Canada’s Top 100 R&D spenders register record increases but ability to maintain momentum questioned

Canadian technology firms produced a banner year for R&D expenditures in FY00, with the biggest spenders increasing their outlays by an astounding 28.5% over FY99. Led by the near $6-billion showing from perennially top-ranked Nortel Networks Corp, the unprecedented annual increase was captured in the latest version of the Top 100 R&D Spenders List. Canada’s Top 100 companies collectively spent more than $11.1 billion FY00, compared to $8.7 billion in FY99, reflecting general good times and the boom in several technology sectors that heated up the economy to red hot levels. The list is included in this issue of RE$EARCH MONEY and was produced for the first time by sister firm RE$EARCH Infosource Inc.

Last year’s stellar performance of Canada’s Top R&D corporate spenders will likely be broken in FY01, due to the plummeting fortunes of some of Canada’s biggest R&D spenders. The meltdown of the telecommunications equipment industry in particular could have a devastating impact on the aggregate numbers, with major players like Nortel and JDS Uniphase Ltd already implementing dramatic cutbacks in their R&D activity to weather the downturn.

But the stellar performance of Nortel and many others in FY00 capped a year in which R&D spending increased in every major sector. The pharmaceutical/bio-technology (P/B) sector is second ranked only to the communication and telecommunications equipment (C&TE) sector with a total of $972.7 million in FY00, up 24% over the previous year. But if Nortel is removed from the C&TE mix, that sector’s overall spending drops to $886.5 million and a second-placing showing behind P/B. Year-over-year increases in other major sectors, particularly software & computer services and electronic parts & components were also impressive.

Of the 101 firms listed in the annual ranking (two firms tied for 100th spot), an impressive 83 increased their year-over-year R&D outlays, including 28 that improved by more than 50%. That compares to just 16 firms registering declines, while 1999 data were not available for one company — Astra Zeneca Canada Inc — due to the merger that year of Astra Pharma and Zeneca Group plc.

“For FY00, R&D spending was extremely buoyant. It’s quite astounding,” says Ron Freedman, president of RE$EARCH Infosource and publisher of RE$EARCH MONEY. “Private sector R&D spending is far in excess of government spending now.” Freedman adds that the steep annual increase is good news for the federal government and its objective of moving Canada from 15th to 5th by 2010 in terms of R&D spending as a percentage of gross domestic product. But the recent downturn of technology stocks raises questions as to whether the momentum can be maintained in years ahead.

Nortel is a particularly painful case in point. Since the end of FY00, the Brampton ON-based firm has announced a work force reduction of 30,000 and a pending quarterly loss nearly unprecedented in global corporate history. The extent of the crisis facing the optical networking giant was underscored recently by the dismantling of its influential disruptive network technologies group and the decision to limit R&D activity to eight core technology areas.

Any significant reduction in R&D spending at Nortel would have a major impact on future Top 100 listings, as the company’s FY00 R&D expenditures account for 53% of all spending by the Top 100.

The latest ranking demonstrates that, in good times, private sector firms are willing to step up to the plate and increase R&D spending in all but a few sectors. The C&TE sector is by far the biggest R&D spender at $6.835 billion, fuelled in large part by Nortel’s outstanding performance. The P/B sector comes next with 24 firms reporting, the largest number of sector-specific firms on the list. In third place is the software and computer services sector, with 17 firms spending $613.8 million on R&D. The highest spending firm in the sector is Geac Computer Corp Ltd, which placed 12th overall with R&D expenditures of $120.4 million.

Aerospace is the fourth-ranked sector at $589.6 million, with the majority accounted for by Pratt & Whitney Canada Corp, which secured 2nd place in the Top 100 with R&D outlays of $331 million. The electronic parts and components sector racked up $434.6 million in total R&D, PMC Sierra accounting for half and a 6th ranking in the Top 100.

In terms of R&D spending as a percentage of revenue, Biomira Inc tops the list with $42.1 million in R&D expenditures against just $1.1 million in revenue. Most of the firms displaying the greatest R&D intensity are in the P/B sector and are just introducing products onto the market.

THE ONES THAT GOT AWAY

The release of Top 100 data marks the 10th time such data have been published. The ranking was generated for nine consecutive years by Evert Communications Ltd, the former publisher of RE$EARCH MONEY, and has become a highly regarded source of R&D corporate data not available elsewhere.

But caution should be exercised when drawing comparisons between the current list and previous incarnations, due to various factors including the increasing incidence of firms that do not provide R&D data. Three major corporate R&D spenders that ranked among the top five in FY98 — IBM Canada Ltd, Merck Frosst Canada & Co and Newbridge Networks Corp (now Alcatel Canada Inc) — did not participate this year, potentially removing close to $1 billion from the list. This helps to explain why there was no change in total R&D or the Top 100 threshold between FY98 and FY99, although there was undoubtedly a year-over-year increase. Ironically, Merck Frosst’s decision not to participate has pushed a Canadian generic drug manufacturer — Apotex Inc — to the top of the list as the highest R&D-spending pharmaceutical firm in Canada.

The absence of mandatory R&D reporting requirements by both Canadian and foreign-based firms conducting R&D in Canada has resulted in an increase in non-participation. A growing number of people see this trend as a serious public policy issue, as R&D expenditures by the corporate sector are viewed as an important economic and social indicator, as well as a key instrument for measuring a nation’s innovative capacity.

As the federal government puts pressure on the private sector to increase R&D output, it is becoming more and more difficult for those outside government to determine whether progress is being made, and by whom.

“Non-participation is becoming a more important issue as we get more mergers and acquisitions. As Canadian companies get acquired by foreign companies and vice versa, there are more restrictions on their ability to publish Canadian data,” says Freedman, adding that some of the larger Canadian R&D performers no longer provide Canadian data. “It’s an unintended consequence of globalization.”

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