The Key to Winning the Trade War is Doubling Down on Research
An opinion editorial article by Dr. Richard Gold
Published March 30 2025 in the Globe and Mail
Richard Gold is the director of McGill University’s Centre for Intellectual Property Policy, chief policy and partnerships officer at Conscience—an independent organization building open science drug discovery to address unmet health needs—and senior fellow at the Centre for International Governance Innovation as well as one of the lead Open Science, Practices and Partnership researchers at TRIDENT.
Canada’s productivity slump leaves the country more susceptible to Donald Trump’s economic warfare. The issue of productivity is not new. Canada has been on a downward slide for decades through multiple federal and provincial governments. But now there is renewed urgency to the matter. The country must start reversing this trend of declining productivity, and it can do so by altering the way it uses tax incentives and grants that leverage the strong research coming out of its universities and colleges.
Productivity is a measure of the wealth a country produces for each hour of work done. One way to increase the wealth created while keeping hours stable is to produce and sell higher-value goods and services around the globe.
While governments cannot pick winners and losers, innovative countries can and do create incentives and institutions that support innovation. For too long, successive Canadian governments ignored innovation. This started to change under the Harper government and even more so under the Trudeau government. Nevertheless, Canada still ranks sixth in the G7, ahead of only Italy, in productivity.
A central problem is that Canadian companies spend proportionally less on research than their counterparts in peer countries. Canadian companies funded only 58.8 per cent of research in 2022, while their U.S. counterparts paid for 79 per cent. Federal and provincial governments support proportionally more research than their peers. The result is strong academic research but underwhelming performance in the private sector. The way forward is to better leverage public-sector outputs to help companies innovate.
Canadian policy has limited instruments through which to accomplish this leveraging, mostly relying on universities and colleges to patent and license those patents to industry. While this strategy has had its successes, most universities lose money in the process and, outside the United States, the actual impact on innovation has been low. This is partially due to the weaker venture capital markets in Canada.
One of the principal ways of encouraging companies to invest in innovation is through Canada’s research tax credit system. It provides companies with either lower taxes or, for small companies, a payout even in the absence of profit. Studies show that tax credits work to increase innovation, but overreliance on them tends to support zombie firms that use the money to engage in research with little innovation potential. Furthermore, Canada’s tax credit regime provides higher payouts to small firms, with the undesirable effect of discouraging those firms from growing so they do not lose those payouts.
Instead of differentiating between small and larger companies, Canada should base the rate of its tax credits on the amount invested in research. Firms that are good at innovation do not need the incentives: They invest because doing so provides them with a return. Rather, Canada should target these tax credits at firms that would otherwise do relatively little research, as that will bring the biggest returns to the country’s wealth. To do this, Canada should establish a gradually declining rate of research tax credits (eventually to zero) as research expenditures increase.
To leverage the country’s investments in academic research, governments should provide higher credits for companies that conduct research jointly with a university or college. Canada could target fields such as cybersecurity, quantum computing, AI and biotechnology to build independence from the U.S.
Governments ought to limit the availability of refundable tax credits – reimbursements available to small companies even if they have no profit – where despite having received five or more years of credits, the company still has not introduced a new product or service. This will discourage zombie companies.
Overall, Canada should decrease its reliance on tax credits, reallocating funds from these credits to grants and venture funds targeting joint public-private research, with a particular focus on collaborations that aim to develop products that substitute for goods imported from the U.S.
As Canada is likely to increase defence spending to meet its NATO target, Ottawa should supplement tax credits and grants with defence procurement. The U.S. uses military procurement to subsidize its companies. Take for example its domestic aerospace industry. Companies such as Boeing rely on highly lucrative defence contracts to fund their innovation, then apply those innovations to their domestic aerospace products without significant further expenditures.
By reforming and aligning its tax credit and grant systems, Canada can increase productivity through the development of new technologies that its companies sell globally. This in turn will provide it with the resources needed to resist economic warfare while also increasing national security and independence.