Financing Profile: Financing Innovative Small and Medium-Sized Enterprises in Canada

PDF Version
(868 KB, 14 pages)

March 2009

Shunji Wang
Small Business Branch, Industry Canada

Summary: This profile describes innovative small and medium enterprises (SMEs) along a range of characteristics and examines whether they differ from non-innovative SMEs in terms of access to financing, financing terms and conditions, and obstacles faced in accessing financing.

Highlights

In 2004, innovative SMEs (firms that allocate more than 20 percent of their investment expenditures on research and development (R&D)) represented 4.2 percent of SMEs in Canada.
In 2004, 34.5 percent of innovative SMEs sought external financing compared with 23.2 percent of non-innovative SMEs in Canada. Of those innovative SMEs, 54.2 percent were approved for financing compared with 83.0 percent of non-innovative SMEs.
Innovative SMEs were more likely to approach chartered banks for debt financing.
Innovative SMEs were three times more likely to request equity financing from a venture capital firm.
Only 4.9 percent of innovative SMEs requested equity financing; however, they represented 44.3 percent of the total financing received. Most of the equity financing received was raised from venture capitalists, friends and relatives.
Innovative SMEs were about six times more likely to use the debt financing requested for R&D.
Innovative SMEs paid higher interest rates than non-innovative SMEs.
Innovative SMEs had fewer employees than non-innovative SMEs.
In 2004, 10.8 percent of innovative SMEs operated in the wholesale/retail industry, 22.6 percent in professional services and 18.0 percent in knowledge-based industries.
Ontario had the highest share of innovative SMEs (49.5 percent), followed by Quebec (24.1 percent).

Introduction

Innovation is crucial for maintaining firm competitiveness and increasing standards of living. Financing innovation can be difficult as innovative activities and assets are usually intangible, thereby making the assessment of their monetary values difficult. In addition, innovative firms are usually considered more risky as their chances of success are more difficult to assess. This report describes financing activities of innovative small and medium-sized enterprises (SMEs) in Canada and provides a comparison with non-innovative SMEs. In this analysis, research and development (R&D) intensity is used as a measure of innovation. SMEs that spend more than 20 percent of their total investment expenditures on R&D are defined as innovative firms; those that spend 20 percent or less of their total investment expenditures on R&D are defined as non-innovative SMEs. There exists a substantial body of research that addresses the topic of innovation; however, there is little research on financing innovative SMEs. Thus, studying financing of innovative SMEs will provide valuable information on experiences, instruments used and financing conditions.

This report uses the comprehensive database of the Statistics Canada Survey on Financing of Small and Medium Enterprises. This survey was launched in 2000 by Statistics Canada in partnership with Industry Canada and Finance Canada and is conducted every three years. It measures the demand for and sources of financing of Canadian SMEs, including data on the application process, firm profiles and demographic characteristics of SME ownership. This report is based on the 2004 survey results and tries to address the following research questions:

Are the financing activities and experiences of innovative SMEs in accessing financing different from those of non-innovative SMEs?
Do innovative SMEs face different financing terms and conditions than non-innovative SMEs seeking financing?
What are the substantial obstacles to accessing financing faced by innovative SMEs?