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"Canada's Path to Prosperity"

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The Path to Prosperity: Speech by Gordon M. Nixon
Summary of a speech by Gordon M. Nixon
Canadian firms as entrepreneurial and growth oriented as American small business
Canada's SMEs Study (pdf, 42kb)
IPSOS Reid Report (pdf, 42kb)

Excerpted from a speech by
Gordon M. Nixon
President and Chief Executive Officer
RBC Financial Group
Queen's Centre for Enterprise Development,
Queen's School of Business,
October 7, 2002

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, 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.

Canada has made significant progress in the past decade, and we can be proud of our recent achievements. Despite these successes, our future prosperity is far from guaranteed.

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. 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.

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.

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 results were positive and quite surprising.

For example, contrary to popular belief, Canadian entrepreneurs are far from timid when it comes to taking risks. 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.

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 SMEs on both sides of the border also say 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.

Of course, 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 more in 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.

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. On the government side, perhaps the rules governing R&D tax credits are too narrow to accommodate the type of important development work being undertaken by our entrepreneurs.

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. 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.

There's another ingredient to business success, and that is life-long learning. 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.

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 a country, we have done an excellent job in the last 20 years in creating new businesses. But now 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 the every competitive advantage. And to give them the opportunity to become our next generation of market leaders.

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