Small businesses propelling Canadian economy, but growth depends on innovation, exports

TORONTO—Though small Canadian businesses created a full 80 per cent of the country’s new private-sector jobs over the past year, “this economic piston of growth” is headed for tough times if it doesn’t refocus its efforts on innovation and growing export markets, a new CIBC World Markets report found.

“The small business sector has unequivocally kept Canada’s economy from sinking into deeper water,” Benjamin Tal, CIBC Deputy Chief Economist and co-author of the report, said. “While Canada’s small and medium-sized enterprises have been an island of stability, not only demonstrating resiliency during the recession but also leading the way during the recovery, they are entering a new reality, one that will force them to innovate and enter new markets to sustain growth.”

Following the 2008 recession, Canadian entrepreneurs were the first to get back into the game. The number of new companies has climbed 19 per cent since 2007. Meanwhile, large firms’ growth fell almost 3 per cent over the same time period, according to the report.

“The secret behind this unprecedented ability of small business to overcome weak economic conditions over the past cycle is their exposure to Canadian consumers, who by opening their wallets, almost single-handedly moved Canada back into the growth column,” Tal said.

The strength of Canada’s housing market has insulated the country’s small businesses as well, with SMEs employing close to 70 per cent of workers in the construction and real estate industries.

Still, over-reliance on the domestic market can be dangerous, “should the tide turn,” the report warns.

“With debt-to-income ratios just under 165 per cent and house prices looking stretched in many pockets of the country, consumers can’t be relied on to provide the type of growth seen in the recent past. Canadians are just about maxed out on debt-fueled consumption,” Tal said.

As domestic opportunities dry up, the economist thinks the fall of the loonie has provided an opportunity to push into the export market, especially the U.S. and Europe.

“To maintain and build on the performance of the past cycle, SMEs will have to change their business models by both raising their propensity to export and increasing investment in research and development,” Tal added.

And while some new small businesses look to enter the export market, those already shipping products are starting from a position of strength, already having invested more on innovation than non-exporters.

“Given Canada’s weak productivity track record of late, any support from SMEs will be a boon to the country,” Tal said.

See also: Curse of the five-year plan: stay-at-home attitude putting Canadian businesses at risk