What Drives Innovation? Lessons from Canadian Firms

July 24, 2025 – Canadian firms that actively work to tackle innovation barriers, such as financial constraints or skills shortages, are significantly more likely to innovate than those that don’t act, according to a new report from the C.D. Howe Institute.

In “Unleashing Innovation: Barriers, Government Support Programs, and What Works Best,” Catherine Beaudry shows that the biggest gains come when internal efforts are paired with targeted government support, though financial constraints remain a persistent challenge.

Firms that combine their own efforts with tools like R&D tax credits or targeted grants see additional gains – some government programs boost the chances of innovation by more than 11 percent. Yet despite this, fewer than half of potentially innovative firms make use of these programs. The application process is often cumbersome, requiring dedicated and costly internal resources.

Revisiting data at the time of the previous financial crisis, the analysis points to one clear takeaway: a one-size-fits-all approach doesn’t work.

“Government programs aren’t meant to do the work for businesses,” says Beaudry, an Institute Fellow-in-Residence and Canada Research Chair in Management and Economics of Innovation. “They’re most effective when they help remove specific roadblocks and give firms the room to lead on the innovation front.”

Beaudry recommends a more strategic and coordinated approach to public support. She calls for better alignment across programs and levels of government to eliminate overlap and improve effectiveness. The author also highlights the importance of encouraging firms – especially those not yet using public support – to combine internal innovation efforts with external tools like grants, training, or hiring incentives.

Beaudry also emphasizes the need to focus on programs that have the greatest proven impact and to raise awareness of underused tools, including public procurement opportunities. Finally, she stresses the importance of ongoing evaluation and research to ensure that support is going where it delivers the strongest results.

“A more strategic, targeted approach can help Canada build an innovation ecosystem that’s both resilient and ambitious,” Beaudry says. “The most powerful initiatives come from within firms themselves – but when that drive is matched with the right kind of support, the results can be transformative.”

Read the Full Report

For more information, contact: Catherine Beaudry, Fellow-in-Residence, C.D. Howe Institute; Percy Sherwood, Associate Editor and Communications Officer, C.D. Howe Institute, 416-407-4798, psherwood@cdhowe.org.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

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