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Finlayson & Peacock Op-Ed: How government can help build bigger businesses in B.C. (Business in Vancouver)

To build a more prosperous economy, new businesses have to be created and some existing firms must grow. The business world is characterized by a high degree of “churn,” with many new entrants together with lots of exits and diverse patterns of expansion and contraction among the pool of surviving companies. Many new firms don’t have a long shelf life. About half close their doors within five years. Of those that hit the five-year mark, most never reach the 50-employee level.

But those that do grow swiftly tend to make disproportionate contributions to our economy. This is partly because as businesses expand, they become more productive – and therefore, on average, pay higher wages. In addition, as firms grow, they are more likely to export and to take advantage of the economies of scale that come from doing business beyond local markets.

As documented in a new Business Council of British Columbia (BCBC) report on scaling up B.C. businesses, the province would benefit if we were able to develop more significant-sized local firms.

Today, 404,000 businesses are registered in British Columbia. Of these, 98% have fewer than 50 employees, and more than half are self-employed proprietors with no paid staff. Eight in 10 B.C. businesses have fewer than five employees.

Only 7,900 enterprises in the province employ 50 or more people. Just over 60% of these have between 50 and 99 staff, while 25% have 100 to 199. Just 340 B.C. business establishments have more than 500 employees, while 870 have between 200 and 499.

Many researchers and policy-makers have a keen interest in high-growth companies, sometimes called “gazelles.” There is no agreed definition of the term. Some studies treat job creation as the key indicator. Others focus on revenue growth. Regardless of the definition, only 1% to 2% of companies in Canada can be categorized as “gazelles.” This is the group from which most larger-scale enterprises emerge over time.

Looking at B.C. businesses with paid workers (and thus ignoring the self-employed), those with 50 or more employees account for more jobs (895,500 as of 2016) than their smaller counterparts (635,400).

Since 2011, job growth among B.C. businesses with 50 or more staff has been faster than among smaller firms. The frequently cited claim that micro and other small businesses are responsible for most private-sector jobs, and for almost all net job creation, is not validated by the data. Particularly in a growing economy, all size categories of businesses typically are adding jobs over time.

If governments in Canada and B.C. want to strengthen the “middle class,” foster the creation of higher-paying jobs and stimulate innovation, they need to better align current polices and programs with these objectives. Action is required in several areas.

One is taxation. By 2018, the combined federal-provincial small-business income tax rate in B.C. will drop to 11%. At the $500,000 earnings threshold, the tax rate jumps to 27% – an increase in marginal rates of almost 250%. A smarter approach would be to adopt a tiered structure with a gentler rise in tax rates as business earnings increase. The current Canadian regime of research and development tax credits is also ripe for change. In its present form, it does little to reward medium-sized companies that successfully commercialize new ideas and technologies.

A second area where policy could make a positive difference is public procurement. Innovative Canadian small and medium-sized enterprises (SMEs) find it very difficult to sell to governments and other public-sector customers. The United States and some European countries have moved aggressively to open up public-sector markets to domestic firms with innovative products and solutions. Governments in Canada should do the same.

We also need to encourage more SMEs to participate in international markets by selling abroad and developing linkages into the supply chains of multinational enterprises that dominate global commerce. For a small jurisdiction like B.C., exports are a vital pathway to growth in all industries that produce traded goods and services. Governments can direct resources to enable more companies to become “export-ready” and tap into the unmatched opportunities available in foreign markets.

For companies looking to scale up, often the scarcest resource is the managerial and technical know-how needed to drive growth and penetrate new markets. A strategy to develop a larger cadre of significant-sized Canadian companies must put talent acquisition at its core. Especially in innovation-driven sectors such as IT, life sciences, clean tech and advanced manufacturing, this means accessing global markets to find the right mix of skills, experience and leadership capability. The federal government’s new Global Skills Strategy is a step in the right direction. Closer to home, B.C.’s Provincial Nominee Program is also an effective tool to recruit top-level talent. Both programs should be expanded as part of a multi-pronged strategy to help more Canadian businesses scale up. 

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.

As published by Business in Vancouver.