Study looks at challenges facing R&D in Canada

Toronto, ON – April 29, 2004 – The belief that economic growth in the 21st century will be based on innovation is widespread. A new study shows that research and development intensive firms are the key players in propelling Canada into the top ranks of the global economy.

The study, called Economic Contribution of Canada’s R&D Intensive Enterprises 1994-2001, was co-authored by Dr H Douglas Barber, co-founder and former CEO of Gennum and Dr Jeffrey Crelinsten, president of Research Infosource, took a practical look at the federal government’s innovation strategy. The study specifically examines the goal of moving Canada from 15th to 5th spot in the world’s innovative economies by 2010, and determines that with the right focus, Canada might actually reach that goal.

“As Canadians we have expectations of our health, education and social systems that our economy can no longer deliver,” says Dr Barber. “We can’t do everything internally, we must trade in order generate the wealth to buy what we need. Our strong historical reliance on trading commodities is weakening our economy, [so] meeting the 15th to 5th goal requires focused innovation for Canada to create new tradable value.”

Supported by Industry Canada and using Statistics Canada data, the study found that Canadian R&D spending must increase to achieve the goal. Specificially, it needs to increase from the 1.9% of GDP that was spent in 2001 to 3.1% of GDP by 2010. This represents an increase from $22 billion in 2001 to $50 billion by 2010. The federal government’s plan to double its own R&D spending by 2010 means it will contribute $18 billion, leaving the private sector to make up a $32 billion difference. For this to happen, the private sector would have to increase its spending on R&D by $19 billion between 2001 and 2010.

As the goal was R&D expenditures at 3.1% of GDP, the study looked at the 8,893 companies performing R&D in Canada in 2001 and selected those spending 3% or more of revenues on R&D. This left 6,329 firms. From this list the authors eliminated start-ups (1,992 companies) and companies in the very early stages of development (4,109 companies) as their contribution to the economy would be small in the 2010 time frame. This left a core group of 228 firms, dubbed the R&D leaders, who will be the driving force for meeting the goal. Between 1994 and 2001, the R&D leader group grew revenue at 12.9% per year and spent about 11.7% of this on R&D. If these trends continue, by 2011 there will be about 503 R&D leader firms adding $178 billion in new revenue over 2001 levels. By investing 11% of this in R&D, this group will be spending $19.6 billion on R&D in 2011 – the target figure for the private sector. As the R&D leader group could reach the goal by 2011 alone, factoring in growth by firms in the other groups means that Canada could move from 15th to 5th by 2010. This is the good news.

The bad news is that the 6,329 firms in the start-up or early stages of development find it difficult to move into the R&D leaders category. There are several reasons why this may be happening. An earlier report by the Barber-Crelinsten team in collaboration with ITAC, “Can the Private Sector Get Canada into the Top Five Innovative Economies of the World by 2010?: Views from Leaders of Canada’s Innovation-Intensive Firms”, suggests a few possible answers. First, that Canada has a commerce-averse culture resulting in a poor understanding of the relationship between research and commerce. Second, the number and skills of graduates are insufficient to meet our needs. The result is that managers of smaller technology companies often focus on the technology, neglecting marketing, customer relations and other necessary commerce skills. Third, the need for increased and integrated public support for commerce. In short this means that in an uncertain economic climate, there is no cushion for downturns or other circumstances that may slow growth and inhibit our ability to reach our goal.

“Research Infosource data for 2002 indicates that firms performing R&D in Canada increased revenue by 2% and reduced R&D investment by 8.6%,” says Dr Crelinsten. “Preliminary Statistics Canada numbers also predict a decrease in R&D spending for 2002. Our global position will depend to some degree on the R&D performance of the other innovative economies. As we get more data, we will have a clearer picture of emerging trends.”