Canadian small- and medium-sized enterprises (SMEs) are falling behind on innovation and productivity as they face multiple barriers to investing in new technologies, according to a new report by Desjardins Economics.
The report, launched in honour of Small Business Month, found that while SMEs generally understand the benefits of investing in new technologies and processes, a lack of technical knowledge and skills, a talent shortage, and financing challenges hinder them from innovating.
Innovative new services and processes can help SMEs reach more customers and increase revenues while cutting costs, thereby boosting profits.
“Canada has a much larger share of SMEs or employment in SMEs than other countries do,” said Randall Bartlett (pictured), senior director of Canadian economics at Desjardins.
“We determined that there's a real opportunity to further support SMEs, not just to develop and produce innovation on the goods and services side, but also to adopt innovation in their processes, so they can scale much more rapidly and meet a larger consumer base.”
One key finding in Desjardins’ report is that Canada’s SMEs have historically failed to keep pace with the productivity gains of their international peers, particularly in the US. They have also trailed larger Canadian companies.
Part of the reason is that public and private investment in research and development in Canada lags other economies such as Israel, South Korea, the US, and some European economies, said Bartlett.
“We also have fewer researchers as a share of employment than other leading countries do, and it’s not so much on the public research side, but more on the private side,” he told Insurance Business.
Innovative work in artificial intelligence or clean technology is primarily concentrated in the university and post-graduate sectors, which tend to be more robust outside Canada.
“We don't have the same innovation and R&D ecosystem in the private sector as other countries do, and though that's changing and evolving in Canada, it’s really slow to catch up,” Bartlett said.
The Desjardins report also found that sectors with a larger share of employment in SMEs are generally the least productive, which has dragged national productivity.
Five sectors have emerged to have low productivity levels but an exceptionally high share of employment in SMEs: agriculture, accommodation and food services, wholesale and retail trade, construction, and other services (such as house cleaning and auto repair).
The most productive industries in Canada are natural resources, including mining, oil and gas extraction, and utilities. But Desjardins noted that these highly productive sectors account for a declining share of economic activity.
Bartlett explained the productivity gap among high-SME fields: “Much of it comes down to capital investment required in some sectors over others,” he said.
“For instance, we know that SMEs dominate fields such as food services, retail, auto repair, and construction [because] they have lower barriers to entry in terms of capital investment.
“Retail sales, for example, saw an enormous increase in productivity during COVID-19 because of the move to online sales, but online sales have broadly plateaued coming out of the pandemic.
“Construction productivity, on the other hand, has stagnated in the last two decades, while productivity in the broader Canadian economy has generally trended higher. There’s an opportunity, mainly because of the affordability crisis, to identify ways of standardizing construction techniques, using prefabricated modular homes … [or other innovations] to increase construction sector productivity.
“There's a real opportunity for these sectors to catch up not just with the broader Canadian economy but with similar sectors in other advanced economies.”
While the Desjardins report stressed the importance of well-targeted and well-funded public policy, the insurance industry also has a role in helping lift Canadian SMEs.
“Insurance is an information-rich sector that’s always attempting to better understand the risks of companies and individuals. I think better understanding those risks can go a long way in helping them bring down costs,” Bartlett said.
For instance, construction is one of the sectors facing significant impacts from climate change and needs increasingly innovative solutions to make housing wildfire resistant.
“If individuals knew that their insurance costs would be lower if they adopted these new building technologies, that would go a long way in boosting innovation in the construction sector and making new technologies more competitive there,” he added.
What are your thoughts on the innovation and productivity challenges Canadian SMEs face? Please share them in the comments.
