Stirring the pot

Maybe small biz week is not the best time to bring this up but…

Still, running a small business can be challenging even in the best of times. Statistics Canada figures show that every year, roughly 150,000 new small businesses are started by Canadians and about 130,000 close down. Less than three-quarters of small businesses survive their first year on average across the country, and only about one-in-five survive until their ninth year.  Numbers are lowest in Atlantic Canada, with only 61 per cent of small businesses surviving their first year, and 15 per cent surviving to their ninth year. 

There has been considerable debate among economic developers in this region  – not that publicly for somewhat obvious reasons – whether or not the massive government effort to start and support small businesses in this region has helped or hurt the economy.  I heard a guy on the radio recently talking about the support for small business and it was almost comical – he literally was naming off all the agenices – Enterprises, BDC, CBDC, BNB, ACOA, HRSDC, programs for young entrepreneurs, for women entrepreneurs, for aboriginal entreprenuers, for older people, – I was wondering if the interviewer was going to question why there were so many groups all helping small businesses but he didn’t.

Anyway I own a small biz here and I have been clear onthis blog for five years that small biz play a vital role in the local economy filling niches and cranies in the local market and sometimes – a rare case – they actually break out and start offering products or services nationally – and a handful even breakout beyond the borders of Canada.

But the high rates of failure should cause policy makers to stop and think and the fact that all this money has been poured in and Atlantic Canada still remains among the weakest economes – structurally – in North America.    I think we should look long and hard at the symbiotic relationship between the small biz sector and larger firms in communities.  I think we should look long and hard at whether or not all the support to help firms that are just offering products/services locally might actually be distorting the local competitive enviornment leading to higher than average rates of bankruptcy.  I think we should study issues like wages, benefits, etc. in this context as well.

Everyone treats ‘small business’ with kid gloves – almost to the level of romanticization – without ever stopping to consider the broader policy impacts.  I am not opposed to supporting small business creation but having studied the data for years I want us to be more realistic about the role and what we can expect.  These people that believe you can replace the economic activity generated by a pulp mill closure by doling out a few million to local small businesses are nuts.

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4 Responses to Stirring the pot

  1. > These people that believe you can replace the economic activity generated by a pulp mill closure by doling out a few million to local small businesses are nuts.

    True.

    But no less nuts than the people who think you can make things OK by continuing to dole out money to the company that closed the pulp mill.

    I think, honestly, that the best thing here is to stop people from starting crappy small businesses. And certainly, not funding them.

    I mean, of this – “roughly 150,000 new small businesses are started by Canadians and about 130,000 close down” – I would be curious to know how many were supported and funded, and how many were a sign hung up in some guy’s garage.

    Of the 20,000 that made it, what percentage were supported by government assistance?

    I mean, maybe the reason so many businesses fail is that we don’t provide *enough* assistance – we only provide enough to generate the success of 20,000 of them.

    No doubt you wrote about this in 1994 or something, but I would be curious to know the track record of supported businesses versus the track record of unsupported businesses. *That* statistic – and not a raw number about failures – tells us the value of the government investments in small business.

    Meanwhile – yes – big businesses generate more economic activity. But Detroit didn’t attract the auto industry, it grew it. Atlanta didn’t attract Coke, it grew it. Silicon Valley didn’t attract the tech industry, it grew it.

  2. Tom Rivington says:

    I am no expert but maybe most businesses fail because they are trying to fil a niche that there is no viable business case for. Just because someone has a passion for some product or service doesn’t translate into a profitable business. I agree with David’s assetion on this blog that support (if any) should be directed to attracting large enterprise, this success will spawn demand for a wealth of smaller businesses that feed off the demands of that larger enterprise and the people it employs.

  3. Downes, good point. I suspect the success ratio of supported firms would be higher than the overall average (we know from the data that restaurants, for example, have among the highest failure rates but ACOA or the province would rarely fund a restaurant). My point is that at some point someone should do a system-wide analysis of whether or not the current approach has worked. Some economic developers have told me that if the government cut all small biz funding programs and efforts (moved it to banks, Chambers, CFIB, etc.) and focused on programs and services for a small group of gazelles – high potential firms – they would generate more success in the long term but I don’t think there is much data to support this either.

    Rivington’s point about the trickle down impact from the larger anchor employers to small biz is supported by data.

  4. Anonymous says:

    Right on David.

    Most of the agencies you talk about advocate small business support in part because their own jobs depend on it. Larger business slam the door in their face. Effectively, government has artificially created an economic development sector. There are so many people doing the same thing they now spend good portions of their time meeting with each other (take a look around at the next awards banquet) and there is even talk of creating yet another agency so as to create one stop shopping and ‘reduce the confusion” for the entrepreneurs.

    When something does not work, we re-brand and re-launch it but we never seem to kill the original initiative.

    Re support to small business; moot point now in New Brunswick. By virtue of the small business tax being eliminated (or at least the threshold raised so that by the time you pay tax you are no longer a small business) all small businesses are supported. They are also supported with other tax benefits (like writing off office space in your home, car etc.).

    However, the point is not to start a fight over which strategy is best; the point is that an out-of-proportion amount of resources are targeted at start ups. We need a multi-prong approach to ED that includes supporting of existing business so they can export and become larger and the attraction of new business.

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