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Jock FinlaysonThe B.C. government recently published its annual Small Business Profile, highlighting 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, according to the profile.

Breakdown of all B.C. businesses, 2015

  • Businesses with no paid employees: 204,000
  • Other micro businesses (one to four employees): 109,500
  • Businesses with five to 19 employees: 60,300
  • Businesses with 20 to 49 employees: 14,800
  • Businesses with 50-plus employees: 7,700
  • Businesses with 100 plus employees: 1,500 to 1,750 (Business Council of B.C. estimate)

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 percent 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 startups ever become growth firms. To begin with, half of all new businesses in Canada disappear within five years. Of those that survive, only four to five percent 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’s a positive correlation between firm size and pay levels. In B.C., average weekly earnings are 25 percent 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 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’s 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, they’re 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 to 60 percent 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 research and development, the deployment of up-to-date machinery and equipment, the adoption of advanced technologies, and employee training. Globally, 80 percent of all business research and development is done by large firms. In Canada, 75 companies are responsible for more than half of private sector research and development.

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 startups 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 percent. This compares to the 11 percent 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.

Jock Finlayson is executive vice-president of the Business Council of British Columbia.

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