Canada has a serious “innovation gap” and should adopt a mission-driven innovation strategy to focus national R&D, investment, policy and regulatory efforts on solving "grand challenges," according to a report from the Canadian Science Policy Centre (CSPC).

While Canada ranks well on innovation "inputs" (such as research and talent), it performs exceptionally poorly on "outputs" (i.e. commercialization), ranking 123^rd globally on the World Intellectual Property Organization Input-Output Conversion Rate.

Canada is one of the only Organisation for Economic Co-operation and Development (OECD)  nations to see R&D investment decline as a share of GDP over the past two decades, alongside a steady drop in the number of firms performing R&D, according to the report, done in collaboration with Ottawa-based Global Consulting Group.

This underperformance is rooted in a "uniquely imbalanced" ecosystem,” the report said.

“This imbalance, where small firms dominate the Canadian economy but lack scale-up capacity, while foreign firms account for most R&D investment and IP exploitation, is a key challenge to be addressed.”

“The overarching message from this report is that Canada is extraordinarily poor at transforming innovative “inputs” (e.g. research and talent) into innovative “outputs” (e.g. commercialization),” Dave Watters (photo at left), founder and current strategic advisor to Global Advantage Consulting and president, and founder of the Institute for Collaborative Innovation, said in an email to Research Money.

“The federal [government] response should be to examine the causes of this profound disconnect in our innovation ecosystem between our innovation investments and the outcomes we want from these investments,” said Watters, a former assistant deputy minister for economic development and corporate finance in Finance Canada.

Canada has an economy where a Canadian economy where traditional sectors such as natural resources and agriculture/agri-food dominate in scale and exports, but newer technology-driven industries are the key engines of innovation, according to the report.

Unlike its Group of Seven (G7) peers, Canada’s higher education R&D intensity is exceptionally high (47 percent above the OECD average), while R&D in the business and government sectors are critically low (46 percent and 52 percent, respectively, below OECD averages).

This structural issue has contributed to a $26.1-billion annual R&D gap compared to an average performer of an OECD country, “directly threatening the nation's long-term productivity, particularly as the sectors of focus for this report account for approximately 40 percent of the Canadian economy and millions of jobs.”

Watters pointed out that the barriers in Canada’s innovation ecosystem have been known to the relevant federal ministers, in particular in Innovation, Science and Economic Development, for more than two decades.

“The problem has been a failure of the federal government to establish a sustained process to work with relevant stakeholders to solve them. This is a federal responsibility,” but has been ignored, he noted.  

The one exception, Watters said, was the “extraordinary work” of the Economic Strategy Tables established in 2017 in six key industrial sectors and led by the private sector with senior deputy ministers- and assistant deputy ministers-level engagement.

Each table considered the full range of barriers to economic growth and proposed integrated solutions in six areas: spending, tax, regulation, procurement, talent and trade.

Unfortunately, the federal government cancelled these sectoral Economic Tables, Watters said. “It  needs to restart them. In my view Canada will never, ever, solve its innovation gap without first building an ongoing public/private sector implementation process to address the known barriers industry sector by industry sector.”

Five barriers to innovation and economic growth

The report provides an overarching synthesis of the 2025 CSPC virtual innovation strategy consultations, which convened experts across five key sectors: Agriculture and Agri-Food, Life Sciences, Advanced Manufacturing, Natural Resources, and Digital & High Tech.

These sectors represent a large portion of the national economy, collectively accounting for approximately 40 percent of Canada’s GDP, 6.5 million jobs, and more than $900 billion in exports.

“The findings present a stark consensus: Canada faces a persistent and critical ‘innovation gap,’ not from a lack of ideas, but from an inefficient process to commercialize them,” the report said. In addition to sector-specific panels, CSPC organized a culminating symposium at the CSPC 2025 Conference – providing a forum to reflect on the preceding panel discussions and further advance the emergent themes by focusing on: (a) selecting the most impactful interventions; and (b) identifying implementation pathways.

CSPC’s cross-sector analysis and synthesis identified five systemic barriers that stakeholders reported as the primary impediments to innovation and growth:

1. Fragmented Regulation and Policy: A complex, slow, and misaligned regulatory system in Canada (ranking 35^th of 38^th in the OECD) that deters investment and creates uncertainty for innovators.

Across the sectors, misaligned or outdated regulations often slow innovation adoption.

For example, in agri-food, promising products like novel plant-based proteins and fermentation derived ingredients fall into regulatory “gray zones.”

Companies face unclear pathways on whether a new food is classified as a “novel food” requiring pre-market approval, a process described by entrepreneurs as opaque and unpredictable.

This uncertainty adds cost and delay. Some food tech firms even skip the Canadian market initially in favor of countries with clearer, more unified rules.

Similarly, in life sciences, innovators note that Canada’s health regulatory and reimbursement processes can be slower or more fragmented than international best practices, reducing patients’ timely access to cutting-edge therapies.

“In short, Canada’s regulatory domain remains fragmented and reactive, rather than strategically aligned with innovation objectives.”

2. Lack of Late-Stage Capital for Scale-Up: A "valley of death" for scaling companies.

A shallow domestic capital pool for Series B and C funding causes many promising Canadian firms to be acquired by foreign entities or to move abroad to grow.

Canadian life sciences startups, for example, excel at early R&D (often backed by public grants and angel funding), but when it comes to expensive Phase III trials or building manufacturing capacity, they struggle to raise funds domestically.

This has led to promising biotech firms being acquired by larger foreign pharma or relocating to the U.S. to access venture funding.

Policy papers state that life sciences sector’s greatest hurdle is attracting investment. Although there is a strong venture capital market in the sector, private companies still require greater financing. Government involvement is essential for the fund to succeed.

3. Risk-Averse Procurement and Adoption: A public and private sector culture that often prioritizes established vendors over new technologies from domestic companies, failing to use our immense purchasing power as a "first customer" to catalyze commercialization of domestic innovations.

In the healthcare sector, for example, fragmentation and lack of standardization is widely cited as the single biggest challenge.

Canada does not have one national procurement system; instead, it's a patchwork of 13 provincial/territorial systems, which are further fragmented into individual health authorities and even single hospitals. Each entity may have its own procurement rules, request for proposal processes, and technical standards.

This creates a complex, high-barrier market for suppliers, which can stifle competition, deter innovative new companies (especially smaller ones), and prevent the cost savings that come from large-scale bulk purchasing.

4. Weak Links from Research to Market: Poor connections between Canada's world-class public research institutions and the private sector, resulting in a low rate of intellectual property commercialization and lost economic value.

Canada’s universities, colleges and government labs produce high-quality research and IP. However, mechanisms to translate those outputs into market-ready innovations remain underdeveloped and inconsistent across sectors.

The innovation system has often been described as siloed: academic and industry collaboration is improving but still less frequent than in top-performing countries.

Many entrepreneurs lament difficulties in accessing or licensing university-developed IP, and academic inventors often have little incentive or support to commercialize their work.

In agriculture, federal and provincial research programs develop advanced crop varieties and agri-technologies, but extension and commercialization services are fragmented and under-resourced, meaning many farmers never see these innovations in practice.

In natural resources, Canada has world-leading R&D in areas like mining automation and clean tech, yet those prototypes often stall at the pilot stage without industry uptake.

A concerning outcome highlighted by analysts is that many Canadian inventions end up owned by foreign companies.

“Strengthening these research-to-market links through better industry-academic collaboration, more effective technology transfer and IP strategies, and support for later-stage development is essential for all five sectors to fully leverage Canadian ingenuity.”

5. A Low Risk-Tolerance Culture: A pervasive "fear-of-failure mindset" that dampens bold entrepreneurship and encourages cautious corporate investment in R&D and technology adoption.

Surveys consistently find that a majority of Canadians see our society as risk-averse: about two in three Canadians believe we are not inclined to take risks and have a fear-of-failure mindset.

This conservative attitude can dampen entrepreneurship and intrapreneurship. For instance, compared to the U.S., fewer Canadians start new businesses, and those who do often aim for moderate success or a quick sale rather than pursuing aggressive growth.

On the finance side, Canadian investors have also been cautious. Canadian venture capital funds historically delivered middling returns, reinforcing caution among limited partners.

The net effect is a cycle of caution: fewer wild ideas get funded, fewer scale-ups become global leaders, and Canada’s innovation ecosystem remains moderate in its ambitions

In addition to the five major barriers, there are sector-specific barriers.

Canada’s life sciences sector, for example, lacks sufficient laboratory and Good Manufacturing Practices scale-up space.

The digital and high-tech sector faces data sovereignty and lock-in risk, as well as Canada’s small domestic market limits first-revenue scale for deep tech.

The agriculture/agri-food sector confronts a narrow policy lens on agri-food as farming, rather than a full value chain including value-added products. The sector also faces a small domestic market that limits first-revenue scale for deep tech.

Canada’s advanced manufacturing, natural resources, and agriculture/agri-food sectors face U.S. market concentration and tariff exposure.

Five opportunities and five enablers for Canada to strengthen its innovation capacity

Discussion participants identified five overarching opportunity areas that position Canada to strengthen its innovation capacity and global competitiveness. These include:

• Accelerate tech adoption, AI, automation, and advanced platforms.
• Scale domestic testbeds, pilots, and first-customer procurement.

Living labs, clinical and industrial testbeds, and the U.S. Small Business Innovation Research-style purchasing were cited as practical ways to create bankable demand, reduce perceived risk, and accelerate time to market.

• Capture value from supply chain reconfiguration and market diversification.

The discussion panels saw opportunities in reshoring, North American integration, and targeted diversification overseas, along with more domestic processing to keep value at home.

• Brand with trust, stability, and ethics.

Canada’s soft-power advantage came up in every session, a reputation for trustworthy governance, sustainability, and ethical AI.

The opportunity is to make the Canadian brand explicit in trade, procurement, and investment dialogues, then back it with predictable timelines and service levels in policy and regulation.

• Compete on sustainability and climate solutions.

Discussion panels consistently framed climate and sustainability as a growth market where Canada can lead.

In addition, sector-specific areas of advantage include: expanding onshore agri-food processing capacity; developing a national clinical-trials network; advancing the blue economy; integrating critical minerals into the mobility value chain; and scaling mass timber and bioeconomy solutions.

Discussion participants also identified five key enablers across all sectors as essential to strengthening Canada’s innovation performance:

• Coordinated National Industrial Strategy.

Across all sectors, panelists called for a long-term, whole-of-government industrial strategy that aligns research, trade, talent, procurement, and fiscal levers under clear national priorities.

• Public-Private Co-Investment and Risk-Sharing Mechanisms.

Each sector underscored the importance of co-investment vehicles that mobilize private capital while sharing risk with governments. This approach aims to address the chronic late-stage funding gap that leaves many Canadian innovations stuck on the shelf.

• Modernized R&D and Fiscal Incentives.

A universal call across the five sectors was to update and sharpen R&D incentives to reward commercialization and scale. The Scientific Research and Experimental Development (SR&ED) program, while providing over $4 billion annually in tax credits, was consistently criticized for complexity, limited accessibility for large firms, and insufficient linkage to outcomes.

A goal shared by several participants is to shift fiscal support from early-stage research toward the “valley of death,” bridging prototype to market. By reforming SR&ED and linking incentives to later-stage outcomes, Canada can better translate its strong research base into productivity gains and exportable technologies.

• Integrated Innovation Governance and National Innovation.

Fragmentation in Canada’s innovation ecosystem spread across multiple departments, programs and jurisdictions is a recurring frustration in every panel. Participants urged the creation of coherent, cross-departmental governance structures that align regulatory, funding, and program delivery mechanisms.

• Workforce and Skills Development.

All sectors recognized that human capital is the foundation of innovation. Panels emphasized the need for employer-led training, stronger academia–industry linkages, and targeted talent programs to address the ageing workforce and skills gaps in technical and emerging fields.

Key recommendations call for a fundamental shift

To address the deep-rooted challenges in Canada’s innovation ecosystem, the report synthesized the collective call from stakeholders for a new level of national alignment. The key recommendations, gleaned directly from the innovation strategy consultations, do not call for incremental change, but for a fundamental strategic shift. They are:

1. Adopt a Mission-Driven Innovation Strategy to focus national R&D, investment, policy and regulatory efforts on solving "grand challenges."

Canada should articulate clear national missions to focus innovation efforts across sectors. A mission-driven approach would rally public and private players around grand challenges such as achieving net-zero emissions, building climate-resilient agriculture, advancing precision health care, or winning in the digital economy.

By setting specific objectives, government can then align policies, regulations, and funding to support solutions to those challenges.

2. Modernize and "De-Risk" Procurement by shifting policies from "upfront price" to "total value," using government purchasing power as a strategic tool to build domestic anchor companies.

Reforms to Canada’s procurement frameworks are urgently needed to turn procurement from a barrier into a driver of innovation. Concretely, this means updating procurement rules at all levels of government to allow for greater flexibility, experimentation, and value-based selection.

Governments should expand initiatives that procure R&D and prototypes so that every department dedicates a portion of its purchasing to innovative Canadian solutions.

3. Establish Long-Term Innovation Outcome Metrics and Accountability, focused on outputs (such as business R&D intensity, number of scale-ups) rather than inputs (such as program spending) to ensure accountability and drive tangible results for Canadians.

Canada should institute a robust set of innovation outcome metrics to gauge progress and hold policymakers accountable for results.

Traditionally, Canada has focused on input metrics like dollars spent on R&D or number of programs launched.

The country needs to shift focus to outcomes that matter: for example, business R&D intensity (BERD as percentage of GDP) is one critical metric where an ambitious goal is needed.

Other outcome metrics could include: the number of Canadian firms scaling past $1 billion in revenue; commercialization rate of public research; growth in high-value patents held by Canadian companies; adoption rates of key technologies by SMEs; improvements in productivity or carbon efficiency in each sector due to innovation; and Canada’s rank on international innovation and competitiveness indices.

“By setting clear targets and timelines, Canada can sustain focus on the endgame: not just doing more innovation activity but yielding more innovation impact,” the report said.

Over time, these metrics will inform what policies are working and where course corrections are needed, creating a cycle of evidence-based improvement in innovation strategy.

The issues with Canada’s innovation ecosystem are not primarily technological; rather, they are rooted in policy design, governance coordination, institutional risk culture, and long-term strategic alignment, the report noted.

“The convergence across sectors indicates that incremental, siloed reforms will be insufficient,” the report said. “What is needed is a coordinated reset of how innovation is regulated, financed, governed, and sustained over time.”

“Improving Canada’s innovation performance is the key to improving the sequential links between productivity, competitiveness, standard of living and ultimately the quality of life of all citizens,” Watters said.

This improvement is even more important now because of the increasing turbulence of interconnected economic, social, environmental, technological and geopolitical risks, he said, pointing to the findings of the World Economic Forum’s Global Risks Report 2026  released last week.

“As a result, improving our citizens quality of life over time is essential in order to both maintain our cohesion as a society, and our sovereignty as a nation,” Watters said.

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