By Jock Finlayson
The B.C. government recently published its annual Small Business Profile, highlighting the role and impact of the small business sector in our economy – and showing a pressing need.
The list below summarizes the distribution of B.C. businesses by size category in 2015, according to the profile.
- 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 per cent 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 per cent ever reach the point where they employ 50 people.
Developing more significant-sized, locally based companies would bring a number of benefits.
Worker earnings: In B.C., average weekly earnings are 25 per cent 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.
Focus on outside markets: As companies grow, they're more likely to engage in international commerce. In most countries, companies with 500-plus workers directly supply 50 to 60 per cent of exports, a pattern also found in Canada. For small regional economies like B.C., a solid base of exporting firms is critical to increasing prosperity.
Investments in innovation: International evidence shows that larger companies invest more in research and development, up-to-date machinery and equipment, advanced technologies, and employee training. 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. Yet taxation, regulatory and industrial development policies have long been geared to nurturing entrepreneurial startups. Less thought has been given to how to encourage smaller ventures to become larger ones.
The 2017 B.C. budget is the latest example of that orientation, with the decision to trim the already-low provincial small business income tax rate from 2.5 to 2.0 per cent. This compares to the 11 per cent 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 private sector will remain a challenge.
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.
– Troy Media