Canadian industry data reveals a recent trend in the falling number of medium sized firms (100-499 employees) in the Canadian economy – referred to as the ‘Missing M in SME’ problem.
The Globe & Mail raised the alarm in 2012 with the article Canada’s Vanishing Mid-Sized Firms based on BDC’s report on medium sized firms. According to the Globe & Mail Between 2007 and 2010, 527 mid-sized firms exited the economy representing a 3.6% reduction. Canada is managing to sustain about 40 large and multinational Canadian owned businesses as reported by the Institute For Competitiveness and Prosperity based on data reported in 2009 for firms exceeding $1B. The importance of small businesses to Canada’s economy has received more attention lately as reported by Industry Canada’s small business statistics because as of 2012 small businesses represent 98.2% of all Canadian firms with medium firms making up 1.6% of firms and large making up 0.2% firms. So if the economy is composed primarily of small firms why is ‘The Missing M’ problem important?
Why Is ‘The Missing M’ Problem Important
As the Globe & Mail observed medium firms ‘are more productive, hire more Canadians, and have more clout on the international stage‘ and in 2012 ‘mid-sized businesses, which represent 12 per cent of Canada’s gross domestic product and 16 per cent of the jobs’. Mid-sized firms grow into large firms that can compete better in the global economy. The Institute for Competitiveness and Prosperity trend data from 1985 to 2009 does reveal that the number of large firms has increased over this time period, but only slightly, as some firms have exited. Canada is an exporting country with about 75-80% of GDP derived from export trade so if Canada is not growing more medium sized firms the country’s growth will remain slow. Emerging economies represent tremendous opportunities for Canadian firms but if firms are not large enough to enter these markets and compete the benefits will go elsewhere.
What Is ‘The Missing M’ Problem
What is ‘The Missing M’ problem? Is it a company growth problem? Is it a national productivity or competitiveness problem? Is it the number of medium sized firms or is it the revenue contribution of the medium firms what matters? Was this a short-term phenomena as a result of the 2008 financial crisis? Is this a result of global economic structural change? ‘The Missing M in SME’ problem needs to be clarified.
What Is Causing The Missing M Problem
What is causing the ‘The Missing M’ problem? Is this phenomena because of the shift from goods production to service delivery economy? Or is it because of the pivot to a more resource-based economy from a manufacturing-based economy? How does this problem manifest itself in different industry sectors or different regions of the country? Is the Canadian economy comprised of more private firms whose data is more difficult to see? Does the problem reflect in other business measures such as R&D expenditure where there is a distinct ‘U-Shaped’ phenomena in Canadian industry data as reported in a previous post?
Various causes suggested, but not fully substantiated, include:
- Lack of business leadership growth ambition particularly internationally;
- Risk adversity;
- Preferences for ‘Life-Style’ companies;
- ‘Branch-Plant’ effects where foreign firms acquire mid-sized businesses to gain foot-holds;
- Canadian M&A activity;
- Inability to raise capital in medium revenue range;
- Investor liquidity influences;
- Management experience;
- Effects of international competition;
- Currency effects of a high Canadian Dollar;
- Tax policy somehow disadvantaging medium sized firms;
- Small domestic market size;
At the moment no one has fully connected the dots to reveal a clear understanding of the problem nor is there a sense of urgency to fix this problem. Canada’s future economic growth is dependent on the country solving this problem and increasing the number of medium sized firms.