Small businesses have grown larger since the start of the decade, but overall growth in the number of small businesses has slowed in the last five years, partly reflecting softer economic conditions, according a report from RBC Economics.

According to the RBC report, the lessening of regulation and the high Canadian dollar have upped the ante for small businesses in a wide spectrum of industries over the past decade.

These factors have exerted increasing pressure on small businesses to take steps to become more competitive — including combining with other organizations. Small businesses in sectors directly exposed to foreign exchange, such as tourism, were most affected. Suppliers of goods or services to larger, export-dependent organizations also felt the effects, but to a lesser extent, of the sharp appreciation in the Canadian dollar. And even though the manufacturing sector is experiencing generalized declines in the number of small businesses, the average firm size appears to be increasing.

“While consolidation in the manufacturing sector has led to a loss of small businesses, there is evidence that average firm size has grown in most manufacturing industries,” says Robert Hogue, senior economist, RBC.

“Through the challenging markets of the past several years, the decline in the number of small manufacturing firms might actually be a positive sign if it reflects a movement towards them becoming larger in size. Larger firms tend to be in better position to make the investments necessary to become or remain globally competitive,” Hogue adds.

Although the extent to which small firms are part of this bulking up phenomenon is difficult to determine, the report found that output is being produced by larger and larger enterprises in Canada.

“Whether this size expansion is a result of smaller firms becoming bigger, or larger firms gaining heft, or both, we see this as positive news for our economy. Productivity performance tends to get stronger the larger the size of enterprises,” Hogue says.

Specifically, the report found that within the micro/small business category, the share of the larger firms (those with between 10 and 99 employees) has increased in all manufacturing industries between 2002 and 2007. Even though such a shift does not appear to extend to the medium-sized enterprise category, it does suggest that Canada’s smallest manufacturers are moving up the size chain.

With the Canadian economy expected to gradually emerge from its “soft patch” during 2009, the report found that general business conditions should improve later next year and stimulate the small business environment. However, the rate of growth in small businesses is unlikely to pick up much, if at all, as the maturation process continues and the focus for several key sectors remains on consolidating and restructuring.

“While it is still too early to pass a definitive judgment on whether or not small businesses in Canada are successfully adapting to the tough economic challenges, the evidence is encouraging to the extent that firms are gaining heft across the spectrum of industries,” says Hogue.