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Investment spending by small and mid-sized businesses is vital to strengthen productivity and innovation, improving economic output and jobs. However, many of these businesses encounter difficulties in raising capital in concentrated domestic debt and equity markets.

Throughout its seven-year mandate, the federal Liberal government has brought forward many different discretionary programs geared to provide capital to small businesses in the technology sector. These efforts have intensified in recent years in response to depressed investment spending, flagging productivity and innovation, the need for equity to mitigate record indebtedness, and demographic pressures on the intergenerational transfer of small business ownership. In the latest budget, the government said it would provide $1 billion over five years to help businesses invest in new technologies, noting that Canada ranks last among G7 countries in research and development spending by businesses.

The evident failure of many government programs to identify promising companies and to provide adequate capital for corporate needs explains the continued search for an effective program.

Several different policy approaches would improve circumstances and make a difference. For example, government programs could promote greater reliance on individual Canadians to identify and invest in promising small companies, placing less weight on bureaucratic decisions. Personal tax credits on the purchases of small-cap shares would encourage investment, offsetting significant related risks. Further, tax-assisted financings have the advantage of flexibility for growing companies, enabling small firms to raise capital at different stages of enterprise growth — in private and public markets, and through secondary rounds of financing as business operations expand and as markets are receptive to financing initiatives.

Finally, a system of personal tax credits, unlike direct grants and loans, is a more effective use of tax expenditures, given the associated multiplier effect on the economy. The hidden value of tax-assisted financing is it acts as a catalyst to cycle equity capital within Canadian communities, as individual investors often focus on familiar small business prospects in local communities. The startup and expansion of local enterprise bring more skilled job opportunities, increased incomes and greater economic vibrancy to communities across the country. Tax-assisted financing also facilitates the clustering of local small enterprise in communities, combining with educational institutions and the available local workforce, to reinforce success.

A second policy approach is to encourage large investment funds, notably pension funds, to invest in Canadian small business. Many large pension funds have been reluctant to invest in small business, private and public equity reflecting credit risk and small-scale investments having relatively high investment costs.

The federal government could mandate federally regulated pension funds to invest a minimum small business investment threshold as a share of total invested assets. This minimum investment threshold could release a significant amount of equity capital to the small business sector, and yet would have a minimal impact on overall portfolio returns for pension beneficiaries. This approach would encourage Canadian pension funds to follow the lead of the superannuation pension funds in Australia that support and contribute importantly to small business investment.

Ian Russell is a partner with Russell Deacon & Co. and past president of the Investment Industry Association of Canada.