10/09/2012 10:47 EDT | Updated 12/09/2012 05:12 EST

Why Size Does Matter


Let's face it -- size matters.

When it comes to performance and innovation, smaller ones often underwhelm.

I'm talking about companies, of course.

We all like small firms. All of us -- people, voters, consumers -- whatever the hat you wear. Governments, too, want to show us they help small firms rather than big corporations. Take any government program that supports the industry. Most of the time, they are designed to help small and medium-sized companies, not large multinationals.

There's nothing wrong with lending a hand to small firms. One observation, though: economies dominated by small firms are often sluggish. They are less innovative, because large multinationals are the ones with the large R&D budgets. They are less productive, because large companies have specializations and are able to offer cheaper prices.

Large firms also pay more taxes. Look at the big banks, for example. Remember the reaction when the federal government decided to go ahead with the last decrease of the Corporate Income Tax just before the last election? Another candy for the big banks, said the lefties. I understand the reaction, but year after year, the Canadian financial sector accounts for more or less one-quarter of all taxes paid by businesses in Canada. It is significant.

It is indeed difficult to take the issue of company size out of the current Canadian debate over innovation. The Canadian economy is dominated by Small and Medium-Sized Enterprises (SMEs), with 98 per cent of our businesses having less than 500 employees and 95 per cent with less than 100. This, in itself, is not a problem. The problem is that these companies don't grow. A big part of the reason they don't grow is that our governments want to keep them small.

Take the Scientific Research & Experimental Tax Credit (commonly referred to SR&ED). It offers an enhanced tax credit for eligible R&D activities to SMEs (or Canadian Controlled Private Corporations [CCPC's]) of 35 per cent. For large firms, the credit is 20 per cent. It offers a refundable tax credit to SMEs -- a benefit not available to large firms.

These rules also largely apply to provincial R&D tax credits, too. This is fine, but why would small companies with a very high level of R&D (let's say in sectors like aerospace, information technology, medical equipment) want to grow? To lose their tax return on R&D investments? The current system not only keeps our companies small, but also encourages our large companies to keep their R&D partners and suppliers small.

Unfortunately, the incapacity to grow our small firms has a negative impact on our capacity to innovate. And we all know that what matters in innovation is to make innovation matter.

Making innovation matter means bringing it from prototyping and testing (what we do very well) to mass production and commercialization (what we don't do as well). Mass production can only happen if a firm has achieved a certain size, a certain production capacity, a certain maturity in its marketing methods, and a certain quality of after-sale service.

J.A. Bombardier invented a great snowmobile in his garage. He sold some prototypes to the post, the police and the health system back in the 1940's-50s. It's a remarkable tale of a great Canadian inventor, but Bombardier is what it is today because it grew from that business in his garage. It developed a mass production capacity and a world-class distribution chain. Bombardier was able to turn these prototypes into snowmobiles sold by thousands to the growing middle-class of the 1960's and 70's.

In the end, some of us will always oppose the interests of small firms to the ones of larger companies. I wish life was that simple. The reality is that our objective should be to grow these small businesses into large ones -- not to keep them small.

In the economy, as in many other sectors, size does matter.