Small business ‘gazelles’ – Western Canada’s key economic driver

At our recent Capital Ideas conference, Jock Finlayson, well known BC economist and Executive Vice President of Business Council of BC, reminded us just how important the small and medium-sized businesses are to the western Canadian economy.

Small businesses’ GDP contribution and percentage of employment in western Canada is considerably higher than the national average. In BC, 98 per cent of its businesses are categorized as small (less than 50 employees.) Finlayson told the audience that while the vast majority of small businesses don’t grow, a critical few are superstars who create the wealth and new jobs in a market economy.

They are growth, export and R&D focused. They depend on external financing beyond owner’s equity, angel funding and bank loans. They need to raise capital, including equity, in order to grow.

The Kauffman Foundation, a US organization dedicated to understanding the impact of entrepreneurship, calls these companies “gazelles.” They tend to be young, 10 years or less, and are widely distributed across industry sectors, not all in ‘high tech’ as you might expect.

A 2010 study estimates that the top performing five per cent of US firms – measured by rates of employment growth — creates two thirds of all new net jobs, and the top one per cent are responsible for 40 per cent of net job creation.

While there is no comparable data in Canada, we have some research that says that the highest percentage of new jobs comes from what they call hyper growth and strong growth firms. (Hyper growth is defined as having a 150 per cent increase in jobs over the past four years, and strong growth represents a 50-150 per cent increase.) Only .5-1 per cent of Canadian small and medium sized companies (SMEs) can be described as ‘gazelles’ and another 17-18 percent are strong growth firms.

BC is a hotbed for strong and hyper growth firms—they are responsible for more than 100 per cent of this province’s net private sector job growth, a far higher share than in Ontario for example. (This means that the rest of the small and medium-sized businesses, in aggregate, actual experience net job declines over time as some firms disappear and others reduce their payrolls.)

Jock Finlayson concluded his presentation by stating that the key challenge for policy makers is to find ways to provide financing for these high growth firms given the disproportionate benefits they provide for our economy. They should also look at tax policy, the regulatory environment and how best to nurture and reward entrepreneurship.

This is clearly a message that BC and western Canadian policy makers need to hear, given our dependence on small business as a whole. For more on this subject, read Jock’s article published in the Globe and Mail.