18, December 2024

R&D in Canada – increasing but more is needed.

There have been a slew of recent statistics  on R&D in Canada.  What’s going on?

Overview

Canada’s gross expenditures on R&D (GERD) as  a percentage of GDP has trended down for more than 20 years, in contrast to other G7 countries that have trended up over the same period.

Source:  Statista

GERD consists of two main parts – spending by companies (BERD) and spending by universities (HERD)

Business R&D  (BERD)

Canadian businesses spent a record $30.4 billion on in-house R&D in 2022, an increase of 9.4% from 2021.  That followed a record 17.3% increase from 2020 to 2021.

Preliminary data for 2023 indicate that in-house R&D spending will continue to rise, but at a slower pace with spending increasing by 3.4% (+$1.0 billion) to a projected $31.4 billion. Preliminary intentions are to spend will increase by $1.5 billion (+4.8%) to reach $32.9 billion in 2024 In addition to in-house R&D  Canadian companies spent another $5.8 billion on outsourced R&D in 2022, mostly to Canadian recipients.

How does Canada compare?

Canada had the second lowest business expenditures on R&D (BERD) as a percentage of GDP in the G7 in 2022.  The trend has been downward for more than 20 years, in contrast to the OECD average, that has trended upwards over that time period.

Source: Global Advantage Consulting

Foreign control

According to Statistics Canada assets under foreign control on Canada were $2.5 Trillion, 14.7% of total assets in 2022. However, foreigners control one third of in-house R&D spending in Canada – $11.52 billion of the total $30.4 billion. So assets under foreign control are much more R&D intensive than Canadian owned assets.

Where is R&D carried out?

As you might expect, most R&D is carried out by companies in Ontario and Quebec, the major manufacturing centers with large populations, followed by BC and Alberta.

Which companies spent most on R&D?

The table below shows information from Research Infosource for 2022.  It is interesting to note that the top ten companies spend almost exactly half the total BERD in Canada.

Rank Company R&D spending

$000

 R&D as % of revenue
1 Shopify $1,956,158 26.8
2 Constellation software $1,314,313 15.3
3 Magna International $844,544 1.7
4 TELUS Corp. $819,000 4.4
5 AMD Canada $698,819 n/a
6 Bausch Health Company $688,819 6.5
7 BCE Inc. $644.000 2.7
8 Pratt and Whitney $641,364 n/a
9 Canadian Natural Resources Ltd. $587,000 1.4
10 Open Text Corp. $573,155 12.6

Source: Research InfoSource

Why is BERD so low in Canada?

A part of the answer is that Canada has a resource-based economy and resource companies typically don’t spend much on R&D. More broadly, Canada has relatively few companies in industries that typically spend more on R&D – technology hardware, software and internet, heath industries and automotive and transportation.  Also, Canada has relatively few large companies and large companies spend more on R&D than small companies. And finally, Canada has a very concentrated market in many sectors, that are oligopolistic, and so these sectors are less competitive and companies have less need to spend on R&D.

It is  a sobering fact that the Magnificent 7 companies (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) together spent about $200 billion US on R&D in 2022, almost ten time Canada’s total BERD. They need to spend that because the are in hyper-competitive markets.

More government incentives for R&D.

The Fall Economic Statement provided more generous support for R&D by increasing the funding for the Scientific Research and Experimental Development tax credit.

Higher Education R&D (HERD)

Higher education institutions spent $18.1 billion on R&D in 2022/23, up $1.4 billion (8%) from the year before. This is roughly 60% of BERD. The natural sciences and engineering field saw the largest gain as spending increased by $1.1 billion to $13.6 billion. Social sciences, humanities and the arts rose by $376 million to $4.5 billion.

How does Canada compare?

The graph below from Statistics Canada shows a much more positive picture than for BERD. Canada is ranked second among the G7 for HERD in 2022, after being ranked first in 2020 and 2021 in terms of HERD spending as % of GDP..

 

More funding for university research.

The Fall Economic Statement provided an additional $2.6 billion to the federal granting councils over three years, so Canada’s good performance should continue

 

Who paid for it?

As shown in the graphic below, the spending by the higher education institutions themselves has been rising over the last 10 years while other sources of funding have been fairly flat. The 2024 Federal budget increased tri-council funding (For the Natural Sciences and Engineering Research Council, the Social Sciences and Humanities Research Council and the Canadian Institute of Health Research) by $1.8 billion over five years for core research funding.

The 2024 Federal budget increased tri-council funding by $1.8 billion over five years to the granting councils for core research funding.

 

How did Canadian universities rank?

The table below shows how Canadian universities ranked according to the three major ranking organizations, The Shanghai Academic Ranking of World Universities (ARWU), the Times Higher Education World University Rankings (THE), and the QS World University Rankings (WUR).  The top three Canadian universities in each ranking are the University of Toronto, UBC and McGill.

As Alex Usher points out, we’re a country with 0.5% of the world’s population and maybe 2% of its GDP, and we also have by consensus about 4% of the world’s top 500 universities.

 

Conclusion.

The declining trend in BERD over the last 20 years is concerning.  BERD can be seen as an early indicator of future innovation and productivity improvement, as BERD often leads to new products and processes. More needs to be done to incentivize companies to spend on R&D by making the economy more competitive.  Incentives in the Fall Economic Statement may possibly help with this.

HERD spending is useful up to a point, but it appears that the spill over to private companies is limited, and steps need to be taken to improve transfer to the private sector.

 

Peter Josty