Investing in our success: Why sustained R&D investment matters

We’ve spilled much ink in this column arguing that, as a small, open economy, Canada depends on trade to create jobs, drive wealth creation and raise living standards. A cornerstone of our nation’s prosperity, the success of Canadian exporters is in everyone’s best interest. So, how is that exporter faring?

Over the past two decades, Canadian exporter profit margins have improved from an average of 9% in 2005 to 14% in 2022—a notable achievement reflecting operational efficiencies and favourable market conditions. However, export intensity—the share of total revenue accounted for by exports—has remained largely unchanged, at around 22% to 23%, dipping to a low of 18% during the pandemic.

Meanwhile, the average number of export destinations per exporter has resembled an inverted-U, starting at 2.7 countries in 2005, peaking at 3.2 in 2017 and then declining to 2.8 in 2022. If this trend persists, Canada risks losing the modest gains we made penetrating new markets before the pandemic. While exporters are earning more, they haven’t continued to expand their global reach—a trend that doesn’t bode well for sustainable, long-term export growth.

Canada’s R&D investment lag: A risk to exporter competitiveness and growth

Against this backdrop, another concerning trend stands out. In 2005, Canadian exporters invested 3.7% of their revenue in R&D. By 2022, that figure had fallen to 2.2%, with little evidence of a reversal. This pattern stands in stark contrast to investment trends among Canada’s top export competitors.

Canada currently ranks among the lowest in the Organisation for Economic Co-operation and Development (OECD) when it comes to business-sector R&D investment as a share of gross domestic product (GDP)—nearly half the group’s average and well below leaders like Israel, South Korea, Sweden, the United States and Japan. While Canada’s higher education sector performs relatively well, investing 0.6% of GDP, compared to an average of 0.4% for the OECD, this can’t compensate for weakness on the business investment side.

How innovation and R&D drive export diversification and business resilience

Canada’s export dependence on the United States has come under increased scrutiny this year, since the imposition of wide-ranging tariffs by the current U.S. administration. But market diversification without innovation is extremely difficult. To penetrate new markets and meet increasingly sophisticated global demands, Canadian companies must offer differentiated products and leverage Canada’s innovation advantage across diverse fields.

In EDC’s 2025 cleantech report, Canada’s cleantech future: Scalable, profitable, essential, we point out that Canadian innovation in niche heating and cooling technologies offers strategic advantages for global electrification and low-carbon transformation. R&D in industrial processes can also lead to efficiencies and cost savings, making Canadian exports more competitive in a world where trade has become more expensive.

But the case for R&D investment extends beyond just market diversification. At its core, R&D drives productivity growth, the foundation of long-term competitiveness. The 2025 Nobel laureates in economics, including Canadian economist Peter Howitt, argued that innovation and technological progress are the true engines of economic growth. Progress occurs incrementally, over time, rather than through rare, transformative breakthroughs. For Canadian exporters, this means sustained investment in R&D and building a culture of continuous improvement that compounds over time.

R&D investment: The key to productivity and long-term global competitiveness

In a recent Trade Matters article, Exporter productivity and diversification drive Canada’s global growth, we showed that Canadian exporter labour productivity grew at more than double the pace of Canada’s overall business sector, between 2005 and 2022. These gains stem not only from already productive companies choosing to export, but also from those exporters capitalizing on their productivity improvements and diversifying further.

Digitalization, automation and artificial intelligence are reshaping industries at an unprecedented pace. Sustained R&D investment enhances a company’s ability to respond to economic and technological shocks, making it both an investment in innovation and resilience.

Research by the University of Toronto’s Rotman School of Business shows that exporters that invested in R&D fared better than those that didn’t when faced with an appreciation of the Canadian dollar, and were more than 105% more likely to survive the 2008-2009 financial crisis. This is because these companies have more distinctive products and don’t compete on price alone.

Furthermore, value creation increasingly depends on intellectual property, brand equity and technological know-how rather than physical capital. Countries that lead in innovation capture disproportionate benefits in terms of high-value exports and skilled employment. An analysis by the OECD shows that R&D investment positively affects both the total value of high-tech manufactures and employment in high-tech sectors.

The bottom line: Why Canadian exporters must invest in R&D now to stay competitive globally

Our exporters have built a strong foundation and continue to help drive the success of the Canadian economy. But for Canada to thrive in a globalized market, innovation must lead the way. Investing in R&D today will help businesses diversify, stay competitive, and seize the opportunities of a rapidly changing global economy.

This week, a very special thanks to Hassan Goreja, senior economist at EDC Economics.

As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.