Canada is spending tens of billions more on defence but lacks the domestic industry to absorb it. Without a strong industrial base, most of that money will flow to foreign manufacturers and Canada will buy equipment it can't maintain, upgrade, or replace.
Defence R&D is the most powerful form of industrial policy ever invented. The internet, GPS, semiconductors, jet engines, and nuclear energy all came from military research. Canada is missing the biggest economic opportunity of the next decade.
Summary
Canada has committed substantial defence spending, but turning this investment into a world-class domestic industry requires speed, ambition, and concrete policies. First, Canada should mandate 70% domestic content on all major defence contracts, giving the Defence Investment Agency authority to enforce it and removing regulatory barriers to sole-sourcing Canadian suppliers. Smaller procurements (<100M) should be fast-tracked through a Rapid Capability Pathway, allowing user groups to move from prototypes to scaled deployment within months. Federal research organizations must work directly with Canadian firms to transition technology quickly from labs to production, without creating new bureaucracy. Canada should also grow a domestic systems integrator by reserving lead roles and anchor contracts for Canadian-owned firms on major programs. A Canadian Other Transaction Authority would cut procurement timelines from years to months, letting prototypes move seamlessly into production and ensuring non-traditional contractors can participate. Finally, Canada must aggressively expand exports, easing regulatory restrictions, marketing products to allies, and channeling financing through Export Development Canada, while ensuring Canadian-owned SMEs and startups have a formal voice in policy decisions.
Narrative
In 2022, Canada’s entire defence industry generated $14.3 billion in revenue.2 That’s less than Shopify’s annual revenue. Roughly 600 firms make up the whole sector. Half of what they produce gets exported, mostly to the United States. This is the industrial base that’s supposed to absorb the largest peacetime military investment in Canadian history.
Canada has done this before — and walked away from it every time. In the 1950s, A.V. Roe Canada built the CF-105 Arrow, the most advanced supersonic interceptor in the world. Avro also designed the Iroquois engine from scratch because no existing powerplant could meet the aircraft’s specifications — that is how deep Canadian capability ran.3 On “Black Friday” in 1959, Prime Minister Diefenbaker cancelled the program, ordered all prototypes destroyed, and scattered over 14,000 Avro employees and subcontractors. Many of the best engineers left for the United States and helped build NASA’s Apollo program.4 The Canadarm robotic systems, the CRV7 rocket — one of the most effective air-to-ground weapons ever produced — Theseus, the first autonomous UUV, pioneered by International Submarine Engineering,the light armoured vehicles that allied armies still rely on, CAE’s flight simulators that train military pilots worldwide — Canada has repeatedly proven it can build world-class defence technology. The problem has never been capability. It has been political will and institutional follow-through.
Canada also has no domestic systems integrator. A systems integrator — or “prime” — is the company that designs a complete weapons platform and manages the hundreds of subcontractors that build the components. Think Lockheed Martin or BAE Systems. Canada doesn’t have one.5 Without a Canadian prime, every major defence program starts with a foreign company at the top of the supply chain. That company decides which Canadian firms get work, what technology gets shared, and what intellectual property stays here. Canada’s best path is likely a “neo-prime” — a software-driven integrator modelled on companies like Anduril or Helsing — rather than trying to replicate the massive manufacturing footprint of traditional primes.6 Neither the Defence Industrial Strategy nor the Defence Investment Agency currently addresses this gap.
The numbers ahead are staggering. Budget 2025 committed $81.8 billion over five years to rebuild the Canadian Armed Forces.7 Defence spending is set to hit roughly $63 billion this fiscal year — enough to finally meet the NATO 2% of GDP target for the first time since the benchmark was set in 2014.8 The government has pledged to reach 3.5% of GDP on core military spending and 5% overall by 2035.9 The Parliamentary Budget Officer estimates that reaching the new NATO targets will require an additional $33.5 billion annually beyond current plans — potentially adding $63 billion to the federal deficit by 2035.10
Right now, roughly half of Canada’s defence procurement spending flows to foreign suppliers. TD Economics noted that this limits the domestic economic multiplier.11 When Canada buys an F-35 from Lockheed Martin, Canadian firms get some maintenance and parts work, but the core technology, manufacturing, and intellectual property stay in the United States. Every dollar sent abroad is a dollar that doesn’t build Canadian factories, train Canadian engineers, or create Canadian technology.
The government’s new Defence Industrial Strategy has set ambitious targets: 125,000 new jobs, a 50% increase in defence exports, and 70% of defence acquisitions awarded to Canadian firms within a decade.12 The new Defence Investment Agency, created in October 2025, is supposed to speed up procurement and direct spending toward domestic firms. These are good starts. But strategy documents and new agencies don’t build factories.
The real prize isn’t just sovereignty, it’s an economic transformation. A landmark study published in the Review of Economics and Statistics found that a 10% increase in government-funded defence R&D generates a 5-6% increase in private sector R&D — the opposite of “crowding out.”13 Defence research stimulates more private investment, not less. The London Business School found that when government spending tilts toward R&D, it boosts productivity, GDP, and consumption for 10 to 20 years after the initial investment.14 GPS came from military satellite navigation, semiconductors were driven by defence demand, and jet engines were military technology before they were commercial technology.
Canada has real advantages to build on: aerospace, AI, cyber, quantum technologies, robotics, and drones.15 The defence sector is more than three times as R&D-intensive as Canadian manufacturing overall.16 The Arctic, the world’s next theatre of strategic competition, is Canada’s backyard. No other NATO country can test ice-hardened systems, Arctic drones, or polar communications networks in real conditions the way Canada can. The Defence Industrial Strategy estimates $180 billion in defence procurement opportunities and $290 billion in defence-related capital investment opportunities over the next decade.17 The question is whether Canadian companies capture that opportunity, or foreign ones do.
Real-World Solutions
South Korea went from a minor arms producer to the world’s 10th-largest weapons exporter in a single decade.18 Arms exports surged from $2-3 billion annually in the late 2010s to over $17 billion in 2022. The government treated defence as industrial policy, invested in domestic technology with an 80% localization rate, and gave companies the support to scale globally. In 2022 alone, defence export growth created roughly 130,000 new jobs.19
Australia is investing $765 billion in defence over the next decade, including $330 billion in new capabilities.20 Defence industry already contributes $11.9 billion to GDP and employs over 69,000 people. Australia’s strategy prioritizes sovereign industrial priorities — specific areas where domestic production is required for national security — and has increased domestic procurement from 45% to 55% of spending in five years.
The United States built the most dominant technology economy on earth largely through defence R&D. DARPA — a small, flat agency of about 220 people — helped create the foundations for the internet, GPS, stealth technology, and modern AI. The U.S. spends roughly $78 billion annually on defence R&D alone. That investment doesn’t just produce weapons. It produces entire industries. The U.S. also created the Other Transaction Authority — a contracting mechanism that sits alongside normal procurement regulations and can award contracts in 70 to 120 days.21 OTAs grew from 3% of the DoD’s R&D portfolio in 2015 to 18% by 2019, and are now the preferred tool for getting innovative technology from startups into the hands of the military fast.22 Canada has nothing equivalent.
What Must Be Done
Canada has the money committed. It has early-stage institutions in the Defence Investment Agency and the Defence Industrial Strategy. What it lacks is the speed, ambition, and specificity to turn billions in spending into a world-class defence industry. Here’s what’s needed.
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Set a binding domestic content floor of 60% on all new defence procurement over $100 million , rising to 70% within five years. The Minister of National Defence should issue a directive through the Defence Investment Agency making this a contract requirement, not an aspiration. The current process splits authority across DND, Public Services and Procurement Canada, ISED, and Treasury Board — no single body controls decisions. Cut regulations that prevent DND from sole-sourcing Canadian suppliers when domestic capability exists. South Korea reached 80% localization — Canada can reach 70%.
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Accelerate defence procurement under $100 million by creating a Rapid Capability Pathway inside the Defence Investment Agency. A simple 1 page memo explaining the need from the user group (L1s) should suffice for DIA to initiate contracting. Technology validation contracts of $250,000–$500,000 should be issued within 48 hours and tested within 30 days. Validated technologies are given a sole source contracting vehicle usable across the CAF. If the user requires further adjustments to the capability, they can move quickly through a defined ramp: $2–5M advanced prototypes, $10–25M field experimentation during exercises like Operation Nanook, and scaled procurement of $25–250M within three months for systems that work without needing to go through additional contracting, procurement or public tender bids.
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Mandate that federal defence research organizations work with private industry whenever capable companies exist. Instead of creating a new agency, require the National Research Council and Defence Research and Development Canada to contract directly with Canadian firms if a private company is willing and able to perform work currently done in government labs. No new bureaucracy, programs, or funding are required—only a policy directive shifting execution from government laboratories to the domestic industrial base. NRC and DRDC would continue defining research priorities and validating results, but industry would increasingly carry out the work. This would accelerate technology transition, strengthen Canadian defence companies, and convert existing research spending into scalable, manufacturable capabilities without creating new institutions.
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Grow a Canadian systems integrator. The Defence Investment Agency should designate systems integrator development as a sovereign capability priority. Reserve at least three major programs over five years where a Canadian-owned firm serves as lead integrator — starting with Arctic surveillance and command-and-control, autonomous drone swarms, and cyber operations platforms. Provide anchor contracts of at least $500 million with milestone-based payments that reward delivery speed. Require foreign primes bidding on larger programs to partner with a Canadian integrator as co-prime, not just subcontractor.
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Create a Canadian Other Transaction Authority. Canada’s procurement system averages 16 years to buy equipment. The government should create a Canadian OTA, modelled on the American version, that lets the Defence Investment Agency award prototype and research contracts up to $500 million outside standard federal procurement rules. Target 90 days from solicitation to contract. Require at least one non-traditional contractor — a startup, university lab, or commercial tech company — in every project. Allow successful prototypes to transition directly to production contracts without restarting procurement. Canada already has an Urgent Operational Requirement process but it is rarely used and narrowly scoped. A permanent OTA makes speed the default, not the exception.
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Open the export floodgates and give Canadian-owned companies a seat at the table. Remove restrictions on selling defence technology to NATO and Five Eyes allies immediately by amending the Export and Import Permits Act. Establish a Foreign Military Sales office within Global Affairs Canada to actively market Canadian products to allied governments. Use Export Development Canada’s $5 billion Trade Impact Program to finance foreign purchases of Canadian-made defence equipment. Target $15 billion in annual defence exports within 10 years. To ensure these policies serve Canadian-owned builders and not just foreign subsidiaries operating here, the Defence Investment Agency should establish a formal advisory channel for Canadian-owned SMEs and startups — separate from existing structures where multinational primes dominate. The recently launched Alliance of Canadian Defence Companies, which represents wholly Canadian-owned defence firms, should be consulted before finalizing domestic content requirements on any contract over $100 million.23
Common Questions
Won’t this increase the deficit at a time when Canadians are struggling with the cost of living? This isn’t about spending more. The government has already committed $81.8 billion in new defence spending. This is about spending it here instead of abroad. Every dollar directed to Canadian firms creates domestic jobs, pays Canadian taxes, and builds Canadian technology. TD Economics found that Canadian defence-related sectors have GDP multipliers of 1.9 to 2.2. Spending this money at home generates more economic activity than sending it overseas.24
Can Canadian companies actually deliver at this scale? Not today — that’s the point. Canada’s defence sector currently has about 600 firms. But it also has capacity to grow: transportation equipment manufacturing is running several percentage points below peak capacity. The Defence Industrial Strategy projects 125,000 new jobs and a 240% increase in defence industry revenues within a decade. South Korea’s defence industry barely existed 40 years ago. With the right policy framework, Canadian companies can scale.
Won’t a “Buy Canadian” policy mean worse equipment for our military? The 60% domestic content requirement applies to procurement value, not to every component. If a foreign system is clearly superior and no Canadian alternative exists, the military can still buy it — but the contract must include significant Canadian manufacturing, maintenance, and technology transfer. This is exactly how South Korea and Australia structure their defence procurement, and both maintain world-class military capabilities.
Conclusion
Canada is about to spend more on defence than at any point since World War II. The money is committed. The need is real. The only question is whether this generational investment builds a Canadian industrial powerhouse or whether it flows to foreign factories and foreign engineers, leaving Canada dependent on others for its own security. Canada has built world-leading defence technology before — from the Arrow to the Canadarm. Every time, it let the momentum die. This time, with a Canadian systems integrator, a fast contracting vehicle, and the right industrial base, it doesn’t have to. Defence spending is the most powerful form of industrial policy on earth. The country that funds military R&D builds the technologies that define the next century. Canada has everything it needs: the resources, the talent, the allies, and now the budget. It’s time to build.