Why subsidizing small businesses doesn’t actually boost innovation

We romanticize small companies, but there’s little correlation between size and innovation. We need policy that reflects reality—not sentiment

Large business figure with small business figure on his hand, both pointing the same way

(Jud Guitteau/Getty)

The federal government has been out asking Canadians what we think about innovation. Our answers suggest we are sensitive about the one percenters taking advantage of Prime Minister Justin Trudeau’s desire to do something big in this regard. We are okay with public funds being used to help business, so long as the money is directed to the little guy.

This is what I deduce from this January 11 Globe and Mail story. The Globe’s Bill Curry used the Access to Information Act to obtain material on focus groups the government hosted in nine Canadian cities in November. Curry said the sessions focused on innovation, climate change, and the culture industry. Of the three, innovation received the bulk of the attention, which makes sense, given that Finance Minister Bill Morneau’s next budget likely will be on the same theme.

Here’s what Curry and the Globe shared from the conclusion of the final report on the focus groups:“When asked, there was strong support for the government offering subsidies to support innovation, rather than providing tax cuts or investments, particularly for smaller organizations,” states the final report summarizing the research. “In terms of sectors, participants favoured assistance for the health-care sector, given Canada’s aging population, along with education, agriculture, forestry, and renewables and clean technology.”

It’s difficult to know how much weight Morneau puts on such findings. He’s a politician, so he will be sensitive to public opinion. He also has spent a long time thinking about policy, so he will know that the public doesn’t always know what is good for it. On January 4, CBC Radio’s The Current played Anna Maria Tremonti’s interview with Yale psychology professor Paul Bloom. Bloom is the author of Against Empathy: the Case for Rational Compassion, which argues that we too often let our emotions get in the way of making sound decisions. An example Bloom offered Tremonti was the stuffed animals that flooded Newtown, Connecticut after a gunman killed 20 students and six adults at Sandy Hook Elementary School in 2012. The toys were sent by thousands of well-meaning people. But the gifts became a nuisance because there were too few families in the community to absorb them all. Newtown also is relatively wealthy; if parents thought their children’s trauma would be eased by a new teddy bear, almost all had the means to buy them one. Municipal leaders asked people to stop sending stuffed animals, but the gifts kept coming, forcing Newtown to figure out a way to store them. Empathy made the situation worse.

In terms of economic policy, our empathy for the owners of smaller businesses can cause us to assume that what is good for them must automatically be good for the economy. It is noteworthy that the focus groups appeared to be okay with subsidizing businesses directly, rather than cutting their taxes or making investments in things like infrastructure. That will annoy those who think governments are poor at picking winners, just as it will encourage those who argue that companies such as Apple and Tesla needed the government’s help to get off the ground.

The rub is the public’s apparent preference for giving public funds to small companies. We romanticize small business as the backbone of the economy. Most of our companies are measured in the dozens of employees, not thousands. But when it comes to innovation, it’s not size that matters—it is the desire of management to grow. The International Monetary Fund has criticized Canada for favouring smaller companies, when it is new companies that generate jobs the fastest and introduce new ideas. Nor are bigger companies that seek government assistance necessarily corporate welfare cases. They may be companies in technology or health with big valuations that want to get bigger still. Can such a company secure venture capital from private sources? Probably, but that private money may result in the benefits accruing somewhere other than Canada. Smaller companies count on business from bigger ones.

So the most efficient way to help such firms could be subsidizing the bigger guy. That could be hard for a lot of us to accept, but only if we let our feelings get in the way.