Although the productivity issue inhibiting Quebec’s economic growth was diagnosed more than 20 years ago, it does not seem to be disappearing. Yet the source of the problem has been clearly identified: Quebec firms invest little and are less innovative, and many prefer to rely on the relative weakness of the Canadian dollar to remain competitive. Now a study released today by the Centre for Productivity and Prosperity – Walter J. Somers Foundation (CPP) may well reverse this trend, by identifying the education of SME managers as one of the probable causes of this failure to address the problem. This finding is particularly important, given that the Quebec government is counting on SMEs to drive the recovery.
“There are two factors underpinning our approach,” explains CPP Director Robert Gagné. “Firstly, SMEs are the basis of the province’s economic fabric, generating over 85% of jobs in the private sector. This means that they are also central to the productivity problem. Secondly, decision making in SMEs is normally in the hands of a small number of people, even a single individual in many cases. Consequently, we wondered whether the heads of Quebec SMEs bear some responsibility for Quebec’s poor performance in terms of productivity.”
When they analyzed the data in the Survey on Financing and Growth of Small and Medium Enterprises conducted by Statistics Canada, CPP researchers realized that this could well be the case. “Many studies show an indisputable link between businesses’ performance and the human capital value of their leaders. So we set out to explore this aspect,” says Gagné. “The results were particularly convincing.”
Among other findings, their analysis revealed that SMEs headed by university graduates were more likely to adopt advanced technology, to innovate and export, and to hold intellectual property. “Since fewer heads of Quebec SMEs, proportionally, have university degrees than their counterparts elsewhere in Canada, our analysis could not only partly explain the province’s longstanding productivity lag, but also open up new avenues to remedy the problem,” says Jonathan Deslauriers, CPP Executive Director.
A comparison between SMEs directed by someone with a university degree vs those headed by someone with a high school diploma shows that:
- 87% more of them have adopted advanced technology over the past three years (30% for those headed by an individual with a diploma of college, technical or vocational studies);
- 44% more of them have generated at least one innovation over the past three years (16% for those headed by an individual with a diploma of college, technical or vocational studies);
- twice as many hold intellectual property (60% for those headed by an individual with a diploma of college, technical or vocational studies).
- SMEs directed by a university graduate export twice as much as those headed by an individual with a lesser degree;
- proportionally speaking, Ontario has 40% more SMEs directed by someone with a university degree than Quebec and 5 times more SMEs headed by immigrants (35.6% as opposed to 14.0%).
“These last two findings are particularly revealing when we look at the nature of Quebec’s productivity gap,” maintains Gagné. “Not only does the literature show a strong connection between a business manager’s education and its performance, but also a growing number of studies tend to show that immigration acts as a vector of innovation in western economies. By making use of these levers, Quebec could finally manage to reverse this harmful tendency.”
In light of these observations, the authorities must think seriously about how to ensure effective reform of the measures favoured by the government to stimulate productivity. “Before expanding the range of fiscal solutions and programs encouraging SMEs to invest and innovate, the government must first ensure that they have the means to do so,” says Gagné, “in particular by improving access to training and development, but also by targeting sectors where a university education is less common. In addition, there has to be serious consideration of how to encourage diversity in entrepreneurship in Quebec, since immigration will apparently be a catalyst for innovation and productivity in the province.”
To learn more : Deslauriers, Jonathan, Robert Gagné and Jonathan Paré, Performance des PME québécoises : perspectives sur la formation des dirigeants, Centre sur la productivité et la prospérité (CPP) – Fondation Walter J. Somers, HEC Montréal, March 2021 (In french only)