Small business bulking up for success: RBC EconomicsGrowth in number of small businesses slowing; but moving up the size chain
TORONTO, October 20, 2008 — The latest small
business report from RBC Economics shows that small businesses
have grown larger since the start of the decade, but that
overall growth in the number of small businesses has slowed
in the last five years, partly reflecting softer economic
conditions.
According to the RBC report entitled "Small Businesses
and Industries in Canada - Recent Trends," technological
advances, globalization, the lessening of regulation and the
high Canadian dollar have upped the ante for small businesses
in a wide spectrum of industries over the past decade.
These factors have exerted increasing pressure on small businesses
to take steps to become more competitive - including combining
with other organizations. Small businesses in sectors directly
exposed to foreign exchange, such as tourism, were most affected.
Suppliers of goods or services to larger, export-dependent
organizations also felt the effects, but to a lesser extent,
of the sharp appreciation in the Canadian dollar. And even
though the manufacturing sector is experiencing generalized
declines in the number of small businesses, the average firm
size appears to be increasing.
"While consolidation in the manufacturing sector has
led to a loss of small businesses, there is evidence that
average firm size has grown in most manufacturing industries,"
said Robert Hogue, senior economist, RBC. "Through the
challenging markets of the past several years, the decline
in the number of small manufacturing firms might actually
be a positive sign if it reflects a movement towards them
becoming larger in size. Larger firms tend to be in better
position to make the investments necessary to become or remain
globally competitive."
Although the extent to which small firms are part of this
bulking up phenomenon is difficult to determine, the report
found that output is being produced by larger and larger enterprises
in Canada. "Whether this size expansion is a result of
smaller firms becoming bigger, or larger firms gaining heft,
or both, we see this as positive news for our economy. Productivity
performance tends to get stronger the larger the size of enterprises,"
Hogue added.
Specifically, the report found that within the micro/small
business category, the share of the larger firms (those with
between 10 and 99 employees) has increased in all manufacturing
industries between 2002 and 2007. Even though such a shift
does not appear to extend to the medium-sized enterprise category,
it does suggest that Canada's smallest manufacturers are moving
up the size chain. Only the hardest hit industries within
manufacturing such as textile and clothing have failed to
show a gain in average firm size.
A Look Ahead
With the Canadian economy expected to gradually emerge from
its "soft patch" during 2009, the report found that
general business conditions should improve later next year
and stimulate the small business environment. However, the
rate of growth in small businesses is unlikely to pick up
much, if at all, as the maturation process continues and the
focus for several key sectors remains on consolidating and
restructuring.
As well, when economic growth starts to re-accelerate, the
average output per firm is set to continue rising overall
for the majority of industries. Although the size of firms
in Canada is low on the list of alleged culprits for Canada's
lagging productivity, the growth in average firm size will
become a positive factor enhancing Canada's productivity prospects.
"While it is still too early to pass a definitive judgment
on whether or not small businesses in Canada are successfully
adapting to the tough economic challenges, the evidence is
encouraging to the extent that firms are gaining heft across
the spectrum of industries," said Hogue. "In the
meantime, Canada should aim to strive for a policy environment
that reduces business irritants such as red tape, complex
regulation and the disincentives to grow that are imbedded
in the current tax structure. This would help Canada's firms
and entrepreneurs to be more globally competitive and achieve
their full potential."
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For more information:
Robert Hogue, RBC, Economics, (416) 974-6192
Jackie Braden, RBC, Media Relations, (416) 974-2124
For a copy of the report, please visit: http://www.rbc.com/newsroom/pdf/20081020-sme.pdf
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