How B.C.'s small-business skew became a liability in the pandemic

Credit: Michael Wheatley/Alamy Stock Photo

Being a province of SMEs brings economic advantages as well as drawbacks

Not only do they pay their employees less, small employers often lack the means to survive the disruption to their business

It’s hard to believe, given their relatively high profile, but there are just 700 private companies with 300 or more employees operating in B.C. Small and medium-sized enterprises (SMEs) comprise a greater share of the economy, both by employment and by contribution to GDP, than in most jurisdictions. This can be seen as a good thing. It suggests a culture of entrepreneurship. Plus, if well managed, small businesses can eventually become large ones.

But it can also be a sign of underinvestment; when large businesses don’t see a return and exit a market—or avoid it from the outset—small ones fill in those usually less lucrative gaps. Think of the employee who gets laid off when their local office shuts down and becomes a self-employed consultant, usually with lower or less secure compensation.

This highlights another downside of B.C.’s small-business skew. Large companies generally pay higher wages and provide better benefits than SMEs do. In 2018, average annual earnings for workers in B.C. businesses with fewer than 50 employees was $44,542, compared to $53,569 for those with 50 or more. Big companies post higher revenue per employee than their smaller peers, making the economy more productive and competitive.

The COVID-19 pandemic has brought a still more urgent downside to our SME-dominated economy sharply into focus: small enterprises often don’t have the financial wherewithal to sustain an extended disruption that large businesses do.

“We do have an economy that’s more weighted to small companies, particularly what I would call micro-businesses, those with zero to five paid employees,” says Jock Finlayson, executive vice-president and chief policy officer for the Business Council of B.C. (an association representing big business, it should be noted). “A lot of businesses, I’m afraid, are going to fail because of the protracted nature of this disruption.”

Ten to 15 percent of businesses with paid employees operating at the start of the pandemic will disappear by the end of 2021, the BCBC predicts. Indeed, the wave of exits and insolvencies is expected to really break this year as companies’ balance sheets deteriorate and governments’ emergency support inevitably winds down.

There’s no easy solution to B.C.’s and Canada’s diminutive corporate stature. In a 2016 study covering the years 2001-13, the Business Development Bank of Canada found that Canadian businesses were almost all small and getting gradually smaller and that the number of midsized businesses graduating to the big leagues was slowing down. The problem was even more acute in B.C., which accounted for just 10 percent of the country’s big-business graduates over that period.

Demographics may account for some of the slowdown—as the population ages, fewer truly scalable startups get founded. But there are other factors at work; both small and midsized businesses lag big businesses in investment in tangible fixed assets per employee by a wide margin, for example.

The trend reversed somewhat in 2014-18, notes the report’s Montreal-based author, BDC senior economist Sylvie Ratté, looking at the latest Statistics Canada data. The share of micro-firms decreased and large firms increased incrementally. However, B.C. companies remain smaller than the national average. For example, 1.1 percent of the province’s businesses have more than 100 employees, versus 1.3 percent nationally.

In a 2017 manifesto entitled “Why Canadian Businesses Need to Think Big” published in The Walrus, venture capitalist and former Wind Mobile CEO Anthony Lacavera attributed corporate Canada’s smallness to an “aspiration gap”—a lack of imagination and ambition he sees as engrained in Canadian culture—combined with a regulatory framework that favours stability over competition. Other observers point to Canadian entrepreneurs’ readiness to sell out to larger competitors.

Finlayson blames a policy framework across Canada that favours small businesses—for example, B.C.’s corporate tax rate of 2 percent on the first half million dollars of income, which jumps to 12 percent above that level, and payroll taxes such as the provincial employer health tax, which only kicks in when the enterprise reaches an annual payroll of $500,000. “The Canadian regime of business taxation tends to incentivize companies to stay small,” he says, “for reasons rooted in political calculation. But it’s fundamentally counterproductive to building a high-wage, high-income economy.”

Mind you, no policy reversal on this front would manifest fast enough to get B.C.’s economy off the tracks of the COVID train headed our way. Helping SMEs sell their goods and services online is one of the best things governments can do in the short term, says Ratté, “since it facilitates the gain of market shares, often in other jurisdictions,” which usually correlates with organizational growth.

Ultimately, B.C.’s economy will recover like everywhere else. “Fortunately, we have high rates of business formation and an entrepreneurial environment,” the BCBC‘s Finlayson says. “I’m confident that once we’re through this nightmare, we’ll see lots of business startups and certain companies coming into the market.”