Key Small Business Statistics - July 2005

Do SMEs innovate as much as large firms?

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".^{Footnote 10}

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 SMEs. 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 SMEs: they spend far less than large firms do in terms of absolute amounts; but, as a percent of revenue (R&D intensity), spending on innovation by SMEs far outstrips that of larger firms.

In 2002, according to Statistics Canada, nearly 9000 firms spent over $12 billion on R&D, as shown in Table 13. Of the total R&D spending, close to 20% came from some 7770 firms with fewer than 100 employees, or an average of $0.33 million per SME. On the other hand, just 288 large firms accounted for 60% of total R&D expenditures, an average of $25.6 million per firm. However, the proportion of R&D expenditure as a percentage of company revenue generally decreases with firm size.

Table 13: Scientific Research and Experimental Development Expenditures by Number of Employees, 2001

Number of Employees	Number of Companies	R&D Expenditures ($ millions)	Average Expenditure per Company ($ millions)	% of Performing Company Revenues
Source: Statistics Canada, Industrial Research and Development – 2004 Intentions, Cat. No. 88-202-XIB, January 2005. 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.
Non-commercial	18	163	9.1	—
1–49	6 959	1 489	0.2	5.5
50–99	811	1 042	1.3	10.2
100–199	509	1 1098	2.2	6.7
200–499	307	1 201	3.9	4.8
500–999	114	1 165	10.2	3.5
1 000–1 999	88	1 815	20.6	2.8
2 000–4 999	48	1 120	23.3	1.2
>= 5000	38	3 279	86.3	1.2
Total	8 892	12 383	1.4	2.2

A broader gauge of innovative behaviour, but only among manufacturing firms, can be found in Statistics Canada's 1999 Survey of Innovation.^{Footnote 11} The survey found that 80% of SMEs innovated, only slightly less than 88% of large firms. SMEs are defined here as manufacturing firms with between 20 and 249 employees. An innovative firm is one that offered new or significantly improved processes, goods or services in the previous three years.

Innovating SMEs generally displayed the same characteristics as larger innovators; for example, the sales ratio of innovative products in SMEs and large firms differed little from the overall average of 27%. Furthermore, smaller innovators identified the same top seven objectives of innovation and ranked them in almost the same order as did large firms. (These were, in order of importance to SMEs: to improve product quality, increase production capacity, extend product range, reduce production time, improve production flexibility, increase speed of delivering products to the market and reduce labour costs.)

Although innovative companies in the manufacturing sector exhibited similar characteristics regardless of their size, the magnitude of innovation did vary with size; for example, SMEs 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. As well, large firms were consistently more involved than were SMEs in innovative activities such as training, industrial design and engineering, acquisition of machinery and equipment, tool-up and production start-up, and R&D activities. Fewer SMEs introduced innovations that were world firsts or Canadian firsts — 41% compared with 61% for large firms. As for collaboration, 31% of innovating SMEs collaborated with other firms to acquire complementary knowledge and technologies, compared with 46% for large innovators. Figure 12 shows differences between small, medium-sized and large manufacturing firms regarding the use of intellectual property rights, while Figure 13 illustrates differences with regard to use of government support. In these figures, small refers to firms with at least 20 but fewer than 50 employees, while medium-sized firms are those with between 50 and 249 employees. While small, medium-sized and large firms scored their practices in the same order, as noted above, Figures 12 and 13 show the differences in the degree to which these practices were used, depending on the size of firm.

Figure 12: Use of Intellectual Property, 1999 (Percent of Manufacturing Innovative Firms)

Source: C. D. Le and D. Tourigny, Innovation in Canadian Manufacturing SMEs, Industry Canada, September 2003.

Note: Small firms are defined as having fewer than 50 employees, medium-sized as having between 50 and 249 employees, and large as having more than 250 employees. Only manufacturing firms with more than 20 employees and at least $250 000 in annual gross business revenues were included in Statistics Canada's 1999 Survey of Innovation, on which these data are based.

Figure 13: Use of Government Support, 1999 (Percent of Innovative Manufacturing Firms)

Source: C. D. Le and D. Tourigny, Innovation in Canadian Manufacturing SMEs, Industry Canada, September 2003.

Note: Small firms are defined as having fewer than 50 employees, medium-sized as having between 50 and 249 employees, and large as having more than 250 employees. Only manufacturing firms with more than 20 employees and at least $250 000 in annual gross business revenues were included in Statistics Canada's 1999 Survey of Innovation, on which these data are based.

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Footnote 10. Government of Canada, Achieving Excellence: Investing in People, Knowledge and Opportunity, January 2001, p. 4.

Footnote 11. The 1999 Survey of Innovation 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.