Establishment Size and Employment Growth in the Canadian Urban System 1991-1994: An Exploratory Analysis

Article excerpt

Richard G. Shearmur and William J. Coffey

Departement de Geographie

Universite de Montreal

Montreal, PQ H3C 3J7

It has become accepted wisdom today that "the role of creating jobs has moved from big companies to small business and the self-employed" (Globe and Mail 1996a). Probably the ultimate source of the accepted wisdom can be traced back to Birch's work in the late 1970's, in which he reported that 66% of net new jobs created in the US economy between 1969 and 1976 were generated by firms with less than 20 employees (Birch 1979). This result did not go unquestioned. A study commissioned by the US Small Business Administration for the 1978-1980 period found that firms of 100 employees or less only created 38% of all jobs: the same period was subsequently analysed by Birch using the same data, who obtained a figure of 70%! (Giaoutzi et al. 1988). Storey and Johnson (1987) examined these conflicting results and reported that the difference stemmed from the different treatment of firms not included in the data base: in their view, 50% of new jobs were created by companies of less than 100 employees over the period covered, while the latter employed only 38% of the labour force.

Whether or not such statistical observations could truly be construed as supporting the contention that small businesses created a disproportionate share of new jobs, "during the 1980's (the observations) had a tremendous impact on public policy" (Picot et al. 1994). The message taken by many "economic development officials (in the USA) is that job-generation begins at home ... (and that) ... efforts are best concentrated in helping local businesses expand and encouraging potential entrepreneurs to establish businesses" (Eisinger 1988). Indeed, with average unemployment rates in Canada and in many European countries rising to a seemingly irreducible 10% or so over the 1980's, small businesses have been seized upon as generators of employment.

One of the consequences of such research has been a fundamental reappraisal of approaches to regional development policy. Whereas throughout the 60's, 70's and early 80's Canadian regional policy concentrated on a variety of top down approaches such as infrastructure provision, capital investment grants, and incentive packages (Savoie 1986), there has been an increasing trend towards the promotion of local development initiatives (Economic Council of Canada 1990c; Fondation de l'Entrepreneurship 1994). (1)

Needless to say, statistical evidence alone is unlikely to have brought about such fundamental policy shifts. The increasing budget problems faced by most western governments have reduced their capacity to finance regional policy on a grander scale, and local development is perceived as a low cost alternative. It also fits well with the current anti-government bias in popular opinion, as local development is seen as a bottom-up approach which empowers individuals and municipalities at the local level. Thus, while local development in general, and specifically the aspect of it which stresses small businesses and entrepreneurship, can be presented as a rational response to a series of empirical observations concerning employment creation, it can also be seen as an opportune policy initiative in keeping with the generalised move towards liberal economic management experienced by western countries in the `80's and early `90's.

In the light of these developments, this paper first reviews the evidence that small companies create more jobs than larger ones, and examines the reasons why this may be so. While the evidence does appear to point this way, the policy implications are unclear for a number of reasons which are set out below. After reviewing this evidence, the results of our analysis of 59 Canadian cities are presented.

This exploratory analysis introduces a geographic dimension to the analysis of Small and Medium Enterprises (SMEs) which has hitherto been largely ignored in the literature. …