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Mid-sized businesses—those with between 100 and 500 employees—are essential to the health of any developed economy. They provide jobs on a scale that smaller companies can’t, bring valuable innovations to market and make disproportionately big contributions to GDP. Which makes it all the more alarming that mid-sized businesses in Canada are floundering.

A new study entitled “The Scale Up Challenge: How Are Canadian Companies Performing?”  by the Business Development Bank of Canada (BDC) presents a startling snapshot of mid-sized businesses. Analyzing businesses in Canada between 2001 and 2013, BDC senior economist Sylvie Ratté found that mid-sized companies’ share of the total number of firms has been in steady decline. Moreover, those that exist are fairly stagnant: More than 82% remain mid-sized year over year. Less than two percent grow into large companies (with greater than 500 employees); nearly 13% shrink back to small-business status (with fewer than 100 employees). Some 3.4% declare bankruptcy.

BDC president and CEO Michael Denham discussed the study, the state of mid-sized businesses in Canada, and what businesses need to do today to scale up effectively.

PROFITguide: Your new study does not present the most flattering portrait of mid-sized businesses in Canada today. Broadly speaking, why do you feel mid-sized ventures are failing to thrive?

Michael Denham: By and large, the research does show that we’re not making progress as a country with respect to increasing the percentage of medium-sized companies here. The proportion of businesses that are growing to a hundred or more employees has be going down since 2001. It’s a very consistent picture that we’re painting around Canada’s inability to produce these mid-sized firms.

There are a number of reasons for that. I think one a lot of Canadian companies that have good prospects do end up getting sold before they reach their full potential; they’re acquired too early. Many remain too securely focused on their local markets, as opposed to other provinces and other other countries. And I think many of them are not investing adequately. As a result, they’re not achieving all of the productivity they could be.

To your point, the study identified three characteristics of mid-sized companies that do grow into large businesses: They tend to be relatively more productive than their industry competitors, they are present in at least three Canadian provinces and they invest in fixed tangible assets. The latter stood out to me, as it seems to go against the trend of companies trying to become more lean and asset-light. In that context, why do you think capital investments continue to make such a difference?

It’s a good question, because of course there are certain segments and industries where you don’t need physical assets—a lot of the tech firms, services businesses, etc. But Canada still has an enormous number of manufacturing companies, and wholesaling companies, and logistics companies and distribution companies. These businesses represent a large percentage of the total number of companies we have in the country, and all by definition are asset-intensive.

So, we do find if you’re in an asset-intensive business, the key way to become productive and stay competitive is to make sure you continue to modernize and refresh your asset base. It’s really important because. We see that even those successful companies that have systematically eliminated waste, which is what lean is all about, tend to do it in the context of having high-quality infrastructure and high-quality physical plants.

One of the key causes for concern identified in the report is that very few companies move beyond the 500-employee mark. If mid-sized businesses are so productive and valuable, why is it important for them become huge?

Our focus is, frankly, more on getting small companies to that medium-size [level], with more than 100 employees, because that’s the sweet spot. The metric is the need for that segment of company size to grow disproportionately.

That said, it is good for Canada, I think, to have a number of [large] companies that have that are significant players globally in their industries. That has all sorts of knock-on effects locally, in terms of ecosystems and clusters and all that. So, I think it is important for the country to have these global leaders.

The study also identified a sharp uptick in the number of businesses with between one and four employees between 2001 and 2013. What’s the key to get these tiny ventures thinking bigger?

A lot of our clients are quite small. And one of the challenges that we have is separating those clients those that really want to make a difference, grow and become significant, versus those that are, frankly, happy and successful being quite small.

It’s why business creation is is so important. It’s good for Canada I think to have a higher rate of business creation, and if you look at [business creation] rates in Canada, they were up a little bit in 2015, but have been significantly down since 2005. I think the more we can increase the rate of business creation, the more, by definition, we’’l be creating that segment within those small companies that have aspirations to grow.

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