Small Business | The Canadian Encyclopedia


Small Business

Small Business

Small business has many definitions, but generally it refers to the many business firms that are small compared to the relatively few giant firms (characterized by multi-locational operation, large numbers of hired employees, ownership by publicly traded stocks and management by professionally trained salaried managers). Economic activity has become concentrated in the frequently conglomerate, usually foreign-owned MULTINATIONAL CORPORATIONS, the wealth and power of which sometimes exceeds that of most nation-states. By contrast, small businesses are typically local operations owned privately by a family or by a small number of shareholders, some of whom also manage the operation, and staffed by a small number of hired workers (if any) in addition to the owner-managers.

By any criterion some 90% of all businesses are small, but a further distinction can be made between small and medium-sized businesses. The international definition of a small business is one which employs fewer than 50 employees, although other sources define firms with up to 20 employees as being small. In certain sectors (eg, construction business, personal services, that do not lend themselves to standardization and centralized management), small businesses are still responsible for a large part of economic activity.

Role in the Economy

Recent data suggest that small business currently accounts for about 30% of Gross Domestic Product in Canada, and this proportion is growing. An estimated 928 200 firms, equivalent to about 97.5% of the total number of firms in Canada, have less than 50 employees. In 1998, companies with less than 50 full-year equivalent employees maintained a labour force of around 3.4 million, representing about 33.4% of total private-sector employment.

Small businesses produce goods for which there is no mass market - specialty items, high-quality and hand-crafted items, custom-made goods and components that require detailed design and production. Small business does much of the wholesaling and retailing where the sales and service requirements (owing to the nature of the goods or to the absence of high-volume customer traffic) are high, and in certain cases, particularly construction, services and agriculture, where individual application is at a premium, small business continues to hold its own. The most important nonstandardized types of goods and services are those that are new and innovative; despite the commercial technological successes of gigantic, concentrated research and development efforts, a large number of the most fundamental advances have been developed by individuals working alone or in small firms.

The indispensable role of small business in the Canadian ECONOMY is likely to expand. In recent years, small businesses have been the largest creator of new jobs. Since 1989, 75% of job growth has been through self-employment, and this trend is expected to continue in future years. With the long-term decline in some major industries, Canada will be turning more to innovative small businesses to create new international markets for specialized goods and services.

Characteristics of Small Business

Small businesses vary greatly from one another in size, lines of business and type of organization. Most businesses begin as small firms. The difficulties and myriad details of setting up require all the attention of the entrepreneur, and securing adequate financing is usually a difficulty. It is variously estimated that about 50% of all new businesses fail within 5 years of their creation and do so most often as a result of limited capital. Because smaller businesses are undercapitalized they rely heavily on banks for financing, which leaves them peculiarly vulnerable to recessions and management error. Ironically, large firms like DOME PETROLEUM or MASSEY-FERGUSON may lose millions of dollars and still survive. Nevertheless, it is vitally important to the economy that new firms are formed regularly because frequently new ideas or processes can only realize development in a new firm.

Small business has had to overcome the general feeling by both the public and the government that large businesses are more efficient and progressive. Only in the 1970s has it developed a national voice to represent its concerns before government and the general public. The Canadian Federation of Independent Business, formed in 1971, grew to 96 000 members by 1999. In addition, improved business data have revealed the growing economic role of small business. For example, small businesses continued to create jobs through the 1982-83 recession when larger companies were shedding workers in record numbers. Even in the subsequent economic recovery, large firms continued to "downsize" while small business expanded. Small business employees report the highest levels of job satisfaction and public credibility. Consequently, governments are introducing policies more favourable to entrepreneurship and small business.

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