Corporate R&D enjoys double-digit growth in 2018 with outlays of $13 billion by the top 100

Canada’s Top 100 corporate R&D-performing companies posted a very healthy 10.6% increase in R&D spending in FY2018, dwarfing 2017’s insipid 0.7% advance. But headwinds in the form of a possible recession, lower business investment and the lack of future corporate R&D champions like Nortel and Blackberry, indicate that those gains could be short-lived.  

The Top 100 companies — compiled by Toronto-based Research Infosource — collectively spent $13.0 billion last year, a step-change spurred on by a deep talent pool and an impressive 11.5% jump in revenues to $391.4 billion. Problem-plagued Bombardier Inc remains the country’s biggest R&D performer with spending of $1.47 billion, an 8.2% decline that follows on declines of 18.5% and 14.2% respectively for 2017 and 2016.

An impressive 12.4% increase in R&D outlays by Magna International Inc allowed the Aurora ON-based auto parts giant to retain its #2 ranking, followed by Suncor Energy Inc, which jumped to the #3 spot from #11 on the strength of an 81.4% increase in R&D spending.

Overall, 71 firms posted an increase in R&D spending in 2018, with 26 experiencing declines while three registered no change.

“It’s certainly a very positive trend for the leading companies,” says Research Infosource CEO Ron Freedman. “Companies whose revenues are going down are going to pare back on research. But there’s no automatic linkage. R&D spending decisions are made before the company knows what their revenues are going to be, so there’s a lag there.”

The second new entry into the Top 10 is Ottawa-based software firm Shopify Inc, which enjoyed a year-over-year R&D spending increase of 156.8% from $176.6 million in 2017 to $453.6 million in 2018.

Another solid gainer in 2018 was Stars Group Inc — formerly Amaya Gaming Group Inc — which boosted R&D spending by 88.8% to $118.6 million for a lock on the #27 spot. The Toronto-based gaming and on-line gambling software firm fuelled its growth in R&D and revenue by pursuing an aggressive acquisition strategy similar to that of the #4 R&D performer, Constellation Software Inc, which increased R&D outlays by 23% to $584.7 million.

From a sectoral perspective, software firms accounted for 23% of the total (up from 21% in 2017), followed by aerospace (18%), pharmaceuticals/biotechnology (13%), telecommunications services (10%), energy/oil & gas (10%) and automotive (7%).

The R&D resilience of the embattled oil and gas sector is one surprising feature of the Top 100. While some firms, such as Canadian Natural Resources Ltd (#17) and Cenovus Energy Inc (#70), suffered a substantial reduction, others — Suncor Energy Inc (#3) and Syncrude Canada Ltd (#34) — notched healthy gains.

Freedman says it unclear what’s behind the R&D buoyancy of some oil and gas firms, although the lag factor between R&D spending decisions and revenue declines may be a contributing factor. As for increased spending on technological innovation, he adds that the results of these types of investments won’t be seen immediately.

“The returns [from technological investment] are going to be way down the road from those productivities. So it’s an act of faith to be investing in new technology,” he says.

Credit: Research Infosource Inc

R&D champions disappearing

While the latest corporate R&D data offer welcome news, there are concerns that the positive trend may not continue for the foreseeable future. A chief reason for such negative speculation is the gradual disappearance of Canadian corporate R&D champions.

“For the last couple of decades, perhaps longer, we’ve had corporate champions that have driven the R&D totals. Companies like Nortel or Blackberry or Bombardier were spending more than $1 billion a year. That has a huge influence on the corporate R&D total. Similarly, if you take them out of the picture that has a huge influence,” says Freedman. “The second-ranked company spent only half the amount of Bombardier. It would have to double its spending to bring it to the level of a Bombardier.”

The federal government is aware of Canada’s lack of R&D champions. It is taking action to address the problem, such as by launching programs designed to assist firms in scaling and entering global markets, including assistance for financing to give growing firms a Canadian option for expansion funding.

The government is also targeting so-called threshold companies by taking a portfolio approach to growing tech firms and instituting a client management strategy to provide more holistic support to companies with high-growth potential.

Business investment decline

Finance minister Bill Morneau’s December 16 Economic and Fiscal Update confirms the drop in business, showing a 10% decline in investment between 2015 and 2019. The decline is largely attributed to troubles in the oil and gas sector, which has seen a massive sell-off of assets by most foreign-based firms and, more recently, spending cutbacks by domestic companies.

“Investments — foreign and domestic — are plummeting in Canada. People are making their investment decisions outside of the country,” says Freedman. “Inevitably, these kinds of macroeconomic factors are going to influence R&D spending. If you don’t think your overall business prospects are improving, your chances of investing in research in Canada are going to be muted.”

Provincial Breakdown

Geographically, Ontario-based firms account for 46% of total corporate R&D spending at $6.0 billion, spent by 43 companies. That’s up from a 43% share in 2017 and a 40% share in 2016. In Quebec, 32 firms spent $4.86 billion for a 37% share, down from 40% in 2017 and 43% in 2016 when it exceeded Ontario. Firms in Western Canada accounted for the remaining 17% share in 2018 with R&D outlays of $2.2 billion.

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