The Importance of Small Business to the Canadian Economy

Entrepreneurship and small business ownership are important aspects of the Canadian economy, contributing significantly to job creation, economic growth, and innovation. In Canada, small businesses are defined as those with fewer than 100 employees, and they account for roughly 98% of all businesses in the country. A small business is one that is independently owned and operated, exerting little influence in its industry.

Indigenous-Owned Businesses

Why Are Small Businesses Important?

However, small business constitutes a force in Canada and other economies. The millions of individuals who have started businesses have helped shape the business world as we know it today. Some small business founders like Henry Ford and Thomas Edison have even gained places in history. Others, including Bill Gates (Microsoft), Mike Lazaridis (Research in Motion), Steve Jobs (Apple Computer), and Larry Page & Sergey Brin (Google), have changed the way global business is done today.

Aside from contributions to our general economic well-being, founders of small businesses also contribute to growth and vitality in specific areas of economic and socio-economic development. In particular, small businesses do the following:

•    Create jobs
•    Spark innovation
•    Provide opportunities for many people, including women and minorities, to achieve financial success and independence

In addition, they complement the economic activity of large organizations by providing them with components, services, and distribution of their products. Let’s take a closer look at each of these contributions.

Job Creation

The majority of Canadian workers first entered the business world working for small businesses. Although the split between those working in small companies and those working in big companies is about even, small firms hire more frequently and fire more frequently than do big companies. Why is this true? At any given point in time, lots of small companies are started and some expand. These small companies need workers and so hiring takes place. But the survival and expansion rates for small firms are poor, and so, again at any given point in time, many small businesses close or contract, and workers lose their jobs. Fortunately, over time more jobs are added by small firms than are taken away, which results in a net increase in the number of workers.

The size of the net increase in the number of workers for any given year depends on several factors, with the economy being at the top of the list. A strong economy encourages individuals to start small businesses and expand existing small companies, which adds to the workforce. A weak economy does just the opposite: discourages start-ups and expansions, which decreases the workforce through layoffs.

Innovation

Given the financial resources available to large businesses, you’d expect them to introduce virtually all the new products that hit the market. Yet according to the United States Small Business Administration (SBA), small companies develop more patents per employee than larger companies. During a recent four-year period, large firms generated 1.7 patents per hundred employees, while small firms generated an impressive 26.5 patents per employee ^[1]. Although similar statistics are not available for Canada, our business practices tend to align with our neighbours in the United States.

Small business owners are also particularly adept at finding new ways of doing old things. In 1994, for example, a young computer science graduate working on Wall Street came up with the novel idea of selling books over the Internet. During the first year of operations, sales at Jeff Bezos’ new company—Amazon.com—reached half a million dollars. In less than twenty years, annual sales had topped $107 billion ^[2]. Not only did his innovative approach to online retailing make Bezos enormously rich, but it also established a viable model for the e-commerce industry. In 2018, Amazon’s model is creeping into the physical. Shortly after entering the grocery market by acquiring Whole Foods, it prototyped a cashier-less and checkout-less store where your purchases are charged against your Amazon account via an app. It hopes to revolutionize grocery shopping just as it did book buying.

Why are small businesses so innovative? For one thing, they tend to offer environments that appeal to individuals with the talent to invent new products or improve the way things are done. Fast decision-making is encouraged, their research programs tend to be focused, and their compensation structures typically reward top performers.

According to one SBA study, the supportive environments of small firms are roughly thirteen times more innovative per employee than the less innovation-friendly environments in which large firms traditionally operate. ^[3]

The success of small businesses in fostering creativity has not gone unnoticed by big businesses. In fact, many large companies have responded by downsizing to act more like small companies. Some large organizations now have separate work units whose purpose is to spark innovation. Individuals working in these units can focus their attention on creating new products that can then be developed by the company.

Opportunities for Women

Small business is the portal through which many people enter the economic mainstream. Business ownership allows individuals to achieve financial success, as well as pride in their accomplishments. While the majority of small businesses are still owned by white males, the past two decades have seen a substantial increase in the number of businesses owned by women.

Canada’s 2018 budget had continued investment in women entrepreneurs. On February 28, 2018, the Financial Post reported: “By far, the largest net new impact on Canada’s entrepreneurial class is the $1.65 billion in new financing being made available to women business owners, to be delivered over three years through the Business Development Bank of Canada and Export Development Canada.”

What Industries Are Small Businesses In?

If you want to start a new business, you probably should avoid certain types of businesses. You’d have a hard time, for example, setting up a new company to make automobiles or aluminum, because you’d have to make tremendous investments in property, plant, and equipment, and raise an enormous amount of capital to pay your workforce. These large, up-front investments present barriers to entry.

Fortunately, plenty of opportunities are still available. Many types of businesses require reasonable initial investments, and not surprisingly, these are the ones that usually present attractive small business opportunities.

While there are several industries that attract small businesses in Canada, here are some of the most popular ones:

1. Retail – Retail is a popular industry for small businesses in Canada, as there are many opportunities to open stores in various locations. With a diverse population, Canada has a strong consumer market, which makes it an attractive location for small businesses.
   .
2. Hospitality and Tourism – With its natural beauty, Canada is a popular destination for tourists. The hospitality and tourism industry offers many opportunities for small businesses, from hotels and restaurants to adventure tourism companies.
   .
3. Professional Services – Professional services such as accounting, consulting, and legal services are in high demand in Canada. These services can be easily offered by small businesses that can provide specialized services and tailored solutions to clients.
   .
4. Construction and Trades – The construction industry is a major part of the Canadian economy, and there is always a demand for skilled tradespeople. Small businesses in the construction and trades sector can specialize in areas such as carpentry, electrical work, plumbing, and more.
   .
5. Information Technology – Canada has a thriving technology industry, with many startups and small businesses working in the field. From software development to web design, there are many opportunities for small businesses to thrive in the tech sector.

Why Do Some Businesses Fail?

If you’ve paid attention to the occupancy of shopping malls over a few years, you’ve noticed that retailers come and go with surprising frequency. The same thing happens with restaurants—indeed, with all kinds of businesses. By definition, starting a business—small or large—is risky, and though many businesses succeed, a large proportion of them don’t. The most recent, official statistics for Canada, from 2022, report the following for the births and deaths of SMEs: Industry Canada. Note: These statistics do not deal directly with entrepreneurs but with small and medium enterprises or SMEs.

As disappointing as these statistics on business survival are, some industries are worse than others. If you want to stay in business for a long time, you might want to avoid some of these risky industries. Even though your friends think you make the best pizza in the world, this doesn’t mean you can succeed as a pizza parlor owner. Opening a restaurant or a bar is one of the riskiest ventures (and, therefore, start-up funding is hard to get).

You might also want to avoid the transportation industry. Owning a taxi might appear lucrative until you find out what a taxi license costs. It varies by city, but in New York City the price tag is upward of $400,000. No wonder taxi companies are resisting Uber and Lyft with all the energy they can muster. And setting up a shop to sell clothing can be challenging. Your view of “what’s in” may be off, and one bad season can kill your business. The same is true for stores selling communication devices: every mall has one or more cell phone stores so the competition is steep, and business can be very slow. ^[4]

Businesses fail for any number of reasons, but many experts agree that the vast majority of failures result from some combination of the following problems:

• Bad business idea – Like any idea, a business idea can be flawed, either in the conception or in the execution. If you tried selling snow blowers in Hawaii, you could count on little competition, but you’d still be doomed to failure.
  .
• Cash problems – Too many new businesses are underfunded. The owner borrows enough money to set up the business but doesn’t have enough extra cash to operate during the start-up phase when very little money is coming in but a lot is going out.
  .
• Managerial inexperience or incompetence – Many new business owners have no experience in running a business; many have limited management skills. Maybe an owner knows how to make or market a product but doesn’t know how to manage people. Maybe an owner can’t attract and keep talented employees. Maybe an owner has poor leadership skills and isn’t willing to plan ahead.
  .
• Lack of customer focus – A major advantage of a small business is the ability to provide special attention to customers. But some small businesses fail to seize this advantage. Perhaps the owner doesn’t anticipate customers’ needs or keep up with changing markets or the customer-focused practices of competitors.
  .
• Inability to handle growth – You’d think that a sales increase would be a good thing. Often it is, of course, but sometimes it can be a major problem. When a company grows, the owner’s role changes. He or she needs to delegate work to others and build a business structure that can handle the increase in volume. Some owners don’t make the transition and find themselves overwhelmed. Things don’t get done, customers become unhappy, and expansion actually damages the company.

Why Do Some Businesses Fail?

The COVID-19 pandemic has had a significant impact on small businesses in Canada. Here are some of how small businesses have been affected:

1. Closure of Businesses – Many small businesses were forced to close temporarily or permanently due to government-mandated lockdowns and restrictions to control the spread of the virus. According to a survey conducted by the Canadian Federation of Independent Business (CFIB) in April 2021, 181,000 Canadian small businesses are at risk of closing permanently due to COVID-19.
   .
2. Decreased Revenue – The pandemic has resulted in decreased revenue for many small businesses, particularly those in the hospitality, tourism, and retail sectors. Many small businesses have reported a decline in sales due to reduced demand and consumer confidence.
   .
3. Increased Costs – Small businesses have had to incur additional costs to implement COVID-19 safety measures, such as purchasing personal protective equipment and investing in digital technologies to enable remote work and online sales.
   .
4. Job Losses – The pandemic has led to significant job losses in Canada, particularly in the small business sector. According to Statistics Canada, small businesses lost 556,500 jobs between February 2020 and February 2021.
   .
5. Government Support – To help small businesses cope with the impact of the pandemic, the Canadian government has implemented various support programs, including the Canada Emergency Wage Subsidy (CEWS) and the Canada Emergency Business Account (CEBA).

Overall, the COVID-19 pandemic has been a major challenge for small businesses in Canada. Many have struggled to stay afloat, while others have been forced to close permanently. However, government support programs have helped to mitigate some of the impacts and provide assistance to small businesses in need.

Explore