Another reason for the current dearth of mid-sized firms in Canada, he said, is that after the recession of 2008-09, investors became leery of investing in companies that have the potential to grow but don’t have a wide portfolio of concrete projects on the go. “Nobody is willing to be patient and give you the benefit of the doubt any more, and believe in your story.”
The dwindling number of mid-size companies is a problem for the country as a whole, he said, because those firms tend to be more nimble, fast-moving and aggressive than big companies. “You need both, or else you don’t have a healthy, working economy.”
Mid-sized companies are most exposed to the full force of global competition and the high dollar, and those that don’t work hard to develop new products and invest in equipment are at high risk of failure, said Deloitte vice-chairman Bill Currie.
“There’s no question there’s a cohort [of companies]that we’ve lost over the past three or four years, and we’ve lost them because they weren’t competitive,” he said. “There’s competition, not from Asia, but from Indiana at $15 an hour. You can either be massively productive or have low wage rates. If you lose on either one of those metrics, you can no longer compete for those jobs.”
Against that backdrop, size matters more than ever. Bigger companies with more employees have more resources to help them export, try out new ideas and study new markets.
And their absence may explain why Canada’s export performance has been relatively weak. Exports were still 8 per cent below their pre-recession peak at the end of last year, Bank of Canada Governor Mark Carney said in a recent speech. In fact, Canada’s share of world exports has been the second worst in the G20 in the past decade.
Authorities have a few theories about what’s happening, and several possible suspects: Canada’s industry base is too concentrated on natural resources, and losing focus on technology. Canadians are reluctant to think outside their borders, or take on risk. Government incentives and economic conditions are hampering growth.
While companies less than three years old tend to grow very rapidly, older ones stagnate and grow very little. And that could be attributed to the Canadian tax system that rewards small, and indirectly dissuades growth. Governments – federal and provincial – love showering preferential tax rates and other benefits on businesses that happen to be small.
“These small-business incentives are a disincentive for businesses trying to make the leap out of the small category,” says Andrew Dunn, head of Deloitte Canada’s tax practice. “I am not saying that the lack of mid-sized businesses is driven by tax factors, but tax factors provide a current against which these businesses need to swim as they grow.”
Staying small to get the lower tax rate makes no sense, but companies seem to do it anyway, said Don Drummond, former banker and top federal finance official.
“It seems to be counter to the corporation’s interests, and it’s definitely counter to the national economic interest,” Mr. Drummond said, pointing out that larger companies are more productive, pay higher wages, are more likely to export and to do research and development.
Deloitte Canada, which is running its own investigation into Canadian companies’ growth and its link to poor productivity compared to the United States and other major competitors, has another startling discovery to add to the mix: Six out of 10 Canadian small-business owners are “lifestyle entrepreneurs” who have no interest in growing at all.
Business owner Melissa Orozco, for example, deliberately wants to stay small. The owner of Vancouver-based Yulu Communications, who previously worked for a mid-sized firm in New York, prefers a smaller size that allows for flexibility, and attention on customers.
She acknowledges that it’s tougher as a little firm to attract big clients. “We would love to work with some great companies like Lululemon or something like that, but larger corporate clients are going to go to the larger agencies.”