DRIVING CANADIAN GROWTH AND INNOVATION: FIVE CHALLENGES HOLDING BACK SMALL AND MEDIUM-SIZED ENTERPRISES IN CANADA
Research Summary: “Driving Canadian Growth and Innovation: Five Challenges Holding Back Small and Medium-Sized Enterprises in Canada” By Dan Herman & Anthony D. Williams, deepcentre: Centre for Digital Entrepreneurship + Economic Performance (2013)
At Issue: Small and medium-sized enterprises (SMEs), which comprise over 99 percent of businesses in Canada, are commonly portrayed as the backbone of the national economy. However, only a small minority of companies, approximately 4 to 7 percent, demonstrate sufficient growth to make a meaningful contribution to job creation and overall GDP. It is imperative for policy makers to mitigate or remove the prevailing impediments facing small businesses, such that a larger share of SMEs may embark upon growth trajectories that enable substantial contributions to the national economy.
Research Objective(s): The objectives of this study are to accurately characterize SMEs in Canada, identify key obstacles to their growth, and propose specific recommendations for policy makers to better support the small business economy.
Scope: The study addresses SMEs, defined as companies with fewer than 100 employees, in Canada. In addition to comprising over 99 percent of Canadian companies, SMEs employ more than 6.9 million people and account for nearly 70 percent of private-sector payrolls.
Approach: The authors of this study conducted secondary research by completing a review of more than 23 independent sources.
Findings: Canadian firms lag behind international competitors in adopting productivity-enhancing technologies. In 2006, Canada ranked eleventh among 21 OECD countries in total economic investment in information and communication technologies, down from tenth in 2005 and ninth in 2004. Technology investments by Canadian manufacturers fell by 37 percent between 2000 and 2013. There is a 33 percent technology investment gap between Canadian and U.S. firms, with Canadian SMEs spending 38 percent less on technology than their U.S. counterparts.
Despite the preponderance of service firms among Canadian SMEs, only 12 percent use supply chain management software. Just 4.2 percent of SMEs in Canada qualify as “innovative SMEs” – defined as those that allocate more than 20 percent of investment expenditures to research and Filemaker development. Studies of SMEs in the U.K., Germany, and France indicate that greater adoption of technology by SMEs benefits not only individual companies but also the economy at large. Increased innovation by SMEs results in increased job creation, productivity improvements, and GDP growth.
To enlarge the pool of high-growth, high-impact SMEs in Canada, policy makers are advised to:
(1) Incentivize business growth via tax policy reforms that reward revenue and employment growth;
(2) Promote international expansion of SMEs by (a) facilitating access to export markets and (b) proactively identifying would-be exporters and facilitating their global expansion via management training, export assistance, and export financing;
(3) Build SME management competencies by hosting innovative management mentorship programs and providing incentives for participating in ongoing training;
(4) Promote technology adoption among SMEs by (a) sponsoring collaborative industry-government approaches to financing, (b) engaging in information sharing in order to build the case for technological investment, and (c) emphasizing that technology adoption does not just narrowly benefit knowledge-intensive companies or tech start-ups;
(5) Facilitate more competitive prices for telecommunications services;
(6) Encourage R&D spending by (a) facilitating the development of industry-academic partnerships and (b) providing financing options and commercialization support for SMEs that pursue promising ventures with university partners; and
(7) Improve access to capital for SMEs with high-growth potential by providing conditional loans and matching grants, in order to facilitate private SME investment in technology, training, and R&D.
