Lack of understanding of scale-ups is hindering growth, says Brookfield and Munk School report

Canada’s scale-up firms make significant contributions to the country’s employment, innovation and productivity growth. But a lack of understanding of what they are and how they operate is preventing governments from developing policies that support their growth, according to a report from the Brookfield Institute for Innovation and Entrepreneurship and the Innovation Policy Lab at the University of Toronto's Munk School for Public Policy & Global Affairs.

The report set out to better understand scale-ups, which are defined as young and/or high-growth firms, using data from the period between 2011 and 2016. It found scale-ups can be classified by employment or revenue growth.

How scale-ups grow impacts how they behave, the report found. While companies classified as employment scale-ups excelled at boosting their staff numbers, that didn’t always translate to significant revenue gains; similarly, revenue-intensive scale-ups often made those gains with smaller employment numbers.

“Even though, in sum, scale-ups really contribute to the economy…each of these scale-ups contributes differently, and confusing different types of scale-ups, especially when it comes to the policies that support them, is a really dangerous thing,” said Viet Vu, a report co-author and senior economist at the Brookfield Institute.

“You might not end up supporting the right policy objectives, and you do run the risk of confusing multiple policy objectives in a single policy for scale-ups, and that policy not really serving any of these scale-ups well.”

Vu collaborated on the report with Steven Denney, an associate in the Innovation Policy Lab at the Munk School, and Ryan Kelly, a senior economist at Innovation, Science and Economic Development Canada.

The authors defined employment growth in two ways: an OECD-Eurostat definition of a firm with at least 10 employees experiencing at least 20 per cent year-over-year growth for three years and a Kauffman Foundation definition of companies 10 years or younger that grow to at least 50 employees by their tenth year or the year their growth is measured. It defined revenue growth, meanwhile, as at least a 20 per cent year-over-year real total revenue growth for three consecutive years.

The report also pointed out that growth isn’t uniform. While accommodation and food companies represented the largest chunk of employment scale-ups measured by the Kauffman Foundation, a definition that captures much younger companies, they were a much smaller share of OECD-defined employment scale-ups, which captures more established companies. Conversely, tech companies represented a small percentage of Kauffman employment scale-ups, but the highest proportion of OECD scale-ups.

The authors advocated for a move away from a monolithic approach to scale-up companies, and for policy objectives that are geared toward supporting each of the different types of growth.

Scale-ups represent just one in 100 companies, the report found. But revenue scale-ups reach revenue levels at least 20 times higher than non-scale-ups, and employment scale-ups have employment levels at least five to 10 times higher than non-scale-up peers. High-growth firms of all types are associated with a higher export rate and “significantly” higher amounts of research and development spending.

However, the report found a decline over time in scale-ups investing in R&D, mirroring a broader trend in the Canadian economy of stagnating R&D spending. It’s something Vu called "worrying."

“What’s concerning is we expect the fastest-growing companies in Canada to be leading technology investment, to be leading in adopting new technology that makes (them) more competitive, but we don’t see that from the data,” he said.

He said he hoped to see the government shift the discussion around R&D spending, to acknowledging most efforts are bound to fail. “That’s where the conversation needs to be going, away from a perhaps picking winners approach that some policies seem to do, in that they’re selecting already large companies that have established research guidelines and low-risk projects, and go in on higher risk, higher failure rate projects.”

This story previously stated that the report was from the Brookfield Institute for Innovation and Entrepreneurship. In fact, it was a collaboration between the Brookfield Institute and the Innovation Policy Lab at the University of Toronto's Munk School for Public Policy & Global Affairs. Research Money regrets the error.

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