Mittelstand, Not Middlemen, Will Help Canada Climb the Value Chain

The next Canadian decade should be defined by building, not bargaining. Some argue that our firms are structurally stuck on the low-value rungs of U.S.-led global value chains, and that the best we can do is haggle for slightly better terms of subordination. But what we actually need is a plan to build firms that set their own terms. That means worrying less about where we sit in someone else’s system and more about how we grow Canadian firms that are globally indispensable.

The goal for the next Canadian decade should be simple yet ambitious: support and scale at least 100 mid-sized, export-oriented companies that dominate strategic niches in global markets. Canada needs its own generation of Mittelstand-esque champions—medium-sized firms that may not be household names but are essential players in the global economy.

The latest version of the “trapped-in-the-value-chain” argument comes from the Council of Canadian Innovators (CCI). Kudos to the author, Laurent, for a well-written piece that raises real concerns. But his article gets one big thing wrong: It views Canada’s subordinate position as a moral failing imposed by evil, bloodsucking U.S. firms and concludes that we should seek out more benevolent masters from Japan or Europe.

In reality, we are where we are because we’ve failed to build the institutional conditions that allow firms to grow. Canada has no shortage of talent or ideas, but we lack scale-up capital, demand-side innovation policy, and any serious effort at aligning commercialization with public investment. The result is that our firms struggle to break into higher rungs of the global value chain, not because they’re feeble, but because they’ve been given a knife to bring to a gunfight.

Canadian suppliers aren’t “compelled” to internalize the costs of foreign lead firms. They do so because they lack the leverage that comes from setting standards, offering systems-level solutions, or owning IP. These are not outcomes of foreign exploitation by mustache-twirling villains south of the border, but of domestic policy neglect. We don’t have enough downstream demand, particularly through procurement. Business investment in innovation is low. Late-stage capital is scarce. Thus, instead of becoming firms that others rely on, too many Canadian firms remain interchangeable rather than indispensable.

The Council of Canadian Innovators’ article argues that Canada’s path forward should involve choosing better partners, such as favouring Japanese car manufacturers over American ones because they are nicer to their suppliers. Setting aside the impracticality of dictating whom Canadian firms can and can’t do business with, this is a largely cosmetic solution. Swapping out one lead firm for another doesn’t fundamentally alter the underlying power dynamics. Whether you're supplying Toyota or Ford, if you're not bringing something non-substitutable to the table, you’ll remain a price-taker, even if it provides respite from the escalating trade war between Canada and the United States. And the presence of multinationals is not the problem; they are part of the solution. Their presence brings access to global markets, talent flows, and advanced supply chain linkages that can accelerate Canadian firms—but only if we build our economy to capture and retain more of that value here.

There’s a playbook for this: Korea and Taiwan once sat at the bottom of value chains too! They were known for cheap assembly and outsourced manufacturing, hanging out at the bottom of global value chains on terms dictated by U.S. and Japanese firms. But over time, through coordinated industrial strategy and long-horizon investment, they built firms like Samsung and TSMC—companies that now set the rules for their industries. The Netherlands’ ASML, Germany’s SAP, and Sweden’s Ericsson were also once peripheral players. Now they anchor their respective value chains. They got there not by toying with protectionism or fighting against multinationals, but because their home countries made long-term bets on capability and coordination, leveraging the presence of multinationals and global value chains to create space for themselves.

Canada has proudly built strong research institutions, fostered early-stage entrepreneurship, and generated plenty of tech talent. What’s missing now is turning that into a pipeline of growth-stage firms that scale, export, and retain their IP. Our innovation policy remains fragmented, focused on early-stage R&D and startup incubation, with too little attention paid to scale, procurement, and commercialization.

That’s where the Mittelstand model comes in. Germany’s Mittelstand firms are not household names, but they dominate the industrial and technological niches that make them globally essential. The Harvard Business Review provides several great examples: Jungbunzlauer supplies citric acid for Cola-Cola globally, Tetra is the go-to producer of pet fish food, and Flexi is the number one manufacturer of dog leashes in the world. These Mittelstand firms do one thing, and they do it extremely well and efficiently. They’re mid-sized, export-intensive, highly specialized, have relatively flat corporate hierarchies, and are deeply embedded in global supply chains.

Canada can build its own version of this model. We don’t need to mimic everything about the Mittelstand, but their resilience in the modern economy is a model that we can certainly learn from. First, however, we will need to stop treating scale as someone else’s problem by shifting our policy lens away from startup romanticism and toward growth-stage realism.

That means:

• Reforming SR&ED and related incentives to reward year-over-year innovation intensity instead of R&D checkboxes;
• Aligning research institutions with commercialization outcomes, especially in high-growth sectors like information technology, biomanufacturing, and advanced manufacturing;
• Using government procurement as a strategic tool, not just a function to get the cheapest office chairs as quickly as possible;
• Catalyzing private growth capital to help mid-sized firms finance equipment, expansion, and global market entry.

Note that this is not a call to build Canadian state-owned enterprises or to found the next unicorn tech company that reaches $100 billion in sales. It’s about creating the scaffolding that lets capable, competitive firms scale and stay in Canada. Everyone knows Canada has potential. What we lack is policy ambition.

The goal isn’t to beg for a better position in global value chains or to take our ball and go home. It’s to build firms that set the table, rather than just waiting to be served. That’s what Germany’s Mittelstand firms do. They aren’t the biggest. They aren’t the flashiest. But they own their space, grow sustainably, and build economic resilience at scale.

So, let’s set an ambitious but achievable goal: Policymakers should do everything in their power to ensure that Canada builds up 100 Mittelstand-esque champions in the decade.