SMALL BUSINESS SUFFERING FROM ‘STAGNATING PRODUCTIVITY.’

OTTAWA • A messy tangle of regulatory requirements and growing tax burden in Canada continues to hinder private sector productivity, with policy dysfunction weighing particularly heavily on small businesses, according to a new study.

In a report Monday, the Organization for Economic Co-operation and Development (OECD) found “stagnating productivity and weak business dynamism are a concern” in Canada, due to a host of regulatory and financing shortfalls.

So-called “entrepreneurial dynamism” refers to the ability for new small businesses to enter the market and force out older and weaker firms. The OECD found that Canada has the highest number of older firms among 15 other developed countries, with business dynamism gradually waning since the 1980s.

“Barriers to foreign direct investment and the regulatory protection of incumbents are higher than in many other countries,” the report said, adding that governments should focus on “reducing market failures and better harmonizing provincial legislation.”

Obstacles in inter-provincial trade are particularly troublesome for small companies, the report said. Costs tied to complying with varying regulations in each province amount to the equivalent of a five-to-15 per cent tariff for smaller firms, compared to less than five per cent for larger firms.

Air transport, courier services and telecommunications were deemed to be the most in need of reform, largely due to caps on foreign investment. The report also said a lack of interconnectedness between provinces in the electrical grid “is largely a result of geography and the uneven distribution of the population, but it also reflects regulatory fragmentation."

Observers say policy shortcomings underlie a deeper challenge facing smaller businesses in Canada.

“There are some market distortions that need to be dealt with,” said Ted Mallett, vice-president and chief economist at the Canadian Federation of Independent Business, which represents over 11,000 firms.

Policy failures come in addition to a complicated tax regime that is difficult for small businesses to navigate. Small companies tend to be more burdened by added administrative costs than larger ones, Mallett said.

The CFIB was particularly critical of a move by Canada’s Finance department last year to limit some tax breaks for small businesses, and has suggested Canada instead focus on a broader market reform to reduce administrative costs across the board.

“We wish the clock could be rolled back a year, and pre-empt the previous approach the government wanted to take,” Mallet said of Ottawa’s small business tax reform last year.

After an uproar, the federal government promised to lower the small business tax rate in coming years to nine per cent from the current level of 10.5 percent.

Business investment in innovation in Canada has continued to lag other countries. The OECD found that business spending on research and development is below the OECD average at 0.8 per cent of GDP, despite public spending on R&D above the OECD average (also 0.8 per cent of GDP). Business investment in the U.s. is roughly two percent of GDP.

Canadian small business is also slow to adopt new information and communications technologies, with only 13.4 per cent of companies using resource planning software in 2015. Adoption rates among small firms in Germany was much higher in Germany (50 per cent) and Belgium (44 per cent).