Small and smaller: How the economic outlook of small firms relates to size

Introduction

Businesses with fewer than 100 workers employed 8.4 million people in Canada as of 2019, or 65 percent of the total private labour force.1 The characteristics, business strategies and actions of a firm are likely to depend on the firm’s size.

Every quarter, the Bank of Canada surveys Canadian businesses with 10 or more employees through the Business Outlook Survey (BOS). But to develop a complete picture of the Canadian economy, the Bank needs a solid understanding of firms of all sizes.

In 2018 and 2019, the Bank conducted an experimental online business survey—the electronic Business Outlook Survey (e-BOS)—of key decision makers at small Canadian firms over a period of four quarters. Specifically, the Bank looked at three sizes of firms:

  • micro-micro: firms with 1 to 4 employees
  • micro-small: firms with 5 to 19 employees
  • small: firms with 20 to 99 employees

An online survey can complement the in-person, interview-based BOS, which has become a key input into the Bank’s monetary policy deliberations and is followed closely by economic and financial analysts.2,3

This note compares the responses of these smaller firms. We occasionally combine micro-micro and micro-small firms to create a “micro” group to ease our comparisons with firms of larger sizes.

Survey differences

The e-BOS had a significantly larger sample than the BOS—about 500 firms versus 100. It also targeted firms with 1 to 99 employees, whereas the BOS generally surveys businesses that employ 10 people or more. Including firms with fewer than 10 workers offers more granularity and an opportunity to examine and compare the responses of very small firms.4

Respondents in the e-BOS were asked questions similar to those in the BOS on topics that included their firms’ expectations for sales and their intentions for investment and employment.5

Exploring the differences among small firms not only gives us a better understanding of the economy but also helps us understand the benefits of conducting a new business survey with a larger sample size. Results from a larger survey could provide more accurate signals about prospects for economic growth.

But a larger representative survey sample requires a greater number of small firms because the number of medium and large firms operating in Canada is limited. At the end of 2018, fewer than 25,000 firms had 100 or more employees—only 2.1 percent of the 1.2 million employer businesses in Canada. In contrast, firms with fewer than 20 employees (micro-micro and micro-small firms) made up 86.3 percent of all Canadian businesses, and firms with 20 to 99 employees (small firms) accounted for about 11.6 percent (Table 1). Also, firms with fewer than 100 employees have contributed more than 40 percent of Canada’s gross domestic product (GDP) on average since 2007.

Table 1: Micro-micro, micro-small and small firms in Canada, December 2019

Firm size Share of all firms in Canada (%) Share of total employment (%)
Micro-micro (firms with 1 to 4 employees) 54.9 31.4
Micro-small (firms with 5 to 19 employees) 31.4
Small (firms with 20 to 99 employees) 11.6 34.0
All micro-micro, micro-small and small firms 97.9 65.4

Sources: Innovation, Science and Economic Development Canada (ISED 2020) and Statistics Canada (Table: 14-10-0068-01, Employment by establishment size)

Background

The e-BOS experiment was conducted between the second quarter of 2018 and the first quarter of 2019. Its objective was to assess the benefits of expanding the Bank’s efforts in gathering business intelligence. Based on the in-person BOS, the e-BOS questionnaire was modified to increase clarity for online respondents and reduce survey response times. For these same reasons, the survey did not include follow-up and probing questions. Unlike the BOS, the e-BOS did not ask participants to provide context or add nuances and caveats to their answers.

By conducting an online survey with similar questions but a larger sample size than the BOS, the Bank was able to develop a more statistically oriented approach to the analysis. This also allowed for more granular and cross-sectional analysis, such as across regions, industries and firm sizes.

A national market research firm administered the e-BOS using the firm’s existing business panel. The BOS uses a quota sampling approach by sector, region and firm size that is largely based on the composition of Canada’s GDP (Amirault, Rai and Martin 2020). But the sample for the e-BOS reflected the distribution of Canadian private sector businesses with fewer than 100 employees by region and industry.

Each quarter, the sample included 400 micro firms (1–19 employees) and 100 small firms (20–99 employees). The response rate was estimated to be around 5 percent, which is typical for online surveys although considerably lower than the BOS response rate of 40 to 50 percent across the same four quarters.6 Firms in the sample were generally representative of smaller firms in the Canadian economy by region, industry and size.

Survey questions and balances of opinion

The e-BOS was designed to capture firms’ business outlook through their responses to structured questions. Participants were asked about their sales expectations; intentions for investment, hiring and wages; outlook on pricing and inflation; capacity pressures and labour shortages; and credit conditions.7 Most questions were closed-ended, focusing on expected changes over the next 12 months versus the last 12 months (e.g., “Over the past 12 months, did your firm’s total sales volumes (adjusted for price changes) decrease, remain the same or increase?”). The questionnaire consisted of about 20 questions and took respondents approximately 10–12 minutes to complete.

Survey questions usually included a five-part scale for measuring responses:

  • significantly positive / higher
  • slightly positive / higher
  • no change / the same
  • slightly negative / lower
  • significantly negative / lower

We aggregated responses into balances of opinion or as proportions of the sample.8 Other questions asked respondents whether a characteristic applies to their firm, with response options of either “yes” or “no” or “significant,” “some” or “none.”

For multiple-choice questions, we summarized responses by firm size and calculated balances of opinion.9 For example, a positive balance of opinion for the question on future sales implies that more respondents expect sales volumes to be positive than those who expect sales volumes to be negative.

Our initial results

Firm demographics

The representation of firms by region and firm size in the e-BOS was generally consistent across the four quarters of the experiment. Where there were slight deviations from the target sample distribution by size, region and sector, we weighted individual observations to achieve the desired distribution when calculating balances of opinion.

Micro-micro firms were generally younger than small firms. Only 35 percent were more than 20 years old, compared with nearly half of all small firms (Chart 1, panel a). In addition, micro-micro and micro-small firms had a more concentrated customer base. About 40 percent of micro-micro firms reported that more than half of their sales were from fewer than five customers; less than 10 percent of small firms reported the same (Chart 1, panel b).

Chart 1: Firm age and concentration of sales

Chart 1: Firm age and concentration of sales

In the e-BOS, more than 50 percent of micro-micro firms were involved in commercial, personal and business services (Chart 2, panel a).10 These firms were found less often in retail and wholesale trade; manufacturing; and construction, information, transportation and utilities. Micro-micro firms tended to be more consumer-oriented than small firms (Chart 2, panel b).11 Micro-micro firms were also far less likely than small firms to be exporters (18.9 percent compared with 43.9 percent). As in the BOS, across all firm sizes, less than 5 percent reported their primary customer type was government.

Chart 2: Sector and customer type

Chart 2: Sector and customer type

Note: Sector aggregates are defined by North American Industry Classification System codes as follows: primary: 11 and 21; manufacturing (MFTG): 311–339; construction, information, transportation and utilities (CITU): 22, 23, 48, 49 and 51; trade: 41, 44 and 45; finance, insurance and real estate (FIRE): 52–53; and commercial, personal and business services (CPBS): 54, 55, 56, 71, 72 and 81.

Sources and uses of financing

Micro-micro and micro-small firms were more reliant on earnings, personal savings and credit card borrowing than small firms, who sought funding primarily through loans and trade credit (Chart 3, panel a).12 This is consistent with a Government of Canada survey of small and medium-sized businesses that found financing was more often requested by and approved for larger firms (ISED 2017).

A greater share of small firms used external financing to fund payroll expenditures, spend on physical capital and expand operations. In contrast, a greater share of micro-micro firms refinanced loans or paid down their existing debt (Chart 3, panel b).

Chart 3: Sources and uses of financing

Chart 3: Sources and uses of financing

Responses to labour shortages

Small firms reported they respond to labour shortages in a variety of ways, such as increasing hours and staff and improving productivity. In contrast, micro-micro and micro-small firms said they were more likely to reorganize or contract out their work (Chart 4).

Just under 20 percent of all micro-micro firm reported they take no action at all. This may reflect distinct financial and labour market constraints faced by smaller firms in the economy. In a Business Development Bank of Canada survey conducted in 2019, over half of small and medium-sized businesses surveyed said that labour shortages caused them to limit business investment (BDC 2019).

Chart 4: Responses to labour shortages

Drivers of input and output prices

Generally, the drivers of input prices across micro-micro, micro-small and small firms were similar. One exception is that small firms more often reported being affected by the exchange rate (Chart 5, panel a). This reflects the fact that micro firms are predominantly non-exporters.

In terms of output prices, micro-micro firms’ prices are influenced disproportionately by competitive markets and demand conditions, while small firms’ prices are affected more by pass-through of both commodity prices and labour costs and their own actions to address margins (Chart 5, panel b).

Chart 5: Factors influencing input and output prices

Chart 5: Factors influencing input and output prices

Comparing balances of opinion

Aggregating firms’ responses allows Bank staff to interpret and describe overall business sentiment from quarter to quarter. Several BOS variables are well correlated with economic data that are relevant and important for macroeconomic policy (see Amirault, Rai and Martin 2020). Over the sample period of the second quarter of 2018 to the first quarter of 2019, both the e-BOS and BOS results reflect a year of modest economic growth with an economy operating close to capacity.

For the main e-BOS questions, we aggregate responses of micro-micro, micro-small and small firms to calculate balances of opinion in each quarter. In Chart 6, Chart 7 and Appendix A, we plot e-BOS variables alongside the most relevant macroeconomic data series (e.g., future sales compared with real business GDP growth), as well as the comparable BOS balance of opinion. We shift e-BOS and BOS data based on the peak correlation of BOS and external data.13 Since the e-BOS and BOS have different survey frames, survey modes and slightly different questions, balances of opinion are not expected to have similar magnitudes but should be qualitatively similar (i.e., have the same sign).

On visual inspection, most balances move in the same direction as the underlying macroeconomic variable. BOS balances of opinion appear to be relatively more erratic than those of the e-BOS, possibly reflecting the smaller sample size. Also, the order of the time series of balances for micro-micro, micro-small and small firms for each e-BOS question is consistent across all four quarters. Most often, the balance of opinion for micro-small firms falls between those for micro-micro and small firms. Interestingly, micro-micro and micro-small firms generally responded more negatively than small firms. This may be linked to constraints on access to credit and labour markets that limit investment and employment growth.

Chart 6: Past sales

* Balances of opinion are constructed by assigning scores (e.g., 1, 0.5, 0, -0.5 and -1) to the responses, totalling all scores and dividing by the number of responses.
Note: Responses are plotted one quarter ahead; BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey.
Sources: Statistics Canada and Bank of Canada calculations

Taking stock and looking forward

Our findings from this e-BOS experiment suggest that smaller firms (i.e., micro-micro, micro-small and small) operating in Canada share many characteristics and have a common business outlook. Movements in the balances of opinion (the aggregated survey responses) show similarities with movements in major macroeconomic variables across size groupings. This suggests that some factors unique to smaller firms and their outlooks may be averaged out in the relatively large sample size.14 This, in turn, increases confidence in the generality of the results.

The results of an online business survey with smaller firms can be combined with those of the interview-based BOS and other sources of information. This broader business intelligence can help inform the Bank about the prospects for growth in the economy and allows for greater confidence in the results.

Chart 7: Future sales

* Balances of opinion are constructed by assigning scores (e.g., 1, 0.5, 0, -0.5 and -1) to the responses, totalling all scores and dividing by the number of responses.
Note: Responses are plotted two quarters ahead; BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey.
Sources: Statistics Canada and Bank of Canada calculations

Still, important differences exist across the three types of smaller firms:

  • their sources and uses of financing
    • micro-micro firms (and micro-small firms to a lesser degree) rely more on earnings, personal savings and credit card debt, while small firms more often access traditional bank loans and trade credit
  • how they manage operations in the face of labour shortages
    • when faced with labour shortages, small firms increased hours and staff and made improvements to productivity, while micro-micro firms were more likely to reorganize their operations or contract out
  • what drives their input and output prices
    • input prices of small firms are relatively more affected by the exchange rate, while the output prices of micro-micro firms are influenced disproportionately by competitive markets and demand conditions

Generally across most questions, the balances of opinion for micro-small firms nearly always fell between those of micro-micro and small firms. This suggests that a firm’s outlook is, to some extent, affected by the firm’s size.

Understanding how firm characteristics and outlooks differ across smaller firms may help the Bank develop a more robust outlook for the Canadian economy. Further, a more diverse sample may provide a fuller picture of how shocks spread through the economy and affect firms differently, depending on their size.

The Bank continues to connect with all types of organizations to expand its intelligence-gathering efforts. An online business survey would allow the Bank to expand and diversify its connections with the business community. Given the large number of firms in Canada with fewer than 100 employees, this type of outreach would be fairly straightforward. Collecting a greater number of smaller firm responses may also provide insight into the contribution of younger firms to overall economic growth and the reasons why some firms fail.

  1. 1. See Innovation, Science and Economic Development Canada (ISED 2020) for data on the small business sector in Canada.[]
  2. 2. Amirault, Rai and Martin (2020) provide a comprehensive reference guide to the BOS.[]
  3. 3. The monthly Business Barometer from the Canadian Federation of Independent Business is also monitored closely by analysts. While the barometer covers similar topics to the BOS, most questions focus on the short-term outlook of firms (i.e., the next three or four months). The BOS and e-BOS ask questions about the next 12 months, which is consistent with the longer time horizon of the Bank’s Staff Economic Projection and Monetary Policy Report.[]
  4. 4. Firms with fewer than 10 employees have been excluded from the BOS based on the assumption that the expectations of these firms are more likely to be driven by idiosyncratic factors rather than broad economic trends.[]
  5. 5. A comparison of responses in the e-BOS and BOS is provided in Suvankulov, D’Souza and Fudurich (forthcoming).[]
  6. 6. See Amirault, Rai and Martin (2020).[]
  7. 7. The e-BOS survey included most of the core questions from the BOS. Some questions were modified to better suit an online format. For example, while some BOS questions ask about changes in growth rates, e-BOS questions asked about changes in levels.[]
  8. 8. For more information on how business tendency surveys are designed and used, see the Organisation for Economic Co-operation and Development (OECD 2003).[]
  9. 9. Balances of opinion are constructed by assigning scores (e.g., 1, 0.5, 0, -0.5 and -1) to the possible responses, totalling all scores and dividing by the number of valid responses to the question.[]
  10. 10. Sector aggregates are defined by North American Industry Classification System (NAICS) codes as follows: primary: 11 and 21; manufacturing: 311–339; construction, information, transportation and utilities: 22, 23, 48, 49 and 51; trade: 41, 44 and 45; finance, insurance and real estate: 52–53; and commercial, personal and business services: 54, 55, 56, 71, 72 and 81.[]
  11. 11. Generally, micro-micro firms were relatively more service-oriented.[]
  12. 12. Across the survey results for firms’ sources and uses of financing, responses to labour shortages, and drivers of input and output prices, Bank staff used Pearson chi-square tests to test the null hypotheses that the shares of firms were independent of firm size. Hypotheses were rejected at the 99 percent significance level in all cases. The tests compared observed data with model data distributed according to the expectation that the variables are independent of firm size.[]
  13. 13. See Appendix 1 of Amirault, Rai and Martin (2020). Correlations cover the period from the third quarter of 2003 to the first quarter of 2020.[]
  14. 14. The BOS does not usually include firms that have fewer than 15 employees because it is harder to disentangle the unique factors that drive their decision making from broader economic trends.[]

References

  1. Amirault, D., N. Rai and L. Martin. 2020. “A Reference Guide for the Business Outlook Survey.” Bank of Canada Staff Discussion Paper No. 2020-15.
  2. Business Development Bank of Canada. 2019. “Investment Intentions of Canadian Entrepreneurs: An Outlook for 2019.” Available at https://www.bdc.ca/en/about/analysis-research/investment-intentions-canadian-entrepreneurs-outlook-2019.
  3. Innovation, Science and Economic Development Canada (ISED). 2017. “Survey on Financing and Growth of Small and Medium Enterprises.” Small Business Branch, Research and Analysis Directorate. Available at http://www.ic.gc.ca/eic/site/061.nsf/eng/03086.html.
  4. Innovation, Science and Economic Development Canada (ISED). 2020. “Key Small Business Statistics: 2020.” Small Business Branch, Research and Analysis Directorate. Available at https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03126.html.
  5. Organisation for Economic Co-operation and Development (OECD). 2003. Business Tendency Surveys: A Handbook. Available at www.oecd.org/sdd/leading-indicators/31837055.pdf.
  6. Suvankulov, F., C. D’Souza and J. Fudurich. Forthcoming. “From in-person to the web: Findings on survey mode effects from the e-BOS.” Bank of Canada Staff Analytical Note.

Acknowledgments

We wish to acknowledge the support of Bank of Canada senior leadership for the e-BOS. Brigitte Desroches, Lise Pichette, Larry Schembri, Joshua Slive, Gabriella Velasco, Jane Voll and Bank staff in regional offices contributed to the design and development of this experiment and provided helpful comments and suggestions. The views expressed are those of the authors and not the Bank of Canada. All errors and omissions are our own.

Appendix A: Comparison of balances of opinion by firm size

Chart A-1: Future sales indicators

* Percentage of firms of firms reporting that indicators have improved minus the percentage reporting that indicators have deteriorated
Note: Responses are plotted one quarter ahead; BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey.
Sources: Statistics Canada and Bank of Canada calculations

Chart A-2: Investment

* Balances of opinion are constructed by assigning scores (e.g., 1, 0.5, 0, -0.5 and -1) to the responses, totalling all scores and dividing by the number of responses.
Note: Responses are plotted one quarter ahead; BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey.
Sources: Statistics Canada and Bank of Canada calculations

Chart A-3: Employment

* Balances of opinion are constructed by assigning scores (e.g., 1, 0.5, 0, -0.5 and -1) to the responses, totalling all scores and dividing by the number of responses.
Note: Responses are plotted one quarter ahead; BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey; SEPH is Survey of Employment, Payrolls and Hours.
Sources: Statistics Canada and Bank of Canada calculations

Chart A-4: Wage growth

* Percentage of firms of firms reporting the expected average change in wages to be higher minus the percentage reporting it to be lower
Note: Responses are plotted two quarters ahead; BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey; SEPH is Survey of Employment, Payrolls and Hours.
Sources: Statistics Canada and Bank of Canada calculations

Chart A-5: Ability to meet demand

* Share of firms reporting some or significant difficulties
Note: BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey.
Source: Bank of Canada calculations

Chart A-6: Labour shortages

* Share of firms reporting shortages of labour
Note: BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey.
Source: Bank of Canada calculations

Chart A-7: Changes in input prices

* Balances of opinion are constructed by assigning scores (e.g., 1, 0.5, 0, -0.5 and -1) to the responses, totalling all scores and dividing by the number of responses.
Note: Responses are plotted one quarter ahead; BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey.
Sources: Statistics Canada and Bank of Canada calculations

Chart A-8: Changes in output prices

* Balances of opinion are constructed by assigning scores (e.g., 1, 0.5, 0, -0.5 and -1) to the responses, totalling all scores and dividing by the number of responses.
Note: Responses are plotted one quarter ahead; BOS is Business Outlook Survey; e-BOS is electronic Business Outlook Survey.
Sources: Statistics Canada and Bank of Canada calculations

Disclaimer

Bank of Canada staff analytical notes are short articles that focus on topical issues relevant to the current economic and financial context, produced independently from the Bank’s Governing Council. This work may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this note are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.