Sovereignty Needs Builders: Why Startups, SMEs, Universities, and Incubators Must Sit at the Centre of Canada’s Defence Innovation Strategy

Photo by Dylan McLeod on Unsplash

By Aaron Johnson, Associate Vice-President Research or Strategic Institutional Initiatives & Innovation, Concordia University, and Torrey Sirdevan, Learning and Recruitment Specialist, Toronto Metropolitan University

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Canada should stop thinking about sovereignty as a procurement problem and start treating it as a production problem. A sovereign country is not one that merely purchases equipment for defence; it is one that can design, test, manufacture, adapt, maintain, and improve critical technologies at home. That is the logic now visible in Canada’s recent sovereignty posture. The Federal Budget 2025 committed $81.8 billion in new defence spending, including $6.6 billion over five years for a Defence Industrial Strategy intended to expand Canadian supply chains, domestic capability, and sovereign control over key technologies.

This shift matters because startups and small and medium-sized enterprises are not marginal actors in the Canadian economy. They are the economic base from which sovereignty must be built. As of December 2024, SMEs accounted for virtually all (99.7%) employer businesses in Canada, and small businesses alone employed 46.6% of the private labour force; together, small and medium-sized firms accounted for nearly two-thirds of private-sector employment. SMEs also contributed 37.9% of the total value of Canadian goods exports in 2024 and nearly half of private-sector GDP in 2022. *Stats from Key Small Business Statistics 2025.

The same pattern holds in defence. Canada’s Defence Industrial Strategy states that small and mid-sized businesses account for 92% of Canada’s defence industrial base and 40% of its employment. That is a striking figure. It means that any serious attempt to strengthen Canadian sovereignty in AI, cyber, quantum, robotics, advanced manufacturing, aerospace, energy systems, or space cannot rely only on a handful of large incumbent firms. Canada needs these large firms, certainly, but it also needs a dense layer of agile domestic firms capable of solving niche technical problems, moving quickly in dual-use markets, and scaling up into trusted suppliers for both domestic and export purposes.

Recent federal policy announcements recognize this need. Canada’s Innovation for Defence Excellence and Security program is investing over $1 billion over 20 years to draw on Canadian innovators for defence and security solutions. In January 2026, the National Research Council of Canada Industrial Research Assistance Program launched Defence Industry Assist with more than $240 million in support for high-potential Canadian SMEs developing defence and dual-use technologies. Budget 2025 also created a new mobilization program at Business Development Bank of Canada (BDC) with the December 2025 launch of the Defence and Security Business Mobilization Program with up to $4 billion in financing, advice, and investment solutions, including dedicated venture streams for deep technologies and startups.

This is the right direction. Sovereignty is not secured by rhetoric about self-reliance; it is secured by firms that can deliver capabilities under Canadian control. Startups and SMEs are especially important because many of the technologies now shaping defence are dual-use: AI, autonomous systems including drones, sensors, cyber tools, quantum applications, advanced materials, secure communications, and space technologies all emerge in ecosystems where civilian and defence markets overlap. If Canada wants credible domestic capacity, it must finance the firms that occupy this overlap before they are bought out, move south or abroad, or scale entirely in other jurisdictions. The Defence Industrial Strategy explicitly links this agenda to IP that is generated and maintained in Canada, domestic supply chains, and sovereign control.

But capital alone is not enough. Firms also need customers, test environments, and pathways into allied markets. Here again, the Canadian Government is sending clear signals of their agenda. Canada’s Defence Industrial Strategy pairs domestic investment with export promotion and deeper integration into allied supply chains. It explicitly commits the federal government to strengthen defence exports, increase trade commissioner support in key allied markets, and pursue arrangements with trusted partners that create commercial opportunities for Canadian firms abroad. BDC similarly states that its Defence Platform will support supply chains and direct sales destined for Canadian defence and security entities and their allies. In other words, the emerging model is not one of complete self-sufficiency. It is domestic capability first, allied market access and export second.

Universities and incubators are therefore not peripheral to sovereignty; they are foundational to it. Canada’s own defence strategy now recognizes this directly. BOREALIS, the new Bureau of Research, Engineering and Advanced Leadership in Innovation and Science, is intended to coordinate and accelerate frontier defence R&D, and it will establish a national network of Defence Innovation Secure Hubs where security-cleared academic researchers can collaborate with government and industry. The same strategy also emphasizes better leveraging post-secondary institutions to promote and sustain highly skilled students, strengthen defence-focused education and training, and build the talent pipeline for the future workforce.

That recognition is overdue. Universities are where much of Canada’s deep technical talent is formed, and increasingly where translational research begins. NSERC’s Lab to Market program is built on precisely this premise: it funds post-secondary networks to develop and deliver entrepreneurial skills training, mentorship, practical learning, and commercialization support so that researchers and highly qualified personnel can move research into market and community use. The Stratégie québécoise de recherche et d’investissement en innovation has likewise argued that higher education institutions in Québec can shift entrepreneurial attitudes, strengthen innovation networks, and engage more effectively with SMEs. Lab2Market, funded by NSERC's Lab to Market program, embodies that mission, a national network of more than 50 universities and colleges dedicated to moving Canadian research from discovery to market. The results are visible in the companies these programs have helped produce. Phantom Photonics, spun out of the Quantum Photonics Lab at the University of Waterloo's Institute for Quantum Computing, was selected for the inaugural cohort of NATO's Defence Innovation Accelerator for the North Atlantic and then advanced to Phase 2, a distinction fewer than one in four companies from that first cohort achieved, and one that speaks directly to the dual-use strength of their quantum sensing technology. Flow Genomics, another Lab2Market alumnus, is advancing Canadian biotechnology by building sovereign, ultrafast genomics infrastructure at a time when relying on foreign services carries growing risk.

Incubators matter because they convert talent into ventures. They help students and researchers move from technical promise to customer discovery, product validation, IP strategy, team formation, and investor readiness. Canada’s own evidence base supports their value. ISED’s 2025 analysis of business accelerators and incubators found that such programs help reduce startup risk and speed routes to market. Firms participating in these programs had employment levels 14.0% higher in the year of participation and 13.1% higher in the following year than comparable non-participants; revenue was 13.0% higher in the year of participation; and the share of high-employment-growth firms was markedly higher among supported companies than among the comparison group.

For defence and sovereignty, this has an additional implication: universities and incubators must train not only technical competence, but also an entrepreneurial mindset oriented to national capability. Students should learn how to identify operational problems, work across disciplines, protect IP, navigate procurement, understand export controls and security requirements, and build products that can survive both domestic adoption and allied competition. Not every student should found a company. But many more should graduate able to translate research into usable capability, whether inside a startup, an SME, a scale-up, a public lab, or an established Canadian manufacturer.

If Canada is serious about sovereignty, it must treat startups and SMEs not as a side stream of innovation policy, but as core national infrastructure. It must treat universities not only as sites of discovery, but as engines of capability formation. And it must treat incubators not as optional campus amenities, but as strategic institutions that help turn Canadian knowledge into Canadian firms, Canadian supply chains, and Canadian leverage in allied markets.

That is the real sovereignty agenda: not simply buying security, but building it up from startups and SMEs.