Big Is Beautiful: Strengthening Growth and Competitiveness in the Canadian Economy

Robert D. Atkinson November 22, 2021
November 22, 2021
Report for the Macdonald-Laurier Institute: Instead of succumbing to the “small is beautiful, big is ugly” narrative, Canada must recognize the critical role large businesses play in a growing, competitive economy with high productivity and wages.

In recent years it has become de rigueur to proclaim that small business is good and big business is bad. Our politicians actively support and praise small- and medium-sized enterprises (SMEs). But the flip side of SME worship is the derision of big business. Increasingly, big business is the villain.

If only, the narrative goes, Canada’s Competition Bureau would show some courage and stop mergers, file more suits against “monopolists,” and break up existing companies, all would be well. Income inequality would decline. Wholesome “mom and pop” small businesses would thrive. The environment would be protected. And consumers and workers would be better off. This populist appeal may be seductive, but it’s also misguided and dangerous.

If Canada wants a growing, competitive economy with higher productivity and wages, policymakers need to recognize the critical role that large businesses play—and ensure that policies recognize and support that role. Among developed nations, large corporations outperform small businesses on virtually all economic and social indicators.

Consider wages: In Canada, one study has shown that large firms (more than 500 employees) pay their workers on average 44 percent more than small firms. Large firms can do so because, on average, they are more productive than small firms. What about job growth? According to Statistics Canada, from 2002 to 2020, small businesses increased employment at half the rate of large businesses (by 13 percent versus 26 percent). Large companies also outperform SMEs on a host of other economic and social measures, whether it’s employing female workers or being unionized.

Smaller firms are also less productive than larger firms. And in Canada, that problem is heightened—smaller firms in Canada are even less productive than similarly sized firms in the United States.

Despite the popular narrative is that small is better, size is undeniably a benefit in industries that require scale (banking is a good example) or innovation (where initial development cost is high), are network-based (such as utilities or transportation, with high fixed costs), or face global competition (where firm size can provide some defense against foreign advantages).

Small-is-good advocates are also concerned about industry concentration. And indeed, largely because of its relatively small population and GDP, Canada has long had higher rates of industrial concentration than the United States. Indeed, Canada’s Competition Bureau has asserted that concentration has grown to problematic levels in Canada. But there is no recent data from StatCan to support that claim, so it is difficult to assess whether concentration in Canada has grown or not. It has not in the United States.

Too many firms in Canada are sub-optimally small and increasing competition by limiting the ability of firms to get larger would have negative consequences for productivity. At the same time, there can be negative consequences from too much concentration, including higher domestic prices.

Keeping these factors in mind, Canada should:

  • Focus competition policy on conduct, not on structure. This means worrying less about the size of dominant firms than about specific anti-competitive conduct.
  • Expand the size of its markets and recognize that this country needs larger companies if it wants to compete effectively. One place to start would be to open up Canada’s aviation, financial and communications markets, at least to US entry.
  • Be careful about changing the current efficiencies and competitiveness defense in any review of mergers, where firms can defend proposed mergers on the basis of improved productivity and global competitiveness.
  • Resist the urge to bow to pressure from the activists and radically change competition law to meet new industry conditions.
  • Focus on policies that can help firms get more productive. For example, extending services to small farmers and small manufactures can help these firms embrace better technology and more productive work organizations
  • Embrace size neutrality, by treating all companies, large and small, the same. Having said that, an argument can be made for adopting policies that support and encourage new firms.

The “small is beautiful, big is ugly” narrative is becoming widespread and appears grounded in a broader anti-capitalist, anti-corporate animus. If policymakers succumb to those agitating for such a view, the fallout will be significant: lower productivity and wage growth, worse working conditions, reduced innovation, and declining global competitiveness. Canada should choose a different and more positive path by seeking ways to maximize productivity and competitiveness while at the same time ensuring that competitive forces remain robust.

Full report: Robert D. Atkinson, “Big Is Beautiful: Strengthening Growth and Competitiveness in the Canadian Economy” (Macdonald-Laurier Institute, November 2021).

Big Is Beautiful: Strengthening Growth and Competitiveness in the Canadian Economy