SMEs in Canada lagging in innovation and productivity, says Desjardins

According to a new analysis by Desjardins Economics, Canadian SMEs are falling behind on innovation and productivity because of the many obstacles they face when trying to invest in cutting-edge technology.

A report released in celebration of Small Business Month finds that while SMEs understand the benefits of investing in new technologies and processes, they are hampered from innovating due to a lack of technical knowledge and skills, a talent shortage, and financial issues.

Innovative new services and processes can help SMEs expand their customer base, improve income, and decrease expenses, all of which will increase their bottom line.

“Canada has a much larger share of SMEs or employment in SMEs than other countries,” said Randall Bartlett (pictured), senior director of Canadian economics at Desjardins.

We came to the conclusion that “there is a real opportunity to further support SMEs” by helping them “not just develop and produce innovation on the goods and services side, but also adopt innovation in their processes, so they can scale much more rapidly and meet a larger consumer base.”

In terms of innovation, Canadian SMEs lag behind their international counterparts.

One important conclusion in Desjardins’ analysis is that Canada’s SMEs have historically failed to keep pace with the productivity increases of their international peers, particularly in the US. Similarly, they’ve lagged behind larger Canadian firms.

Bartlett posited that one contributing factor was Canada’s comparatively lower levels of governmental and corporate investment in R&D compared to other economies.

He told Insurance Business, “We also have fewer researchers as a share of employment than other leading countries do, and it’s not so much on the public research side, but more on the private.”

Canadian universities and research institutes aren’t exactly known for their cutting-edge contributions to fields like artificial intelligence and renewable technology.

Canada is “really slow to catch up” to other countries when it comes to its private sector’s “innovation and R&D ecosystem,” as Bartlett put it.

What’s the deal with more small and medium-sized enterprises and lower productivity?

According to Desjardins, the lowest levels of productivity may be seen in industries where small and medium-sized enterprises (SMEs) make up the majority of the workforce.

Agriculture, lodging and food services, wholesale and retail trade, construction, and other services (including house cleaning and vehicle repair) have emerged as the top five industries with low productivity levels but an extraordinarily large share of employment in SMEs.

Mining, oil and gas extraction, and utility provision are among Canada’s top natural resource-based sectors in terms of economic output. Desjardins, however, pointed out that the proportion of the economy made up of these highly productive sectors is shrinking.

According to Bartlett, “much of it comes down to the capital investment required in some sectors over others” when describing the disparity in productivity amongst high-SME fields.

For example, we know that small and medium-sized enterprises (SMEs) are preeminent in the food service, retail, auto repair, and building industries because of the lower capital investment requirements for these sectors.

“Retail sales, for example, saw a tremendous gain in productivity during COVID-19 as a result of the shift to online sales, but online sales have mostly plateaued since the end of the pandemic.

In contrast to the general upward trend in productivity across the Canadian economy, construction productivity has remained flat over the past two decades. The affordability dilemma presents an opening for new approaches to standardizing construction methods, such as the usage of prefabricated modular homes… [or other technologies] that can boost construction industry productivity.

It is possible for these industries to catch up to the rest of the Canadian economy and even to those in other developed countries.

How does insurance play a part in encouraging creativity and production in Canada’s small and medium-sized enterprises?

The insurance sector can play a part in supporting Canadian SMEs, despite the Desjardins report’s emphasis on the need for well-targeted and well-funded public policy.

The insurance industry is a data-rich field that is always researching new ways to assess the hazards faced by businesses and individuals. Bartlett opined that a greater grasp of those risks would go a long way toward assisting the company in lowering costs.

One industry that is feeling the effects of climate change is building, which has a dire need for creative ways to make homes more resistant to wildfires.

“If individuals knew that their insurance costs would be lower if they adopted these new building technologies, that would go a long way toward boosting innovation in the construction sector and making new technologies more competitive there,” he added.