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Finlayson Op-Ed: Growing more large companies should be a key policy goal for B.C. (Troy Media, Exchange Magazine & Castanet)

The B.C. government recently published its annual “small business profile,” a document that highlights the role and impact of the small business sector in our economy.  The table below summarizes the distribution of B.C. businesses by size category.  Of 396,000 enterprises, more than half are one-person operations with no paid employees. Another 109,500 have between 1-4 staff.  Just 7,700 have 50 or more employees.  And perhaps 1,500-1,750 of these have surpassed the 100 employee threshold. 

British Columbia would gain from the presence of a greater number of larger-scale firms -- as well as more rapidly growing medium-sized businesses.    

Fast-growing firms, in particular, play a disproportionate role in driving job creation and economic dynamism.  American research has found that the fastest growing one per cent of companies account for two-fifths of net new jobs.  The picture is similar in Canada. 

It should be noted that only a sliver of start-ups ever become growth firms.  To begin with, half of all new businesses in Canada disappear within five years.  Of those that survive, only 4-5 per cent ever reach the point where they employ 50 people.  Moreover, a hefty slice of all small businesses in Canada consist of self-employed professionals (e.g., dentists, lawyers, consultants), who establish corporations to shield income from tax and manage their liabilities.  Very few of these kinds of businesses ever grow.

For British Columbia, there is a pressing need to develop more significant-sized, locally-based companies.  Doing so would bring a number of benefits.

  • Worker earnings:  There is a positive correlation between firm size and pay levels.  In B.C., average weekly earnings are 25 per cent higher at large companies than at firms with fewer than 50 staff. When non-wage benefits are added, the overall compensation gap is wider still.
  • Productivity: The principal reason why larger businesses, on average, pay their employees more is that productivity generally increases as a company expands. This reflects the greater capital intensity and technological and management sophistication that is characteristic of bigger enterprises.  B.C. has struggled to raise private sector productivity, in part because the province has comparatively few large enterprises.
  • Focus on outside markets:  As companies grow in size, they are more likely to engage in international commerce – cross-border trade and investment, and participation in supply chains that extend beyond local markets.  In most countries, companies with 500 plus workers directly supply 50-60 per cent of exports – a pattern also found in Canada.  For small regional economies like B.C., a solid base of significant exporting firms is critical to increasing prosperity.   
  • Investments in the drivers of innovation: The international evidence shows that larger companies invest more, in absolute terms, in assets and activities that spur innovation  – in R&D, the deployment of up-to-date machinery and equipment, the adoption of advanced IT and other technologies, and employee training. Globally, 80 per cent of all business R&D is done by large firms.  In Canada, 75 companies are responsible for more than half of private sector R&D.

Fostering business growth has been identified as a priority by policy-makers in B.C. and in Canada.  Yet government taxation, regulatory, and industrial development policies have long been geared to nurturing entrepreneurial start-ups and supporting small businesses in general.  Less thought has been given to how to encourage smaller ventures to develop into larger ones.  The 2017 B.C. budget is the latest example of policy-makers’ small business orientation, with the government’s decision to trim the already low provincial small business income tax rate from 2.5 to 2.0 per cent.  This compares to the 11 per cent general B.C. business tax rate.  Once again, B.C. is making it incrementally more attractive for some businesses not to grow.   

Absent a surge in the ranks of larger and fast-growing businesses, boosting real wages and incomes for many employees in the B.C. private sector will remain a challenge.  

We should continue to celebrate the valuable contributions made by those who own and operate very small businesses.  But if British Columbians want to build a high productivity, high-wage economy, what we really need is an expansion in the number of large companies and a stronger base of growth-oriented medium-sized firms.

Breakdown of All B.C. Businesses, 2015

Businesses with no paid employees

204,000

Other micro businesses (1-4 employees) 

109,500

Businesses with 5-19 employees

60,300

Businesses with 20-49 employees

14,800

Businesses with 50 plus employees

7,700

Businesses with 100 plus employees*

1,500-1,750

* Business Council of B.C. estimate

Source: BC Small Business Profile, 2016        

 

Jock Finlayson is executive vice-president of the Business Council of British Columbia.  As published by Troy Media, Exchange Magazine, and Castanet.