New report demonstrates that Canada on track to become Top 5 R&D spending nation

Canada’s most prominent innovative companies are still on track to thrust Canada into the top five R&D spending nations but the target of 2010 may be difficult to achieve, according to a new report prepared for the Information Technology Association of Canada (ITAC). The report identifies 228 companies with the necessary size, R&D intensity and revenue growth to boost R&D spending from approximately $13 billion in 2001 to about $32 million.

Those firms — dubbed the R&D Leaders group — spend more than $3 million annually on R&D representing between 3% and 50% of revenue. Collectively they comprise the innovation engine that the report contends has the capability of adding $19 billion to the 2001 R&D private sector total and boosting national R&D intensity to more than 3.1% of gross domestic product.

The R&D Leaders group represents just 2.6% of the total sample of 8,893 companies used as the basis for the report. Yet they accounted for 59.1% of all R&D spending in 2001. The data were provided by Statistics Canada. Entitled Corporate Domestic Research and Development Study, the report is a follow-up to a smaller study conducted last year by the same authors – Dr Douglas Barber, former CEO of Gennum Corp and Dr Jeffrey Crelinsten, a partner in The Impact Group and co-publisher of RE$EARCH MONEY. Both reports were produced with financial assistance from Industry Canada.

The previous report was based on data provided by Research Infosource Inc, a subsidiary of The Impact Group, which is based on a far smaller sampling of R&D-conducting firms. That data yielded 121 companies that fit the criteria of R&D Leaders (R$, April 16/03).

In addition to the larger sample size (228), the StatsCan data include a number of private companies not captured by the Research Infosource data, a greater historical window going back to 1991 and the separation of R&D spending by Canadian firms into domestic and international categories. Even so, Barber says the larger data set doesn’t substantially change the picture that emerged from the earlier report – continued growth by the firms comprising the R&D Leaders group is essential for Canada to achieve its S&T and innovation policy objectives.

“These are the companies we need to back us if we want to get into the top five countries by 2010,” says Barber. “It’s certainly a very tight timeline. We took the historical data of these companies and used that to project to 2010. They can get us in thereby 2011, which is a little shy of 2010.”

GROWTH IN R&D LEADERS GROUP TOO SLOW

The report reinforces an earlier finding that Canada’s thousands of early stage and start-up companies won’t be significant contributors to achieving the government’s objective. The StatsCan data show that Canada, in 2001, Canada was home to nearly 2,000 start-ups and more than 4,000 early-stage firms yet their contribution to the corporate R&D total is relatively modest. If historical trends continue, the start-ups can be expected to achieve impressive revenue and R&D growth, adding $6 billion to current revenues and $4 billion to R&D spending, assuming a 70% R&D intensity.

What’s troubling about these two categories of firms, however, is that they don’t seem to be growing into R&D Leaders in any significant quantity. The report says that the R&D Leaders group is growing by an average of 14 firms annually.

“We’re not moving many companies into the field quickly enough. That’s possibly the biggest thing that came out of this study,” says Barber. “We’re good at getting companies started and we fund them pretty well, but we’re not following through. The real issue about young companies is that we can’t grow them into sustainable businesses.”

Barber argues that part of the reason is the commerce-averse culture in Canada and attitudes within the venture capital industry where just 10% of investments are expected to spawn successful companies.

“Why do we look at 10% as normal? Why do we accept this. We should aim for one hundred percent,” he says. “I’ve been involved in five start-ups including Gennum which was very successful. And the other four are growing and profitable. Venture capital wants to make a fortune on one successful firm and get out after two years. Why not stay in? I’m concerned that the VC attitude also contaminates the angel world.”

ICT THE DOMINANT SECTOR

The report also looks at the information and communications technologies (ICT) sector in isolation and shows that it is by far the largest R&D performing sector in Canada. Between 1994 and 2001, ICT firms increased their share in the R&D Leaders group from 40% to 52%. Revenue growth during that period was 130.5% or an average of 12.7% annually (slightly lower than the group average of 12.9%), while R&D spending of $4.9 billion in 2001 accounted for 63% of the group total.

Barber says he was unable to take a similar look at Canadian pharmaceutical and biotechnology firms, due to the way StatsCan codes industry groups.

“The codes are problematic. They were of some value for ICT but they don’t work for pharma and biotech. As a result we couldn’t say much on these sectors,” he says.

Once the new report is thoroughly circulated, Barber and Crelinsten will turn their attention to a possible follow-on study. And while it’s too early to announce its focus, he says he would like to examine the problem with growing start-ups into more mature corporate entities.

“We need to understand the start-ups,” he contends. “With all the funding and human energy they receive, this is an area of tremendous potential.”

The full report can be found at www.researchinfosource.com.

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