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The Benefits of Scaling Up BC Businesses

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Presentation by Jock Finlayson and Ken Peacock to the Business Council of British Columbia's 2017 BC Business Summit

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The Benefits of Scaling Up BC Businesses

  1. 1. T H E B E N E F I T S O F S C A L I N G U P B C B U S I N E S S E S NOVEMBER 1, 2017 PRESENTED TO B C B U S I N E S S S U M M I T JOCK FINLAYSON Executive Vice President and Chief Policy Officer KEN PEACOCK Vice President and Chief Economist
  2. 2. P O P U L AT I O N O F C O M PAN I E S – A S N AP S H O T • In Canada, > 98% of all firms are “small” o 55% are very small (fewer than 5 paid staff), often called “micro-businesses” • About 1% are “medium-sized” (100-499 employees) • Less than 1% are “large” (500+ employees) • Note that firm size classifications differ across statistical agencies, government departments, and research studies • Proportions of firms by size category in BC are similar to Canada • However, BC has relatively more “self-employed” – including those without any paid help, a group that has increased since the mid-1990s • BC is also home to a vast number of “micro-businesses”
  3. 3. B R E AK D O W N O F B U S I N E S S E S I N B C Source: BC Stats, Small Business Profile, 2017. 7,900 0 50,000 100,000 150,000 200,000 self-employed no employees 1 to 4 5 to 9 10 to 19 20 to 49 more than 50 BC businesses by size (number of employees), 2016 188,100 businesses with 1 to 49 employees = 96% of all businesses with employees
  4. 4. B C H AS C O M PAR AT I V E LY M O R E S M AL L B U S I N E S S E S T H AN O T H E R P R O V I N C E S Source: BC Stats, Small Business Profile, 2017. 83.4 0 10 20 30 40 50 60 70 80 90 BC Alta Sask Man Ont Que NB NS PEI Nfld Small businesses per 1,000 population Canadian avg = 69.9
  5. 5. … B U T F E W L AR G E B U S I N E S S E S Source: Statistics Canada, CANSIM 552-0005 *businesses with employees 1.7 0.0 0.5 1.0 1.5 2.0 2.5 3.0 BC Alta Sask Man Ont Que NB NS PEI Nfld Establishments with more than 500 employees per 1,000 businesses* Canadian avg = 2.4
  6. 6. L AR G E B U S I N E S S E S AC C O U N T F O R M O S T E X P O R T S Source: Statistics Canada, CANSIM table 228--0070. 22,160 13,134 3,531 2,397 904 1,129 0 5000 10000 15000 20000 25000 30000 0 50 100 150 200 250 300 < 9 employees 10 to 49 50 to 99 100 to 249 250 to 499 500+ employees Millions 2016 exports by enterprise size, Canada, billions $ Number of exporting firms (RHS)
  7. 7. B I G G E R F I R M S E X P O R T M O R E ( I N B C T H E Y AC C O U N T F O R N E AR LY 2 / 3 O F E X P O R T S ) 12,881 22,807 0 5,000 10,000 15,000 20,000 25,000 small firms (<50 employees) large firms (50+ employees) BC merch. exports 2014, millions $ just 2% of small businesses export = 5,131 864 large firms exporting Source: BC Stats, Small Business Profile, 2016. Statistics Canada, “Trade by Enterprise Characteristics: Exporters of goods by employment size class.” • In Canada, the top 10 exporting firms account for 25% of all exports o all had more than 500 employees • The top 50 account for 1/2 of exports • The top 100 provided 65% of all exports • The largest firms are somewhat less dominant in BC’s export statistics
  8. 8. L AR G E B U S I N E S S E S I N B C E M P L O Y M O R E P E O P L E Source: BC Stats, Small Business Profile, 2017. 208,000 188,100 7,900 0 50,000 100,000 150,000 200,000 250,000 Self employed (no paid help) Small Businesses (1-49 employees) Large Businesses (50+ employees) Number of BC businesses, 2016 635,400 895,500 0 200,000 400,000 600,000 800,000 1,000,000 Employed by small business Employed by large business Private sector employment by business size, 2016
  9. 9. … AN D T H E Y G E N E R AL LY PAY H I G H E R WAG E S Source: Statistics Canada, CANSIM table 281-0044. 400 500 600 700 800 900 1,000 1,100 0 to 4 employees 5 to 19 20 to 49 50 to 99 100 to 299 300-499 500+ employees BC average weekly earnings by size of business, 2016 All sizes 25% to 35% higher than firms with fewer than 100 employees
  10. 10. “A common empirical observation in advanced economies is that large firms and plants have, on average, higher labour productivity than do small ones.” Bank of Canada
  11. 11. B C ’ S P R O D U C T I V I T Y L E V E L S T I L L B E L O W C AN A D A’ S 11 Source: CANSIM Table 383-0033. 37 39 41 43 45 47 49 51 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Labour productivity business sector, GDP/hour worked chained 2007 $ Canada BC
  12. 12. D I F F E R E N C E S I N F I R M S I Z E H E L P TO E X P L AI N C AN A D A - U S P R O D U C T I V I T Y G AP Source: John Baldwin, Danny Leung and Luke Rispoli, “Canada-United States Labour Productivity Gap Across Firm Classes, Statistics Canada (January 2014). Note small firms defined as those with fewer than 500 employees and large firms more than 500 employees, 2008 data. 35.7 large 39.7 small 75.6 small 59.2 large 0 10 20 30 40 50 60 70 80 Canada US GDP per hour worked by firm size, $ 47% of large firm’s productivity 67% of large firm’s productivity 29.2 large 44.4 large 70.8 small 55.6 small 0 10 20 30 40 50 60 70 80 Canada US Share of hours worked by firm size, %
  13. 13. “With large firms more productive than small ones, the productivity of a country would increase if its employment became [more] concentrated in larger firms, all else being equal.” Bank of Canada
  14. 14. L AR G E R F I R M S D O M O R E R & D ( I N C AN A D A AN D G L O B AL LY ) Source: T. Songsakul, Bernice Lau, and Daniel Boothby, Firm Size and Research and Development Expenditures: A Canada- US Comparison, Industry Canada Working Paper No. 12, 2008. 1.0 6.1 14.7 1.1 10.3 15.5 0 2 4 6 8 10 12 14 16 18 < 100 employees 100-499 500+ Share of manufacturing firms conducting R&D, % Canada US
  15. 15. “One of the problems with Canadian innovation is that even though our entrepreneurs are good at launching companies, very few companies achieve scale.” Advisory Council on Economic Growth
  16. 16. E N T E R P R I S E G R O W T H : W H AT D O E S T H E L I T E R AT U R E S AY ? • In a typical regional economy, most private sector “growth” originates with existing firms, not start-ups. A sub-set of existing firms are “high-growth” • High growth firms (HGFs) are “enterprises with average annualized growth in employees or turnover greater than 20% per annum over a three-year period, and with more than 10 employees at the beginning of the observation period” (OECD, Measuring Entrepreneurship: A Digest of Indicators, 2008) • HGFs are found among all size-categories of businesses • HGFs are not: o mainly new businesses o restricted to, or predominantly found in, the advanced technology sector o spun out from universities (with rare exceptions) o usually backed or financed by venture capital o built solely through organic growth (acquisitions are often involved) o the above points are true across advanced economy jurisdictions
  17. 17. E N T E R P R I S E G R O W T H : W H AT D O E S T H E L I T E R AT U R E S AY ? • Relatively few businesses ever grow to the point where they enter new size categories; many hardly grow at all • There is a high mortality rate among new Canadian firms (~50% within 5 years) • Number of “exits” comes close to equalling the number of new firm “entries” in many years • A tiny proportion of all businesses account for a large share of net job creation in the private sector o fastest growing 1% of US firms responsible for 40% of job growth o fastest growing 5% of US firms generate up to 2/3 of net new jobs • Canadian data are broadly similar • Industry Canada studies find that 1-2% of firms qualify as “gazelles,” while 4-5% can be categorized as “growth” businesses that expand in a steady fashion over time
  18. 18. P O L I C I E S N O T S U F F I C I E N T LY AL I G N E D W I T H F I R M G R O W T H • Most Canadian governments provide small business with preferential tax rates – gaps with general corporate tax rate have widened recently • R&D tax credits – biggest program to support business innovation. More generous for smaller businesses o small Canadian controlled private corporations can get tax credits = 35% of R&D o credit for medium-sized and large firms = 20% of eligible expenses, up to a limit • Pubic procurement in Canada/BC has not been geared to drive scaling up • BC has focused on start-ups and supporting small business in general • Little or no policy or analytical attention in BC to medium-sized firms or helping them develop into larger enterprises. Nor on accelerating the growth of HGFs • Few resources directed at encouraging SMEs to export
  19. 19. S M AL L B U S I N E S S TAX R AT E S H AV E D R O P P E D 19 Sources: Corporate Income Tax Rate Database: Canada and the Provinces (March 2007) BC corporate income tax information at https://www2.gov.bc.ca/gov/content/taxes/income-taxes/corporate/tax-rates 5 10 15 20 25 30 2012 2013 2014 2015 2016 2017 2018 2019 Combined federal and BC general corporate income tax rates and small business tax rates, % small business general CIT
  20. 20. P O L I C Y D I R E C T I O N S TO S T I M U L AT E B U S I N E S S G R O W T H • Look for ways to better tax align tax policy with goal of scaling up firms o reduce the corporate income tax rate (narrow the gap with small business rate) o nudge small business tax rate higher, or move to a gentler, tiered rate structure o introduce investment tax credits for businesses that invest in productive assets in BC o tweak R&D programs to provide stronger incentives for companies to grow • Consider providing incentives to BC firms that export – possible options include: o exemption from PST on business inputs for goods and services sold in international markets o broaden PST exemptions, with focus on export-focussed industries • Strengthen capacity within government to understand and support HGFs • Step up efforts to attract talent to help our companies grow o dearth of top management talent a barrier to growth o we support BC’s plan to direct $100 million to expand university/college capacity in engineering, technology, data science, and related fields o advocate for a higher BC allocation under the PNP program
  21. 21. P O L I C Y D I R E C T I O N S TO S T I M U L AT E B U S I N E S S G R O W T H • Leverage government procurement to accelerate firm growth o broad public sector is a big purchaser of goods/services o commercial success with domestic buyers helps local SMEs succeed in export markets o Advisory Council on Economic Growth recommends set-asides and other changes to procurement practices/policies • Support BC’s bid to build a Digital Supercluster o BC has strengths in digital technology (data generation, data analytics, visualization platforms) o stronger clusters, including anchor firms, are key to ecosystems that foster innovation and support SME growth • Access to capital o Advisory Council on Economic Growth has proposed stepped up federal government efforts to support “high impact” SMEs, including via a new Matching Fund o also recommends that Ottawa work with the private sector to establish “Business Growth Funds to provide “patient capital”
  22. 22. C O N C L U D I N G T H O U G H T S • Larger businesses export more, pay higher wages, are more productive, and tend to spend more on activities and assets that drive innovation • Scaling up firms in BC would benefit the province o large firms constitute an important customer base for SME suppliers of goods and services in the markets and communities where they operate • BC has a robust SME sector, which is a strength, and a good record on start-ups • But we need more large-scale firms • Also need to put more attention on medium-sized companies with growth potential • Policies – on tax, trade, innovation, industrial development, public procurement, human capital an immigration – can be tweaked to further spur and reward business growth

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