CANADA IS SET TO SCREW UP INNOVATION POLICY

On February 7, 2017 Canada’s Advisory Council on Economic Growth Released its report:

UNLOCKING INNOVATION TO DRIVE SCALE AND GROWTH

Unfortunately at least one of the key underlying assumptions is demonstrably false and therefore may have led the council to reach the wrong conclusions. Specifically:

“Small firms account for about half of business sector employment in Canada versus just over one-third in the United States.” — see page 4 of the report

I suspected that this assertion was false based upon my own analysis in 2012, when I was setting up my own accounting practice. At that time I took a look at US and Canadian statistics for employment and firm size, in order to gain a better understanding of the market. Surprisingly, the results showed me that the 2 countries were very similar. Predictably, the US had more very large businesses, at least in absolute terms. However there was also a relatively larger number of self-employed persons in the US.

Interestingly the US Census Bureau excludes nonemployer firms from their analyses:

“Nonemployer Statistics is an annual series that provides subnational economic data for businesses that have no paid employees and are subject to federal income tax. The data consist of the number of businesses and total receipts by industry. Most nonemployers are self-employed individuals operating unincorporated businesses (known as sole proprietorships), which may or may not be the owner’s principal source of income.

The majority of all business establishments in the United States are nonemployers, yet these firms average less than 4 percent of all sales and receipts nationally. Due to their small economic impact, these firms are excluded from most other Census Bureau business statistics (the primary exception being the Survey of Business Owners). The Nonemployers Statistics series is the primary resource available to study the scope and activities of nonemployers at a detailed geographic level. For complementary statistics on the firms that do have paid employees, refer to the County Business Patterns. Additional sources of data on small businesses include the Economic Census, and the Statistics of U.S. Businesses.”

Compare US and Canadian Employment By Firm Size — 2015

Note: US figures for nonemployer firms is based upon the total number of firms in 2008 (21,313,324) adjusted for the fact that as many as 3 million of these firms had more than one self-employed “employee”. (US self-employed numbers may vary between 17% and 19.7%.)

The definition of small business is also troubling and likely outdated. If you define small and medium enterprises (“SMEs”) as having fewer than 500 employees, you are left with a very small number of large businesses. In British Columbia, BC Stats uses 50 or more employees as the cut-off for large businesses. Using this definition, and including “non-employer firms”, there is virtually no difference between US and Canadian statistics:

Based upon their flawed analysis Canada’s Advisory Council infers that:

“This lack of scale accounts for 20 percent of the labour productivity gap between Canada’s business sector and that of the United States.”

Is there a labour productivity gap?

Probably.

However it clearly wasn’t attributable to differences in the relative size of employers. Unfortunately economic analyses are subject to the prejudices of those doing the analysis.

Small business owners and their advisers are invariably excluded from business advisory councils. They don’t have either the time or the “profile”. Predictably when governments appoint business advisory councils, they tend to appoint people that represent larger interests. CEOs from successful companies are over-represented and they will inevitably reflect their own interests in any analysis.

Government bureaucrats and academics would much rather rub shoulders with officials from important and successful companies. It makes them feel more important themselves.

But it doesn’t contribute to objective research and analysis.