October was Small Business Month. Did you notice? If you checked the business media, you probably found some upbeat stories with pictures of bright young people who had started a little business and were now offering food services, tech support or e-tail to their community or, more broadly, electronically. Everything was upbeat. Growth and success seemed likely.
Maybe you saw an interview of a small business owner that was less positive. Those operating a small business can find enough to complain about. Rules, regulations and red tape are often more troublesome than taxes. Workers with the right skills and, more importantly, the right attitudes, are hard to find and harder to keep as big employers and governments with better pay and benefits lure them away.
Getting capital to expand is perhaps the biggest challenge of all. From a small business person’s point of view, Canadian bankers seem to take seriously the old joke about how to run a successful bank: never lend money to anyone unless they don’t need it. The numbers seem to bear them out. Small business received a mere 15.3 percent of business loans in 2013, down from 17.4 percent in 2007 and the lowest it has been in this century.
The good news is that this risk averting behaviour on the part of our bankers has provided Canada with what is likely the most safe and secure banking system in the world. This was apparent in the 2007 recession. The bad news is that the cost has been borne by the very people who are at the growing edge of our economy. And we all pay for it in terms of our productivity, that is output per worker, and by foregoing growth in our income.
Most productivity comes from doing new things in new ways. Nowadays, it is largely the application of new technologies and it is small business and start-ups that do most of it, but not much in Canada. Productivity in Canada has been creeping along at 1.4 percent a year for decades. Compare this to the United States, still our biggest trading partner although we are losing ground to Mexico and China. Over the same time period, American productivity has been increasing at 2.2 percent, leaving Canada falling ever further behind. It has been estimated that our lack of productivity has reduced our potential income by $7,000 per person per annum.
Slow productivity growth means a weaker economy. British Columbia is expecting growth in the 2 percent range for this year and next. Canada will probably do a little worse. Meanwhile in the United States, there are debates about whether growth will come in at 3.7 percent or 3.9 percent. In B.C., growth is coming from a weaker dollar, more spending by our indebted consumers and the rising housing prices in Vancouver. In the States it is coming from increased business investment.
Small business is important not only because of its potential contribution to growth and productivity, but also because it is not a small component of B.C.’s economy. It is where the jobs come from. Almost every day we hear of big companies and even governments cutting back and laying off hundreds of workers. Guess where those people go. In B.C., eight out of 10 private sector hires were in small- and middle-sized businesses. If we define big businesses as those having 500 or more employees, 98 percent of us work for small or medium firms. Tiny companies (0 to 5 employees) provide over one million jobs in B.C. out of a total of 2.3 million. This leads to another important question. Why do so few of these companies become big?
Apart from the lack of capital and other challenges, there are two main reasons. First, many operators are quite content to stay small. They are not ambitious. They have found a niche. They are making a living. They don’t need the extra stress, risk and work hours that getting bigger would entail. This preference is much less common south of the border.
Second, big companies tend to leave the country. Some companies are more ambitious and do want to grow. The Business Development Bank of Canada (BDC) has been instrumental in providing those Canadian businesses with needed capital to get to the next level. Far too often, when these firms attain a net worth of $10 million or more and are on the cusp of becoming globally competitive, they are sold or move outside of Canada.
Canada needs to encourage and support our small businesses better. We also need to do more to encourage big businesses. Our standard of living depends upon it.
Troy Media columnist Roslyn Kunin is a consulting economist and speaker.