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MACAULAY CULKIN as Kevin McCallister in Home Alone. (NBC/ZUMA Press)
MACAULAY CULKIN as Kevin McCallister in Home Alone. (NBC/ZUMA Press)

Guest Column

It's a myth that startups drive economic growth Add to ...

Canada has a growing love affair with startups. Look around any city in the country, and it’s easy to see why.

Any entrepreneur will tell you that launching a new venture is exciting. As a former entrepreneur myself, I’ve had the privilege of working with hundreds of bright-eyed, aspiring industry leaders as they take those critical first steps. It is an energizing experience and one that is filled with promise.

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But creating significant value following the launch of a startup is riddled with challenges – and they are often several orders of magnitude greater than those associated with starting a new venture. These stumbling blocks have far-reaching impact. In Canada, too many companies ‘start up’ and stagnate and never ‘scale up.’

This has important implications for policy makers who often simply invest in the launch of startups as a means to cultivate and support entrepreneurship. It is not enough to support the ‘start-up’ of new companies. It would be akin to planting a seed, but not providing what it needs to grow and flourish. To garner the greatest economic benefit and return on entrepreneurial investments, we must actively support the development of Canada’s highest potential firms.

Moreover, we must accelerate their growth as quickly as possible by building the required capacity and resources – from leadership talent to sales and marketing savvy, and supply chain management. Why? Because it is large and sustainable firms, not startups, that fuel wealth creation.

In fact, it is a myth that startups and small businesses are engines of economic growth – particularly job creation and export revenues. In February, 2012, the Institute for Competitiveness & Prosperity published Small Business, Entrepreneurship, and Innovation Working Paper 15, which concluded that “while small firms provide a critical foundation for an economy, it is larger businesses that drive growth, productivity, and prosperity.”

It is not difficult to find evidence in our own backyard. Between 2001 and 2012, large firms accounted for 63 per cent of net change in employment and 71 per cent of export value in Ontario alone. These companies have a distinct competitive advantage over their smaller counterparts. They enjoy economies of scale and scope that enable them to create more jobs, invest more in innovation and continually expand their businesses.

This leads to the creation of economic wealth. It also increases our competitiveness as a country. So how does Canada stack up in this department?

A quick look at the U.S. Fortune 500 shows 83 Canadian global leaders would make 17 per cent of the list – but they would hover around the bottom. Why does it matter? Because very large firms drive innovation through R&D spending. Innovation increases the value added of products and services, it makes firms more competitive, and it stimulates GDP growth that strengthens our economy and increases our ability to weather any global storm.

As a nation built on small and medium-sized businesses (SMBs), these firms represent some of Canada’s most precious resources. Many companies hit $50 million in revenue and then plateau, or they are acquired or worse – fall off the cliff. Only a few Canadian companies achieve significant global revenue and become worldwide leaders.

It presents an opportunity and raises important questions: How can we help more Canadian firms scale up, not just start up? What can we do to accelerate the growth of our most viable born-global firms and help them break through the multimillion-dollar ceiling and create greater wealth?

Public policy is a crucial part of this equation. It is time to bring laser focus to our commercialization investments, and to allocate these resources to globally oriented firms with the greatest potential. We must help them address the many serious business issues that cause firms to stall at the $50-million revenue mark, thwarting their ambitions to become a $1-billion company.

So, where do we start?

  • Refocus policies to enable more business ‘scaleups’ instead of exaggerating the importance of mere ‘startups.’
  • Develop sector-based strategies with strong actions to back the winners.
  • Evolve blanket policies for all startups and SMBs and create more tailored support for born-global companies and high-impact firms that focuses on global customer needs, export market development and building management capacity.
  • Distinguish between large and small companies in taxation and shifting investor incentives – this includes creating different reward and tax treatments that promote “buy and hold” as opposed to “buy and trade.”
  • Address management gaps by repatriating Canadian CEOs who lead hugely successful $100-million-plus businesses abroad, and enlist them to help promising firms scale up.
  • Incent large multinational companies to support and collaborate with smaller businesses in their sector. This training and experience will accelerate the development of SMBs, while helping them acquire new connections, customers and market opportunities.

To build our economy more rapidly, we must focus on nurturing robust global players. Only a few will emerge from the myriad of startups created each year. With the right policy and investment focus, we can make those with the highest potential count – because when it comes to increasing innovation, productivity and prosperity, size does indeed matter.

Dr. Mario Thomas is the managing director of the federally funded  Centre for Commercialization of Research, which accelerates the commercialization of publicly funded research and builds more robust, globally competitive Canadian entrepreneurs and firms across Canada. He also serves as senior vice-president of the  Ontario Centres of Excellence and founding chairman of the  International Commercialization Alliance.

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