Research and development expenditure

Canadian R&D expenditure increased by 1.6% in 2025 to reach $44.8 billion, reversing prior declines and marking a return to growth after a period of stagnation. Lower interest rates, prompted by monetary policy adjustments from the Bank of Canada, reduced financing costs and restored profitability for Canadian firms, encouraging renewed investment in research activities. The resurgence in R&D was also accompanied by significant increases in investments targeting automation and artificial intelligence, reflecting an economy-wide prioritization of innovation and technological advancement as businesses capitalized on improved financial conditions.

From 2020 to 2025, Canadian R&D spending was characterized by notable volatility as macroeconomic challenges repeatedly interrupted funding cycles. At the outset, the COVID-19 pandemic and subsequent uncertainty diverted corporate resources away from research and toward debt servicing and payroll obligations. As a result, overall expenditure stagnated, particularly affecting the industrial and energy sectors, which reduced R&D budgets due to weak commodity prices and limited profitability. Outsourcing of R&D increased, notably in 2023, in response to persistent profit volatility, marking the largest year-on-year spending drop of the period at 0.9%. Despite initial signs of recovery after border reopenings in the latter half of 2020, inflation and elevated interest rates continued to restrict investment, with 2022 and 2023 seeing additional declines. This period also built upon contractions observed in prior years, such as 2013 and 2015, illustrating the cyclical nature and vulnerability of corporate R&D to broader macroeconomic conditions. Only with the onset of more accommodative monetary policy in 2024 did corporate profits and labor market conditions improve, leading to renewed business confidence and R&D expansion. The five-year CAGR for R&D expenditure reached 1.9%, shaped by intermittent periods of growth and decline as firms adjusted to shifting external pressures.

Macro trends fundamental to the driver included persistent inflationary pressures, evolving lending practices, and lagging wage and productivity levels across the economy. These trends limited corporate investment capacity, making R&D budgets highly responsive to policy changes and profitability cycles. Fluctuations in interest rate policy shaped both short-term and long-term investment prospects, while subdued wage growth and productivity gains constrained the economy's ability to sustain higher innovation outlays.