A pervasive and unhelpful myth about the Canadian economy is that its productivity is lower than the United States' because our companies are generally smaller. It makes sense: smaller country; smaller companies. As a consequence, we have a policy mix that is tilted toward helping our greater mix of small companies.
Sadly, as with so many deep-abiding beliefs about the Canadian economy, there is no truth to it. And believing it doesn't help a bit.
Indeed the overwhelming majority of Canada's companies are smaller than 100 employees – 97.8 per cent of them in fact. That alone would make one believe that we have unusually many small companies. However, in the gigantic U.S., 98.2 per cent are smaller than 100 employees – proportionately even more than in Canada. It turns out that we have more medium-sized companies (1.9 per cent of our companies versus 1.5 per cent of theirs) and exactly the same proportion of large companies – those with 500 or more employees – at 0.3 per cent of our respective companies.
So America's companies don't actually skew larger. But if we look at employment, there are a lot more workers employed in big companies in America (50 per cent) than in Canada (36 per cent). That suggests that within that small slice of large companies, the American companies are generally larger than the Canadian companies.
But that doesn't turn out to be the case either. The Fortune 500 is the definitive annual list of the biggest companies in America – the 500 giants that clock in at more than $4.8-billion (U.S.) in revenues. These are really big companies! If our big companies were generally smaller than theirs, we would expect to find fewer than 50 companies in Canada – because our economy is roughly one-tenth the size of America – that would be big enough to fit into the Fortune 500. But we actually have 78 of them, all the way down to Rona. So we have more than our fair share of really big companies. How about the Fortune 200? Well, we have more than expected – 23 of them down to Brookfield. So we have more than our expected share of really, really big companies with more than $14-billion in revenues.
So how can America have so many more jobs in big companies with no more big, really big or really, really big companies? The answer is if you ask how many Canadian companies fit into the Fortune 74, companies with more than $38-billion in revenues, there are none. Seventy-four Fortune companies from Exxon Mobil at $453-billion down to Hess at $38-billion are bigger than our biggest, Manulife Financial.
The only size difference between the entire universe of Canadian and U.S. companies is that a tiny fraction of large U.S. companies – 74 of the over 18,000 large companies in America – are of a 'ginormous' size not found in Canada. What does this all mean for Canada and Canadian policy? We don't know all the answers yet but are really motivated to figure them out. However, a few things are evident already.
First, preliminary indications suggest that these 'ginormous' American corporations are especially valuable to the U.S. economy. One indicator of the potential of these corporations to drive innovation and productivity is their spending on R&D, not a perfect indicator but a useful one. In a global study of R&D spending giants, it turns out that both in America and around the world, 25 per cent of the 320 biggest R&D spenders in the world are of ginormous size (above $38-billion in revenues) and they account for 55 per cent of the R&D spending of the sample. So a wildly disproportionate amount of the world's corporate R&D spending is done by firms of a size that Canada just doesn't currently have.
Second, pro-small-business policies predicated on the notion that we are a small-business economy, such as tax breaks for small businesses, have no logical basis and should be very carefully and thoroughly reviewed. We are definitively not a small-business-oriented country.
Third, we have to think a lot more clearly and carefully about policies that attempt to restrict the size of companies in this country. We denied to right to merge to Royal Bank and Bank of Montreal as well as TD Bank and CIBC. That prevented Canada from having an approximately Fortune 50-sized company in a combined RBC/BMO. A merger of BCE and Telus was considered beyond the pale. These policy decisions are not simple and one-dimensional and bigger is not always better. But we need to think about them in the context of the economy we really have; not the one that we mistakenly think we do.
Roger Martin is Dean of the Rotman School of Management at University of Toronto and Jim Milway is the Executive Director of the Institute for Competitiveness & Prosperity. They are the authors of Canada: What It Is, What It Can Be (Rotman UTP Publishing, 2012).
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