This article is based on a recent MLI paper titled, “Big is Beautiful: Strengthening growth and innovation in the Canadian economy.”
By Robert D. Atkinson, December 2, 2021
In recent years it has become de rigueur for politicians to make a show of praising small- and medium-sized enterprises (SMEs), while ignoring or attacking larger ones. In the stage production that is Canadian politics, big business is regularly cast to play the role of the irredeemable villain.
If only, the narrative goes, Canada’s Competition Bureau would show some courage and stop mergers, file more suits against “monopolists” and break up existing companies, all would be well. Income inequality would decline. Wholesome “mom and pop” shops would thrive. The environment would be protected. And consumers and workers would be better off. This populist tale may be seductive, but it’s also misguided and dangerous.
If Canada wants a growing, competitive economy with higher productivity and wages, policymakers need to recognize the critical role that large businesses play — and ensure that policies recognize and support that role. The reality is that in advanced economies, large businesses outperform small businesses on virtually all economic and social indicators.
Consider wages: according to a 2020 Statistics Canada study , large firms (with more than 500 employees) pay their workers on average 44 per cent more than small firms. Large firms can do so because, on average, they are more productive than small companies.
Large businesses also create more jobs. Statistics Canada data shows that, from 2002 to 2020, small businesses increased employment at half the rate of large businesses (by 13 per cent versus 26 per cent). Large companies also outperform SMEs on a host of other economic and social measures, including rates of women in the workforce and unionization.
Despite the popular narrative that small is better, size is undeniably a benefit in industries that require scale (banking is a good example) or innovation (where initial development costs are high), are network-based (such as utilities and transportation companies, which have high fixed costs) or face global competition (where firm size can provide some defence against foreign advantages).
Advocates for small businesses are also concerned about industry concentration. And indeed, largely because of its relatively small population and GDP, Canada has long had higher rates of industrial concentration than the United States.
The Competition Bureau has indeed asserted that concentration has grown to problematic levels in Canada. But there is no recent data to support that claim, so it is difficult to assess whether concentration in Canada has grown or not — although it has not in the United States.
Too many Canadian firms are sub-optimally small and increasing competition by limiting the ability of firms to get larger would have negative consequences on productivity. At the same time, there can be negative consequences from too much concentration, including higher domestic prices. So what should Canada do?
First, Canada should focus not so much on the size of dominant firms as on specific anti-competitive conduct. It should work to expand the size of its markets and recognize that this country needs larger companies in order to compete effectively.
It should also resist the urge to bow to pressure from the activists and radically change competition law to meet new industry conditions. On the positive side, Canada can help its small firms boost their productivity and embrace an agnostic approach to firm size. In other words, we can treat all companies, large and small, the same. Having said that, an argument can be made for adopting policies that support and encourage startups, as getting new companies off the ground can be very challenging.
Ultimately, competition and business development policies should be size-neutral: they should neither punish nor protect large firms on the basis of their size. This will help ensure our large firms can compete on a continental and global stage, while providing greater economic benefits for all Canadians.
The “small is beautiful, big is ugly” narrative is becoming widespread and appears grounded in a broader anti-capitalist, anti-corporate animus. If policymakers succumb to those agitating for such a view, the fallout will be significant: lower productivity and wage growth, worse working conditions, reduced innovation and declining global competitiveness.
Canada should choose a different and more positive path by seeking ways to maximize productivity and competitiveness, while at the same time ensuring that competitive forces remain robust.
Robert D.Atkinson is founder and president of the Information Technology and Innovation Foundation.