Have We Been Looking for Economic Growth in All the Wrong Places?

No matter where you live in Canada, you’ve probably done one of the following things recently: a) purchased a coffee from a local café; b) driven a car with parts from the Canadian manufacturing sector; or even c) hired a digital advertising firm or other professional service for yourself or your business needs. As different as these purchases seem, they all have something in common: they are made possible by a small business—maybe even one of the 35,000 small businesses in Canada that are projecting high growth in the next three years.

Canada’s economic growth in recent years has been troubling. Simply put, we are our underperforming peer countries, and we are underperforming relative to our own potential. Without significant changes, we risk falling further behind. Contrary to popular belief, it’s not only the startups, the high-tech sector, and big businesses that can help Canada emerge from its growing economic slump—it’s also the often-overlooked small businesses across a range of sectors, from professional services to manufacturing to accommodation and food services. Our future prosperity depends critically on creating an environment where small businesses can scale up.

The Untapped Potential of Small Businesses

A recent report found that while only 3.3% of small businesses in Canada expect to achieve annual growth of 20% or more over the medium term (which would qualify them as “high-growth firms”), this actually exceeds the 2.3% for medium- and large-sized businesses. So, if we’re looking for growth, we need to start looking at small firms. 

High-growth firms have a disproportionately positive impact on innovation, job creation and economic expansion, and given the ubiquity of small businesses—representing 98% of all firms in Canada—this massive group could have an outsized impact at a time when our economy needs it most. 

The research identifies four key factors that matter for businesses to scale: financing, exporting, technology, and policy. Policy is the one factor that’s outside a small business’s control, and it’s also the one that wields significant influence over the availability, accessibility, and adoption of the first three.
While the private sector desperately needs to lead this push, the government has a critical role to play in helping this segment succeed.

The Challenge of Scaling a Business

The process of scaling a business can be even more challenging than the initial startup phase and often requires more capital to support additional hiring and technology adoption. Financing can be the make-or-break factor. While there are various options available, younger firms and firms owned by underrepresented groups—two common characteristics of small businesses projecting high growth—have a harder time getting funds, as they face higher borrowing costs and more restrictive lending conditions. As a result, some small businesses turn to alternative financing resources with greater flexibility but higher costs, such as marketplace lending or government-backed loans.

Another shared characteristic among high-growth small businesses is trade. Yet, despite making up 90% of Canadian exporters, small businesses account for only 18% of total export value. Exporting provides a crucial pathway for small businesses to scale by expanding their market reach, driving down their unit costs, and increasing and diversifying their revenue streams. Digital tools like e-commerce have enabled Canadian businesses to trade interprovincially and reach new global markets and customers, but many small businesses struggle to understand foreign market regulations, manage complex logistics, or secure the necessary financing to support their expansion strategy.

Businesses that invest in technology—whether to upgrade systems, automate processes or adopt digital tools, like artificial intelligence or e-commerce tools—also tend to improve productivity and lower costs. Almost one-third of small businesses report that adopting new technologies has improved their operations. However, many small businesses, especially those outside the traditional tech sector, struggle to invest in these tools, lacking skilled employees or capital.

Small Businesses Are Key to Prosperity

There are a wide variety of federal, provincial and local programs and entities that support small businesses. However, their efficiency and success depend on their ability to identify and address clear market failures. By simplifying financing, reducing regulatory burdens, fostering export capability and prioritizing worker upskilling, governments can create a business environment that promotes growth. 

Helping small businesses realize their growth potential will go a long way in addressing our chronic economic malaise. While the government needs to focus on improving the policy environment, you can grab your next coffee with pride, knowing that you and the business you’re supporting are part of the economic solution.