In December, when Kellogg's announced that it would be closing its doors, London's economy was hit with another devastating blow.
The cereal plant, based in London since 1924, will stay open until the end of this year. But by the end of 2014, more than 500 people will have to search for work or live off of a severance package that will probably be small. This follows other recent or impending closures in the city and Ontario more generally.
In February 2012, more than 450 workers found themselves out of work when Electro-Motive Diesel closed. In 2007, the McCormick-Beta Brands candy factory shut down, leaving around 100 employees without a job. And the list goes on. Heinz in Leamington. Ford in Talbotville. Smucker's in Dunnville and Delhi. Lance Canada Ltd. in Cambridge.
There are many reasons for these closures. A high Canadian dollar is one answer. Energy and labour costs, both relatively expensive when compared to other markets such as Mexico, Asia and, increasingly, the southern United States, also provide an explanation. Changing consumer trends are important too: the popularity of yogurt over breakfast cereal has taken a toll on Kellogg's sales and has been cited as a reason behind the London closure.
Yet, even if all of this was reversed, it is highly unlikely that new companies would move in to save us. In 2013 alone, more than 33,000 factory jobs were lost and this trend is likely to continue.
Technological advances have made automation the rule in factories large and small. The Kellogg's plant, for example, utilizes computer-run automation in every stage of production, from the mixing of grains to the packaging of cereal boxes. Because of this, even if it were to remain open, many Kellogg's workers would have probably been let go anyway.
This sad truth is not confined to the factory floor. Instead, human labour is being made redundant -- albeit unevenly -- in a variety of sectors, with both blue and white-collar workers facing troubling questions about their future. In the U.S., for instance, lawyers are starting to be replaced by high-powered software that has the ability to scan thousands of documents quickly and cheaply. If this continues -- and there is no evidence to suggest it will not -- we can presume that the same will happen in Canada soon.
Obviously, these problems cannot be dealt with by doing away with technology. Human beings have become reliant on machines. Many positives have come about because of this: increased crop yields, reliable electricity, improved construction, better transportation, the internet and so much more.
Other knee-jerk reactions, such as mass reductions in wages, ought to be avoided too. After all, good paying jobs are what allow people to pay the rent, buy a home and put food on the table. Once those jobs fade, people suffer and economies shrink. Retraining programs, for their part, are unlikely to help much either.
Instead, the most constructive way forward is to encourage the kind of economic development that has the best chance of ensuring lasting prosperity. This is where the importance of small business comes in. Not everyone can become an entrepreneur. Even those who choose this path will face difficulties and often fail. Yet, with just a few success stories, a broad impact of economic growth can be felt, one that could help the individuals who lost their jobs because of a mass closure and the communities they belong to.
Although estimates vary, according to Industry Canada, close to eight-million Canadians work for a small business, defined as a business that employs 100 people or less. All together, this represents 70 per cent of our country's total private labour force. In contrast, only 10 per cent work for large companies such as Kellogg's and others like it, which employ more than 500 people. On top of this, collectively, small businesses contribute just over 30 per cent to the GDP.
If small businesses are so essential to our economy, then encouraging their growth is an obvious answer to the economic malaise that some southwestern Ontario cities -- London and Windsor are good examples -- are going through.
The challenge, however, is that starting or expanding a small business can be very difficult. Approaching the bank for a loan is not always an option because banks require collateral in the form of a home, cash savings, stocks or bonds, GICs, etc. When such means are not available -- and for many Canadians, especially young people, they are not -- funding sources dry up in a hurry.
Taking the company public via the stock market, for example, is not a realistic option because this is so expensive and time consuming. Offering potential investors the chance to buy shares is also difficult and the rules vary from province to province. In Ontario, only wealthy individuals, such as "accredited investors" (those with an annual income of at least 200,000 dollars and one million in liquid assets on hand) can gain an ownership stake. The same is true in other provinces, although exceptions exist. In Quebec and the Western provinces, for instance, family and friends can invest and be given equity in return, even if they are not wealthy.
One possible answer to this problem is crowdfunding. In general, crowdfunding is used to fund various projects including disaster relief, charity projects, film and music production and scientific research. Small businesses have also had the opportunity to take advantage of crowdfunding, but in limited ways.
Although some have benefited from gaining access to donations through sites such as Kickstarter, regulations in the U.S., Europe and Canada have, until recently, prevented equity crowdfunding, whereby investors are given a percentage of the business they invest in. The result is that businesses have not been able to raise as much money as they could have, preventing their development and expansion.
The good news is that this is starting to change. Following steps in this direction by the U.S., Australia and the U.K., regulators in Saskatchewan a few weeks ago opened the door to a framework that will legalize equity crowdfunding. To protect against fraud, the key rules are that businesses can raise no more than 300,000 dollars annually and the limit on investment is capped at $1,500. Contributors must also only invest in Saskatchewan-based firms. Ontario appears set to bring in something similar in the coming months.
There are good reasons to be concerned about crowdfunding. The possibility that some could scheme money from mom-and-pop angel investors is very real, although strong regulation could help prevent against this. What is more dangerous, though, is continuing to place hope in an economic model that will lead us nowhere. A real economic recovery will not come about through crowdfunding alone. Nevertheless, it is an important piece of the puzzle and deserves a serious look.
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