C.D.Howe_Institute_SME_2015

Institut C.D. HOWE Institute

Conference Report

Driving Canada Forward:Enhancing SME Growth

March 5, 2015

Statement of Motivation 1

Conference Agenda 2

Biographies of Speakers 3

Conference Participants 10

Conference Summary 12

Presentations 15

Follow–Up Activities 27

The Institute’s Commitment to Quality 29

C.D. Howe Institute Draft Publication 30

Thank You and Contacts 46

Notes 47

Recent C.D. Howe Institute Publications Back Inside Cover

Contents

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Statement of Motivation

Small and medium-sized enterprises (SMEs) play a critical role in the Canadian economy, accounting for nearly 70 percent of the total private labour force in 2012. Canadian governments focus considerable attention on supporting the SME sector. However, there is a critical need to ensure that the wide range of policies being utilized to support the sector are both achieving their objectives, and providing an adequate return on investment.

To ensure continued national economic growth, policies must work to bolster these institutions. What should the government be doing to encourage success of SMEs? What do fair incentives look like? What are the barriers to growth?

On March 5, 2015, with the gracious support of Industry Canada, the Institute held an invitation-only conference in Toronto entitled Driving Canada Forward: Enhancing SME Growth. The off-the-record event brought together senior policymakers, notable academics, venture capitalists, and entrepreneurs to delve into viable policy options. The conversation was held under Chatham House Rules to encourage frank conversation. This report covers the content and findings of the conference and contains a list of follow–up activities that the C.D. Howe Institute plans to pursue.

Please note that the contents of this report were prepared exclusively for Industry Canada. As the conference was held under Chatham House Rules and the publication included is in draft form, the report is not for external circulation or citation.

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Conference Agenda

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Essential Policy Intelligence / Conseils indispensables sur les politiques

C.D. Howe Institute Special Seminar, March 5, 2015

Driving Canada Forward: Enhancing SME Growth

Agenda

Reception and RegistrationWelcoming RemarksPresented by Duncan Munn, Senior Vice President and Chief Operating O�cer, C.D. Howe Institute

Session I – Growing SMEs: �e Contribution of SMEs to the EconomyIn any given year, SMEs provide a large share of both job creation and job destruction. How should we view the role of small �rms, new �rms, and fast growing �rms?Presenters:• Shereen Benzvy Miller, Assistant Deputy Minister of Small Business, Tourism and

Marketplace Services, Industry Canada• Philip Walsh, Chair, Entrepreneurship & Strategy Department, Ted Rogers School of

Management, Ryerson University• Julia Deans, Chief Executive O�cer, Futurpreneur CanadaPanel discussion and Q&A (moderated by Finn Poschmann, Vice President, Policy Analysis, C.D. Howe Institute)

Break and Refreshments

Session II – What Is Holding Us Back? �e Barriers to SME GrowthCanadian small businesses report that they have di�culty seeking market funding. �ere are multiple potential sources of funding for small businesses, ranging from venture capital to equity investment to debt. What is the rational for governments to intervene in venture capital markets? What is the evidence of government venture capital policy a�ecting �rms?Presenters: • Doug Cumming, Professor in Finance and Entrepreneurship, Schulich School of Business,

York University• Paul Buron, Executive Vice President and Chief Financial and Risk O�cer, Business

Development Bank of Canada • Elmer Kim, Managing Director, Roynat Equity PartnersPanel discussion and Q&A (moderated by Ben Dachis, Senior Policy Analyst, C.D. Howe Institute)

9:00 am – 9:10 am

9:10 am – 10:10 am

9:40 am – 10:10 am

10:30 am – 11:30 am

11:00 am – 11:30 am

8:30 am – 9:00 am

10:10 am – 10:30 am

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Agenda

Lunch

Session III – From the Ground Up: Growth in the Eyes of the EntrepreneurHow do �rms themselves view the opportunities to grow? What are the potential barriers they face as they grow, and what are the economic costs of those barriers? Do policies create unintended consequences? �is session will explore the barriers entrepreneurs face and how they overcome these obstacles.Presenters:• John Lester, Executive Fellow, University of Calgary, School of Public Policy• Ben Dachis, Senior Policy Analyst, C.D. Howe Institute• Victoria Lennox, Co-Founder & CEO, Startup Canada, Founder of NACUEPanel discussion and Q&A (moderated by Duncan Munn)

Wrap Up and Closing RemarksPresented by Ian Bandeen, Co-Founder and Vice-Chairman, NACO

Sponsored by

12:15 pm – 1:15 pm

1:15 pm – 1:30 pm

12:45 pm – 1:15 pm

11:30 am – 12:15 pm

Conference Agenda

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Speaker Biographies

SHEREEN BENZVY MILLERShereen Benzvy Miller, M.A., LL.B, is the Assistant Deputy Minister, Small Business, Tourism and Marketplace Services at Industry Canada.

Ms. Benzvy Miller joined the federal public service in the late 1990s when she was recruited by the Correctional Service of Canada for her experience as a human rights lawyer. She worked with CSC until 2008 when she became the Director General responsible for the O�ce of Small and Medium Enterprises and Client Engagement in the Acquisitions Program at Public Works. She played a pivotal role in bringing the perspectives of suppliers and government buyers together to help federal procurement meet the needs of all parties: suppliers, the government, and Canadians.

Shereen was instrumental in the introduction of e-strategy initiatives including the launch of buyandsell.gc.ca and of a new approach to procurement embodied in the Canadian Innovation Commercialization Program (now referred to as BCIP), a program that allows the Canadian government to buy pre-commercialized innovations from Canadian companies.

She brought these experiences with her to Industry Canada where she continues to work within government to reduce barriers for small and medium enterprises wishing to do business in Canada.

Shereen is a mother of two and actively involved in championing the rights of persons with disabilities.

DUNCAN MUNNDuncan Munn is Senior Vice President and Chief Operating O�cer of the C.D. Howe Institute. He joined the Institute in 2000, holding increasingly senior roles culminating in his appointment as Sr. VP and COO in 2008. He oversees the daily a�airs of the Institute as well as initiatives and special projects, and plays a leadership role in the strategic direction of the organization.

He is also the Chair of the Board at Alterna Savings, a full-service �nancial services �rm with $2 billion in assets under management. He studied at the University of Toronto where he won the Gordon Cressy, JS Woodsworth and Woodsworth Cup awards and has previously served a number of organizations in a voluntary leadership capacity including Youth Challenge International (Director), �e Etobicoke Easter Seals Society (as Chair) and the George Hull Centre for Children and Families (as a Director).

Apart from his work with the Institute and in the voluntary sector, he has business interests in an investment management �rm focused on real estate.

Session I – Growing SMEs: �e Contribution of SMEs to the Economy

Welcoming Remarks

Biogr aphies of Speakers (Listed in order of appearance)

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Biogr aphies of Speakers

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Speaker Biographies

JULIA DEANSJulia Deans is the Chief Executive O�cer of Futurpreneur Canada (formerly the Canadian Youth Business Foundation), the only national non-pro�t organization providing �nancing, mentoring and support tools to aspiring business owners aged 18-39. Futurpreneur Canada and its 3000 volunteer mentors and other partners have helped 7500 young people launch start-ups in Canada.

Julia joined Futurpreneur Canada in January 2013 with a track record of success in the corporate, entrepreneurial, non-pro�t and public sectors. She started her career as a lawyer, practicing law with Torys LLP in Toronto and Hong Kong, before creating a successful legal recruitment business in Singapore. From 2005 to 2012, she was CEO of the CivicAction – a coalition of thousands of senior leaders tackling major social, economic and environmental challenges through large-scale summits and collaborative projects. In 2012, she chaired Ontario’s Expert Roundtable on Immigration, helping develop the province’s �rst-ever immigration strategy.

Julia is Co-Chair of the International Women’s Forum (Toronto), a trustee of the Canada Post Community Foundation, and an advisor to Artscape. She is a former board member of Luminato and the Living City Foundation and a past advisor to many organizations including the Mowat Centre for Policy Innovation and the Hague Process on Refugees and Migration. She has been awarded the University of Toronto’s Arbor Award and recognized as a Woman of In�uence 2012 Canadian Diversity Champion. Most recently she was named 2014 Canada’s Most Powerful Women: Top 100 Award Winner.

Julia is a graduate of Queen’s University (political studies), Columbia University (public administration), Osgoode Hall Law School, and Harvard Business School Executive Education. She is quali�ed to practice law in Ontario, the United Kingdom and Hong Kong.

PHILIP WALSHDr. Walsh is currently Chair of the Entrepreneurship & Strategy department at the Ted Rogers School of Management and undertakes policy research into the commercialization of energy technology innovation at Ryerson’s iCUE. Prior to joining academia in 2003, he founded a consultancy providing services to energy utilities, governmental and municipal agencies, and various energy consuming organizations, some of whom he continues to consult for today. Phil is a John Dobson ACE Fellow, a Fellow of the Ryerson Entrepreneurship Research Institute and a member of the Ryerson Institute for the Study of Corporate Social Responsibility. He holds a B.Sc. from Queen’s, an M.B.A from the Ivey School of Business and a Ph.D. from Bradford University.

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Speaker Biographies

DOUGLAS CUMMINGDouglas Cumming, J.D., Ph.D., CFA, is a Professor of Finance and Entrepreneurship and the Ontario Research Chair at the Schulich School of Business, York University. His research interests include venture capital, private equity, hedge funds, entrepreneurship, and law and �nance.

He is a Co-Editor of Entrepreneurship �eory and Practice, and has been a guest editor for 12 special issues of top journals. He has published 90 articles in leading refereed academic journals, such as the Journal of Financial Economics, Review of Financial Studies, and the Journal of International Business Studies.

He is the coauthor of Venture Capital and Private Equity Contracting (Elsevier Academic Press, 2009), and Hedge Fund Structure, Regulation and Performance around the World (Oxford University Press, 2013). He is the Editor of the Oxford Handbook of Entrepreneurial Finance(Oxford University Press, 2012), the Oxford Handbook of Private Equity (Oxford University Press, 2012), and the Oxford Handbook of Venture Capital (Oxford University Press, 2012).

His work has been reviewed in numerous media outlets, including Canadian Business, the National Post, and �e New Yorker. He is a research associate with the Bocconi University Paolo Ba� Center for Central Banking and Financial Regulation (Milan), Groupe d’Economie Mondiale at Sciences Po (Paris), Capital Markets CRC (Sydney), Venture Capital Experts (New York), Cambridge University ESRC Center for Business Research (Cambridge UK), Center for Financial Studies (Frankfurt), Amsterdam Center for Research in International Finance, and the University of Calgary Van Horne Institute. He has also consulted for a variety of governmental and private organizations in Australasia, Europe and North America.

Session II – What is holding us back? e barriers to SME growth

FINN POSCHMANN Finn Poschmann graduated in economics from Carleton University in Ottawa in 1986 and is Vice President, Policy Analysis at the C.D. Howe Institute, where he has held a variety of positions since January 1998.

For more than a decade previous, he was at the Parliamentary Research Branch in Ottawa, where he held a number of research positions principally involved with providing economic analysis and advice to Parliamentarians and Standing Committees.

He has worked in numerous areas within the �eld of economics, but has primarily been concerned with public �nance and taxation and federal-provincial relations. He is particularly interested in the distributional impact of taxation and in the use of microsimulation tools in the design of tax policy, but has also worked on monetary policy issues and disparate public policy questions. Recent publications have dealt with public-private partnerships, federal and provincial tax and �scal issues, the tax treatment of retirement savings, and Canada’s exchange rate policies.

Moderator: Session I


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Speaker Biographies

ELMER KIM Elmer Kim is a Managing Director at Roynat Equity Partners. Elmer has been investing in small-to medium-sized enterprises since 1995 with Whitecastle Investments Limited, Whitecap Venture Partners, Whitecastle Private Equity Partners and currently with Roynat Equity Partners. His successful investing experience spans numerous industries such as industrial (Turtle Island Recycling), telecom (Broadband Networks Inc.), food (Bento Nouveau Inc.) and �nancial (Equity Financial Holdings Inc.).

He currently sits on the boards of Doc-It Inc. (document management software), Carbon60 Networks (cloud based hosting company), Skytrac Systems Ltd (aviation �ight data management), NetSet Communications (rural wireless internet service provider) and Redberry Restaurants (Burger King and Pizza Hut).

Elmer is currently a board of director member of Canada’s Venture Capital and Private Equity Association. On the side, Elmer has been a contributing weekly panelist on CBC News Network’s Saturday morning business show “�e Bottom Line” for more than �ve years.

PAUL BURONPaul Buron was appointed Executive Vice President and Chief Financial O�cer in 2006, and also became CRO in 2015. He is responsible for �nance, risk management and treasury, as well as corporate strategy and planning. In the fall of 2011, Mr. Buron was also appointed Interim Executive Vice President, Financing and Consulting. For the following year, he was responsible for �nancing, consulting, corporate �nancing, global expansion services for entrepreneurs, and operations support across the bank, in addition to his CFO responsibilities.

Mr. Buron has over 30 years of experience in �nance. Before joining BDC, he held leadership positions in major corporations, such as Société générale de �nancement du Québec, Donohue Inc. and the TVA Group Inc., where he assumed responsibility for television operations and regional stations in addition to his role as Senior Vice President and Chief Financial O�cer.

He holds a Bachelor of Business Administration from HEC Montréal and is a member of the Ordre des comptables agréés du Québec.

Moderator: Session II

BENJAMIN DACHISBenjamin Dachis is a Senior Policy Analyst at the C.D. Howe Institute. He started with the C.D. Howe Institute in 2006 as a Research Fellow and also has experience with a major U.S. think tank. He returned to the C.D. Howe Institute as a Policy Analyst in January of 2008.

Dachis has an Hon. BA in Economics from the University of Toronto, an MSc from the London School of Economics, where he was awarded the George and Hilda Ormsby prize for his dissertation, and an MA in Economics from the University of Toronto. He has written on municipal �nance, transportation, tax, energy, environmental and labour policy. He is a member of the 2012 Insight Grants Economics Committee for the Social Sciences and Humanities.


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Speaker Biographies

VICTORIA LENNOXVictoria Lennox is a Canadian social entrepreneur, commentator, program architect and policy advisor with a track record of creating meaningful political and policy inroads to advance entrepreneurship. As the co-founder and CEO of grassroots non-pro�t Startup Canada and the founder and President Emeritus of UK-based Charity NACUE, Victoria is recognized by the UNDP and EU as a foremost expert in entrepreneurship education; ecosystem and program architecture, governance, development and implementation; and fuelling entrepreneurship movements and awareness campaigns. Victoria contributes actively on the global stage as the founder of Startup Generation; a catalyst of the Startup Nations; through speaking at global forums; advising more than 20 youth enterprise organizations; and, by supporting colleges and universities in countries across the world in enhancing student entrepreneurship. She is the �rst Canadian and one of the youngest recipients of the Queen’s Award for Enterprise Promotion on the recommendation of the British Prime Minister; is the recipient of the UK’s ‘Enterprise Support Network Builder Award’ and ‘Overall Enterprise Champion of the Year Award’ and has been recognized as a ‘Top 30 Under 30’ by Real Business Magazine, ‘One to Watch’ by Spectator Business, and as one of Canada’s ‘Top 30 Entrepreneurs’ by Pro�t Magazine. Victoria completed her MSc. Global Governance & Diplomacy at Oxford University in 2008, before becoming the �rst woman President of Oxford Entrepreneurs. She has an undergraduate degree in Political Science and Governance & Public Policy from the University of Ottawa.

BENJAMIN DACHISSenior Policy Analyst, C.D. Howe InstituteFor full biography please see previous page.

JOHN LESTERJohn Lester is an Executive Fellow with �e School of Public Policy at the University of Calgary, Canada. He is a former federal government economist whose last public service assignment was Director of Research for the Expert Panel Review of Federal Support to Research and Development. Prior to that assignment, John managed the Tax Evaluations and Research Group at the Department of Finance Canada. Since leaving the public service he has published papers with the School of Public Policy, the Canadian Tax Journal and Canadian Public Policy on the Canadian government’s expenditure management system (including evaluation policy) as well as bene�t-cost evaluations of the federal government’s investment tax credit for R&D, its largest R&D grant program and tax credits for foreign location shooting of �lms. His most recent paper, published by the School of Public Policy, is An International Comparison of Tax Assistance for R&D: Estimates and Policy Implications, jointly with Jacek Warda.

Session III – From the Ground Up: Growth in the Eyes of the Entrepreneur


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Speaker Biographies

IAN BANDEENIan Bandeen is a �nancial consultant specializing in capital markets. A Founding Director in 2002 of the National Angel Capital Organization (NACO), Ian sits on their Executive Committee and is both a Vice-Chairman as well as Chairman of their Finance Committee. He also sits on the Ontario Securities Commission’s Small and Medium Enterprises Committee.

In 2001, Ian was the co-founding Chairman of CNSX Markets Inc., operator of both the Canadian Securities Exchange (CSE) as well as Pure Trading, and served as their CEO from 2005 until July 1, 2011. CSE was the �rst new stock exchange in Canada in over 70 years. Pure Trading is a facility of CSE and was the �rst visible alternative market system for the trading of equity securities listed on other exchanges. �e arrival of Pure Trading served as the e�ective catalyst for the evolution of the Canadian capital markets into the global realm of multi-market, high-speed trading.

Prior to this, Ian co-founded the Canadian Mortgage-Backed and Asset-Backed Securities markets in 1986 and 1990 respectively. He retired in November, 1999 from his role as Managing Director & Global Head of Securitization and Structured Finance at BMO Nesbitt Burns Inc. Additionally, Ian was a member of the Bank of Montreal’s Capital Management Committee as well as the Asset Liability Committee.

From 1996 to 2005 Ian was a Director at the Robarts Research Institute where he served as Chairman of their Business Development Committee and as such oversaw their various commercialization initiatives. He served as a Director of the Toronto International Film Festival Group from 2001 to 2013 and sat on their Finance Committee. Ian is a member of the Advisory Board for the Faculty of Law at McGill University as well the Hot Docs Cinema Advisory Committee. A past member of the British-North American Committee, Ian is a long standing Trustee of the S.M. Blair Family Foundation as well as a proud member of Canada Company.

Ian completed an Honours BA (Economics) from Queen’s University, an L.L.B. and B.C.L. from McGill University, was admitted to the Ontario Bar in 1987 and remains a member in good standing of the Law Society of Upper Canada. Married with four children, he resides at Lorne Hall in Toronto.

Wrap Up

Sponsored by

DUNCAN MUNNSenior Vice President and Chief Operating O¢cer, C.D. Howe InstituteFor full biography please see page 4.

Moderator: Session III


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Conference Participants

Adrianna Alterman C.D. Howe Institute

Kent Andrews TD Bank Group

Natasha Apollonova Toronto Region Board of Trade

Stephanie Appave Ministry of Economic Development Employment & Infrastructure

Ian Bandeen NACO

Shereen Benzvy Miller Industry Canada

Paul Buron Business Development Bank of Canada

Justin D. Caldwell C.D. Howe Institute

Jeff Cates Intuit Canada

Alex Ciappara Canadian Bankers Association

Michael Cohen Industrial Skyworks

Will Cornelissen Wind Beacon

Annie Cuerrier Industry Canada

Douglas Cumming York University

Ben Dachis C.D. Howe Institute

Eric Dagenais Industry Canada

Tatiana Danilova Wind Beacon

Julia Deans Futurpreneur Canada

Robert Dunlop

Jasmin Ganie-Hobbs Business Development Bank of Canada

Jennifer Green Ministry of Economic Development Employment & Infrastructure

Jason Hann Canadian Commercial Corporation

Dan Herman Centre for Digital Entrepreneurship and Economic Performance

Russell J. Hiscock CN

Sarah Howcroft Ontario Securities Commission

Greg Hunter Ontario Ministry of Finance

Elmer Kim Roynat Equity Partners

Amanda Klowak C.D. Howe Institute

Hal Koblin C.D. Howe Institute

Robert E. Lamoureux The Independent Order of Foresters

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Conference Participants

Victoria Lennox Startup Canada

John Lester The University of Calgary

Lauren Linton Achilles Media Ltd

Dennis Lopes Microsoft Canada Inc.

William Mak Business Development Bank of Canada

Ted Mallett Canadian Federation of Independent Business

Colin McKay Google Canada Inc.

Susan McLean Ministry of Research and Innovation

Laura Morin Industry Canada

Duncan Munn C.D. Howe Institute

Kyle Murphy C.D. Howe Institute

Anchela Nadarajah Department of Finance Canada

Alison Nankivell Business Development Bank of Canada

Yanning Peng Federal Economic Development Agency for Southern Ontario

Avvey Peters Communitech Technology Association

Blair Poetschke ONS Projects

Matthew Poirier Canadian Finance & Leasing Association

Finn Poschmann C.D. Howe Institute

Paul Redman Ontario Securities Commission

Jos Schmitt Aequitas Innovations Inc.

Matthew Seniuk Startup Canada

Thitima Songsakul Industry Canada

Cyprian Szalankiewicz Startup Canada

John D. Tennant W2N2 Partners

Jimmy Vu Department of Finance Canada

Philip Walsh Ryerson University

Marion G. Wrobel Canadian Bankers Association

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Conference Summ ary

Introduction and Context

On March 5, 2015, experts on small and medium– sized enterprise issues gathered in Toronto to discuss how to enhance the growth of Canada’s small and medium-sized enterprises. With a lively question and answer period with the conference attendees, participants routinely underscored the issue of awareness of programs for growth-oriented firms, the need for mentorship opportunities, the effect of federal and provincial tax policies on growth and the need to more openly discuss, and learn from, examples of firm failures.

Summary of Conference Discussion and Presentations

The event had three main sessions. The kick-off session presented an overview of the role of SMEs in the Canadian economy. The second session examined how firm-financing issues hold back firm growth. The third session examined the barriers in the Canadian tax system and elsewhere that firms face as they grow. The day concluded with wrap up and closing comments.

Session 1 – Growing SMEs: The Contribution of SMEs to the Economy

The discussion started on entrepreneurship and firm growth. Canada has many advantages in fostering firm growth: Canadians have relatively favourable views of entrepreneurs, Canada has a good general ease of doing business score and a low tax burden, and has a large number of businesses starting in a year. But the problem is that small firms are not necessarily growing firms. Many traditional SMEs are lifestyle firms, meant to serve local markets and grow little. Growth-oriented firms, however, are a small minority of firms but are responsible for the majority of net job growth, and export more and do more research and development.

Canada’s SMEs have seen high growth in employment since 2002. The Canadian industries that have the most firms starting up are in the accommodation, services and construction sectors. However, these are among the slowest growing sectors. The sectors with the fastest growth are knowledge-based sectors. The majority of SME owners are now over the age of 50, suggesting a looming demographic problem for SMEs. However, only 12% of SMEs are led by people under 39 and few people under 39 are looking to take over small businesses. Further, many of Canada’s small businesses have owners with little formal education, which leaves them unprepared to run more sophisticated companies should they grow.

The role of many government programs – such as export promotion programs, the Industrial Research Assistance Program and the Scientific Research and Experimental Development credit – and their role for small firms came up in the discussion. Many small firms are simply not aware of the programs available. Many participants of the conference believed there is a need to integrate SME programs such as those around firm financing, mentorship, networking, and building a focus on growth.

Although SMEs are supported by over 200 programs, the majority of programs serve business based on their size, not their growth ambition. The imperative is to provide an integrated approach of these policies to stimulate growth by taking action on awareness of programs related to access to growth capital, support for export activities, mentoring and supporting an entrepreneurial culture.

Session 2 – What Is Holding Us Back? The Barriers to SME Growth

Canada’s poor record of venture capital financial begins with understanding the poor performance of labour sponsored venture capital funds, and the effect that they had on crowding out venture capital funding from elsewhere. Since those have been replaced in


Ontario and federally with privately managed venture capital funds seeded with government funding, the question becomes: is this enough to bring Canada’s venture capital market in line with that of parts of the United States? The data reveal that Ontario’s venture capital investment would need to be nearly twice as large to match that of Massachusetts. Likewise, federal investments would need to nearly double to match venture capital as a share of GDP figures in the United States.

There are also relatively few firms in Canada able to offer equity financing for growth-oriented firms in Canada. There is a particular dearth of growth-oriented equity capital outside of Quebec. A particular cause is the excess focus that Canadian financial institutions place on whether a person had a previous bankruptcy in a previous venture. In Silicon Valley, for example, a previous failure would be relatively little impediment to accessing finance, as firms there are more interested in the potential upside benefit of investing in an idea. Indeed, learning from such failures assists firms in their future growth.

The discussion of this topic was wide-ranging. There are a number of barriers to firm: first is a lack of management desire or ability to grow; second is a low risk tolerance; third is underinvestment in the latest technology; fourth, is a lack of financing and ability to increase scale. The discussion brought up the need for financial institutions and other firm finance providers to use government programs to reduce the risks of financing small firms.

One commenter argued that it would be worthwhile to better understand the nature of the kinds of firms that take up government programs and whether they are the 3% of SMEs that are growth oriented. For example, it could be worthwhile to see what indicators of firm characteristics governments could use to assess whether a firm is likely grow quickly and target support to those firms.

The Canadian investment ecosystem could learn from places like Israel that support people who have failed in start-ups, but also have supported crowdfunding mechanisms that appear to be

successful. In particular, the discussion centred on the importance of celebrating failure, such as by hosting an event that discusses failed business ideas.

Session 3 – From the Ground Up: Growth in the Eyes of the Entrepreneur

The final session of the day began with a focus on tax policy for small firms. Federal and provincial policy substantially favours small firms, with a small business deduction for corporate taxes. As of 2015, small firms have a cumulative ten percentage point lower combined federal and provincial corporate income tax rate relative to large firms. This higher tax rate once a firm grows creates a tax claw back that results in firms choosing to set their income levels to minimize their tax burdens. The result is some firm clustering at the income level at which they minimize their taxes. The social cost of the program is that the federal government must finance the lower rate for small firms with other revenues, creating a social cost through higher taxation for other firms and individuals. Further, the lower rate creates potential efficiency losses by leaving firms below their optimal scale. The result is that the economic benefits of the program, such as by enabling firms to have more retained earnings to invest in themselves, are lower than the social costs.

Economic theory suggests that it is young firms that will grow. Young firms simply happen to be small. The evidence from Canada and around the world is that, after controlling for firm age, firm size has relatively little relationship with growth. It is young firms that grow. Further, the only Canadian evidence on firms that benefit from the lower tax rate on small business shows that 90 percent of the benefit of the tax break goes to firms that do not grow past the threshold to eventually pay the full corporate tax.

Lastly, there is a disconnect of the support start-up firms are looking for as opposed to what they can find. First and foremost is the need for mentorship as many firms feel isolated. However, many government programs are not helpful for many start-ups. Only

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12 percent of companies access start-up support programs. the conclusion is governments should focus on improved delivery of support programs and better partnership with the private sector and entrepreneurs.

The discussion focused on the question of what kinds of firms grow and how to interpret the meaning of firms clustering at the small business deduction threshold. One participant pointed out that the effect of the tax threshold is likely lower now than in the past and that firms might be ‘recharging their batteries’ at the threshold to prepare for future growth with more retained earnings.

The conclusion for policymakers is that they should reform Canada’s tax system to provide low corporate rates for all firms and not use the tax system to support firm growth. Instead, governments should focus on enabling new firms to enter and target other policies

for firm growth by other means, such as venture capital policy.

Wrap Up and Closing Remarks

The conclusion of the day was a call for better mentorship opportunities for growing firms. The particular conundrum is that growing firms need better access to growth-focused capital, yet many are not aware that they have program options available to address this.

It is also important to have a better understanding of firm growth by better understanding, and learning about, firm failures. In particular, financiers and entrepreneurs should come together to hear which particular mistakes their failures have in common.


Presentations

Shereen Benzvy Miller, Assistant Deputy Minister of Small Business, Tourism and Marketplace Services, Industry CanadaSession I – Growing SMEs: The Contribution of SMEs to the Economy

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Presentations

Philip Walsh, Chair, Entrepreneurship & Strategy Department, Ted Rogers School of Management, Ryerson UniversitySession I – Growing SMEs: The Contribution of SMEs to the Economy

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Shereen Benzvy Miller, Assistant Deputy Minister of Small Business, Tourism and Marketplace Services, Industry CanadaSession I – Growing SMEs: The Contribution of SMEs to the Economy


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Presentations


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Presentations


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Presentations


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Presentations

M A R C H 5 , 2 0 1 5

C D H O W E I N S T I T U T E

What is Holding Us Back?Barriers to SME Growth

Douglas CummingProfessor and Ontario Research Chair

York University Schulich School of Business

Public Policy towards Venture Capital

Disastrous experience with LSVCCs…Ontario announced phase out in 2005, effective in 2011Federal program announced phase out in 2012, effective 2016

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Figure 9.3. Selected Indices 1992 - 2005

Globe LSVCC Peer Index Globe Canadian Small Cap Peer Index

TSE 300 Composite Index / TSX Total Return Index US Venture Economics Index

30-Day Treasury Bill Index

Public Policy towards Venture Capital

Replacing the LSVCC program:

The Government of Ontario committed $90 million to the Ontario Venture Capital Fund (OVCF), $29 million to the Innovation Accellerator Fund, and $205 million to the Ontario Emerging Technologies Fund

Each multi-year investments (these are not per year figures)

The Government of Canada allocated $500 million to be displaced to private VC managers in 2013

Is this enough?

Douglas Cumming, Professor in Finance and Entrepreneurship, Schulich School of Business, York UniversitySession II – What Is Holding Us Back? The Barriers to SME Growth

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Presentations


Public Policy Towards VC: Drop in an Empty Pond

The data indicate that the Government of Ontario’s VC expenditures would have to be 99% higher ($4.4 billion per year) to achieve levels of VC/GDP that are comparable to Massachusetts.

Similarly, the Government of Canada’s expenditures would have to be 94% higher ($1.6 billion per year) higher to achieve levels of VC/GDP that are comparable to the U.S.

These statistics are even more startling when one considers the fact that the government is already the largest VC investor in Canada through the BDC and EDC.

Venture Capital / GDP in Canada and the U.S.

Public Expenditure on Venture Capital and the Remaining Shortfall in Ontario and Canada

What is Current Government Expenditure Towards Business in Ontario?

$4.1 billion in 2012

Targeted towards…

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Presentations

Can Institutional Investors Fill the Void

Small participation in Canadian VC fundsPartly explained by long history of low returns (explained in part by presence of by LSVCCs)

Unusual, given the presence of the Institutional Limited Partners Association (ILPA) in Toronto

But the ILPA has an international focusRun courses taught by US instructors that have connections to US funds

Can Crowdfunding Fill the Void?

$2 billion in 2012. $5 billion in 2013. $16 billion worldwide in 2014. Growing exponentially!

National Crowdfunding Association of Canada (NCFA)

Potential for equity crowdfunding with new rules proposed by the OSC

Example: OurCrowd in Israel finances some of the world’s leading technologies; AngelList in the US

Example: Some VCs use crowdfunding to supplement their deals, Mark Skapinker, Brightspark Ventures

Entrepreneurial Ecosystem

Learn from other successful places, such as Israel

Failure is acceptableFailure Conferences – brag about and be rewarded about failing

Incubator CentersMuch evidence of success from current incubatorsGreater presence would help


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Presentations

John Lester, Executive Fellow, University of Calgary, School of Public PolicySession III – From the Ground Up: Growth in the Eyes of the Entrepreneur

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Presentations


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Supplementary Slides


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Empirical analysis: the statutory small business deduction

Number of Small CCPCs Claiming the Federal Small Business Deduction, by Taxable Income, 2000, 2007 and 2011 – from Department of Finance

Background Statistics – Small Business Deduction in 2009

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Income eligble for the small business deduction (thousands)

Distribution of Income and Capital of Firms Claiming the Small Business Deduction

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%

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� Benefits

� Improved access to financing � Higher capital stock

� Costs

� Efficiency effect of raising taxes to finance the SBD � Scale-related cost savings forgone � Higher administration and compliance

� Net social cost

� 10-12% of tax revenue forgone – about $800 million in 2009

Illustrative Benefit – Cost Analysis of the Small Business Deduction in 2009

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Clustering at the SR&ED Expenditure Limit

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Qualified SR&ED Spending Less the Firm-specific Expenditure Limit ($000)

2009 2008 Trend

About 170 extra firms in each cluster

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Background Statistics – Enhanced SR&ED Tax Credit 2009

0%

10%

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% of Firms % of Spending

Distribution of R&D Spending by Claimants of the Enhanced SR&ED Credit

Clustering at the Business Limit 2000

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Income eligible for the SBD less the firm-specific business limit (dollars)

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About 64,000 extra firms in the cluster

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Background Statistics – Small Business Deduction in 2009

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Less than $1 million $1 to 7.999 million $8 to 9.999 million $10 to 14.999 million

Distribution by Size of Small Business Deduction Claimants

Percentage of Firms Percentage of Total Capital

%

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Background Statistics – Enhanced SR&ED Tax Credit 2009

% of firmsNil 73.2%Less than $100K 14.1%$100 to $399K 10.3%$400 to $499K 1.4%$500K and up 1.1%

Distribution of Taxable Income

% of FirmsUnder $1M 60.8%$1M to $2.999M 20.7%$3M to $9.999M 13.8%$10M and over 4.7%

Distribution of Capital Stock

% of Firms % of Spending

Under $100K 51.0% 11.3%$100 to $499K 39.7% 14.8%$500 to $999K 5.9% 13.1%$1M to $1.999M 2.4% 22.0%$2M to $2.999M 0.6% 7.0%$3M and over 0.4% 7.5%

Distribution of Spending on R&D


The C.D. Howe Institute is committed to continuing to bring awareness to the critical policy issues SMEs face. While we will hold more events and publish research well into the future, our immediately planned activities include the following.

Planned Publications on Small and Medium-Sized Businesses

Venture Capital Policy -- Choices and Consequences Author: Richard Remillard, former executive director of Canada’s Venture Capital and Private Equity Association (CVCA)

Governments have supported venture capital policies in Canada for a number of years. Governments have done this through programs such as Labour Sponsored Venture Capital Funds, the Business Development Bank of Canada, ‘angel investor’ tax credits, or the new federal Venture Capital Fund. Governments intervene in these areas to address a perceived market failure resulting in a lack of venture capital in Canada. This paper intends to inform debate on the role of the state in venture capital. Are there market failures, and will there always be? How much involvement is too much? How effective have the various policy tools proven to be? Should the state get out of the venture capital business entirely?

Ottawa is reviewing its Venture Capital Action Plan, and this paper aims to examine the issues.

Tax Barriers to Small Business GrowthAuthors: John Lester, Executive Fellow, University of Calgary School of Public Policy; Benjamin Dachis, Senior Policy Analyst, C.D. Howe Institute

Small firms benefit from a number of tax preferences and have more favourable access to government subsidy programs than large firms. For example, small business income is taxed at a lower rate than large firms by the federal and provincial governments. In addition, the Scientific Research and Experimental Development

(SR&ED) investment tax credit is substantially more generous for small firms than for larger firms. The main rationale given for providing enhanced support for small business is to compensate for capital market failures that adversely affect investment and firm growth. A second rationale is that extra support offsets the higher compliance costs per dollar of tax paid incurred by small firms. A third possible motivation in the case of SR&ED is that the extra support encourages entry and increased R&D intensity, which may lead to more successful transitions to large firms.

The general research issue raised by the enhanced support for small business is whether it represents good public policy in the sense that the benefits exceed the costs. This project contributes to that assessment by examining the evidence on one important potential cost of the extra support: the creation of a barrier to growth through threshold effects.

This paper tests this proposition by using a cross-section of Canadian corporate tax data from 2000 to 2009 to examine whether firms are clustering at thresholds that limit access to the small business deduction and the enhanced SR&ED tax credit.

Public Policies to Support Venture Capital in Canada: Past Mistakes and Promising AvenuesAuthors: Douglas Cumming, Professor in Finance and Entrepreneurship, Schulich School of Business, and Ontario Research Chair in Economics and Cross Cultural Studies; Sofia Johan, Adjunct Professor, Schulich School of Business

Follow–Up Activities

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Follow–Up Activities

This paper will analyze the supply of venture capital over the 1997-2012 period, with consideration given to the adoption of LSVCC legislation in different provinces in the 1980s and1990s. Also, it will consider the announced phase-out of the LSVCC program in 2005 in Ontario, and other related public policy reforms. The paper will analyze whether there was a comparative decline in venture capital with the adoption of LSVCC programs, and a comparative improvement in Ontario with its removal. Further, it will examine recent public policy initiatives in Ontario, including the Ontario Venture Capital Fund and the Ontario Emerging Technologies Fund, in terms of recent fundraising and investment efforts in Ontario, and the likelihood of future success.

The Microeconomics of Macroeconomic PolicyAuthor: Peter Howitt, Lyn Crost Professor Emeritus of Social Sciences and Professor Emeritus of Economics, Brown University

How do different types of firms and people respond to macroeconomic policy? Interest rates, free trade, taxes, depreciation, etc. all have different effects in different sectors and on firms within each sector. Do firms at the technological frontier grow in response to certain policy changes, while others stagnate? What role do other signals (like exchanges rates, market prices, foreign entry) have versus policy in influencing divergent growth? What role does increased competition – such as through foreign entry and foreign direct investment – play in improving productivity of firms? What are the implications for sectoral restrictions on foreign ownership? This paper will aim to fill the gap in understanding how increased competition and firm entry influences productivity growth in Canada and what that means for traditional macroeconomic policy.

Planned Policy Events

Toronto Entrepreneurs Debate Series Breaking Through The Barriers: How Do We Create Successful Entrepreneurs in Canada?Arlene Dickinson, CEO, Venture Communications and featured on CBC’s Dragons’ Den, Nitin Kawale, President, Enterprise Business Unit, Rogers, and Greg Taylor, Co-Founder, Steam Whistle BrewingThursday, April 23, 2015 5:30 – 7:00 pmSponsored by: Business Development Bank of Canada

James Moore, Minister, Industry CanadaToronto Roundtable Luncheon Monday, April 20, 2015 12:00 - 1:30 pm

Sam Sabastian, Managing Director, Google CanadaToronto Roundtable Luncheon Thursday, September 24, 2015, 12:00 - 1:30 pm


The Institute’s Commitment to Quality

C.D. Howe Institute publications undergo rigorous external review by academics and independent experts drawn from the public and private sectors.

The Institute’s peer review process ensures the quality, integrity and objectivity of its policy research. The Institute will not publish any study that, in its view, fails to meet the standards of the review process. The Institute requires that its authors publicly disclose any actual or potential conflicts of interest of which they are aware.

In its mission to educate and foster debate on essential public policy issues, the C.D. Howe Institute provides nonpartisan policy advice to interested parties on a non-exclusive basis. The Institute will not endorse any political party, elected official, candidate for elected office, or interest group.

As a registered Canadian charity, the C.D. Howe Institute as a matter of course accepts donations from individuals, private and public organizations, charitable foundations and others, by way of general and project support. The Institute will not accept any donation that stipulates a predetermined result or policy stance or otherwise inhibits its independence, or that of its staff and authors, in pursuing scholarly activities or disseminating research results.

Essential Policy Intelligence | Conseils indispensablessur les

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Finn PoschmannVice-President, Policy Analysis

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Thank You

The C.D. Howe Institute wishes to thank Industry Canada for their support for the conference. As a charity, the Institute depends on member giving to allow it to convene important policy discussions, mobilize outstanding scholars, push innovative ideas, and ultimately foster, smarter public policy. This conference would not have been possible without Industry Canada’s generous funding.

Contacts

For more information, please contact:

Duncan Munn, Senior Vice President and Chief Operating Officer, 416-965-1904 ext. 1730, [email protected]

Benjamin Dachis, Senior Policy Analyst, 416-865-1904 ext. 4126, [email protected]

Adrianna Alterman, Manager, Special Projects and Events, 416-865-1904 ext. 1405, [email protected]


Notes:

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Notes:

A Reputation for Independent, Nonpartisan ResearchThe C.D. Howe Institute’s reputation for independent, reasoned and relevant public policy research of the highest quality is its chief asset, and underpins the credibility and effectiveness of its work. Independence and nonpartisanship are core Institute values that inform its approach to research, guide the actions of its professional staff and limit the types of financial contributions that the Institute will accept.

For our full Independence and Nonpartisanship Policy go to www.cdhowe.org.

Recent C.D. Howe Institute Publications

March 2015 Busby, Colin, and Nicholas Chesterley. A Shot in the Arm: How to Improve Vaccination Policy in Canada. C.D. Howe Institute Commentary 421. March 2015 Dachis, Benjamin. “Tackling Traffic: The Economic Cost of Congestion in Metro Vancouver.” C.D. Howe Institute E-Brief. March 2015 Gros, Barry, Karen Hall, Ian McSweeney, and Jana Steele. “The Taxation of Single-Employer Target Benefit Plans – Where We Are and Where We Ought To Be.” C.D. Howe Institute E-Brief. March 2015 “Oil Prices, Economic Growth and Monetary Policy.” C.D. Howe Institute Verbatim.February 2015 Blomqvist, Åke, and Colin Busby. Rethinking Canada’s Unbalanced Mix of Public and Private Healthcare: Insights from Abroad. C.D. Howe Institute Commentary 420. February 2015 Boyer, Marcel. The Value of Copyrights in Recorded Music: Terrestrial Radio and Beyond. C.D. Howe Institute Commentary 419. February 2015 Friesen, Jane, Benjamin Cerf Harris, and Simon Woodcock. Expanding School Choice through Open Enrolment: Lessons from British Columbia. C.D. Howe Institute Commentary 418. February 2015 Blomqvist, Åke, Colin Busby, Aaron Jacobs, and William Falk. “Doctors without Hospitals: What to do about Specialists Who Can’t Find Work.” C.D. Howe Institute E-Brief. January 2015 Dodge, David A. “Financial Regulation and Efficiency: Tradeoffs in the Post-Financial Crisis Era.” C.D. Howe Institute Verbatim.January 2015 Robson, William B. P. “It’s All About People – Really! Some Human Capital Priorities for Canada in 2015.” C.D. Howe Institute Verbatim.January 2015 Oreopoulos, Philip, Robert S. Brown, and Adam Lavecchia. “Evaluating Student Performance in Pathways to Education.” C.D. Howe Institute E-Brief.January 2015 Ciuriak, Dan, Jingliang Xiao, and Ali Dadkhah.“The Canada-Korea Free Trade Agreement: What it Means for Canada.” C.D. Howe Institute E-Brief.

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