Canada has an innovation problem. More specifically, several issues compound into one larger issue. The Conference Board of Canada scored Canada only a ‘C’ on their 2024 Innovation Report Card, placing 15th among 20 other developed countries, scoring below average on 14 of the 21 innovation indicators, underscoring weak performance in innovation to date. Pair this with an increasing annual productivity gap compared to the U.S., which has increased to over $20,000 per person, exacerbating the problem. The economic gap between Canada and the U.S. has reached its widest point in almost a century, charting back to the Great Depression. Poor innovation standards across multiple industries are hurting the Canadian economy. This journalist then asks why Canada's global performance in innovation is relatively weak?

Canada’s Market Structure

Historically, Canada has warranted a concentration system, favoring large market oligopolies over small and medium enterprises (SMEs) and startups. The traditional notion Canada has used to excuse the lack of competition is based on a relatively small population and market share. This isn't true anymore in the digital era, where companies can scale faster than ever across borders. The median age of the top 15 largest publicly traded Canadian firms is 122 years, compared to the United States at 45 years showcasing the disparity in age and lack of innovation. Of these companies, the most recent is Shopify, founded in 2006 in Ottawa. Unfortunately, success stories like Shopify are few and far between. Canadian firms struggle due to an absence of incentive to change, which has allowed them to continue their behavior trends in the modern day.

Canadian regulations have allowed these older institutions to continue to dominate the market across industries like telecom, grocery, and banking which is an industry extremely relevant to this phenomenon in the banking sector. Canada’s banking industry is shaped by the ‘Big Five’, consisting of TD, Scotiabank, CIBC, RBC, and BMO. Together, they command 90% of the market share for financial services. Consequently, Canadians overpay $8.5 billion more in annual fees in comparison to the equivalent banking fees in the U.K. It’s clear to see that these firms have no incentive to innovate and change their business practices. This market structure is leading to Canadians paying the highest banking fees on the planet, and will only continue to worsen if no market disruption is allowed to challenge the status quo.

Lack of Competition

Part of the reason Canada’s large oligopolies enjoy so much market share is due to Canada’s weak competition policy that has enabled these firms to continue to dominate the market. As a result, any new firms trying to innovate and offer something new face the daunting challenge of working around the regulations that exist for these already established firms to thrive.

Canada needs more variety in new, dynamic, disruptive firms introducing emerging technologies and driving innovation. These companies possess the ability to grow exponentially, taking market share back from the big firms, and helping to lower skyrocketing prices for Canadians.

Examining the productivity gap, Canada is more comparable to a low-income state in the United States, such as Alabama or Mississippi, than a G7 country. As a result of the lack of competition, Canada is 30% less productive than the U.S., and producing less each year, with real GDP per capita on a decline.

Mergers and acquisitions play a major role in the lack of competition, by increasing market concentration and limiting the number of competitors. When firms can just acquire their competitors instead of innovating with new products and services to lure consumers, change is unlikely to occur. Once again, the Big 5 banks are an example of this, as they control over 85% of banking assets, restricting the choices for both consumers and startups alike.

Weak R&D Investment & Attitudes

Canada needs to invest more heavily in research and development initiatives, both privately and publicly. According to a report from the Information Technology and Innovation Foundation (ITIF), in 2021, Canadian firms invested approximately $5.2 billion in R&D across advanced sectors, while U.S. firms allocated nearly $529 billion. That’s 103 times greater than Canada’s R&D investment. Even after adjusting for the difference in gross domestic product (GDP), U.S. firms' R&D spending was substantially higher. For instance, in the software and computer services sector, U.S. firms spent $9.39 on R&D for every $1,000 of GDP, compared to Canada's $1.24.

One argument is that Canada is great at producing innovation talent, and can compete on the global stage in innovation, but there is a continuous inability to keep up with other countries in innovation activity which translates into below-par economic growth and results. Canada ranks very high in research output, and world-class institutions and facilities make the country a leader in fields such as biotechnology, mineral production, and sustainable energy. On the contrary, our struggle comes in connecting this to applicable innovative solutions and businesses that drive growth.

A lack of venture capital and risk-averse investment culture keeps Canada in a safe bubble. This translates to the underfunding of startups and more risky ventures with long-term growth potential. Canadians are far more likely to put their money into safe investments like real estate and mortgages compared to growth assets like startups and high-tech companies. This overstatement of safe assets introduces more problems than benefits in the long run. Real estate dominates investment, meaning the capital needed for companies to scale is absorbed by the housing market, which increases the average housing price in major cities and economic zones such as the Greater Toronto Area (GTA).

Canadian innovators and talent are more likely to leave the country to explore economic hot zones like Silicon Valley and New York City, where they can find better opportunities with more tailored support. Canada’s limited government support, with less focus on investing in the later-stage resources needed for firms to retain consumers, is why companies like Shopify must leave to hit the next level of growth to compete on the international stage.

Policy Implications & Potential Considerations

Canada’s innovation problems extend beyond just a lack of competition, the market structure of major industries, or startup culture. At the root of the issue is an unwillingness to adequately alter policy for years, leading to profit-maximizing firms taking advantage of Canadians, exploiting them with high costs at their will.

So how can Canada solve this problem? Heavy investment in innovation is required to help SMEs win again. Initiatives such as the Innovation Superclusters and the Strategic Innovation Fund are a good start and show the right level of ambition. Additionally, there is a need to combine investment with policy reform on multiple fronts to ensure competition is allowed to thrive and resources are guided.

Reform to the Competition Act occurred between 2022 - 2024, marking the first major changes to the Act in over 16 years, since the last major financial crisis in 2008. Some of the changes introduced included reinforcing stronger merger control, creating tougher penalties for anti-competitive practices, wage-fixing and no-poach agreements being made illegal, and allowing easier market entry for new competitors. Francois-Phillipe Champagne, the current Minister of Innovation, Science, and Economic Development (ISED), can consider developing an organizational culture where economic development is championed thus ushering in a new era of Canadian innovation.

Works Cited

Bester, K. (2024, June 24). How the big five banks are quietly squeezing billions out of Canadians. Corporate Knights. https://www.corporateknights.com/category-finance/canada-big-five-banks-squeezing-billions/

Conference Board of Canada. (2024, April 11). 2024 Innovation Report Card. https://www.conferenceboard.ca/wp-content/uploads/2022/10/innovation-report-card_2024.pdf

Government of Canada / Gouvernement du Canada. (2025, February 6). The Strategic Innovation Fund. Innovation, Science and Economic Development Canada. https://ised-isde.canada.ca/site/strategic-innovation-fund/en

Hearn, D. (2022, February 28). Lack of competition blunts Canadian innovation. Policy Options. https://policyoptions.irpp.org/magazines/february-2022/competition-hurts-innovation-canada/

Long, T., & Atkinson, R. D. (2024, October 8). Comparing Canadian and U.S. R&D leaders in advanced sectors. RSS. https://itif.org/publications/2023/09/25/comparing-canadian-and-us-rd-leaders-in-advanced-sectors/

Moffat, V. B. and G. (2021, December 16). Opinion: Canada already has big companies-it needs young, Dynamic Ones too. The Hub Opinion Canada already has big companiesit needs young dynamic ones too Comments. https://thehub.ca/2021/12/16/canada-already-has-big-companiesit-needs-young-dynamic-ones-too/

Talukder, S. (2024, June 4). Canada’s Growth Challenge: Why the economy is stuck in neutral. RBC Thought Leadership. https://thoughtleadership.rbc.com/canadas-growth-challenge-why-the-economy-is-stuck-in-neutral/?utm_source=chatgpt.com

Tombe, T. (2024, September 4). Trevor Tombe: The great divergence: Canada’s economic gap with the U.S. reaches a new record. The Hub. https://thehub.ca/2024/09/05/trevor-tombe-the-great-divergence-canadas-economic-gap-with-the-u-s-reaches-a-new-record/

Vasiliki (Vass) Bednar, V. (Vass). (2022, February 23). We need to talk about Canada’s painful lack of competition. Policy Options. https://policyoptions.irpp.org/magazines/february-2022/we-need-to-talk-about-canadas-painful-lack-of-competition/