The Conference Board of Canada defines innovation as “the process through which economic or social value is extracted from knowledge to produce new or improved products, processes … or capabilities.” In our paper, Innovation for Jobs and Productivity (www.bcbc.com), the Business Council of British Columbia argues that innovation is the key to creating and sustaining more high-productivity, high-wage jobs in B.C.
Business growth remains an ongoing challenge in B.C. (and indeed Canada). Government taxation and regulatory and industrial development policies have long been geared to nurturing entrepreneurial startups and supporting small businesses in general. Policy-makers have given less attention to fostering an economic environment that encourages smaller ventures to develop into larger companies. In fact, the structure of the business tax system discourages firms from expanding: in B.C., the statutory income tax rate doubles once a business’ net income hits $500,000; research and development tax credits are also more generous for small firms.
Fast-growing companies play a disproportionate role in driving job creation and overall economic dynamism. American research has found that the fastest-growing 1% of U.S. companies account for two-fifths of net new jobs. The picture is similar in Canada. Yet only a tiny sliver of startups become growth firms. In Canada, half of new businesses disappear within five years, and of those that survive, only 4% to 5% ever reach the point where they employ even 50 people.
For British Columbia, there is a pressing need to develop more significant-sized companies. Of 390,000 “businesses” in the province, half are one-person operations while another 109,000 have fewer than five staff. Just 7,600 B.C. companies have 50 or more employees. We estimate that around 1,500 to 1,750 of these are at the 100-employee threshold, with perhaps 800 to 900 providing jobs for more than 500 employees.
British Columbia would benefit from the presence of more large companies. The evidence – from Canada, but also many other developed countries – confirms that regions with a substantial number of sizable businesses reap tangible economic rewards.
•Employee earnings: There is a positive correlation between firm size and worker pay. In B.C., average weekly earnings for employees of large companies are almost one-third higher than for employees of companies with fewer than 50 staff. And when non-wage benefits are added to the mix, the overall compensation gap is wider still.
•Productivity: The main reason larger businesses, on average, pay more is that labour productivity is generally higher than at smaller firms. This mainly reflects the greater capital intensity and technological sophistication of bigger companies.
•Focus on outside markets: As companies expand, 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 account for 50% to 60% of exports – a pattern also found in Canada. Particularly for small economies like B.C.’s, a solid base of exporting firms is critical to increasing real wages and incomes.
•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 at the level of the enterprise – research and development, the deployment of up-to-date machinery and equipment, the adoption of advanced IT and other technologies and employee training. Consider research and development: globally, 80% of all business R&D is done by large enterprises, while here in Canada 75 companies are responsible for more than half of private-sector R&D.
October 17 marks the start of Small Business Week. By all means let’s celebrate the many contributions made by the self-employed and those who run micro-businesses. But we should also recognize that what B.C. really needs to strengthen the foundations of our economy is more large companies and more growth-oriented medium-sized firms.
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.
