The cost of regulatory compliance is often identified as an obstacle to innovation and growth such as was observed in the 2009 Industry Canada SIBS study. The Small Business Branch of Industry Canada recently shed further light on regulatory compliance cost issue in a small business regulatory compliance cost report.

Small Business Regulatory Compliance Cost Report Conclusions

The SBB study was based on a survey of  10,477 Canadian SME respondents in 2011 looking at the regulatory compliance costs from federal, provincial, and municipal regulations. The main conclusions were:

1. Regulatory compliance cost was $4.76B in 2011 or $3,500 per business, $370 per employee, or 0.29% business sector revenues.
2. The real cost of regulatory compliance decreased by 0.3% since 2005 as a share of economic resources.
3. 6% of SMEs considered regulatory compliance to be a serious obstacle to success.
4. 72% of SMEs did not even consider it to be a moderate obstacle to success.
5. On average SMEs submit two government forms per month taking them on average 3 hours per month to complete or less than an hour per week.
6. Firms consider paperwork to be the most time consuming with tax related requirements remaining the biggest challenge.
7. Small businesses continue to bear a disproportionate share of the national burden of regulatory compliance and regulatory burden initially increases as a firm grows and hires employees before decreasing once economies of scale are reached.
8. 65% of firms indicated cost of regulatory compliance was at an acceptable level in 2011 and 8.5% that cost was much higher than an acceptable level.

Compliance cost categories used were: payroll remittances; record of employment; T4 summary/Individual T4s; Workers Compensation Remittances; Workers Compensation Claims; Federal/Provincial Business Income Tax Filing; Federal/Provincial Sales Taxes; Corporate Tax Installments; Corporate Registration; Mandatory Statistics Canada Surveys; Municipal Operating Licences and Permits; Provincial Operating Licences and Permits; and Other Federal , Provincial, and Municipal Regulations.

Regulatory Issues Impeding Innovation

The regulatory compliance cost study is useful to understand the regulatory internal cost of taxation, permitting, and labour related regulations, particularly for labour intensive service industries, but really does not help to understand the market specific regulatory costs facing product/service SMEs that could impede innovation.

In terms of innovation, regulatory costs of certification, safety, and environmental compliance are not faced by most of these SMEs who are business-to-consumer and business-to-business service industries. The sectoral distribution of respondents were: 10.7% manufacturing; 19.5% retail trade; 45.7% professional, scientific, and technical servicers; 7.9% accommodation and food services; and 16.2% other services.  Potential high growth SMEs who would face market facing regulatory costs impeding innovation would fall within the manufacturing (10.7% of respondents) and possibly some percentage of the professional, scientific, and technical services (45.7% respondents) but even these are likely not end market facing.

Unfortunately the study did not look deep enough into innovation impeding market regulations or the impact were averaged out from the disproportionate number of service companies. The cost category ‘Other Federal, Provincial, and Municipal Regulations’ either does not appear in most tables of results or are a negligible amount of the total which may have been due to the survey structure.

The root cause of innovation impeding regulations are market segment specific (ie. air transportation, rail transportation, medical devices, personal telecommunications, etc) with complex interactions and market dynamics requiring a very different survey to the one prepared by SBB pertaining to the internal costs of taxation, permitting, and labour related regulations. Although useful, these internal regulatory costs are likely only a small portion of regulatory costs of market facing firms who adopt innovation as a strategy.