30, November 2023

Does Canada have enough big companies?

The real key to standard of living and prosperity is GDP per capita. Canada’s GDP per capita has been slipping since 1980 when compared with the US and other advanced economies, largely driven by declining productivity. See the graphic below.

Many reasons have been put forward for the decline in productivity compared with peer countries – population growth (Canada’s population has risen much more than peer countries), low levels of investment in machinery and equipment and non-residential structures, less spending on information and communications technology, the decline in research and development spending (particularly business spending on R&D), insufficient employee training, a less competitive economy,  inefficient regulatory and tax policies and more.

One topic that hasn’t been discussed so much is the lack of large firms in Canada. Look at the graphic below that shows the number of manufacturing companies (numbers in thousands) with more than 250 employees in OECD countries. Manufacturing represents about 10 % of the Canadian economy ($174 billion) but it is very important as it is high value-added sector and accounts for 68-70% of Canadian merchandise exports, that, as Dan Breznitz points out, is a main determinant of Canada’s international competitiveness. Canada has the smallest number of large manufacturers among the 35 OECD countries surveyed.

Why does size matter?

A few years ago, Rob Atkinson wrote a book titled “Big is Beautiful.” He is President of the Information Technology and Innovation Foundation, one of the most active think tanks in Washington DC (and a Canadian, born in Calgary). He listed some of the ways big firms outperform small firms in the US:

  • They pay higher wages, 28% higher on average.
  • They pay higher benefits (vacation, bonus, retirement plans, healthcare, etc.).
  • They are more productive, by 17% according to one study.
  • They spend more on software and equipment.
  • They spend more on R&D and file more patents.
  • They create more sustainable jobs (small businesses create more jobs but they are often short lived.)

A point Atkinson makes is that if you are going to compete with international giants like China you need large, sophisticated companies to do so.

What about Canada?

A report by the Business Development Bank (Ref. 1) stated that in the United States, the productivity of small and medium-sized businesses is 67% that of large businesses. In Canada, this proportion is reduced to 47%. It also points out that the relative weight of small and medium sized businesses is higher in Canada than the US. In Canada 53% of GDP is produced by small companies, while in the US it is only 46%. They defined small companies as having fewer than 500 employees, and large companies as having more than 500 employees.

A study from the Bank of Canada (Ref 2) showed that large manufacturing firms in Canada were 80% more productive than small manufacturing firms. An all-industry comparison showed that on average large firms were about 30% more productive than small firms. In business service the productivity differences were smaller.

The OECD ranked Canada 18th among 38 OECD countries in GDP per hour worked, just behind the UK, Australia, and Italy.

All the reports comment that while some small firms are more productive than large firms, the average difference is significant.

Why are larger firms more productive?

Economies of scale are a major factor explaining the higher productivity of large firms. Size also allows them to recruit specialized expertise in areas such as finance, R&D, strategy development, etc.

Size also permits more effective lobbying, to tailor government programs to their needs. A recent paper by David Wolfe et al from the University of Toronto concluded that government support programs were structured in such a way as to benefit large firms more than small firms (Ref 3) because of their better lobbying skills.

Why does Canada have so few large firms?

The reasons for this don’t appear to be well understood. A paper by the Business Council of Alberta (Ref 4) speculates that there may be barriers—trade, financing, institutional, regulatory, or taxation, among others—limiting the ability of small firms in Canada to grow.

Conclusion

Canadian industry is only 78% as productive as US industry, on average, measured by GDP per hour worked. There are two main factors involved 1. Canada has fewer large firms than the US and 2. Smaller Canadian firms are much less productive than smaller US firms. According to Statistics Canada these two factors explain much of the differences in productivity between the two countries.

Peter Josty

 

References

1.BDC report: Productivity Matters: Benchmarking Your Company to Up Your Game.
2. https://www.bankofcanada.ca/wp-content/uploads/2010/06/leung2.pdf
3. Do winners pick government? How scale-up experience shapes entrepreneurs’ assessments of innovation policy mixes. Science and Public Policy, June 2023, Denny, Southin, Wolfe.
4. https://businesscouncilab.com/insights-category/analysis/productivity-part-three-canada-us-productivity-gap/