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Do small businesses innovate as much as large firms?

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In a world with limited resources, the fastest way to boost productivity and economic growth is to innovate. Innovation is often thought to be synonymous with high technology inventions, but innovative behaviour encompasses much more than that. The government's January 2001 White Paper on Canada's Innovation Strategy defines innovation as "the creative process of applying knowledge and the outcome of that process."¹¹

One indicator of innovative behaviour is the amount of research and development (R&D) expenditures a firm undertakes. R&D is not necessarily easy to measure, especially in the context of small businesses. However, certain data can be obtained either through surveys or from tax records of firms that claim tax credits for R&D expenditures. Statistics on Scientific Research and Experimental Development tax credits reveal two telling facts about innovation by small businesses — in absolute amounts, they spend far less than large firms; however, as a percentage of revenue (R&D intensity), spending on innovation by small businesses far outstrips that of larger firms.

In 2003, according to Statistics Canada, over 12 000 firms spent more than $13 billion on R&D as shown in Table 14. Of total R&D spending, 23 percent came from some 10 734 firms with fewer than 100 employees, or an average of $0.28 million per small business. There were 371 large firms that accounted for 60 percent of total R&D expenditures, an average of $21.3 million per firm. However, the proportion of R&D expenditure as a percentage of company revenue generally decreased with firm size.

Table 14: Scientific Research and Experimental Development Expenditures by Business Size (Number of Employees), 2003
Number of Employees	Number of Companies	R&D Expenditures ($ millions)	Average Expenditure per Company ($ millions)	Percentage of Performing Company Revenues
Non-commercial	18	185	10.3	—
1–49	9 609	1 980	0.2	5.8
50–99	1 125	1 042	0.9	6.8
100–199	708	1 034	1.5	5.3
200–499	441	1 234	2.8	3.9
500–999	155	1 314	8.5	4.3
1 000–1 999	114	1 933	17.0	2.0
2 000–4 999	59	2 609	44.2	2.0
≥5 000	43	2 062	48.0	0.8
Total	12 272	13 393	1.1	2.1

Source: Statistics Canada, Industrial Research and Development — 2005 Intentions, Cat. No. 88-202-XIB, January 2006.

Note: For firms funding or performing less than $1 million in R&D and applying for a tax credit under the Scientific Research and Experimental Development program, the data are derived from administrative data of the Canada Revenue Agency. For firms spending more than $1 million, the data are obtained from a mail-out survey of all firms.

A broader gauge of innovative behaviour, but only among manufacturing firms, can be found in Statistics Canada's Survey of Innovation 1999.¹² The survey found that 75 percent of small businesses innovated, slightly less than the proportion of large firms (88 percent). Small businesses are defined here as manufacturing firms with between 20 and 49 employees. An innovative firm is one that offered new or significantly improved products (goods or services) or processes in the previous three years.

Although innovative companies in the manufacturing sector exhibited similar characteristics regardless of size, the magnitude of innovation did vary with size. For example, small businesses scored lower than large firms in all measures of involvement in innovative activities, novelty of the innovation, rate of collaboration, use of intellectual property rights and use of government support.

Statistics Canada's Survey of Innovation 2003, which targeted selected service industries,¹³ is another source of data on innovation. Similar to the manufacturing survey, this survey defines innovative establishments¹⁴ as those that introduced a new or significantly improved product (good or service) on the market or integrated a new or significantly improved process during the survey period (from 2001 to 2003).¹⁵

Results from the Survey of Innovation 2003 suggest that the larger the service establishment, the more it innovates. 51 percent of establishments with 15 to 49¹⁶ employees and 55 percent of establishments with 50 to 99 employees stated that they were innovators for the 2001–2003 period. For the same period, almost 70 percent of establishments with 100 employees or more identified themselves as innovative. Product innovation was the type of innovation developed by the majority of respondents — 83 percent of small, 83 percent of medium-sized and 78 percent of large innovative establishments undertook this type of innovation. In comparison, process innovation was developed by 62 percent of small establishments, 54 percent of medium-sized establishments and 57 percent of large establishments.

Survey results indicate that clients, management staff and R&D staff are each an important source of information for innovation development. The reasons most frequently cited for undertaking innovation are to help businesses stay competitive and to improve product quality. Conversely, non-innovators most often cited absence of demand in their market as the reason they did not innovate.

Small establishments clearly identified economic challenges as the main obstacle to innovating. Small innovators also cited as contributing factors a lack of market information and qualified staff, which are the main obstacles to innovation cited by medium-sized and large establishments.

Source: Statistics Canada, Survey of Innovation 2003.

Note: Vertical rules indicate the 95 percent confidence intervals.

11. Government of Canada, Achieving Excellence: Investing in People, Knowledge and Opportunity, January 2001, p. 4.

12. The Survey of Innovation 1999 covered approximately 6000 provincial enterprises in manufacturing industries and asked about their innovative activities during the three-year period between 1997 and 1999. The definition of innovation, based on the Oslo manual (OECD, 1996), was the introduction of new or improved products or processes. Only firms with more than 20 employees and at least $250 000 in annual gross business revenues were included in the survey.

13. The industries covered by this survey were information and communications technologies industries; selected professional, scientific and technical services; transportation industries; and natural resource support industries.

14. The Survey of Innovation 2003 uses the establishment as the base unit, whereas the previous survey (1999) used the businessas the reference unit. For a discussion on the difference between establishment and business.

15. In this survey, an innovative product is a product new to the business, whose characteristics differ significantly from those of the unit's previous products. An innovative process is a new or significantly improved process as well as new or significantly improved ways of supplying services and delivering products that are new to the business.

16. Businesses with fewer than 15 employees were not included in the survey.

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