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There’s no question that things are tough in Canada right now, with the economy flatlining in the first quarter of 2026 following a decline in business investment and trade.
With early-stage risk venture capital in short supply [1] and the US trade war hitting businesses hard, many are in a holding pattern, waiting to see if, and when, things will improve.
However, while the natural tendency might be to pause or slow down innovation to save cash, this is exactly the time when maintaining or even increasing your research and development (R&D) activities could be the most fruitful option.
R&D is what underpins product improvement, market expansion, productivity gains, and competitive advantage, and even at the start of a technical recession you shouldn’t rush to put the brakes on your innovation program. The trick is to be strategic about it so you can emerge from a downturn stronger and better positioned to lead.
This blog looks at some of the reasons why it’s important to continue to innovate while you ride out uncertain market conditions, how to keep innovation on the agenda, and tips to help you prioritize where to spend your R&D dollars.
Innovation helps businesses adapt to tough conditions
Management consulting firm McKinsey says innovation is what sets high-performing businesses apart. “While innovation is critical to all companies’ growth, the most successful organizations use it to both expand their lead within their industries and disrupt new ones, even in uncertain times.” [2]
Innovation can help businesses do more with less. It can improve productivity, streamline processes, reduce costs, and create new sources of value at a time when every dollar matters.
When it comes to reviewing innovation projects, businesses often think first about external innovation: developing new products, entering new markets, or creating new revenue streams. However, it’s just as important to consider internal innovation. Improving manufacturing processes, automating repetitive tasks, reducing waste, or making better use of existing technology can help you strengthen margins and free up capital to fund future growth or to ride out the tough times.
Established businesses can’t assume those productivity gains will happen on their own. They need to be just as deliberate about pursuing innovation as the startups challenging them. Bank of Canada Senior Deputy Governor Carolyn Rogers says, “History shows that advances in productivity often come from the start-ups, the new companies led by entrepreneurs with groundbreaking ideas.” [3]
During economic uncertainty, the key is to decide which innovation activities should be pursued and which should be put on hold or stopped so that your company exits the downturn stronger than your peers.
To help you do just that, we’ve put together a checklist of ways to keep a tight, strategic R&D budget.
1. Protect a minimum viable innovation budget instead of applying uniform cuts
Put your innovation dollars where they’re going to create the best bang for your buck. In constrained budgets, aim to maintain a balanced portfolio of projects that either strengthen your competitive position or improve your business efficiency. Prioritize projects that:
- enhance productivity, reduce costs, or strengthen margins through creating better processes or operations
- protect or expand revenue with existing customers
- create strategically important options that can open new markets or capabilities in time, without the need to commit significant resources upfront. Look for projects that can be staged, or that build on your existing strengths.
Initiatives with long payback periods, weak strategic fit, or no clear path to proving customer demand should be either paused, partnered, or discontinued. But how do you decide which projects to keep, and which should be put aside?
2. Make hard decisions
- Rank projects on common criteria – To help you evaluate your current and planned R&D projects, rank them. Use a set of criteria: strategic fit, customer value, cost, time to impact, feasibility, potential for reuse, leverage, stakeholder support, and future strategic value and ROI. Weight each criterion according to your specific business objectives and use an evaluation matrix to help remove any emotion from the evaluation. Once you have your ranked list, it’s time to prioritize and cull.
- Create hard rules – If you’ve identified a project with weak strategic fit, no practical way to test it with customers, or complexity that makes it difficult to scale, it may be worth putting it on hold while you ride out tighter economic conditions. It doesn’t mean you have to give up on that project; you might just have to come back to it when conditions improve.
- Balance external and internal innovation – Include a mix of projects, with some aimed at future growth and others that improve the business. Both create competitive advantage, especially in uncertain economic conditions.
3. Keep a few cheap options alive
Rather than fully funding large, uncertain bets, maintain a few lower-cost projects with clearer payoffs. The goal is to preserve future opportunities at relatively low cost until market conditions become clearer.
For example, improving an existing product may deliver a competitive edge faster than developing an entirely new product from scratch. Building on what you know can help you strengthen your market position, especially if you operate in rapidly emerging markets.
4. Build on your strengths
McKinsey recommends identifying your business’s key strengths and considering how to deploy them outside your core business. “Where are your manufacturing capabilities, intellectual property, customer relationships, and other strengths truly distinctive?” [4]
Identifying and then building on these strengths can be a less risky way to capitalize on new opportunities than creating something entirely new.
5. Stage your research and check progress
This is not a time to ‘set and forget’.
Can you split larger projects into clearly defined stages? Instead of committing $2 million upfront to develop a new product, can you instead stage the project and allocate funding as milestones are achieved? You might allocate $50,000 to market research now, $100,000 to a prototype later, and then $250,000 to a pilot. As you complete each stage, evaluate progress and decide whether further investment is justified.
Review your R&D projects monthly. Check they’re reaching critical milestones and be prepared to shift resources as market conditions, customer needs, and business priorities change.
6. Capture non-dilutive support early
This is the time to diversify your capital sources. If you want to raise equity funding, you need to accept that you’ll be giving away some of your ownership of the business in return for capital. That doesn’t always make sense in a market downturn: if your company valuation is low, you’ll end up giving away more equity in proportion to the funds you receive.
Instead, look at non-dilutive forms of capital such as grants, bootstrapping, revenue-making activities and SR&ED financing. In tough times governments often step in with financial incentive programs in the form of new, targeted grants. The Canada Grant Finder uses AI to cross-reference more than 1,200 federal and provincial funding programs against your profile and help you identify which grant opportunities will best suit your business. If you’re bootstrapping, take some time to brainstorm if there are any elements of your IP or manufacturing experience you could commercialize to help raise funds. Don’t forget founder knowledge too – that is marketable.
Plus, if you’re claiming the Scientific Research and Experimental Development (SR&ED) tax incentive, consider injecting cash into your business by accessing your refund early. You can use an Easly Advance to access up to 75% of your expected SR&ED refund when it suits you, to use however you want to in your business. It’s non-dilutive, fast, and certain: you know how much to expect, and when, so you can build it into your budget.
When times are tight and R&D budgets are shrinking, you can use SR&ED financing to maintain the same R&D spend, while redirecting your own capital to other parts of the business. It’s a great way to slow your burn rate and extend your runway.
7. Track outcomes
Look at the big picture: what are your R&D dollars achieving for the business? Create clear milestones and track projects against these.
Are your external innovation projects reaching new customers, creating new revenue, helping you commercialize faster, or allowing you to enter new markets? Are the internal innovation projects improving productivity, increasing margins, cutting timelines, or lowering operating costs?
If you need to justify your R&D spending in a market slowdown, it helps to be able to quantify the value those dollars are creating, rather than focusing only on the dollars spent.
Evaluate the cost of standing still
It can be easy to pause R&D when you’re worried about the bottom line. But it’s important to consider the cost of not innovating.
The biggest risk is not necessarily the risk of missing the ‘next big thing’. It’s about losing your edge with existing customers while competitors evolve, seeing your margins erode from outdated production processes, and your prices drop, while key technical staff are lured to other businesses with continuing R&D.
Downturns often reshuffle competitive positions. Companies that continue developing products, improving processes, and engaging customers during uncertain periods can emerge with a stronger position when demand returns.
It can help to measure this opportunity cost. Pausing a project might save cash today, but what will it cost you tomorrow?
Remember why you need to keep building
Canadian business leaders know innovation helps businesses improve productivity, solve customer problems, enter new markets, and develop new revenue streams.
The Great Canadian CEO Survey of 125 heads of Canadian-headquartered technology firms found business leaders remain focused on developing technologies to capture the market, “embedding and owning technologies that define the 21st-century economy”. The Council of Canadian Innovators says its survey “points to a growing focus on securing strong positions in global value chains, shaping product categories, and building technologies that global industries rely on.” [5]
Innovation remains central to achieving that.
Be more strategic about your innovation
Economic uncertainty doesn’t remove the need for innovation. It simply raises the stakes on choosing the right projects.
The companies that come out of downturns ahead of their competitors won’t necessarily be the ones spending the most on R&D.
They’ll be the ones that continue investing deliberately, protecting the initiatives that strengthen their competitive position while being disciplined enough to pause the rest.
[1] RBCx (June 24, 2026). “Canadian VC 2026 market check-in: The early-stage squeeze continues”. [online]. RBCx. Available at: https://www.rbcx.com/ideas/startup-insights/canadian-venture-capital-report-2026-mid-year/
[2] McKinsey & Company (February 12, 2025). “How top performers use innovation to grow within and beyond the core”. [online]. McKinsey Quarterly. Available at: https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/how-top-performers-use-innovation-to-grow-within-and-beyond-the-core
[3] Rogers, Carolyn (March 26, 2024). “Time to break the glass: Fixing Canada’s productivity problem’. Speech summary. [online]. Bank of Canada. Available at: https://www.bankofcanada.ca/2024/03/time-to-break-the-glass-fixing-canadas-productivity-problem
[4] McKinsey & Company (February 12, 2025). “How top performers use innovation to grow within and beyond the core”. [online]. McKinsey Quarterly. Available at: https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/how-top-performers-use-innovation-to-grow-within-and-beyond-the-core
[5] Council of Canadian Innovators (May 2026). LinkedIn post [online]. Available at: https://www.linkedin.com/posts/council-of-canadian-innovators_new-results-from-ccis-great-canadian-ceo-activity-7445093637501317121-K7vz/
