Canada’s future prosperity is linked to the ability of the next generation of small to medium-sized enterprises (SME) to grow faster and be more productive, according to a new study released today by RBC Financial Group.

Although the number of SMEs being created is expected to grow at peak volumes for the next decade, the report argues that sheer numbers alone will not necessarily propel Canada forward to remain competitive in the global marketplace.

“No matter the type, the size, or the motivation for being in business, it will be increasingly important for Canada’s entrepreneurs to think about productivity and profitability,” said Derek Holt, assistant chief economist, RBC, in a release. “This is especially the case if we are going to close the productivity gap with the U.S. We need companies to invest in physical and human capital, be more proactive in adapting to new technologies, and to think beyond borders. Unfortunately, our track record on these issues has been relatively weak.”

The RBC report notes that while SMEs in both Canada and the U.S. tend to be far less productive than larger firms, small and medium-sized firms in the U.S. have grown their productivity at a more rapid pace than their Canadian counterparts since the early 1990s — and the gap is growing.

Closing Canada’s productivity gap is vital given that Canada’s small business sector is responsible for nearly half of Canada’s economic activity. In fact, SMEs comprise the lion’s share of total employer business establishments in Canada at a whopping 99.7%. Furthermore, 65% of 10 million private sector employees are on SME payrolls, and the Organization for Economic Co-operation and Development (OECD) estimates that SMEs added roughly 43% to Canada’s private sector GDP in 2000.

In addition, Canada is much more reliant on small owner-operated businesses (with less than four employees) than is the United States and Canada has significantly fewer businesses with over 500 employees.

“Per capita, Canada has more SMEs and more people depending on them for their livelihoods than in the U.S., but comparatively ours don’t contribute as much to our economy,” said Holt. “This is due to many factors and all stakeholders share in the reasons, including the business community, financial institutions, all levels of governments, and labour. Looking ahead, Canada’s economy will benefit from more growth-oriented firms and stronger productivity gains at existing firms.”

“It is important to realize that this is not an exercise about picking winners and losers,” said Holt. “You’ll find star performers in all industries and in all sectors. Even some firms in traditional industries such as dairy farming, mining and crop growing achieve high-growth by adopting new technologies and focusing on being more productive.”