Business cycle for larger firms is less stable in recessions
OTTAWA—Small and medium-sized businesses (SME’s) accounted for 54.2% of Canada’s gross domestic product (GDP) from all non-agricultural businesses in 2005.
In the U.S., they accounted for 50.7% of GDP in 2004.
Service industries such as information, finance and other services, the importance of small and medium-sized businesses was similar between the two countries.
But in health, education, administrative and professional services, small and medium-sized businesses were relatively more important in Canada’s economy.
Large businesses accounted for the majority of GDP in both countries in utilities, mining and manufacturing, information and cultural industries and transportation and warehousing.
In the United States, large businesses also accounted for the majority of GDP in trade, administrative services and educational services.
The contribution of SME’s firms to industry GDP in Canada and the U.S. was similar in the goods-producing industries. But small and medium-sized firms in Canada tended to make larger contributions to GDP in the service industries.
During the recession, it is likely the number of larger firms decreased because of layoffs, resulting in SMEs taking a larger percentage of GDP because some larger firms actually became SMEs, says Ted Mallett, vice-president and chief economist at the Canadian Federation of Independent Business (CFIB).
“In a recession, business cycle differences between smaller and larger firms definitely show,” he says. “Larger firms cut back on production more so than smaller firms, but once the economy starts to recover, more firms cross that threshold to larger firms because of increased production and adding jobs to accommodate that.”
Many GDP metrics are based on pay roll, he adds. Because employment is usually more stable for SMEs in rough economies, those companies earn larger percentages of GDP until the economy recovers to the point that larger firms boost production and employment.
“It is a virtuous cycle,” he says. “As small firms develop, they can eat away at larger firms that may have lost their way or their technological advantage during a recession. It’s a dynamism in the economy that is important.”