BY LEIGH HARRIS & PETER GRAHAM
A Strong Defence Makes for the Best Offence – Defence Business
Canada’s best economic offence may well lie in our defence. Finally.
The fact that military spending was a key part of the Throne Speech delivered by King Charles III is critical.
Investment is required to modernize and properly equip the Canadian Armed Forces, all of which will help reinvigorate morale and support recruitment. To strengthen the military’s presence in the North – and meet NORAD commitments – it’s essential that Canada fast track defence infrastructure, thereby creating jobs and providing access to safe and dependable power in the North.
Equally important, will be the investments made in technology, having a robust cyber defence infrastructure, and defending our intellectual property (IP) and advanced research.
TECHNOLOGY
Technology is irrevocably changing the nature of warfare. In modern warfare, real-time intelligence sharing – enabled by resilient and effective communication networks – is essential. From cloud computing, quantum computing, advanced microelectronics, data management and edge analytics to AI and autonomous systems, there is a role to play for the business community in building up our defence industry. When the private sector develops technologies for commercial applications, it alleviates pressure on defence budgets, but companies need incentives to explore “dual use” technologies for civilian and military applications.
The US is Canada’s main market, accounting for 63% of defence exports. “Seventy-five cents of every dollar of capital spending for defence goes to the United States. That’s not smart,” Prime Minister Mark Carney told the CBC.
With only 11% of defence exports destined for Europe, Canada will join ReArm Europe, opening and deepening the market for Canadian industrial defence goods and services in Europe’s $1.25-trillion defence marketplace. The EU’s Security Action for Europe (SAFE) loan program – designed to fund joint defence initiatives across EU countries and aligned partners – could also enable Canadian companies to bid on projects tied to shared production goals and procurement frameworks.
Canada can also offer Europe a place to build arms with much cheaper energy costs and access to AI data centres to run military technology.
THE BUSINESS COMMUNITY IS EXCITED
As many as 85% of Canadian business leaders told KPMG in a recent survey that they support Canada ramping up its military spending.
Two recent reports highlight the economic benefits from increasing defence spending.
According to Desjardins, an empirical study of OECD countries shows that a 10% increase in defence research and development (R&D) spending leads to a 5.6% increase in private R&D in the following year, resulting in productivity gains. “What’s important is to allocate those funds intelligently by expanding applied research capacity, focusing on dual-use technologies, and creating synergies with technological ecosystems, especially for cybersecurity and surveillance,” it wrote.
Manufacturers, impacted by ongoing US tariffs, could potentially reallocate some of their capacity to defence, helping Canada to reduce its dependence on imported military equipment, which Desjardins estimates represents 45% of supply chain costs.
Defence spending does not crowd out activity, it crowds in, CIBC Economics points out. The economic multiplier of defence spending can be larger than perceived, with multiple short-and-long-term positive spinoffs, CIBC says. The only question is the size of the multiplier.
The larger the share of R&D in overall defence spending, the larger the positive spinoffs, says CIBC. By their calculations, the $31 billion that the Canadian government earmarked for additional defence spending into fiscal 2028-2029 – which is 56% operational and 44% capital investment – could boost Canada’s economy by up to $64 billion.
PRIVATE EQUITY INVESTORS TAKE NOTICE
Already, they are zeroing in on aerospace and defence opportunities in Europe. According to PitchBook, deal activity is on pace to match or even exceed that seen after Russia’s invasion of Ukraine in 2022 in anticipation of increased defence spending. While the S&P 500 is down slightly this year, the aerospace and defence subindex is up 16% and global defence tech ETF shares are up 46%.
This bodes well for companies looking to fund their expansion. With long investment horizons, typically five-to-10 years, PE funds will be important to the building up of Canada’s defence industry, especially since the industry is comprised of hundreds of small- and medium-sized businesses, mostly privately held.
Canada, though, has yet to join the US$1-billion NATO Innovation Fund (NIF), a venture capital fund aimed at backing next-generation defence technology in areas like quantum computing, AI and hypersonic systems. Because NIF invests only in companies based in participating countries, Canada is missing out on an opportunity to attract private capital to domestic defence tech companies. Access to capital will be essential for growth. We can’t squander any opportunities.
For years Canada has talked a good game. We better do this right so that our economy does indeed grow along with the increased spending.
Leigh Harris is a Management Consulting Partner and Lead Partner, Federal Government, at KPMG in Canada. Peter Graham is a Partner in Deal Advisory and the Aerospace and Defence Industry Leader for KPMG in Canada. For more information, visit, www.kpmg.ca. The views expressed here are their own and do not necessarily reflect a CDR editorial position.
