Canada’s Colleges Need a New Engine: SMEs Can Provide It
By: Mabel Zhao
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Canadian colleges are in trouble. After years of relying on international tuition, which made up more than half of their tuition revenue, federal policy shifts have significantly reduced the number of study permits issued. Colleges are now struggling to fill budget gaps. At the same time, Canadian small and medium-sized enterprises (SMEs) make up most of the country’s business landscape but lack the capacity to invest in research and development, resulting in sluggish productivity growth. By scaling applied research partnerships with SMEs, colleges can build a more durable revenue model while supporting the Canadian economy.
Running Out of Gas: Canadian Colleges Need New Fuel
To understand why colleges must look for new revenue opportunities, it is important to examine the extent of their current fiscal challenge.
In early 2024, the Canadian government announced it would cut the number of international study permits issued that year by 35 per cent. In 2025, the new federal budget cut study permit targets again by another 49 per cent for 2026. For many of Canada’s colleges – post-secondary institutions that offered certificate programs, diplomas, apprenticeships and associate degrees – these policy changes are bad news. In the past five years, Canada’s college system has grown financially dependent on international students, who paid nearly five times more tuition than domestic students. A 2021 report showed that, across Ontario’s 24 colleges, 68 per cent of tuition fee revenue came from international students.
Despite their status as public institutions, colleges received insufficient government funding, leading them to rely on tuition as their primary source of revenue. The Ontario government froze funding to post-secondary institutions in 2019 and cut domestic tuition by 10 per cent. As such, the impact of international student visa policy changes was quickly made visible in colleges’ enrolment and revenue numbers. For example, Seneca Polytechnic, one of Canada’s largest colleges, saw a 9% dip in tuition and related fees between March 2024 and March 2025, and net earnings went from 32 million to a net loss of 5.6 million in the span of 12 months.
While an obvious next step for Canada’s colleges is to focus on domestic enrolment for revenue growth, government research indicates that domestic student enrolment for college programs is on a multi-year decline. Building a domestic recruitment pipeline to reverse this trend is a gradual process and unlikely to fully replace the revenue once generated by international tuition.
This dual decline creates a structural hole in colleges’ finances. To fill it, colleges must look for a significant, growing, chronically underserved revenue source aligned with what colleges already do well. SMEs can do just that.
When the Tuition Tank Runs Dry, Look to the Factory Floor
This creates an inflection point: if neither international tuition nor domestic enrollment can fill the gap, colleges must explore alternative sources of income.
SMEs currently make up 98 per cent of private businesses in Canada and employ over 60 per cent of the private sector workforce. Yet, despite their importance to employment and entrepreneurship, economists increasingly point to SMEs as a key contributor to Canada’s lackluster productivity growth. Between 2001 and 2021, Canada’s annual labour productivity growth averaged 0.9 per cent, compared to 2 per cent in the United States, meaning it takes Canadian workers 1.4x more effort to generate the same output as their U.S. counterparts. Among G7 countries, Canada ranks second-last in productivity growth, ahead of only Italy.
A key reason for this gap is structural. Canada’s economy has a much higher proportion of small firms than peer countries, and these firms tend to be less productive than larger companies. SMEs generally have slimmer margins, fewer specialized staff, and less capacity to engage in strategic planning. As a result, they face barriers to investing in productivity drivers like R&D, process improvements, and digital tools. Business R&D spending in Canada has declined over the past two decades, particularly among small firms, while countries like Germany, Japan, and the U.S. have increased their investments.
A lack of R&D investment limits SMEs’ ability to boost productivity. According to the Brookfield Institute, R&D is directly linked to experimentation, testing, and process modernization, all of which are necessary for long-term productivity growth. According to a survey by the CFIB, the most common barriers SMEs face when testing and adopting new technology are a lack of digital skills, a lack of time, and high implementation costs. This means that even when SMEs want to build and adopt productivity-enhancing technologies, they often do not have the internal capability, time, or knowledge to do so.
The implications of this are national in scale. Because SMEs make up most of Canada’s business landscape, their underinvestment in R&D directly affects the country’s overall productivity. And without productivity improvements, Canada will struggle to create more jobs, raise wages, and achieve economic growth. A productive economy is also a meaningful way to protect from the risks of high inflation.
The Perfect Pit Stop: Colleges as R&D Partners
With colleges seeking new revenue and SMEs lacking R&D capacity, the alignment becomes clear. Canadian colleges are well-positioned to address two pressing challenges simultaneously: the revenue loss from international student visa cuts and the productivity deficit among SMEs. Colleges already operate labs, workshops, technical talent, applied-R&D offices, and industry expertise, yet their revenue models remain largely enrolment-based. By shifting their focus toward applied research partnerships with SMEs, colleges can create a durable revenue stream while helping SMEs that struggle to adopt innovation and scale operations.
What makes this opportunity immediately viable is that federal mechanisms for college-SME partnerships already exist. The Natural Sciences and Engineering Research Council of Canada (NSERC) Applied Research and Development (ARD) grants support Canadian colleges to lead research projects in collaboration with business partners, with cost-sharing and project periods of one to three years. The program helps SMEs access R&D at a subsidized cost, while also creating a pathway for colleges to build longer-term, paid innovation partnerships beyond the grant system. The Colleges and Institutes Canada found that over 60 per cent of applied-research partnerships involve SMEs, and that in 2023-24 colleges supported nearly 9,000 industry partners annually.
Because government funding is already in place and colleges have some pre-existing partnerships with SMEs, the next step is to scale research and development services into a meaningful revenue source. For example, Conestoga College worked on 140 research and development projects with 116 business partners in 2023. But the college’s revenues from research and development services were just $6 million, including $5 million from government grants and $1 million from payments from business partners. In comparison, tuition revenue for that same year was $389 million. This means that there is plenty of room for colleges like Conestoga to scale their research partnerships to make up a greater percentage of total revenue. However, for this model to grow into a major revenue stream, colleges need internal capacity to deliver R&D at scale.
Upgrading the Engine: How Colleges Can Build R&D Capacity?
Because SMEs lack internal resources, colleges must expand their ability to deliver applied R&D at scale. To scale this new revenue source, Canada’s colleges should take steps to expand their institutional research capabilities. This includes hiring dedicated project management staff, streamlining intake processes for SME-led projects, expanding student involvement to increase research capacity and strengthening marketing and outreach to attract regional industry partners. Colleges should also develop flexible pricing and contracting models to support fee-based work that is not tied to government grants.
By scaling their R&D services, colleges can increase the number of hands-on learning opportunities for their students. Getting students involved in industry R&D already exists at many colleges, just on a smaller scale. For example, Seneca Polytechnic’s 2024 project showcase included several projects that were led by faculty members and supported by student researchers. Since colleges are known for their emphasis on practical and skills-based training, initiatives that offer more opportunities for students to work with start-up companies and SMEs fit well with their mandate.
Colleges can also focus on what their research labs offer to regional industries so that their services and brand can be scaled. For example, the Waterloo-Kitchener region is known for being a regional hub for advanced manufacturing and digital technologies. As a result, colleges located in this area are well positioned to focus their applied research and development efforts on those industries and develop long-lasting community partnerships.
Case Study: Germany Did It First
Germany offers a good example of how applied higher education institutes can work directly with SMEs to drive innovation and development. For example, at the FH Münster University of Applied Sciences, the school shifted its research strategy in the late 1990s to focus on long-term industry partnerships, particularly targeting funding from business rather than relying solely on government support. The university found that many regional SMEs lacked the internal capacity to conduct R&D on their own. FH Münster then offered tailored, applied research services that SMEs could afford, and in doing so generated external contract revenue and long-term relationships. By 2011, 45% of the university’s non-tuition / third-party revenue came from R&D services provided to companies. Overall, third-party revenue makes up one-third of FH Münster University's total revenue. The university now manages a private agency that manages a network of around 1,800 companies and handles around 800 projects per year.
This model had broader resonance. Universities of Applied Sciences across Germany emphasize practical, application-oriented research aligned with local SMEs’ needs in manufacturing, digital technologies and process optimization. For the SMEs, partnering with a UAS permits access to technical resources, student talent, prototyping capacity and applied testing. For the institutions, these partnerships diversify revenue, strengthen local relationships and build capacity for applied innovation. Germany’s UAS demonstrates that when applied-science institutions and SMEs align around regional productivity challenges, the result is mutually beneficial.
The Road Ahead: Colleges Can Steer Canada Forward
Following the model of their German counterparts, the goal of Canada’s colleges should be to use government grants as a jumping-off point to scale R&D services for local SMEs with the end goal of becoming less reliant on tuition as a source of revenue. If Canada wants a more productive economy, and colleges want a more resilient future, the path runs directly through the R&D lab. The question is no longer whether colleges can step into this role—but whether they can afford not to.
Editor(s): Alexander Nani
Researcher(s): Warren Zhang, Emily Chen
