As the province’s long-running real estate and housing boom unwinds, it is important to identify and pursue new and more sustainable sources of future economic growth.
Working to increase productivity and build more sizable B.C. companies are good places to start.
Productivity is defined as the economic value of what a business – or the economy as a whole – produces, measured per hour of work. The wages and salaries that employees receive depend in large part on the productivity levels achieved by businesses.
Many factors determine how productive a company is, including its size, management strategy, workforce skills, and the tools, technologies and equipment available to help employees do their jobs.
For British Columbia, one key to developing a highly productive economy is growing more of our businesses into companies of significant size – e.g., annual revenues of $100 million plus, and/or at least 250 employees.
A glance at the existing mix of B.C. businesses confirms two things: Small is apparently beautiful, and company growth is far from the norm.
Today, B.C. is home to approximately 500,000 businesses. Around 300,000 of these are tiny one-person operations with no paid employees. Another 111,000 are small firms with fewer than five employees. Thus, more than four-fifths of all enterprises in the province are best described as “micro” businesses, each with under five staff.
At the other end of the spectrum, just 8,200 companies have 50 or more employees, with only 1,300 of these having at least 200 people on the payroll.
Why is it important to encourage more B.C. companies to grow? There are several reasons.
Higher pay: In Canada, like other advanced economies, there is a positive relationship between business size and the compensation provided to employees. The relationship is not one-for-one, but people who work for bigger companies generally earn more than their counterparts toiling for smaller organizations.
The average weekly wage for employees of the largest B.C. companies (500 or more employees) is 25-30 per cent higher than that for employees of businesses with fewer than 100 staff. Non-wage benefits – e.g., pension contributions, extended health coverage, life insurance, etc. – also tend to be more generous at larger employers.
Increased productivity: For employees of larger businesses, higher average pay is linked to another well-documented fact: Bigger firms tend to be more productive than smaller ones, measured as the value of production per hour of work. Often, this is because larger companies invest more than smaller ones in the equipment, technologies, digital tools, and up-to-date facilities that boost productivity.
More exports: As businesses expand, they are increasingly likely to engage with outside markets and export their products and services. In Canada, the top three per cent of exporting companies account for a whopping 60 per cent of total merchandise exports.
For a small jurisdiction like B.C., exports are vital to overall prosperity. To improve export performance over time, more of our companies need to reach a size where it makes sense – or becomes necessary – for them to sell beyond the local market.
Smart public policy can assist in creating an environment that facilitates the growth of B.C. companies.
One priority is to ensure that firms have access to the right kinds of talent, not just well-qualified entry-level employees (where B.C. does quite well), but also people with substantial expertise in areas critical to business growth, like finance, market and product development, global supply chains, data management, and executive leadership.
Policy-makers should also be looking to retool the tax system to incentivize business growth and innovation. This calls for a fresh look at the tax rules affecting investments in machinery, equipment, software, digital technologies and other forms of capital that often increase productivity.
In addition, the dramatic jump in income tax rates as businesses scale up should be reconsidered. In B.C., the combined federal-provincial business tax rate climbs from 11 to 27 per cent once a company reaches a net income of $500,000. It is hard to see any justification for this kind of sharp and arbitrary tax rate escalation.
Finally, government has a role in assisting small and mid-sized enterprises (SMEs) to become export-ready. Export Development Canada and the B.C. Ministry of Jobs, Trade and Technology are both active in working with SMEs that are keen to export. World Trade Centre Vancouver operates a trade accelerator program that’s targeted at growth-oriented SMEs.
Given the huge number of small businesses in B.C., enhanced support for local firms to participate in international markets should be a priority for the provincial government.
Jock Finlayson is executive vice president and chief policy officer of the Business Council of British Columbia