Small Businesses lead Canada’s productivity gains, says
RBC Economics
TORONTO, October 30, 2006 — Canada's micro-,
small- and medium-sized businesses are experiencing much faster
productivity gains than their larger peers, according to a
new report by RBC Economics.
According to the report by RBC Economics, small- to medium-sized
businesses across Canada increased their productivity by annual
growth rates of between 2.5 and 3 per cent from 2000 to 2005,
whereas their larger competitors increased productivity by
only 0.5 per cent per year.
"With the rise of South Asian economies and several
economic shocks in recent years, Canadian businesses have
needed to focus more closely on growth and productivity,"
said RBC Assistant Chief Economist Derek Holt. "In the
1990s, we saw an explosion in the number of small businesses,
and while they led employment creation, they suffered from
weak productivity. Now, we are seeing micro-, small- and medium-sized
businesses mature into a more powerful growth phase in which
they are leading productivity gains."
"While bigger companies still have an advantage in productivity
levels over their smaller peers, they have let some of that
advantage slip in recent years with smaller firms now nipping
at their heels," Holt said.
Of the 70 industry classes tracked, three-quarters saw micro
and small business employers experience faster productivity
gains than the industry average. Of the large majority that
experienced productivity growth, half achieved gains through
employment cuts, while the other half did so by boosting the
pace of revenue growth above employment growth.
Some industries where small businesses demonstrated the strongest
productivity growth over the past five years include motor
vehicle and parts wholesalers, chemical manufacturers, plastics
and rubber product manufacturers, and information and cultural
industries. Among medium-sized businesses, solid productivity
growth was seen in non-store retailers, petroleum products
manufacturing and wholesaling, air transportation, and wood
product manufacturing; and for large businesses, strong productivity
growth was found in the following sectors: machinery equipment
and supplies wholesalers, transportation equipment manufacturing,
food and beverage stores, and food manufacturing.
Alberta, B.C. and Ontario demonstrated the fastest growth
rates in new business formations across all size categories,
especially among large firms. Alberta led the country with
large employers and oil patch-related businesses making the
strongest gains in business formations. However, apart from
Alberta, B.C. and Ontario, the rest of the country saw a decline
in the number of micro firms, and east of Ontario, small business
numbers declined as well.
"High energy prices, tight labour markets and the appreciation
of the Canadian dollar are the key driving forces that focus
attention on increasing productivity levels," noted Holt.
"To meet production targets, small- and mid-sized companies
have invested in more machinery and equipment, relying less
heavily on labour. As a result, smaller and mid-sized firms
have raised their average economies of scale and cost competitiveness."
Consolidation Pressures
Restructuring and consolidation are also playing heavily on
the Canadian business landscape. Businesses are responding
to global pressures and competition by merging and acquiring
business lines to boost productivity and competitiveness.
While mega deals appear to grab the headlines and media coverage,
most of the consolidation happening in Canada's business sector
is among smaller firms.
A nearly perfect storm is guiding M&A activity in Canada,
noted RBC's report. The number of deals this year will likely
break the previous annual record set in 2000, with the lion's
share of deals valued between $1 million and $100 million.
"Strong market forces are reshaping Canada's business
community and more consolidation is waiting in the wings,"
said Holt. "Policymakers need to address growth impediments
such as high corporate taxation rates on business investment
- particularly in Ontario - and a growing reliance on profit-insensitive
levies, if Canada is to continue to remain competitive in
the global marketplace. Indeed, policy success or failure
on this count will help in determining whether the fresh productivity
focus of small- and mid-sized firms is part of a long-term
trend that will benefit living standards, or is just a cyclical
flash in the pan."
Job creation moves upstream
Between 2000 and 2005, roughly 1.4 million new jobs were added
to the Canadian economy. In percentage growth terms, however,
nationwide medium and large employer payrolls were up by roughly
10 per cent while the number of jobs at micro and small employers
was up by only three per cent. This also marks a shift in
the relative sources of growth in Canadian labour markets
compared to the 1990s when small businesses drove all of the
job gains.
Four provinces - B.C., Alberta, Ontario and Quebec - accounted
for 87 per cent of total employment in Canada, with Alberta
as the growth leader across every business size. Industries
with strong employment growth include real estate, management-related
firms, construction, oil & gas extraction and utilities.
For a full copy of the report, please visit www.rbc.com/economics.
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Media contact:
Jackie Braden, Manager Media Relations, (416) 974-2124
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