Small and Medium-Sized Enterprises in the Prairie Provinces

GENERAL CHARACTERISTICS

SMEs in the Prairie Provinces

With a population of more than 5.5 million people, the Prairie region economy is based mainly on oil and gas (especially Alberta, which has the fastest growing economy in Canada), agriculture, minerals and forestry, and Saskatchewan has an emerging biotechnology sector. According to Statistics Canada's 2004 Survey on Financing of Small and Medium Enterprises, there were approximately 1.4 million commercial (for-profit) small and medium-sized firms in Canada. Of these, approximately 22 percent operated in the Prairie provinces, a proportion somewhat higher than the Prairie region's 17 percent share of the 2004 Canadian population. Table 1 shows the regional distribution of population, SMEs and Canadian gross domestic product (GDP).

Table 1
Distribution of SMEs, Gross Domestic Product and Population across Canada, 2004

Region	SME Share	GDP Share	Population
	(% Canada)
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004. Statistics Canada, CANSIM, Table 051-0001, Estimates of Population, by Age Group and Sex, Canada, Provinces and Territories. Statistics Canada, CANSIM, Table 384-0002, Gross Domestic Product, Expenditure-Based, by Province and Territory.
Atlantic Provinces	6	6	7
Quebec	22	20	24
Ontario	36	40	39
Prairie Provinces	22	21	17
British Columbia	15	12	13
Territories	<1	<1	<1
Canada Total	100	100	100

The incidence of business formation in the Prairie provinces ranged from 64 establishments per 1000 population of the province in Manitoba to 94 establishments in Alberta and 96 establishments in Saskatchewan per 1000 population of the provinces. These rates compare with the national average of 71.5 establishments per 1000 population of Canada.

The age distribution of SMEs in the Prairie provinces was lower than the national average. Approximately 10.2 percent of firms in the Prairie region first started selling goods or services between 2002 and 2004 compared with the national average of 11.2 percent.

High Percentage of Self-Employed Throughout the Prairie Provinces

Size of firm is an important aspect of SME financing. Medium-sized and large firms are more likely to seek external financing than small firms. It is also widely believed that small firms are less able to obtain financing than large firms and that small firms are more likely to turn to informal sources of capital, including personal finances. Figure 1 compares the size distribution of Prairie region SMEs with the national average. It shows that SMEs in the Prairie provinces were predominantly small businesses, with 97 percent of firms employing fewer than 20 people. Self-employed individuals accounted for a relatively large fraction (58 percent) of SMEs in the Prairie provinces compared with approximately half of all firms nationwide. Likewise, self-employed individuals were considerably more prevalent in the Prairie provinces, comprising 14.6 percent of all workers compared with the national average of 11.9 percent.³

Industrial Composition of Prairie Region SMEs

The industry sector is also an important determinant of SMEs' needs for, and access to, financial capital. Figure 2 compares the sectoral distribution of firms in the Prairie region with the national average distribution of SMEs by sector. It shows that firms in the primary and agricultural services sectors were relatively heavily represented in the Prairie provinces, with correspondingly lower concentrations of firms in other sectors. The incidence of knowledge-based firms in the Prairie region was 5 percent, which compares with 7 percent of firms in Ontario, 6 percent of firms in British Columbia and 5 percent of firms in Quebec.⁴

Characteristics of SME Owners in the Prairie Region

Table 2 compares the profiles of primary owners of Prairie region SMEs with national averages. The data show that the profile of SME owners in the Prairie provinces was generally consistent with the national average.

Table 2
Profile of Entrepreneurs, Comparison between Prairie Provinces and Canada, 2004

Prairie Region Entrepreneurs	Characteristics	National Average
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
14 percent owned by women, 57 percent owned by men and 29 percent are equal partnerships	Gender	16 percent owned by women, 64 percent owned by men and 20 percent are equal partnerships
5 percent visible minority, 5 percent disabled and 1 percent are recent immigrants	Minority Status	7 percent visible minority, 4 percent disabled and 1 percent are recent immigrants
4 percent are under 30, 88 percent are between 30 and 64, and 8 percent are over 65 years	Age	3 percent are under 30, 87 percent are between 30 and 64, and 10 percent are over 65 years
92 percent speak English, 1 percent speak French and 7 percent speak a non-official language	First Language	67 percent speak English, 19 percent speak French and 14 percent speak a non-official language
10 percent have fewer than 5 years, 15 percent have 5 to 10 years and 75 percent have more than 10 years	Managerial Experience	12 percent have fewer than 5 years, 19 percent have 5 to 10 years and 69 percent have more than 10 years
53 percent urban-based and 47 percent rural-based	Location	72 percent urban-based and 28 percent rural-based
7 percent export outside Canada	Export Activity	8 percent export outside Canada

Prairie Region Business Growth and Innovation

Approximately 35 percent of SME owners in the Prairie provinces intended to expand their businesses within the next two years compared with 39 percent nationally. Developing a growth strategy is contingent on identifying drivers of, and obstacles to, growth. Firms across Canada reported productivity, commercialization, succession planning and access to financing as the top drivers for business success. One growth strategy is exporting and 7 percent of Prairie region business owners exported products or services outside Canada in 2004, a proportion not statistically different from the national average of 8 percent of SMEs.

Another means of achieving business growth is through innovation. From 2000 to 2004, small, medium-sized and large firms throughout the Prairie provinces funded nearly $5 billion in research and development (R&D), accounting for 39 percent of R&D expenditures in the region (see Figure 3).

According to the 2004 Survey on Financing of Small and Medium Enterprises, 24 percent of SMEs in the Prairie provinces reported some investment in R&D during 2004. This rate is among the lowest of all regions in Canada, but is comparable to the national average of 29 percent. Only 3 percent of Prairie region SMEs devoted more than 20 percent of their investments to R&D (not statistically different from 4 percent of firms nationally). Past research suggests that SMEs that accessed equity financing were, in general, more likely to conduct R&D activities than firms that sought debt financing.⁵

Business owners were more likely to identify as obstacles to growth external factors (such as current tax levels and finding qualified labour) than internal causes (such as low profitability and insurance rates). Table 3 shows the relative importance of various obstacles to growth as perceived by SME owners. Generally, Prairie region perspectives on obstacles to growth were in line with national views; however, Prairie region respondents were relatively more likely to mention low profitability as an obstacle.

Table 3
Perceived Obstacles to Business Growth and Development, 2004

		Prairie Region SMEs	SME National Average
		%
Source: SME Financing Data Initiative, Statistics Canada, Survey on Financing of Small and Medium Enterprises, 2004.
External to the Firm	Levels of Taxation	50	47
	Finding Qualified Labour	39	37
	Instability of Consumer Demand	35	36
	Government Regulations	34	33
Internal to the Firm	Insurance Rates	35	36
	Low Profitability	46	38
	Obtaining Financing	20	20
	Management Capacity	17	13

³ Statistics Canada, Labour Force Survey. www40.statcan.ca/l01/cst01/labr66a.htm

⁴ Knowledge-based firms are defined using Industry Canada's categorization of industries in the science and technology field and those considered "high knowledge" based on measures of research and development activity.

⁵ Baldwin, J., G. Gellatly and V. Gaudreault. "Financing Innovation in New Small Firms: New Evidence from Canada," Statistics Canada, May 2002.