The Importance of Small Business to Our Economy

I recently came across two resources that quantify the importance of small business to the economy. Statistics Canada’s report titled The Contribution of Small and Medium-Sized Businesses to Gross Domestic Product and TD Economics Special Report titled Small Businesses will Reclaim the Driver’s Seat Behind the Economic Engine.

The authors of the Statistics Canada report estimate that small and medium sized enterprises (SMEs) with less than 500 employees account for 54.2% of the gross domestic product (GDP) in Canada and 50.7% in the United States. This contribution to GDP rises further depending on the industry. For example, construction, health and accommodation industries have even larger shares of GDP among the small and medium businesses.

The authors of the TD Economic report use U.S. data and estimate that these SMEs are responsible for just under half of total employment. They further state that 85% of net job creation in the first two years of recovery when coming out of the last three recessions took place among these businesses.

Typically, SMEs serve specialized, niche markets that larger businesses cannot or choose not to compete in. SMEs can also be more flexible in production processes and are capable of offering personalized products that larger businesses cannot effectively offer, an observation echoed in the Statistics Canada Report. However, for SMEs to be truly innovative and increase production and jobs requires financing to support improvements to production processes or to create specialized products.

A key message that I gained from these resources is that as Canada and the US weave our way back through economic recovery, our local communities must have the small business support mechanisms (e.g., funding capital resources and venture capital networks) in place to foster growth in this sector of the economy.