Business Growth, Job Creation and Innovation

April 11, 2014
Jock Finlayson

BCBC is pleased to partner with CKNW in their Putting BC to Work programme. Over the coming weeks, we will be highlighting issues and opportunities in British Columbia's labour market both on air and here on our blog. On April 24th, we will be holding a wrap up event featuring Canadian Economist, Don Drummond. Tickets and details here.

Canada ranks as one of the best places in the world to start a new business, according to an annual survey done by the World Bank. But the country does less well when it comes to encouraging enterprises to grow – and in fostering private sector innovation.

The two phenomena are linked: an economic and public policy environment that stimulates and rewards business growth should also generate a high level of innovation, since growth-oriented companies are more likely to develop and to adopt innovative technologies and business practices.

In thinking about these issues, government policy makers would be wise to pay close attention to the outsized economic contributions made by the sub-group of fast-growing small and medium-sized enterprises (SMEs) – sometimes called “gazelles.” A 2010 study by the Kauffman Foundation estimated that the top-performing 5% of all American businesses – measured by their rates of employment growth – are responsible for two-thirds of net employment gains. And the top-performing 1% account for a remarkable 40% of US job growth.[1]

The picture is broadly similar in Canada – and, we can assume, in BC. A report prepared for Industry Canada a few years ago confirmed that the comparative handful of businesses that grow rapidly generate outsized economic benefits and drive a large faction of economy-wide employment gains.

British Columbia is home to roughly 393,000 businesses. Fully 98% of these are small – by the BC government’s definition, this means they have fewer than 50 employees (more than half actually have fewer than five). In fact, some 217,000 businesses in this province consist of self-employed individuals with no paid staff at all.[2]

As of 2012, only 6,900 enterprises in BC employed more than 50 people – and of these, most were medium-sized (50 to 499 employees). I estimate that only 500-600 or so firms in British Columbia have 500 plus workers. To build a more productive private sector BC economy, the most pressing challenge is not to engineer more start-ups and micro-businesses – these are areas where we already perform well. Instead, it is to develop more large-scale enterprises, and to create an environment that supports growth-oriented mid-sized companies with strong roots in the province.

Why might we want more of our local businesses to expand in size? There are several reasons.

First, larger companies generally pay their employees more. In Canada, average weekly earnings in firms with 500+ employees are 22% higher than in those with 20-49 workers. Non-wage benefits also tend to be more generous in larger companies. In BC, the average full-time equivalent small business employee pulled down an annual salary of $39,210 in 2012, compared to $48,318 for employees at firms with 50 plus staff. Moreover, as the provincial government’s most recent Small Business Profile report observed, between 2007 and 2012 “the difference between wages of employees of small and large businesses widened…as average earnings of small business employees increased at less than half the rate than those of their large business counterparts.” [3] Policymakers keen to see higher pay for workers and to nurture “family-supporting” jobs should be thinking about ways to bolster BC’s attractiveness to large companies and to the sub-set of innovative SMEs that have ambitions to grow.

Second, larger firms tend to be more productive, meaning that they generate more “value-added” per employee or per dollar of capital invested. This is because bigger firms often have better educated workers and managers, invest more in equipment and technology, do more training and skills upgrading, and have longer production runs (allowing fixed costs to be spread over additional output). Two recent Statistics Canada studies find that the sizable productivity gap that exists between Canada and the United States is mainly due to the fact that small companies and the self-employed make up a larger portion of the private sector economy on our side of the border.[4]

Third, evidence from around the world shows that as businesses expand, they are more likely to engage in international commercial activity, including exporting. Getting local companies engaged with outside markets is a principal means by which small jurisdictions like BC can grow richer over time. In most countries big companies usually dominate the trade statistics. According to Industry Canada, three quarters of the country’s exports come from “larger” businesses (here defined as those with at least 100 employees).

Fourth, a substantial body of research shows that the presence of both large “anchor” firms and growth-oriented SMEs in a region accelerates innovation. While it is true that many small companies are highly innovative, large firms are responsible for 75-80% of global business research and development spending and for most patenting activity. In Canada, 75 companies account for half of all private sector R&D. Bigger companies have a greater capacity to finance innovation; to commercialize new ideas; to hire and develop scientists, engineers, and product managers; and to participate in collaborative arrangements with universities and external research organizations.

Finally, the presence of significant corporate head offices has positive spillovers for regional economies. Among other things, a thriving corporate head office sector increases the demand for locally-provided professional and business services (accounting, law, executive search, engineering, architecture and design, etc.); directly supports high-paying jobs in the large companies that have their headquarters in an urban region; and enhances the business community’s capacity to contribute to and invest in local institutions and philanthropic activities (e.g., universities, hospitals, the arts). The presence of corporate headquarters is an area where Metro Vancouver has lagged other large North American urban centres. If more BC-based companies grew over time to achieve significant size, both the province and Metro Vancouver would benefit in many ways.

Looking ahead, government policies affecting business should be shifted in a direction that better recognizes the disproportionate contributions to job creation made by innovative, high-growth SMEs, as well as the important economic benefits that flow from the presence of large enterprises. This calls for a reconsideration of the design of the business tax regime and of current public policies in areas such as industrial development, procurement, intellectual property, and innovation.

[1] Duane Stangler, High Growth Firms and the Future of the American Economy, Kauffman Foundation, 2010.

[2] For further details, see the BC Government’s 2013 Small Business Profile report.

[3] Ibid., p. 21.

[4] Statistics Canada, “The Distribution of Gross Domestic Product and Hours Worked in Canada and the United States Across Firm Size Classes,” Economic Analysis Research Paper Series, No. 88, 2013; and “Canada-United States Labour Productivity Tap Across Firm Size Classes,” The Canadian Productivity Review, 2013.

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