The 2025 Nobel Prize in economics offered a timely reminder of what ultimately drives sustained improvements in living standards.
Joel Mokyr was recognized for identifying the conditions that allow technological progress to become self-sustaining. Philippe Aghion and Canadian economist Peter Howitt—who spent 24 years at Western University, where much of his Nobel-recognized research took shape—were recognized for formalizing Joseph Schumpeter’s insight that growth occurs through creative destruction: new technologies, firms and methods of production continually displace older ones. Their common proposition is that long-term growth depends on the continuous development and diffusion of useful knowledge.
That proposition does not, by itself, establish the case for industrial policy. It does not tell governments which sectors to support, which firms will succeed or whether targeted intervention will outperform broader reforms to taxation, regulation and competition.
But it does direct attention to the technological composition of an economy.
An economy with a substantial concentration of firms operating in R&D-intensive sectors—where commercial success depends on scientific discovery, engineering, intellectual property and continuous technological improvement—will generate different patterns of investment, innovation and productivity growth from one in which relatively few firms face those demands.
R&D is not the only source of productivity growth. Technology adoption, capital investment, effective management and the reallocation of resources toward more productive firms are also essential. But an economy with relatively few firms developing proprietary technologies will struggle to generate the intellectual property, high-value production and technological leadership that increasingly shape economic power.
This provides a useful test for industrial policy: does public intervention principally preserve existing economic activity, or does it also increase an economy’s capacity to develop, commercialize and apply new technologies?
That distinction is becoming increasingly important for Canada.
Canada’s industrial policy is being reshaped largely in response to a more difficult external environment. The trade relationship with the United States has become much less predictable. Technological competition is reshaping economic power. Governments are intervening more directly to secure strategic industries, supply chains and intellectual property. Canada, meanwhile, is embarking on a generational increase in defence investment.
The federal government has responded with a more active approach to trade diversification, economic security, major projects and defence industrial capacity. These are important shifts. They recognize that national-security requirements, technological spillovers and the scale of strategic investments can require forms of public coordination that ordinary market incentives do not always provide.
The next step is to ensure that measures designed to strengthen Canada’s economic defences also contribute to a deeper transformation of its productive economy.
Governments are under understandable pressure to protect employment, help firms absorb tariffs, replace lost markets and preserve domestic production. Sudden trade disruption can threaten otherwise viable companies, strategically important capacity and entire communities.
But measures designed to absorb an external shock will not necessarily, on their own, produce the innovation and productivity growth required for a sound long-term economic strategy.
A useful distinction is therefore between defensive industrial policy and offensive industrial policy.
Defensive industrial policy helps the economy withstand disruption. It protects firms and productive capacity, provides liquidity and temporary assistance, and helps industries develop new markets while they adjust.
If done well, offensive industrial policy expands the number of firms capable of creating technologies, investing at scale and competing internationally. It connects research, private investment, sophisticated demand and access to global markets. It increases the share of the economy in which growth depends on R&D, engineering, advanced production, intellectual property and continuous technological investment.
Adjustment assistance can help viable firms survive a period of trade disruption. Where possible, it can also encourage investment, technology adoption, new products and market diversification. Measures taken to preserve capacity in the short term can become bridges toward a more productive and technologically sophisticated industrial structure.
This is not an argument for replacing markets with government direction, nor for subsidizing any industry that can plausibly be described as strategic.
The principal objective of an offensive industrial policy is to create the conditions in which more Canadian firms invest their own capital, develop valuable technologies and ultimately succeed in international markets.
The distinction is therefore not simply between supporting existing industries and inventing entirely new ones. Preserving a critical aerospace supplier, shipyard, steel facility or advanced-materials producer may protect knowledge and productive capacity that would be difficult to reconstruct. Conversely, supporting a fashionable technology with no viable customers or credible pathway to scale may leave behind little of enduring value.
What matters is what the intervention leaves behind.
Norway did not abandon its natural-resource advantage when it developed world-leading capabilities in subsea engineering, offshore equipment and marine technologies. It used the difficult operating conditions of the North Sea, demanding customers, research institutions and specialized suppliers to turn resource production into a platform for technological development and international exports.
The Netherlands similarly combined agricultural production with advanced research, specialized education and close collaboration among government, universities and industry. It did not choose between agriculture and technology. It made agriculture increasingly dependent on technology.
These cases demonstrate a more limited point: countries can use existing strengths and sustained investment to accumulate new technological and productive capabilities over time.
The structure of the economy matters
Canada’s productivity debate usually concentrates on the general conditions facing firms: taxation, regulation, competition, infrastructure, skills, capital formation and internal trade. All matter.
But the structure of the economy matters too.
Different firms operate under very different technological conditions. Some face rapid product cycles, difficult engineering problems and customers that continually demand better performance. They must invest in research, software, equipment, specialized talent and organizational capacity simply to remain competitive.
In such firms, innovation is not an activity encouraged periodically by a government program. It is embedded in the business model.
Other firms can remain profitable without making comparable investments. This does not make their activities unimportant. It does mean that an economy’s aggregate propensity to innovate is influenced by the kinds of companies it contains and the markets in which they operate.
This is one underappreciated part of Canada’s innovation problem.
Canada provides substantial public support for business research. The Scientific Research and Experimental Development program alone delivers approximately $4.2 billion annually. Yet Canada’s total R&D expenditure was only about 1.8 per cent of GDP in 2023, compared with an OECD average of 2.7 per cent and 3.3 per cent in the United States. Canada’s R&D intensity has stagnated since 2010, and its share of business-funded research is particularly low.
A tax credit can support a firm that already has technological ambitions, specialized employees, customers and a strategy for growth. It cannot, by itself, create those conditions. Nor can it overcome every other source of weak innovation performance, including limited firm scale, foreign ownership of intellectual property, weak commercialization and insufficient investment in technology adoption.
Canada’s persistent weakness despite substantial incentives suggests that the problem lies not only in the price of R&D. It also lies in the scale, ownership, market opportunities and industrial composition of the firms expected to perform it.
Canada’s innovation weakness has several causes. But one deserves more attention: too little of the business economy is concentrated in R&D-intensive firms and sectors where technological development and adoption is central to commercial success.
The objective should therefore be to increase the share of the economy made up of R&D-intensive firms and sectors, while also raising the technological intensity of Canada’s established industries.
That means building new capabilities at the technological frontier. It also means spreading advanced technologies throughout the existing economy.
Mining, energy, agriculture, forestry and manufacturing are not inherently old-economy activities. Many are already technologically sophisticated. Their future competitiveness will depend increasingly on automation, artificial intelligence, advanced materials, biotechnology, clean production and specialized engineering.
Canada’s natural resources can create demand for environmental technologies, advanced extraction methods, specialized equipment and new materials. Its energy systems can support innovation in nuclear technologies, electricity management, carbon capture and industrial processes. Its agricultural base can generate opportunities in biotechnology, precision farming and advanced food production.
But greater technology adoption within established industries is not a substitute for developing more sectors whose principal economic activity is the creation and commercialization of technology. Canada needs both.
The distinction is not between traditional and modern sectors. It is between an economy in which relatively few firms develop proprietary technologies and one in which a much larger share of production, investment and employment is organized around research, engineering and continuous innovation.
Beyond market diversification
This distinction also matters for Canada’s trade-diversification strategy.
Developing new markets beyond the United States is essential. The federal government is right to make it a central economic priority.
Selling more energy, minerals or agricultural products to new customers can increase exports, incomes and investment. It can create demand for infrastructure, equipment and new technologies. It can also support highly productive and technologically sophisticated domestic industries.
But changing the destination of a product does not necessarily increase the share of the economy devoted to developing proprietary technologies or building R&D-intensive firms.
The next stage of trade diversification should therefore operate along both dimensions.
Canada should find new markets for its existing strengths while using research, technology and investment to deepen those strengths and develop new ones. Market diversification and productive diversification should become mutually reinforcing parts of the same strategy.
The objective is not to produce everything domestically. Canada is a medium-sized economy integrated into continental and global supply chains. A credible strategy must be based on specialization and access to allied markets.
Canada does not need to be self-sufficient in every advanced technology. It needs to become indispensable in more of the technologies and production systems that will shape its prosperity and security.
The defence opportunity
The new Defence Industrial Strategy creates an unusual opportunity to put this approach into practice.
Defence procurement must, of course, begin with the operational needs of the Canadian Armed Forces.
Sovereign capabilities operate near some of the most R&D-intensive and technologically demanding parts of the economy. They draw on aerospace, artificial intelligence, cybersecurity, quantum science, space systems, robotics, communications and advanced materials.
They can also provide something Canada’s innovation system has often lacked: sophisticated customers with substantial, predictable and long-term demand.
This matters because firms do not invest simply because research has become less expensive. They invest when they see a credible market, a demanding customer and a pathway from invention to production.
The Defence Industrial Strategy recognizes much of this. It aims to build leading Canadian firms in key sovereign-capability areas, increase government investment in defence-related R&D by 85 per cent and accelerate the procurement of successful Canadian innovations.
These commitments contain many of the foundations of an offensive industrial policy.
The opportunity now is to connect them as effectively as possible: linking research to technological development, development to procurement, procurement to production, and domestic production to allied and commercial markets.
Properly understood, procurement can be more than a purchasing exercise. It can create difficult technological problems, support experimentation, provide environments in which new systems can be tested and give firms an initial customer from which to pursue broader markets.
The measure of success will not simply be how many procurement dollars are nominally spent in Canada. It will be whether those expenditures leave behind stronger R&D-performing firms, valuable intellectual property, experienced scientific and engineering teams, advanced suppliers and technologies that can compete in allied markets.
From economic defence to industrial offence
Public policy—and politics—naturally gives priority to the industries, workers and communities facing immediate disruption.
Existing firms are visible. Their employees, facilities and supply chains already exist. The costs of losing them are immediate and concentrated. The benefits of building new capabilities are less certain, more dispersed and take longer to emerge.
Canada needs both economy-wide technology adoption and stronger capabilities at the technological frontier. The first will determine how quickly productivity improves across existing industries. The second will determine whether Canada develops and exports more of the technologies on which its future prosperity and security will depend.