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Good afternoon, everyone.
Thank you for inviting me here today.
My topic is Canada's need for a greater number of medium-sized businesses. I will explain why I think this is necessary and what small companies should do to grow into larger, globally competitive firms.
For those of you who may be unfamiliar with our organization, BDC, I will say a few words about who we are and what we do.
1. BDC
BDC is Canada's business development bank. Parliament created us to do one thing: promote entrepreneurship. We do this by offering financing, venture capital and consulting services to small and medium-sized enterprises. Only SMEs.
We are financially self-sufficient, but our job is not to maximize returns. It is to support entrepreneurs.
We have 94 offices from St. John's to Victoria, including three here (with 50 employees) in Manitoba. To reach entrepreneurs who don't live in cities and towns, we partner with organizations throughout the country.
Every day across Canada, hundreds of BDC employees visit entrepreneurs at their places of business. We have 27,000 clients, including almost a thousand here in Manitoba. To support our clients, we have committed more than $10 billion in financing and venture capital.
More than 6,000 of our clients are exporters. This group represents almost 40% of our portfolio.
Our consulting services help entrepreneurs deal with a variety of competitiveness challenges—such as, for example, strategic planning, human resources, operational efficiency and business ownership transition. Last year, we did 2,400 consulting mandates.
With our venture capital services, we help create companies to commercialize Canadian technologies. In other words, we help create economic value by bringing ideas and innovations from the lab to the marketplace. We have almost 200 companies in this portfolio. And through investments in 17 funds, we have equity positions in more than 180 others. In total, this means $770 million in venture capital committed to almost 400 technology-based companies.
Before getting into the thick of my topic, I'll share a few final introductory numbers. Of all the statistics and numbers that we throw around at the office—we are bankers, remember—these are the ones that always startle people.
If we categorize businesses by number of employees—where small firms have between one and 100 employees, medium-sized firms have 100 to 500 employees and large firms have more than 500—we will see that of the estimated one million employer businesses in Canada, 97.5% are small, 2.2% are medium-sized and 0.3% are large.
If you're like most people, you'll be surprised by the 97.5 and dismayed by the 2.2. But these percentages do not lie: Canada's SME community consists almost entirely of small businesses. Indeed, the closer we look, the more startling it gets. Fifty-eight percent of Canadian companies—almost six out of every 10—have between only one and four employees.
For individual entrepreneurs, small may be beautiful. But for nations, all small is not enough. For nations, bigger is better. National economies, woven as they are into the global marketplace, need firms that can compete around the world. To do so, these firms must have the capacity to survey what is happening in their industry in other countries, know what the innovations are, implement state-of-the-art processes and invest in technology.
Companies can only do these things if they are a certain size.
The near absence of globally successful, medium-sized firms hampers our economy's ability to generate the national wealth that we want for ourselves and our children. Simply put, 2.2% is not enough. We need more globally competitive, medium-sized businesses.
2. We must be more competitive
I will now take a few minutes to discuss three things I believe justify my belief that Canadian entrepreneurs should strive to create larger companies. These are 1) the promise of more competitive challenges brought by globalization; 2) the consequences of the rise in value of the Canadian dollar; and 3) the need to close the gap in our productivity vis-à-vis the United States.
First, globalization. As you know, globalization gives no more shelter to SMEs than it gives to anyone else. We had best get used to this, because if the recent World Bank study on the issue is right, the next wave of globalization will bring even more competitive pressures.
In its study, the World Bank found that globalization's next wave will have three principal characteristics. One, the economic clout of developing countries— specifically, China, India and Brazil—will continue to grow. Two, global supply chains, particularly in services, will offer a high potential for productivity gains. Three, there will be an accelerated diffusion of technology due to falling costs, greater access to telecommunications and the Internet, and innovative forms of business organizations.
The result will be more of the same: greater competitive pressure, with more products—and, increasingly, more skills and knowledge—becoming commodities. This pressure will continue to push businesses, including Manitoban businesses, into a marketplace where success requires knowledge and innovation, as well as niches in global supply chains.
The second development I think should prod us to work to create larger, more globally competitive firms is the rise in the value of the Canadian dollar—the fastest appreciation in its history. Its recent arrival at parity with the American dollar has, like the proverbial bullet, focused many minds. Let's hope that this attention is more than fleeting and broad in scope.
We have only just begun to feel the effects of our dollar at parity. SMEs that competed on cost alone are facing greater pressure to become more competitive and more productive.
In conversations with entrepreneurs, I am struck by how many believe or assume this parity will be short term. I think this assumption is very risky. If the price of natural resources remains high and the U.S. keeps running deficits, the parity of our dollar with theirs may well be long term. I think it is prudent to start planning accordingly.
I also think that parity may well trigger American entrepreneurs to become more interested in our market. That would oblige us to become even more competitive.
The third reason why I believe we should act is the continued productivity gap between Canada and our closest, most important market and competitor, the United States. This gap is big, and it's growing.
Canada's per capita GDP is $42,400. That of the U.S. is $51,600. The difference: $9,200. For each one of us. Every year.
What does this $9,200 mean? To start, it means a lower standard of living. More fundamentally, it means that each of us is $9,200 per year less successful than Americans at adding value to our human, material and natural resources.
It is bad enough that we accept this complacency with lesser success. That we accept it as it grows bigger before our very eyes is astonishing. In 1981, the gap was $3,000. Today it is three times that.
How do we explain this difference? One contributing factor is that Canadian businesses invest less in their workers and in their machinery, material and software. They invest significantly less: $1,400 less per worker per year in information communications technology. And $900 less per worker per year in machinery, material and software.
Of course, investments of this kind are necessary everywhere in Canada, including places like Manitoba that suffer shortages of qualified labour.
3. Solutions
So what, specifically, should entrepreneurs be doing? I would recommend three things. The first two are quite straightforward. The third will require a little more explanation.
To start, entrepreneurs should start buying more machinery and equipment. Our strong dollar provides a terrific opportunity to do so.
Secondly, entrepreneurs should outsource where they can find additional efficiencies. There are excellent, efficient suppliers abroad, especially in the many emerging economies of the world.
Thirdly, because machines and equipment are necessary but insufficient, entrepreneurs should start investing in intangible assets.
By intangible assets, I mean things such as process re-engineering and technology platform overhauls, R&D (not only in labs, but also in terms of trying to do things differently), technical and managerial training, pooling of resources, collaboration through national and international networks, a culture of "best practices" and improved management capability.
When we look at other, more productive countries, it is clear that investments in intangible assets are essential. According to the OECD, they now represent more than 10% of GDP in the United States. Also, their contribution to that country's labour productivity growth rivals that of tangible assets.
Canadian research is finding the same things. According to a recent study by Statistics Canada, while company failure is most often related to a lack of basic management skills, company growth is often distinguished by specialized competencies related to technology and innovation.
This is a really important finding: survival depends on a basic skill set. But success depends on a series of skills tied to intangible assets.
So, tangible assets—machines and equipment—are still essential. But we need to augment our investments in the intangibles as well.
4. Successful SMEs
We at the Bank meet and know a lot of SMEs. We have come to see that the successful ones share certain characteristics and behaviours.
They are lean.
They respond rapidly.
They invest in productivity-enhancing automation.
They outsource tasks that do not add value or that are readily done elsewhere.
They invest in human capital and training.
They understand their clients' needs.
They focus on added value and service quality.
They seek niche markets where they can compete, despite the presence of global and larger competitors.
They seek and find opportunities in adjacent markets, where they can deploy products or services in a complementary way to meet new clients' needs.
They use global networks to secure opportunities in global supply chains.
5. Concluding Remarks
If I were to ask you to remember anything from my talk today, it would be this: small is beautiful, but bigger is better. Seize the day: buy new machinery and equipment, outsource what you can and invest in the intangible assets.
* * *
In closing, I would like to offer my thoughts on our national attitudes toward entrepreneurialism.
The past 20 or 30 years have been pretty easy. The low Canadian dollar allowed many of us to do well without re-investing in our businesses, especially if we were exporting to the U.S. It was a time when the quality of life generated by a successful small business was high and became, for many, a goal in itself. It was an environment in which small business owners could afford, if perhaps not an extravagant lifestyle, then at least a very pleasant one. It was an environment in which we were sheltered from competition because we had lots of natural resources and a weak currency.
But those days are over. The dollar is at parity. Unrelenting advances in technology and transportation shrink the world a little more every day. The American economy is weakening as a driver of world growth. It may even slow down in the months ahead. Now is not the time to rest our plans for the future on out-of-date, unambitious measures of success.
Let's keep celebrating small business, but let's also applaud small businesses when they grow to medium size. Let's applaud when we see them gaining the critical mass they increasingly need to compete even in their own sectors. And when we do see smaller businesses consolidating into bigger ones, let's see this as a sign of progress—a kind of progress required by the times.
As Canadians and business people, we have a choice. We can leave behind a country of happy lifestyle entrepreneurs with a slipping quality of life, or a country of successful entrepreneurs capable of and itching to take on the best, because they know they can.
We could count on big business—0.3% of our businesses—to deliver what our trade-dependent national economy needs. Or we could recognize that it would be smarter to engage the 97.5% to help. It is these businesses that will have to make a difference.
Thank you. |
