Economic returns from defence spending push will require removing barriers for industry: report

Ottawa’s aspirations to build a sovereign defence industry will not bring long-term economic gains without the removal of structural barriers for companies building what it wants to buy, a Canadian Chamber of Commerce report says.

The federal government has stated its ambition of growing the Canadian defence industry as it works toward spending 5 per cent of gross domestic product on defence by 2035, alongside its North Atlantic Treaty Organization allies.

But first, it needs to fine-tune the pathway from innovation to commercialization for the small to medium-sized companies that make up the bulk of Canada’s domestic defence industry, according to the report, titled “Deepening Our Defence” and published Tuesday by the chamber. This means creating stronger links between industry and academia, as well as ensuring specific procurement vehicles exist for each of the government’s many innovation programs.

Guided by the Defence Industrial Strategy, released about seven months ago, Ottawa has introduced several initiatives, including a new marketplace for autonomous systems and reforms to the industrial benefits policy.

Yet, the intersection of research and innovation with the federal procurement system remains a sticking point, said Robert Asselin, chief executive officer of U15 Canada, an association of the country’s top research universities. He warned that this could hamper the long-term sustainability of a sovereign defence industry.

“This is the best economic strategy the government has had in front of it for a long time, because it is focused on innovation,” said Mr. Asselin, who contributed to the chamber’s report. “The intent is there, but the execution right now is not.”

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Canada is projected to increase its pure-play defence spending from $64-billion in 2025 to approximately $160-billion by 2035, the report said. The share of federal expenditures allocated to defence will increase from about 11 per cent to almost 30 per cent by 2035.

But the resulting economic outcomes will depend largely on how the money is spent. According to modelling by the International Monetary Fund, every additional $10-billion in defence spending can potentially generate $7-billion to $10-billion in cumulative real GDP over three years. However, this return diminishes if most of the money is spent on imported equipment, rather than government consumption and investment, for instance.

The IMF analysis used Poland as an example. Between 2021 and 2025, the country increased its defence spending by roughly 2 per cent of GDP. But an estimated 80 per cent of its equipment purchases were made through foreign suppliers, owing to limited domestic capacity at the time of its rapid rearmament sparked by the war in Ukraine.

To see an economic payoff, the chamber’s report stated, a government must be willing to buy and encourage investment into what it wants to see built at home in the long term. Otherwise, its own defence dollars can easily be funnelled into imports or purchases from foreign-owned companies, minimizing the benefits for domestic industry.

“Defence spending is an opportunity to advance sovereignty while crowding in significant private investment,” Andrew DiCapua, the chamber’s principal economist, said in a statement. “Our research suggests that defence spending can support economic growth with many industries having the capacity to contribute to this tall task.”

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A crucial factor in that potential is Ottawa’s commitment in its industrial strategy to increase investment in defence-related research and development by 85 per cent within the next decade, Mr. Asselin said. This will be especially important for Canadian universities and small to medium-sized businesses, he added.

“In the best-case scenario, we would have this interface between the Department of Defence and our leading research universities, like they have in the U.S., like they have in most G7 countries,” he said, “where you would work on research problem sets that get translated into products and services that the government can buy for the military.”

Closer relationships between government and academia would also help ensure intellectual property generated through this R&D stays in Canada. U15 analyzed thousands of global patent families – meaning a collection of patent applications covering similar technical content – that had both a Canadian inventor or applicant and relevance to Ottawa’s industrial strategy.

Of those filed between 2014 and 2023, about 75 per cent involved a foreign-controlled firm as the applicant – indicating that even when Canadians are involved, they’re not necessarily in control of the IP they helped create.

Mr. Asselin sees room for improvement. Canada is well known for its research and development prowess at postsecondary institutions, but this talent must be transferrable into domestic industry, he said.

Initiatives such as the federal government’s Bureau of Research, Engineering and Advanced Leadership in Innovation and Science show promise, the chamber’s report stated. But only time will tell whether Ottawa can translate that promise into industrial growth, Mr. Asselin said.

“The government could spend a lot of money acquiring things from Canadian companies, but at the end, it won’t create any innovation if we don’t get the research pipeline connected to the commercial pipeline.”