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Canada's Path to Prosperity:
Growing our Small and Medium-sized Enterprises

Gordon Nixon
President and Chief Executive Officer
RBC Financial Group
Queen's Centre for Enterprise Development,
Queen's School of Business,
Queen's University

Kingston, Ontario

Monday, October 7, 2002

Good morning….and thank you Bill for that kind introduction.

I am delighted to be in Kingston today at one of Canada's pre-eminent centres of learning. And I'm pleased to be part of this conference, which has been organized by Queen's Centre for Enterprise Development.

As a Queen's graduate, I'm well aware that the quest for excellence lives on at the Queen's School of Business, where future entrepreneurs come to deepen their skills and broaden their view of the possible.

I also want to acknowledge the important work being done by Queen's Centre for Enterprise Development. In less than two years, QCED has established itself as one of North America's top centres of enterprise development, offering leading research and a unique portfolio of services designed to grow and sustain businesses in Canada.
This mission is precisely what Canada needs. And your conference theme, "Breaking Through the Barriers to Growth," is critically important to the future prosperity of our country.

The Challenge

Today, I would like to continue a discussion we've been having at influential forums like this about how to secure a solid position for Canada in a rapidly changing world economy. One of my key points is that leaders of industry, government and other key stakeholder groups have a shared responsibility to work together in creating the conditions necessary to grow successful, world-class companies here in Canada. And to keep them here while they tap into markets across North America and around the world.

This mission is not only critical to business; it is critical to the future prosperity of our country, and to the future standard of living of all Canadians. We all have a stake in the outcome.

One of our major challenges is that we are a small country competing in a global marketplace, where the ability to productively create and commercialize ideas is a critical determinant of economic success. To be successful, we need to create a culture of excellence through education, innovation and business leadership. And we need to find ways to capitalize on our competitive advantages. One of the most important ways is through our small and medium-sized businesses, which is the subject of my talk today.
But first, let's take a brief look at our country's performance and challenges from a macro-economic perspective.

Canada has made significant progress in the past decade, and we can be proud of our recent achievements.

We have the highest rate of growth in the G7. Our economy is expected to grow 3.6 per cent this year, and 4.1 per cent in 2003. We've eliminated the federal deficit, kept inflation low, dramatically reduced unemployment, improved our debt-to-GDP ratio, and made significant investments in the infrastructure that supports research and development.

From the fiscal framework of government to the quality of life enjoyed by our citizens, Canada is one of the best places in the world in which to live, work and raise a family.

Despite these successes, however, our future prosperity is far from guaranteed. Indeed, certain issues should concern all of us who care about Canada's future.

We face serious challenges in areas critical to our social well being starting with health care, education and the quality of city life. Our standard of living has failed to keep pace with the United States, and, on a relative basis, has actually fallen by 20 per cent. And our performance has been disappointing with respect to innovation, productivity, regulatory efficiency and other indicators of our competitive ranking.

Canada now lags behind other countries in several key measures. In 2000, a survey conducted by the OECD showed that our GDP per capita had slipped to eighth place. Behind the U.S. as you might expect, but also behind Norway, Switzerland, Iceland, Ireland and Denmark.

In Ontario, labour productivity over the long run has slipped steadily. Rated against the 60 state and provincial jurisdictions in North America, Ontario now sits in 32nd place. Alberta fares only slightly better-23 rd place. Quebec stands at 49th.

Our failure to achieve better productivity growth, and the widening gap with the United States, may well be the single biggest threat to our long-term prosperity. Our competitive performance is Canada's only lasting source of economic vitality and the wealth creation that we need to sustain our way of life. Clearly, we need a strategy that will help Canadians catch up to Americans in terms of per capita income. And in time, even surpass them.

Canada's Prosperity Agenda

With this challenge in mind, last May we raised six issues that I believe are crucial to improving our productivity and advancing Canada's prosperity agenda.

First, Canada needs a sectoral strategy for excellence. We need to see business, government and other key constituents working together in partnership to develop the right policies and micro-economic climate for our key industries.

Second, we need to encourage innovation. Many factors are at work here, but clearly Canada must enhance its commitment to skills and education, and become more successful at commercializing R&D.

Third, we need to work with our major trading partner to create a more transparent border - one where people, goods and capital can flow freely and easily.

Fourth, there is a pressing need for regulatory and tax reform. From environmental approvals to securities regulation, Canadian business is subject to costly and lengthy regulatory processes that are seriously undermining our competitiveness. Canada must focus on continuously improving our tax system so that it is globally competitive in encouraging and not penalizing investments.

Fifth, we must address the challenges to our education and health care systems. We must also ensure that our cities are attractive places to live, and that they provide a competitive environment for the head offices of global corporations.

And sixth, we must improve our ability to grow our small and medium-sized enterprises, and to develop more market and industry leaders to replace the ones we have been losing.

As I said earlier, I believe leaders from all key constituencies have a collective responsibility to create the conditions necessary to enhance Canada's productivity and standard of living. It is in this spirit of cooperation that RBC Financial Group has been working with Canadian Manufacturers and Exporters, and the Canadian Federation of Independent Business to study how Canada can help its small- and medium-sized business enterprises prosper and grow.

Small and medium-sized enterprises are the building blocks of the Canadian economy. Canada's SMEs employ more people and generate more economic activity than any other sector.

SMEs are the prime drivers of economic growth in Canada, and that has never been more evident than today. The statistics on start-ups demonstrate that we do a good job at getting new businesses up and running. But we fall short in sustaining business success and growing small companies into larger ones.

On a per-capita basis, Canada has many more micro-businesses than the United States, yet fewer market or industry leaders. The distance from medium to large seems greater in Canada. Canadian entrepreneurs struggle to get to the next level, which given our greater access to markets under NAFTA, should not be the case. That's where the problem lies, and that's the challenge I would like to address today.

Path to Prosperity Study

To better understand this issue, RBC and its partners conducted an extensive study of the challenges facing small and medium-sized businesses as they attempt to grow.

The study, which was released this morning, has two components. The first is a review of existing data. And the second is a survey of more than 1,200 small business owners and operators in Canada and the United States in firms with fewer than 250 employees.

The object of the study was a cross-border comparison of SMEs: the nature of the businesses, the attitudes of the owner-operators, their opinions, concerns, and frustrations. We wanted to know the challenges they face, and whether they believe the business climate in Canada differs from that in the United States.

The results were positive, and quite surprising.

For example, contrary to popular belief, Canadian entrepreneurs are far from timid when it comes to taking risks. In fact, only 20 per cent of them cited a reluctance to take on risk as a reason for not growing - which is not a significant difference from their American counterparts. Furthermore, some 75 per cent of Canadian entrepreneurs said they have a strategy to grow their business, which is consistent with the United States.

Most striking of all, perhaps, is that American and Canadian entrepreneurs agree on the same broad category of barriers to growth. They include taxes, the overall market environment, and a shortage of qualified personnel.

It's worth considering these barriers in the Canadian context.

In terms of tax burden, many small businesses in Canada have benefited from a variety of measures including a $500,000 capital-gains exemption, and an accelerated rate of reduction in corporate tax rates for business income between $200,000 and $300,000. But a paradox remains. The "reward" for growing your business and earning income of more than $200,000 a year is a nine per cent increase in the rate of taxation - a disincentive for growth. And Canada still has punitively high rates of capital taxes and payroll taxes -- which our entrepreneurs rate as the biggest tax barrier to growth.

Furthermore, while announced cuts in corporate taxes are designed to bring Canada in line with its major competitors by 2004, we won't make much progress because the rest of the world is also cutting.

As Tom Axworthy, a Harvard professor and former principal secretary to Pierre Trudeau said last week at a conference:

"The cost of doing business in Canada must be radically improved. Payroll taxes, which are taxes on jobs, must be reduced, especially the employer's contribution to unemployment insurance. We must not only reduce corporate taxes to U.S. levels, we should significantly go beyond them."

We know that the Canadian economy has been performing well. While economic growth through most of the 1990s was driven by exports, growth is now primarily due to domestic demand, itself a response to interest rates that are the lowest we've seen in 40 years.
Our recovery is retail driven, and the data is impressive. In the first half of this year, Canadian retail sales grew by six per cent-twice the American increase. Canadian auto sales were up 11 per cent versus a 3 per cent decline in the U.S. And housing starts grew four and a half times faster in Canada. These are all promising numbers.

The Canadian economy is in good shape, recovering impressively from the aftershocks of September 11, largely because of continued optimism and job creation from the SME sector. As John Manley put it, Canada is becoming a "very polite and self-effacing Northern tiger."

But there are many sectors of our economy where uncertainty makes business difficult, and corporate profitability across North America is being severely challenged. So we should be aware of the fragile state of business confidence, and our governments should do everything they can to stay the course on monetary and fiscal policy, and to build on our recent economic gains.

SMEs on both sides of the border also say they face a human-resource challenge. They find it difficult to build a talented workforce, particularly in the early stages of development.

Designing solutions to the human-resource challenges facing SMEs may be difficult, but it is a challenge that we must address through both our education and immigration policies. We need to ensure that our children stay in school, and that they acquire the skills needed to move productively into the workforce. And we need to do a better job of aligning our immigration policy with the needs of our employers.

Identifying barriers is the first step, but addressing them in a timely fashion is also important since a competitive advantage will accrue to the jurisdiction that addresses them first. This is particularly important to Canada for a couple of reasons.

First, Canada has proportionally more micro-business than the United States, so the economic benefits of removing barriers on a relative basis will be greater for us. Second, since SMEs on both sides of the border tend to have lower rates of productivity than larger firms, we can get a bigger lift by helping our SMEs grow profitably and efficiently. In other words, the payoff for removing these barriers is much greater for Canada.

Productivity growth, as we know, drives profitability and enables businesses to expand. Recent research, including our survey, suggests there are three primary ways to help small businesses grow more productively. The first is to facilitate access to capital through a wider scope of partners. This is essential to foster investment in machinery and value-added processes.

The second is to encourage small businesses to expand their marketplace and eventually become more export oriented. As a country, we've done a great job of capitalizing on NAFTA, but we still need to increase the level of exports coming from the small business sector. And the third way is to make it easier for SMEs to adopt new technology and invest in more research and development.

The issue of R&D is a difficult one because most small businesses can afford very little "research" past their first product launch, and the tax definition of "development" does not capture much of what they do. In fact, pure research generally takes place while entrepreneurs are inventing something to start their business. Once they bring their product to market, their focus turns away from research, which is more expensive and time-consuming.

This is where both educational institutions and government can help. Universities undertake a great deal of research, some of which might be very useful to small business. This would provide researchers with a living laboratory for their best work, and provide busy entrepreneurs with access to new and helpful information.

On the government side, some recognition of the important development role that small business plays in bringing new products to market might also be helpful. For example, perhaps the rules governing R&D tax credits are too narrow to accommodate the type of important development work being undertaken by our entrepreneurs. It's worth looking at.

Notwithstanding the complexity of these challenges, we believe that a cooperative effort focused on some specific areas of private and public policy can help our small businesses grown more rapidly and productively.

Responsibility for our progress, of course, must be shared. For instance, while it's up to the government to reform tax law, it's up to all of us to join the debate on precisely which changes are best. And while it's the duty of entrepreneurs to run their business profitably, it remains the role of financial institutions to help provide a competitive marketplace for loans and related services.

Our study shows that loan availability and competitive pricing in Canada is strong, and that entrepreneurs are accessing a wide variety of financial providers. However, our analysis suggests that there is a shortage of higher-risk debt and smaller scale equity financing in Canada. This is particularly true for two types of companies: those companies in lower ROI sectors that are financing their growth with cash flow, and those innovative, early stage companies where high risk money from "angel investors" is so important.

If SMEs are to be encouraged to seek investment, then venture capital must be made more accessible, and angel investing in emerging enterprises must become more coordinated. RBC Financial Group is a sponsor of this year's Canadian Angel Investor Summit in Toronto later this month.

We hope this conference will lead to a permanent National Angel Organization that will encourage and improve the competitiveness of early stage investors. We believe such a group is essential in bridging the venture capital and management gaps in young companies. And we encourage government to work with us in supporting this important initiative.

At RBC, we have been moving aggressively on the venture capital front. Today, we take a life cycle approach in supporting companies from "Lab bench to board room" with a dedicated sales team.

Through RBC Ventures, we are creating and investing in funds that are world leaders in the commercialization of science and technology. And through RBC Capital Partners, we are taking firms that are ready for venture capital and helping them transform into larger and more successful companies.

On the issue of business regulation, our system is more complex than it needs to be. We must work swiftly, collectively and diligently to address this hidden tax on our productivity. The laws and levies that have served us for decades may no longer be appropriate.

I know all too well that in the financial-services industry, which must now compete globally, regulatory cost per $1,000 of service output is $10.83 in Canada. That's 154 percent more expensive than Britain, and 58 per cent more costly than Australia. These additional costs hurt the international competitiveness of our industry. And the same is true of any Canadian industry or sector faced with overly complex and competing regulatory regimes.

There's another ingredient to business success, and that is life-long learning. The business minds sitting in this very room have insights, models and data that business leaders need. However, the pace of business today, puts education into the luxury category for many SMEs.

Canada has to get great business advice out into the field. Our business leaders are bright, energetic and open-minded. But they need solid information and ongoing support. This is one area in which business schools can play a greatly enhanced role.

Suppliers to small business, including lenders, can also play a more active role, and I can assure you that we take this role seriously at RBC. Let me give you an example. In our personal and commercial banking division, we created a new unit called the Knowledge Based Industry team. This group specializes in providing both financial services AND support to knowledge-based industries, with a focus on information technology, life sciences, and health care. This team helps KBI companies access venture capital, enter into global markets, manage volatile cash flow, access project financing, facilitate IPOs and network with key industry players. And they are making a positive difference for their clients.

For the small business market in general, we know there is room for improvement, and we take this challenge seriously. We are in the process of making some positive changes that include the tailoring of services to better meet the needs of our SME customers. We'll be making improvements in the range of our business offerings, taking pains to make entrepreneurs feel more welcome, heard and valued. We'll be using our resources to deliver new, targeted information related to business competitiveness, profitability and growth.
And we'll be improving training programs so that account managers better understand the climate in which this critically important segment of corporate Canada operates.

Management at both small and large companies must also do their part. Over the years, many academic studies have offered the view that, given a decent set of macro-economic fundamentals and generally free and open markets, what ultimately counts in determining the international success of a nation's business sector is the depth of managerial talent.

As Roger Martin from Toronto's Rotman School of Management has said: "Rather than pursue competitive advantage through unique products and processes, Canadian firms, to too great an extent, pursue advantage through cheap raw materials or low-cost labour."

If we expect to improve our standard of living, we must change our attitude and put more emphasis on producing value-added products and services. Canada is like a "sandwich" economy, with low-wage producers like Mexico on one side striving to move up into higher value products and services by investing in education, technology and research, and high-value producers like the US on the other side investing heavily in the industries of the future. We need to find and grow our own competitive niches, and reduce the risk of becoming too dependent on producing low value exports based on low-cost labour and raw materials. And we need to put policies in place that will give us a Canadian advantage in a NAFTA landscape.

Our business leaders also need to keep their management skills sharpened. If we want to grow world-class companies, we also need to grow world-class leaders.


Today, I have tried to list some of the challenges to Canada's future prosperity, and explain why growing our small and medium-sized business sector must be part of the solution. We have provided a wide number of both private and public policy recommendations in the study, revolving around:

  • A continuation of the monetary and fiscal policies that have led to our nation's strong economic performance over the last few years;

  • The enactment of policies geared towards improving our country's rates of productivity and innovation;

  • A reform of tax policies and regulatory burdens aimed at encouraging growth and productivity;

  • Greater alignment of education and immigration policies with the human resource needs of our business owners;

  • Increased access by SMEs to growth capital, particularly higher risk debt and early stage equity financing;

  • More information on business management and research made available to SMEs by business schools, financial institutions and other suppliers, and greater engagement by entrepreneurs in achieving managerial excellence;

  • Greater and faster rates of technology adoption and sharing; and,

  • More emphasis by all business on the productive investment of capital and the creation of value-added products and services.

We recognize that immediately implementing the numerous recommendations in our report is unrealistic and that there are no silver bullets. But growth begins with an understanding of the barriers to growth, and what's required to eliminate them. It's a question of attitude and openness to the challenges of expanded business horizons and new markets. It's a question of execution, and we must move quickly to maximize our competitive advantage.

Every business, no matter how large, begins as a small business. And every business, sooner or later, is confronted with the challenges of how to grow successfully.

As a country, we have done an excellent job in the last 20 years in creating new businesses. But it is important that we get more of them to the next level. To help them grow into larger, more successful companies. To remove the barriers to their growth. To ensure they have every competitive advantage. And to give them the opportunity to become our next generation of market leaders.

Our success in growing these Canadian champions is important to the quality of jobs we can offer to our best and brightest workers. It's important to the level of tax revenues we can raise to support our Canadian way of life. And it's important for the economic spin-off benefits that accrue to our society.

We still have much to learn on this subject, and we look forward to conducting more research with other partners in future, including Queen's Centre for Enterprise Development. In the meantime, I think we can take pride in knowing that our Canadian entrepreneurs are every bit as growth-oriented as their American counterparts. And more importantly, that we have an opportunity to help them move beyond.

As thought-leaders in this field, I would ask each of you here today to review our report, disseminate it to the widest possible audience, and use it as a building block in advancing this important issue. In doing so, you can ensure the right people understand the opportunities facing our entrepreneurs, and you can help enlist them in our joint mission of "breaking through the barriers to growth."

By building on the strength of our entrepreneurs - their vibrancy, optimism and talent - we can ensure they become Canada's path to prosperity.

Thank you.

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