Description
Elucidation around what do would be entrepreneurs want.
MANAGEMENT SKILLS FOR SMALL BUSINESS
A Report Submitted to
Small Business Policy Branch, Industry Canada
Keith Newton
CRUISE
March 30
th
, 2001
Table of Contents
1. I ntroduction and Outline
2. Context and Rationale
S S Characteristics and challenges of the KBE
S The innovation imperative and the centrality of management skills
S The importance of the small business sector, its role in innovation and its
management skills problem
3.The Problem
S Evidence of deficiency
4. The I dentification of Management Skills for Small Business
S S Caveat lector!
S Various approaches
5. Stages of Development and Their Differing Skill Needs
S The management skills pyramid
S Gasse
S NRC
S A new model
6. Some Aspects of Demand and Supply
S Diagnostics and benchmarking
S What do would-be entrepreneurs want?
S What can entrepreneurs get?
7. Factors I mpeding, and Those Conducive to SME Management Skills Development
8. Policy Considerations
9. Concluding Comments
Bibliography
Appendices A,B and C: Case Studies
Appendix D: Key I nformants
Acknowledgments
Thanks are due to Hilje Visser for valuable assistance with respect to the production, formatting
and graphics for this project. Desmond Sackey provided research assistance. Don Harrison, of
the Small Business Policy Branch (SBPB) at Industry Canada was very helpful in suggesting
contacts and in making available a variety of research materials. The assistance and cooperation of
the many respondents for the interviews and case studies are much appreciated. Hats off to SBPB
for recognizing something useful in my earlier research and for giving me the opportunity to bring
something new to this important area of policy research.
1. I ntroduction and Outline
This paper addresses several issues relating to management skills for small business in Canada. Is
there evidence of deficiencies in management skills in the small firm population? Is it possible to
identify key management skills for small firms? What are the barriers to the acquisition of the
critical skills and, conversely, are there factors or circumstances favourable to their acquisition?
What are some of the key characteristics of the demand for, and supply of management skills for
the small business sector in Canada? What are some of the approaches used to address the
problem? What is the appropriate role for government? Can fruitful areas for future policy
research in this area be identified?
The background to this work stems, in general, from Industry’s Canada’s central emphasis in the
policy agenda on a strategy to encourage innovation as the engine of growth for productivity and
competitiveness. It stems, too, from the department’s recognition of competent management skills
as the sine qua non for successful innovation, productivity growth and competitiveness and, in
particular, of the importance of such skills in the large proportions of overall economic activity
that are undertaken in the small business sector. Further, this study is in part an outgrowth of an
earlier one published by the department as Management Skills Development in Canada (Newton,
1995). A major purpose of the present work is to revisit that paper and, inter alia, extend it to
focus on small business. In doing so an important criterion will be, wherever possible, to bring
something fresh to the debate.
The approach adopted has been to survey the recent literature, especially for new empirical
evidence, to draw upon the expertise and experience of key informants in order to elicit
information about promising institutional approaches, and to extract key messages from case
studies. The fruits of all these approaches are presented in what follows. Throughout the
undertaking of this research it has been assumed that the ultimate underlying concern is with
innovation, higher productivity, enhanced competitiveness, growth and jobs in the small business
sector of the economy, and that improved management skills are a critical factor in the
achievement of these goals.
2
Accordingly, the paper is organized as follows.
The next section sets out the context: the forces and characteristics of the evolving global KBE and
some of the challenges it presents to SMEs, with particular emphasis on the importance of
responding to the exigencies of “innovation competition”. It argues that management skills are a
central component of a firm’s innovation strategy. It then goes on to show that small business is a
critical force in the KBE inasmuch as the sector accounts for large shares of economic activity in
practically all advanced, knowledge-intensive economies and is an important contributor to
innovation, dynamism and growth. From the foregoing the paper synthesizes a rationale for the
paper and a set of key underlying assumptions.
Section three looks at the nature of the small business management skills problem. As Baldwin et
al. (1997) put it:
“While entrepreneurs who have tried and failed are a key part of the risk-
taking economy, there is no need to accept the existing failure-rate as optimal”.
Without repeating them, the paper refers the reader back to Newton (1995) for a lengthy list of
factoids which adduce evidence as to deficiencies in management skills in the economy generally.
This section of the paper presents new evidence which relates more specifically to the small firm
sector of the economy.
Then, in section four, the paper turns to the question of the identification of key management skill
sets. It notes at the outset the hazardous nature of this quest because of the sheer heterogeneity of
the small business population. Indeed, this is a major caveat that should be borne in mind
throughout the paper: attempts to be definitive and unequivocal on this issue are foolhardy. To be
practical, the best one can hope for is to be suggestive. A variety of approaches from the extant
literature are described.
Section five takes up the question of stages development. Starting at the intuitive level it goes on
to recall the management skills pyramid of Newton (1995), and presents a new version, and then
outlines the contributions of Gasse (1996) and the National Research Council (2000).
3
A concluding subsection of section five sets out a completely new model developed by the author,
drawing on his earlier work as well as on new information from the literature search, key
informant interviews, and case studies. It posits the notion that a “new management paradigm” can
be seen as the logical response to the forces and challenges of the new global KBE. In terms of the
stages of development framework this new paradigm calls for a level of innovation and
sophistication that is well along on the development continuum.
Section six is a brief overview of recent additions to the literature on the demand and supply sides
of the market for small business management skills as set out in the earlier Industry Canada report.
Section seven looks at the factors impeding, and those conducive to, management skills
development by small business. Section eight addresses some policy questions and the
appropriate role for governments. A final section sets out some principal conclusions and
suggestions for further policy research.
Some underlying assumptions for this paper are as follows.
C the pace of technological change is unlikely to abate
C globalization will proceed apace
C the ferocity of competition will not ease
C knowledge will continue to be an increasingly important factor of production
C continuous innovation will continue to be the source of competitive edge
C management skills will therefore be crucial
C governments recognize the importance of these problems but desperately need applied policy
research to inform decision-making about strategies, policies, and programs
C these strategies, policies and programs will be developed in the broader context of economic
and social policy agendas that explicitly emphasize the role of innovation in promoting
productivity, competitiveness, growth and jobs
C the policy context for considerations of management skills as the key to innovation is therefore
one that emphasizes survival of SMEs and their subsequent prosperity
C therefore it is useful to consider the stages of growth and development of small firms, and the
4
critical management skills that apply to each
C from the standpoint of policy making the major questions pertaining to the issue (having
documented problems and identified critical management skills and competencies) are: what
are the barriers to successful acquisition and development of the management skills; what are
the recommended ways of surmounting these obstacles and what is an appropriate role for
government?
Descriptions of the case studies are given in appendices A, B and C and a list of key informants in
appendix D. The bibliography may steer the reader to other useful material.
2. Context, Rationale and Assumptions
The broad context for this study of management skills for small business in Canada is the emerging
global knowledge-based economy with its emphasis on continuous innovation, and the important
role that small firms play in this new economy.
The KBE
The knowledge-based economy (KBE) is widely acknowledged to be no less than a new techno-
economic paradigm that is revolutionary in scale, impact and pervasiveness. An essential
characteristic is the central role of knowledge (tacit and codified) in the cumulative process of
innovation. The increasing knowledge-intensity of economic activity reflects this (Gera, Sing,
Newton, 2001; OECD; 1998).
Certain features of the evolving KBE are of particular relevance to the issue of necessary
management skills. First, for example, it is global in scope. Trade liberalization has led to
growth rates of world trade in recent decades that far surpass the growth of world GDP; and the
growth of foreign direct investment has been even greater. Global corporations undertake
economic activities around the globe and interfirm alliances and networks have burgeoned and are
now the typical operating mode in the KBE. Trillions of dollars of financial transactions are
undertaken daily.
5
A second major driving force is rapid, incessant and pervasive technological change, exemplified
in particular by the advances in biotechnology and in information and communication technologies
(ICTs). The latter constitute a powerful revolutionary force: they are “general purpose”,
“enabling” technologies that are ubiquitous and have myriad applications. Their speed and
computing power provide researchers with enormous analytical potential and the ability to rapidly
exchange new knowledge and ideas. As networks they bring information to millions of people
around the world and play an important role in heightening awareness of issues and shaping public
opinion. For firms and consumers, electronic commerce is revolutionizing the market place.
The new technologies, accompanied by complementary organizational innovations, have radically
transformed the nature of production, markets, and the workplace. Markets are fiercely contested
on the basis of competitiveness deriving not so much from cost, or quantity but from innovation.
Economies of scale give way to economies of scope (in niche markets characterized by
customization and variety) and economies of networking (for knowledge exchange and for the
production of goods and services in “virtual firms”).
Continuous comprehensive innovation is the sine qua non. Shorter product cycles and speed to
market are of the essence. The continual quest for innovation puts a premium on knowledge in the
production process: new ideas, flair and creativity are highly prized and firms endeavour to turn
themselves into “learning organizations” that create intellectual capital as their most important
intermediate input. It should be noted that the KBE and its defining characteristic --continuous
innovation-- are by no means exclusively large firm phenomena. As the next subsection shows,
small firms figure prominently in the advanced, knowledge activities and the empirical literature
shows that in some cases small firms can be important sources of innovation and dynamism.
Small Firms and Innovation
As table 1 shows, small and medium-sized enterprises (SMEs) account for substantial proportions
of economic activity in many advanced economies. The proportion of all firms accounted for by
SMEs in practically all OECD countries now stand at over 95 per cent. SMEs’ contribution to
6
employment is now generally more than 50 per cent. Contributions to GDP are somewhat smaller,
but nevertheless substantial.
Table 1. The Role of Small and Medium-sized Enterprises (SMEs) in National Economies
Percentages
SMEs as a percentage of
enterprises
Employment SME contribution
to GDP
Australia 96.0 45.0
3
23.0
3
Belgium 99.7 72.0 n.a.
Canada 99.8 60.0
4
57.2
4
Denmark 98.8 77.8 56.7
Finland 99.5 52.6 n.a.
France 99.9 69.0 61.8
5
Germany 99.7 65.7 34.9
Greece 99.5 73.8 27.1
6
Ireland 99.2 85.6
3
40.0
Italy 99.7 49.0
4
40.5
Japan 99.5 73.8
4
57.0
5
Netherlands 99.8 57.0 50.0
Portugal 99.0 79.0 66.0
Spain 99.5 63.7 64.3
5
Sweden 99.8 56.0
8
n.a.
Switzerland 99.0 79.3 n.a.
U.K. 99.9 67.2 30.3
U.S. 99.7 53.7 48.0
1. SMEs definition varies across countries but most countries define SMEs as having less than 500 employees.
Some countries such as Italy and Sweden define them as having less than 200 employees.
2. All data are for 1991, except Spain, Canada and Ireland (1989), Germany, Greece and Italy (1988), the
Netherlands and France (1990).
3. Manufacturing only
4. For Canada, percentage of sector employment and GDP in 1993.
5. Percentage of value added.
6. Percentage of value added in manufacturing.
7. Percentage of sales.
8. Percentage of private sector employment in 1992.
Source: OECD (1997b).
Innovation, as emphasized above, is crucial for survival and growth (figure 1).
Figure 1: Innovation As the Key to Growth and Jobs
7
I
N
N
O
V
A
T
I
O
N
New products
New markets;
Improved market
share
New
Processes
Market
expansion
G
R
O
W
T
H
&
J
O
B
S
Given the critical importance of innovation in the KBE, and given the very significant contribution
of SMEs to the economies of many countries, including Canada, a priority question for policy
research is quite simply: just how innovative is that substantial sector of the economy that is made
up of SMEs?
There has been a long and lively debate about the version of the “Schumpeterian hypothesis” that
maintains that large firms innovate more than small (You, 1995). Thus, for example, it is alleged
that larger firms with superior resources can afford to do R&D, access technological information,
forge partnerships with universities and governments, and so on. Small firms are said to be more
flexible or “nimble” and to have closer relations with customers and suppliers. Drawbacks for
large firms might include certain dangers of sclerosis: unwieldiness, hierarchy, rigidity,
communication problems, impersonality, etc. Small firms, by contrast, may be less hidebound by
tradition and procedure, and have speedier and more personal communication. In any event, for
present purposes a convenient point of departure is the observation that “the most notable feature
of the considerable body of empirical research on the relationship between firm size and
innovation is its inconclusiveness” (Cohen and Levine, 1989 p. 1069).
8
A recent review of the empirical literature (Lee and Newton, 2001) concludes, on balance, that
innovation is positively related to firm size. However, it is misleading to conclude that small
firms are not innovative. Table 2, based on a 1993 Statistics Canada’s survey, provides evidence
that small firms are indeed innovative. It shows that small firms introduce just as many product
innovations per innovator as larger firms, though they lag behind larger firms in process
innovations (Baldwin, 1998).
Table 2: Number of Innovations per Innovator in Canadian Manufacturing, 1989-91
Number of employees
Type of innovation All innovators 20-99 100-499 500+
Products 3.4 3.6 2.9 4.2
Processes 1.9 1.6 2.1 2.4
Combined products &
processes
2.4 3.0 1.7 2.9
Source: Baldwin (1997).
Furthermore, while R&D activity appears to rise monotonically with firm size, Freeman and Soete
(1997) point out that of the small firms that do perform R&D, there are two important categories.
First, those that have just begun to exploit a new invention and whose sales are therefore low
relative to R&D. Second, those with a special, R&D-sustained expertise in a narrow field. In
both cases one would observe high R&D-to-sales ratios. Moreover, the authors contend on the
basis of the rapid growth of science parks and the number of university spin-offs, that the
proportion of small firms in these two categories has grown in recent decades. So one might
suppose that the small firm contribution to the innovative capacity of the economy, at least in terms
of R&D, has been increasing.
It is clear that management skills must be a critical driver of small firms’ innovative capacity
Figure 2: Building Blocks of Innovation: The Centrality of Management Skills
9
Organizational Innovation
Technology Management Skills
Emphasis on Quality
Eco-efficiency
HR Development
Alliances/Networking Customer Focus
Global Orientation
This notion is depicted graphically in figure 2. The model begins to give a sense of the essential
components required for successful innovation and, therefore, of the areas in which management
skills must be deployed. It is worth noting in passing with reference in particular to the “global
orientation” building block that a brand-new study for Industry Canada (Lefebvre and Lefebvre,
2000) finds that Canadian SMEs became increasingly active in foreign markets in the 1994-97
period and that among the strongest determinants of export activity are R&D and knowledge
intensity.
In closing this section the main messages to be reiterated are :
C the small firm sector in Canada accounts for a substantial “share of the action”,
economically
C the lifeblood of the KBE is continuing, comprehensive and pervasive innovation
C small firms can contribute innovativeness and dynamism to the economy but generally, for
a variety of reasons, and on a number of measures, are less innovative than their large
counterparts
C management is central to the innovation process
C so the management capability of small business is of vital concern to the Canadian
economy
Data presented in Lee and Newton (2001) show that among various sources of firms’ innovation,
management is the most prominent. Notably, moreover, there is a clear negative relationship with
10
firm size. In other words, small firms rely on management as the well-spring of their innovation to
a greater extent than do large firms, which tend to exploit alternative sources. This finding
underlines once again the importance of management skills and competences in the small business
sector.
3. The Problem
It is well-known that the small firm population is characterized by high rates of turnover: high
birth-rates and high death rates are typical. Recent Statistics Canada data show that over two-
thirds of micro-sized firms (
Elucidation around what do would be entrepreneurs want.
MANAGEMENT SKILLS FOR SMALL BUSINESS
A Report Submitted to
Small Business Policy Branch, Industry Canada
Keith Newton
CRUISE
March 30
th
, 2001
Table of Contents
1. I ntroduction and Outline
2. Context and Rationale
S S Characteristics and challenges of the KBE
S The innovation imperative and the centrality of management skills
S The importance of the small business sector, its role in innovation and its
management skills problem
3.The Problem
S Evidence of deficiency
4. The I dentification of Management Skills for Small Business
S S Caveat lector!
S Various approaches
5. Stages of Development and Their Differing Skill Needs
S The management skills pyramid
S Gasse
S NRC
S A new model
6. Some Aspects of Demand and Supply
S Diagnostics and benchmarking
S What do would-be entrepreneurs want?
S What can entrepreneurs get?
7. Factors I mpeding, and Those Conducive to SME Management Skills Development
8. Policy Considerations
9. Concluding Comments
Bibliography
Appendices A,B and C: Case Studies
Appendix D: Key I nformants
Acknowledgments
Thanks are due to Hilje Visser for valuable assistance with respect to the production, formatting
and graphics for this project. Desmond Sackey provided research assistance. Don Harrison, of
the Small Business Policy Branch (SBPB) at Industry Canada was very helpful in suggesting
contacts and in making available a variety of research materials. The assistance and cooperation of
the many respondents for the interviews and case studies are much appreciated. Hats off to SBPB
for recognizing something useful in my earlier research and for giving me the opportunity to bring
something new to this important area of policy research.
1. I ntroduction and Outline
This paper addresses several issues relating to management skills for small business in Canada. Is
there evidence of deficiencies in management skills in the small firm population? Is it possible to
identify key management skills for small firms? What are the barriers to the acquisition of the
critical skills and, conversely, are there factors or circumstances favourable to their acquisition?
What are some of the key characteristics of the demand for, and supply of management skills for
the small business sector in Canada? What are some of the approaches used to address the
problem? What is the appropriate role for government? Can fruitful areas for future policy
research in this area be identified?
The background to this work stems, in general, from Industry’s Canada’s central emphasis in the
policy agenda on a strategy to encourage innovation as the engine of growth for productivity and
competitiveness. It stems, too, from the department’s recognition of competent management skills
as the sine qua non for successful innovation, productivity growth and competitiveness and, in
particular, of the importance of such skills in the large proportions of overall economic activity
that are undertaken in the small business sector. Further, this study is in part an outgrowth of an
earlier one published by the department as Management Skills Development in Canada (Newton,
1995). A major purpose of the present work is to revisit that paper and, inter alia, extend it to
focus on small business. In doing so an important criterion will be, wherever possible, to bring
something fresh to the debate.
The approach adopted has been to survey the recent literature, especially for new empirical
evidence, to draw upon the expertise and experience of key informants in order to elicit
information about promising institutional approaches, and to extract key messages from case
studies. The fruits of all these approaches are presented in what follows. Throughout the
undertaking of this research it has been assumed that the ultimate underlying concern is with
innovation, higher productivity, enhanced competitiveness, growth and jobs in the small business
sector of the economy, and that improved management skills are a critical factor in the
achievement of these goals.
2
Accordingly, the paper is organized as follows.
The next section sets out the context: the forces and characteristics of the evolving global KBE and
some of the challenges it presents to SMEs, with particular emphasis on the importance of
responding to the exigencies of “innovation competition”. It argues that management skills are a
central component of a firm’s innovation strategy. It then goes on to show that small business is a
critical force in the KBE inasmuch as the sector accounts for large shares of economic activity in
practically all advanced, knowledge-intensive economies and is an important contributor to
innovation, dynamism and growth. From the foregoing the paper synthesizes a rationale for the
paper and a set of key underlying assumptions.
Section three looks at the nature of the small business management skills problem. As Baldwin et
al. (1997) put it:
“While entrepreneurs who have tried and failed are a key part of the risk-
taking economy, there is no need to accept the existing failure-rate as optimal”.
Without repeating them, the paper refers the reader back to Newton (1995) for a lengthy list of
factoids which adduce evidence as to deficiencies in management skills in the economy generally.
This section of the paper presents new evidence which relates more specifically to the small firm
sector of the economy.
Then, in section four, the paper turns to the question of the identification of key management skill
sets. It notes at the outset the hazardous nature of this quest because of the sheer heterogeneity of
the small business population. Indeed, this is a major caveat that should be borne in mind
throughout the paper: attempts to be definitive and unequivocal on this issue are foolhardy. To be
practical, the best one can hope for is to be suggestive. A variety of approaches from the extant
literature are described.
Section five takes up the question of stages development. Starting at the intuitive level it goes on
to recall the management skills pyramid of Newton (1995), and presents a new version, and then
outlines the contributions of Gasse (1996) and the National Research Council (2000).
3
A concluding subsection of section five sets out a completely new model developed by the author,
drawing on his earlier work as well as on new information from the literature search, key
informant interviews, and case studies. It posits the notion that a “new management paradigm” can
be seen as the logical response to the forces and challenges of the new global KBE. In terms of the
stages of development framework this new paradigm calls for a level of innovation and
sophistication that is well along on the development continuum.
Section six is a brief overview of recent additions to the literature on the demand and supply sides
of the market for small business management skills as set out in the earlier Industry Canada report.
Section seven looks at the factors impeding, and those conducive to, management skills
development by small business. Section eight addresses some policy questions and the
appropriate role for governments. A final section sets out some principal conclusions and
suggestions for further policy research.
Some underlying assumptions for this paper are as follows.
C the pace of technological change is unlikely to abate
C globalization will proceed apace
C the ferocity of competition will not ease
C knowledge will continue to be an increasingly important factor of production
C continuous innovation will continue to be the source of competitive edge
C management skills will therefore be crucial
C governments recognize the importance of these problems but desperately need applied policy
research to inform decision-making about strategies, policies, and programs
C these strategies, policies and programs will be developed in the broader context of economic
and social policy agendas that explicitly emphasize the role of innovation in promoting
productivity, competitiveness, growth and jobs
C the policy context for considerations of management skills as the key to innovation is therefore
one that emphasizes survival of SMEs and their subsequent prosperity
C therefore it is useful to consider the stages of growth and development of small firms, and the
4
critical management skills that apply to each
C from the standpoint of policy making the major questions pertaining to the issue (having
documented problems and identified critical management skills and competencies) are: what
are the barriers to successful acquisition and development of the management skills; what are
the recommended ways of surmounting these obstacles and what is an appropriate role for
government?
Descriptions of the case studies are given in appendices A, B and C and a list of key informants in
appendix D. The bibliography may steer the reader to other useful material.
2. Context, Rationale and Assumptions
The broad context for this study of management skills for small business in Canada is the emerging
global knowledge-based economy with its emphasis on continuous innovation, and the important
role that small firms play in this new economy.
The KBE
The knowledge-based economy (KBE) is widely acknowledged to be no less than a new techno-
economic paradigm that is revolutionary in scale, impact and pervasiveness. An essential
characteristic is the central role of knowledge (tacit and codified) in the cumulative process of
innovation. The increasing knowledge-intensity of economic activity reflects this (Gera, Sing,
Newton, 2001; OECD; 1998).
Certain features of the evolving KBE are of particular relevance to the issue of necessary
management skills. First, for example, it is global in scope. Trade liberalization has led to
growth rates of world trade in recent decades that far surpass the growth of world GDP; and the
growth of foreign direct investment has been even greater. Global corporations undertake
economic activities around the globe and interfirm alliances and networks have burgeoned and are
now the typical operating mode in the KBE. Trillions of dollars of financial transactions are
undertaken daily.
5
A second major driving force is rapid, incessant and pervasive technological change, exemplified
in particular by the advances in biotechnology and in information and communication technologies
(ICTs). The latter constitute a powerful revolutionary force: they are “general purpose”,
“enabling” technologies that are ubiquitous and have myriad applications. Their speed and
computing power provide researchers with enormous analytical potential and the ability to rapidly
exchange new knowledge and ideas. As networks they bring information to millions of people
around the world and play an important role in heightening awareness of issues and shaping public
opinion. For firms and consumers, electronic commerce is revolutionizing the market place.
The new technologies, accompanied by complementary organizational innovations, have radically
transformed the nature of production, markets, and the workplace. Markets are fiercely contested
on the basis of competitiveness deriving not so much from cost, or quantity but from innovation.
Economies of scale give way to economies of scope (in niche markets characterized by
customization and variety) and economies of networking (for knowledge exchange and for the
production of goods and services in “virtual firms”).
Continuous comprehensive innovation is the sine qua non. Shorter product cycles and speed to
market are of the essence. The continual quest for innovation puts a premium on knowledge in the
production process: new ideas, flair and creativity are highly prized and firms endeavour to turn
themselves into “learning organizations” that create intellectual capital as their most important
intermediate input. It should be noted that the KBE and its defining characteristic --continuous
innovation-- are by no means exclusively large firm phenomena. As the next subsection shows,
small firms figure prominently in the advanced, knowledge activities and the empirical literature
shows that in some cases small firms can be important sources of innovation and dynamism.
Small Firms and Innovation
As table 1 shows, small and medium-sized enterprises (SMEs) account for substantial proportions
of economic activity in many advanced economies. The proportion of all firms accounted for by
SMEs in practically all OECD countries now stand at over 95 per cent. SMEs’ contribution to
6
employment is now generally more than 50 per cent. Contributions to GDP are somewhat smaller,
but nevertheless substantial.
Table 1. The Role of Small and Medium-sized Enterprises (SMEs) in National Economies
Percentages
SMEs as a percentage of
enterprises
Employment SME contribution
to GDP
Australia 96.0 45.0
3
23.0
3
Belgium 99.7 72.0 n.a.
Canada 99.8 60.0
4
57.2
4
Denmark 98.8 77.8 56.7
Finland 99.5 52.6 n.a.
France 99.9 69.0 61.8
5
Germany 99.7 65.7 34.9
Greece 99.5 73.8 27.1
6
Ireland 99.2 85.6
3
40.0
Italy 99.7 49.0
4
40.5
Japan 99.5 73.8
4
57.0
5
Netherlands 99.8 57.0 50.0
Portugal 99.0 79.0 66.0
Spain 99.5 63.7 64.3
5
Sweden 99.8 56.0
8
n.a.
Switzerland 99.0 79.3 n.a.
U.K. 99.9 67.2 30.3
U.S. 99.7 53.7 48.0
1. SMEs definition varies across countries but most countries define SMEs as having less than 500 employees.
Some countries such as Italy and Sweden define them as having less than 200 employees.
2. All data are for 1991, except Spain, Canada and Ireland (1989), Germany, Greece and Italy (1988), the
Netherlands and France (1990).
3. Manufacturing only
4. For Canada, percentage of sector employment and GDP in 1993.
5. Percentage of value added.
6. Percentage of value added in manufacturing.
7. Percentage of sales.
8. Percentage of private sector employment in 1992.
Source: OECD (1997b).
Innovation, as emphasized above, is crucial for survival and growth (figure 1).
Figure 1: Innovation As the Key to Growth and Jobs
7
I
N
N
O
V
A
T
I
O
N
New products
New markets;
Improved market
share
New
Processes
Market
expansion
G
R
O
W
T
H
&
J
O
B
S
Given the critical importance of innovation in the KBE, and given the very significant contribution
of SMEs to the economies of many countries, including Canada, a priority question for policy
research is quite simply: just how innovative is that substantial sector of the economy that is made
up of SMEs?
There has been a long and lively debate about the version of the “Schumpeterian hypothesis” that
maintains that large firms innovate more than small (You, 1995). Thus, for example, it is alleged
that larger firms with superior resources can afford to do R&D, access technological information,
forge partnerships with universities and governments, and so on. Small firms are said to be more
flexible or “nimble” and to have closer relations with customers and suppliers. Drawbacks for
large firms might include certain dangers of sclerosis: unwieldiness, hierarchy, rigidity,
communication problems, impersonality, etc. Small firms, by contrast, may be less hidebound by
tradition and procedure, and have speedier and more personal communication. In any event, for
present purposes a convenient point of departure is the observation that “the most notable feature
of the considerable body of empirical research on the relationship between firm size and
innovation is its inconclusiveness” (Cohen and Levine, 1989 p. 1069).
8
A recent review of the empirical literature (Lee and Newton, 2001) concludes, on balance, that
innovation is positively related to firm size. However, it is misleading to conclude that small
firms are not innovative. Table 2, based on a 1993 Statistics Canada’s survey, provides evidence
that small firms are indeed innovative. It shows that small firms introduce just as many product
innovations per innovator as larger firms, though they lag behind larger firms in process
innovations (Baldwin, 1998).
Table 2: Number of Innovations per Innovator in Canadian Manufacturing, 1989-91
Number of employees
Type of innovation All innovators 20-99 100-499 500+
Products 3.4 3.6 2.9 4.2
Processes 1.9 1.6 2.1 2.4
Combined products &
processes
2.4 3.0 1.7 2.9
Source: Baldwin (1997).
Furthermore, while R&D activity appears to rise monotonically with firm size, Freeman and Soete
(1997) point out that of the small firms that do perform R&D, there are two important categories.
First, those that have just begun to exploit a new invention and whose sales are therefore low
relative to R&D. Second, those with a special, R&D-sustained expertise in a narrow field. In
both cases one would observe high R&D-to-sales ratios. Moreover, the authors contend on the
basis of the rapid growth of science parks and the number of university spin-offs, that the
proportion of small firms in these two categories has grown in recent decades. So one might
suppose that the small firm contribution to the innovative capacity of the economy, at least in terms
of R&D, has been increasing.
It is clear that management skills must be a critical driver of small firms’ innovative capacity
Figure 2: Building Blocks of Innovation: The Centrality of Management Skills
9
Organizational Innovation
Technology Management Skills
Emphasis on Quality
Eco-efficiency
HR Development
Alliances/Networking Customer Focus
Global Orientation
This notion is depicted graphically in figure 2. The model begins to give a sense of the essential
components required for successful innovation and, therefore, of the areas in which management
skills must be deployed. It is worth noting in passing with reference in particular to the “global
orientation” building block that a brand-new study for Industry Canada (Lefebvre and Lefebvre,
2000) finds that Canadian SMEs became increasingly active in foreign markets in the 1994-97
period and that among the strongest determinants of export activity are R&D and knowledge
intensity.
In closing this section the main messages to be reiterated are :
C the small firm sector in Canada accounts for a substantial “share of the action”,
economically
C the lifeblood of the KBE is continuing, comprehensive and pervasive innovation
C small firms can contribute innovativeness and dynamism to the economy but generally, for
a variety of reasons, and on a number of measures, are less innovative than their large
counterparts
C management is central to the innovation process
C so the management capability of small business is of vital concern to the Canadian
economy
Data presented in Lee and Newton (2001) show that among various sources of firms’ innovation,
management is the most prominent. Notably, moreover, there is a clear negative relationship with
10
firm size. In other words, small firms rely on management as the well-spring of their innovation to
a greater extent than do large firms, which tend to exploit alternative sources. This finding
underlines once again the importance of management skills and competences in the small business
sector.
3. The Problem
It is well-known that the small firm population is characterized by high rates of turnover: high
birth-rates and high death rates are typical. Recent Statistics Canada data show that over two-
thirds of micro-sized firms (