Mittelstand. It’s a German word for a mid-sized business.
Germany has lots of them, firms manufacturing products that get exported all over the world. These firms create domestic jobs, generate big exports, anchor communities. They are the spine of the German economy.
These companies exist in Canada, too, but there are fewer of them, even relative to the size of the economies of Canada and Germany. Their number in Canada is shrinking. Their disappearance is part of the ongoing drama of manufacturing across the Canadian economy.
In 2000, Canada had the world’s ninth-biggest manufacturing economy; in 2010, it was ranked 15th. Manufacturing tends to produce high-paying jobs, innovation and even some research. Hollow out manufacturing and the economy suffers.
The hollowing has been pronounced in recent years in the mid-sized business sector. An intriguing report from the Business Development Bank of Canada (BDC) tried to figure out how mid-sized business – defined as firms with 100 to 499 employees – were doing.
From 2006 to 2010, the BDC found, “the number of Canadian mid-sized firms decreased by 17 per cent (from 9,370 to 7,814).” Manufacturing suffered the biggest losses: From 2001 to 2010, more than half of the mid-sized manufacturing firms disappeared (the number falling from 2,807 to 1,381).
Maybe they disappeared because they got bigger? No such luck. Only 1.4 per cent grew to become firms with more than 500 employees, whereas 14 per cent went from mid-sized to having fewer than 100 employees. Not surprisingly, Ontario suffered the most from the downdraft of mid-sized manufacturing firms.
Why is all this happening? The BDC offers three plausible reasons: the parity of the Canadian dollar with the U.S. greenback, competition from China (and other places) and the brutal recession of 2008-2009.
Other reasons could be added: spotty innovation and research, inadequate access to financing for growth, an uneven record of searching for foreign (read: non-U.S.) markets.
Not all mid-sized firms disappeared or shrank. While many manufacturing ones did, the number of mid-sized retail firms increased, as did the number of firms in accommodation and food services and some dealing in business services.
Manufacturing accounts for 13 per cent of Canada’s economic output, so that sector alone can hardly be blamed for the dispiriting trade deficit Canada has experienced since the end of 2008. In 2012, Canada enjoyed a big trade surplus with the United States but a deficit with the rest of the world. Remove $58-billion in energy exports from the calculation and our merchandise deficit would look awful. Canada remains, overall, a hewer of wood and drawer of water.
Reports have been tumbling in to the Conservative government about how to stimulate innovation and research and how to use government purchasing to help Canadian firms develop. The latest, from a committee chaired by Tom Jenkins of Canadian software company Open Text, suggests that the government identify six industrial sectors with relevance to the defence industry and steer contracts to them.
This made-in-Canada approach is appealing in theory. It could work just as the committee suggests. It could also follow an old, ingrained Canadian tradition whereby defence contracts are awarded to satisfy regional political imperatives. Buying foreign is sometimes cheaper and better, although buying foreign is always more politically charged. Buying domestic as a matter of course can sometimes mean higher prices and long delays.
The Harper government has just established a venture capital fund. It has changed the tax incentive regime for innovation. Governments will offer various kinds of subsidies to locate plants here and there. A dictionary of government support programs and tax expenditures exists to help businesses, including manufacturing firms. And no one should forget the subsidies and bailouts lavished on the auto and aerospace industries.
Manufacturing industries can produce at a second’s notice a shopping list of other policies they want from government. Remember, though, that governments have been trying to help for a long time, at some political risk, by introducing such measures as the Goods and Services Tax and in some provinces blending the GST with the provincial sales tax to make the HST.
All these measures don’t seem to have arrested the decline of mid-sized manufacturing enterprises.