Opinion: Canada needs a ‘more than dynamic’ small-business sector

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The well-being of Canada’s small-business sector is a big deal to Isabelle Hudon. She thinks it should be to the rest of us, too.

“As a country, we cannot afford not to have a very strong and powerful SME ecosystem,” said the president and chief executive officer of the Business Development Bank of Canada, the federal Crown corporation that provides financing and advisory services to about 100,000 small and medium-sized enterprises.

SMEs account for more than 80 per cent of Canada’s jobs, and more than half of its economic output. Yet this supposed engine of growth is running on fumes. Entrepreneurism is shrinking in this country, and the sector isn’t living up to its promise as a critical driver of innovation. It’s become a big part of the country’s productivity problem, rather than a solution.

“We cannot afford not to keep that sector alive, and more than dynamic,” Ms. Hudon said in an interview at The Globe and Mail’s headquarters last week. “We need to better support SMEs, and help more SMEs.”

When Ms. Hudon began a five-year term as head of BDC in August, 2021, after a stint as Canada’s ambassador to France, she was determined to expand the bank’s client base. At the time, the bank was serving only about five per cent of the country’s SMEs – and less than 20 per cent of the businesses that, according to the bank’s own surveys, say they don’t have the support they need.

A little over two years in, the numbers tell a success story. The bank’s client count has swelled by more than 50 per cent. Its total capital committed to SMEs has increased by about 25 per cent, to more than $50-billion. It has expanded its venture capital commitments by 40 per cent. The bank has placed a particular emphasis on growing in segments that have historically been underserved by financiers, such as female, Black and Indigenous entrepreneurs.

But while BDC’s business has boomed, all is not well in Canada’s entrepreneurial segment.

Nearly two-thirds of SMEs are run by bosses who are over 50 years old. And yet, as a pending BDC report notes, fewer young Canadians are stepping in to fill the void. Employment statistics show that Canada has roughly 100,000 fewer entrepreneurs than it did two decades ago.

Ms. Hudon also noted that the proportion of commercial-banking capital going to SMEs has been steadily shrinking for years. Figures from the Organization for Economic Co-operation and Development show that in 2011, SMEs accounted for more than 17 per cent of Canadian business loans outstanding; today, their share is about 11 per cent, the lowest in the 38-country OECD.

It doesn’t make a great recipe for future growth of the sector. Ms. Hudon said that BDC, which typically lends to businesses that have a hard time securing loans from private-sector banks, “needs to play a bigger role” to address this gap.

Meanwhile, data on SMEs suggest that if Canada is going to turn around its dismal productivity performance, it will have to find a way to ignite small business, to get the sector growing and innovating.

A new research paper from Desjardins, set for release Monday, noted that Canada’s SMEs not only lag in productivity and innovation relative to larger Canadian firms, but they also “have historically failed to keep pace with the productivity gains of their international peers.”

The paper found that the Canadian sectors with the weakest productivity are also the ones with the highest proportion of employment in SMEs. It noted that Canadian SMEs are slow adopters of technology, and that entrepreneurs who develop their own innovations often sell them to foreign companies rather than commercialize those products themselves. For example, the paper said, more than half of the patents on Canadian artificial intelligence inventions are foreign-owned.

“The barriers to SME innovation are not insurmountable, and many can be overcome with well‑targeted, well‑funded public policy. However, clearly more needs to be done to ensure that these policies are tailored to the needs of Canada’s entrepreneurs and well communicated to business owners,” the Desjardins paper concluded.

Ms. Hudon acknowledged that “underinvestment” by SMEs in digital technology, in particular, is a “huge” factor in the country’s productivity woes. And she agreed that public policy needs to do better at stimulating this investment.

“We’ve been underperforming at convincing SMEs to invest in digital,” she said. “I do believe that if we are successful at bringing more SMEs to invest into digital and to adopt digital tools, that our overall productivity will be positively impacted.”

The BDC’s official purpose statement sounds pretty starry-eyed: “To empower a nation of dreamers and doers to build a better tomorrow for all.” But implied within that statement is to not only support growth in small business, but also a culture of innovation. It’s certainly something that the Canadian economy has been lacking from its SME community – and sorely needs now.

“When we look at highly innovative societies, SMEs are the heart of innovation,” Ms. Hudon said. “We need to bring entrepreneurship back to where it was a few years ago, when it was defined as the go-getters and the drivers and the market-shapers in solving problems.”