biotechnology in 2005 through 2007. The vast majority of this R&D was undertaken by firms in the service sector, followed by those in manufacturing and lastly by firms in the agriculture sector (table 15-1).

The manufacturing sector performed ($179 million) the majority of the industrial R&D expenditure of $326 million undertaken for purposes of pollution abatement and control in 2007 (table 15-2).

R&D expenditures for software amounted to $4.2 billion in 2007 with firms in services industries performing $2.4 billion, the majority of this work (58%). Manufacturing firms contributed $1.7 billion of R&D expenditures (41%) dedicated to software (table 15-3).

In 2007, Canadian firms dedicated $1.2 billion towards energy R&D, with particular emphasis on fossil fuels ($659 million). Energy conservation R&D followed at $188 million and transportation and transmission at $122 million (table 17).

Canadian technological balance of payments

For Canadian technological balance of payments (TBP), the estimates are taken only from firms performing or funding at least $1.5 million of research and development starting with 2006, for earlier years, the TBP represented firms performing or funding at least $1 million of R&D. The statistics which appear in tables 16-1 and 16-2 are taken from the survey of industrial R&D rather than from balance of payments surveys. The payments and receipts for technology, other than R&D are therefore incomplete since data from firms not included in the industrial R&D survey are not available.

Technological services are composed of R&D and “other” technological services. These services are typically performed intramurally, but they can be purchased also from a source within or outside of Canada. Similarly, Canadian firms can perform technological services for firms outside of Canada. In 2007, firms operating in Canada received $3.3 billion for technological services and paid $1.4 billion for these services from firms outside Canada for a positive net balance of $1.9 billion (table 16-1).

Throughout the period 1998 to 2007, the Canadian TBP was positive, as was the balance for R&D activities. Starting in 2000 the balance for “other” technological services turned positive (table 16-2).

Counts of research and development (R&D) performing firms

The number of firms performing R&D continues to post annual increases, reaching 20,154 in 2006 up by 3.2% from 19,515 in 2005 and more than double the count of 9,648 for 1997. Measured in constant dollars, the average R&D expenditure by performing firm declined from $977 thousand in 1997 to $704 thousand in 2006 (tables 1 and 18-2).

R&D firms may choose to perform their R&D activities in multiple locations and therefore performance may be counted in more than one province. For 2006, the count of R&D performers including those making expenditures in more than one province was 20,489. Based on location of the R&D performance, the majority of R&D performers are located in the two central provinces, Quebec, 8,078 (39%) and Ontario, 8,057 (39%). There were 680 (3%) R&D performers in the Atlantic Canada; 375 (2%) in Manitoba; 199 (1%) in Saskatchewan; 1,188 (6%) in Alberta; and 1,912 (9%) in British Columbia and the Territories (table 18-2).

R&D is a business strategy. Business strategies are employed by firms in attempts to position themselves in the most advantageous way relative to the competition in the market. The decision to perform R&D therefore represents a wager of sorts, that the expenditures incurred to perform the activity will generate some knowledge that will enable the firm to strengthen, or at least maintain, its position relative to the competition. Propensity data provides a snapshot of all of the firms which were performing R&D in a given period as a proportion of all firms in operation at that time. It is therefore interesting to note that the propensity to perform R&D has increased rapidly from 2001 to 2006 (table 18-3). This may represent a response to an increasingly competitive, global marketplace whose pressures cannot be avoided in protected areas.

Overall, R&D performers represent a very small proportion of all business in Canada, only 2.1%. This varies by sector, with only 0.5% of all construction firms performing R&D versus 16.9% in manufacturing. Propensities varied significantly by industries within each sector as well (table 18-3).

In some industries, R&D is almost a “price of admission”, with just over half of all firms in communications equipment (54.7%) and almost half of pharmaceutical and medicine firms (48.3%) reporting that they performed R&D in 2006. Other manufacturing sector industries with high propensities to perform R&D are navigational, measuring, medical and control instruments (43.2%) and semiconductor and other electronic components (40.8%). Industries least likely to perform R&D within the manufacturing sector are printing (6.2%); and furniture and related products (7.8%) (table 18-3).

In the services sector, the overall propensity to perform R&D was 1.3% in 2006. Not unexpectedly, the leading industry for performing R&D was scientific research and development services at 36.1%. One-tenth of firms in computer system design and related services were R&D performers while one-twentieth of firms in information and cultural industries and architectural, engineering and related services also engaged in R&D in 2006 (table 18-3).