A company's success relies on innovation and technology adoption to unlock both efficiency and competitive advantage—in-house R&D can play a key role.

Industry R&D is a critical driver of innovation. In particular, in-house R&D offers companies a unique competitive advantage, allowing for the rapid identification of problems and the collaborative development of tailored solutions. This internal focus grants greater control over the R&D process, improves risk awareness and management, and maximizes opportunities to protect intellectual property (IP) and capitalize on innovations. This approach has contributed significantly to the success of numerous Canadian companies in resource extractive industries, such as mining and forestry. 

Canadian businesses increased their R&D spending to $30.4 billion in 2022; however, R&D intensity remains significantly lower than that of other Organisation for Economic Co-operation and Development (OECD) countries, sitting at roughly 1% of Canada’s GDP. This is contributing to productivity and growth challenges. Comparatively, countries with the highest business enterprise R&D as a percentage of GDP were South Korea (3.85%), followed by the United States (2.83%), and Japan (2.70%). Anecdotal data further suggests that in-house industry R&D is declining, with organizations outsourcing research and relying more on consultants. Although external collaboration has its advantages, this shift introduces a core challenge:

Could the decline of in-house R&D impact a company's willingness to adopt new technologies and reduce its capability to quickly vet, develop, and integrate tailored solutions?

Innovations can have payback periods of three years or more. With new technologies, the return on investment (ROI) can be challenging to demonstrate. Combined with the adoption of the shareholder value model, which often prioritizes short-term ROI, downsizing in-house R&D provides a short-term cost reduction that can be detrimental to long-term and sustained growth. Since the 2000s, the internalized innovation model has shifted toward a more collaborative, open ecosystem, relying more on contract labs and consultants as needed. 

Some commentators suggest that insufficient competitive intensity in the Canadian economy limits demand for innovation—and in turn for industry R&D. One example is the forestry industry, where the sale of raw logs is profitable, and “slash-and-burn” is standard for dealing with residual wood fibre, so there is less incentive to invest in R&D and drive innovation. External drivers are needed to incentivize the sustainable use of wood waste and improve productivity. The SR&ED incentive program is designed to encourage businesses to invest in R&D by providing tax credits on eligible expenditures. Although in-house R&D is eligible, some argue that this program may encourage organizations to outsource R&D for ease of obtaining credits. 

Building a Knowledge Economy Beyond Resource Exports

Canada’s economy has historically been heavily dependent on resource exports, but the global trade landscape has shifted to also focus on technology and the knowledge economy. As commodity-based industries adapt to increased competition from foreign markets and other external factors such as tariffs and environmental regulations, there is a long-term need to find innovative solutions and alternative products. Higher profit margins can be accessed through value-added products compared to raw materials or resources. In August 2025, the Canadian government announced investment and support for the diversification of the softwood lumber industry to encourage value-added production. This further strengthens the case for maintaining a long-term focus on value and retaining in-house R&D functions.

1. Risk Management

According to a 2022 Statistics Canada survey, 29.3% of businesses cite ‘uncertainty and risk’ as an obstacle to innovation. R&D teams may be streamlined to one or two employees with broad operational duties. Consequently, the required skills have shifted toward generalist knowledge, focusing on conducting techno-economic assessments and critically vetting the work of outsourced R&D teams. As in-house R&D teams rely on fewer people, there may be less internal scientific and technical expertise to effectively assess, adapt, and integrate relevant technologies. This impacts understanding the risks of new technologies and how to manage them, which can lead to slower adoption rates. The reduced ability to absorb and leverage external knowledge directly contributes to the ‘innovation paradox,’ where reported innovations do not result in significant productivity gains because industry struggles to fully implement and gain value from them. 

2. Internal Collaboration and Culture of Innovation

In-house R&D teams hold an advantage in pre-existing knowledge of internal systems, allowing new technologies to be trialed and adopted quickly with few barriers. Understanding relationship networks and fostering a culture of collaboration when introducing new ideas can overcome resistance to change. The ability to provide real-time feedback and analysis aids decision-making and a more iterative innovation process. Interviews conducted as part of this research highlighted that working with external parties can involve long periods of training on internal systems and industry-specific challenges. There may also be a more limited view of how new technologies fit within the broader organization. In-house teams foster the trust and transparency necessary for greater calculated risk-taking, as knowledgeable R&D staff can accurately assess a new technology's potential pitfalls against internal operations.

3. Innovation Ownership

In Canada, there is not only less business expenditure on R&D compared to other OECD countries, but also a challenge in translating knowledge generation from R&D into economic gain. In today’s knowledge-based economy, the ownership of digital data and IP is increasingly important. Outsourcing R&D creates significant risks to IP and competitive advantage. By allowing external parties to use innovations on other projects (especially when applied internationally), companies reduce their market edge. Furthermore, the company may forfeit financial benefits of IP protection, receive a lower share of profits, or be required to pay licensing fees for the use of related innovations. 

Encouraging in-house R&D and a greater focus on developing and scaling innovations within Canada could promote more widespread protection of made-in-Canada IP, thereby generating wider and long-term economic benefits. Companies with in-house R&D have the potential to benefit from intangible and non-registrable rights through internal knowledge transfer and confidential information advantage.

4. Targeted and Tailored Outputs

Working with in-house teams allows for more control over projects. Some interviewees highlighted challenges with availability and finding the right specialists, which can impact the timescales of projects. In addition, working with external teams can make it challenging to ensure outputs are aligned with expectations. External parties may not have the deep knowledge of industry challenges.

External parties need to adopt a holistic and systems thinking approach to ensure that R&D solutions are viable. For example, in the forestry sector, when identifying solutions for wood fibre utilization, industry professionals, engineers, and market researchers need to work together to devise full business plans and ensure that alternative end-products are marketable. Bioplastics can be good alternatives for wood fibre and forest residues, but the market is not yet well-established, which can present challenges. Overall, there is a need for technology producers to work closely with industry professionals and outsourced R&D teams to ensure that solutions are applicable and scalable.

Successful Canadian companies need to develop, adopt, and scale innovative technologies. Business and Industry Canada highlights that 76% of Canadian businesses that prioritize innovation during economic uncertainties emerge stronger, with enhanced market positions. Maintaining in-house R&D can promote technology adoption and innovation, but how can this be adapted to see greater financial benefits for industries and maintain collaboration?

Drawing from global innovation models, such as the Japanese Sogo Shosha (trading conglomerates), Canadian industries can finance and invest in products and technologies across sectors. By partnering with and investing in startups, they efficiently integrate external innovations into their own operations and help these companies scale. This approach—which focuses on funding and scaling R&D pathways—unlocks greater financial benefits for both industry and innovators. Furthermore, engaging in "reverse pitch" events or innovation scouting ensures that R&D is focused on solving high-value issues, resulting in a readily available market and rapid deployment. Ultimately, this will drive Canadian industry to become a leader in the global clean transition and reap the associated benefits.