Investment intentions amongst Canadian entrepreneurs are expected to remain stable, but more of their dollars are likely to be spent on technology.
The Business Development Bank of Canada (BDC)’s fourth annual survey of small-midsized enterprises (SMEs), released Jan.15, reported that 73 per cent of SMEs are expecting their revenues to grow in 2019, compared with 72 per cent in 2018.
But there are several factors, chiefly Canada’s labour shortages are holding their investment back, notably in the construction and resource sectors, according to the survey, Investment Intentions of Canadian Entrepreneurs: An Outlook for 2019. Other constraining factors include insufficient cash flow and lower confidence in the economy.
Tech outlook brightest
The sectors with the brightest investment outlook are wholesale, technology and business services. But reflecting the growing digitization of the economy, SMEs are shifting their investments away from machinery and equipment (M&E) and buildings towards intangible assets, such as intellectual property, marketing, research and development (R&D), software and training.
The balance of opinion on their investment intentions for M&E (-2 per cent), and for buildings (-3 per cent) is negative for 2019, an indication that SMEs plan to spend less in 2019 than 2018, according to the BDC. On balance many SMEs reported plans to spend more on IP, marketing, R&D, training (balance of 8 per cent) and on software (balance of 3 per cent) in 2019 than they had done in 2018. Moreover, exporting businesses are more likely to plan new technology investments, thanks to a low Canadian dollar and strong U.S. demand.
Following on this, a quarter of businesses that will allocate all of their investment to new technologies expect revenues to grow by 20 per cent or more this year, the BDC investment survey reported, compared to only a tenth of firms that will allocate their investment differently. According to BDC’s research, top-performing businesses invest more in intangible assets, allowing them to be more innovative and profitable1.
“In an economy that is increasingly automated and digitized, these assets are at the heart of a business’s capacity to produce goods and deliver services competitively,” said the BDC.
Labour shortages to intensify
The higher investment in training is a sound move. This is the second year in a row that staffing has been cited as the top obstacle to investing: 53 per cent of businesses did so for the most recent survey.
A recent BDC study found a direct link between the shortage of workers and slower growth in a company’s sales. What’s more, it said, demographic changes, notably an aging workforce and retiring Baby Boomers, will make chronic labour shortages worse over the next decade2. The BDC suggests employers formalize their HR policies, develop employee value propositions to make their businesses more attractive to existing and prospective workers and consider hiring from underutilized segments of the labour force, including immigrants. Businesses should also improve operational efficiency, automate processes and leverage technologies to become less dependent on workers.
Cash flow issues
The BDC investment survey said that insufficient cash flow generated by businesses is posing an increasingly important investment hurdle. But it noted that the majority of business owners prefer to invest with cash, instead of taking on debt.
“Entrepreneurs could invest more if they borrowed,” said the BDC report. “Credit conditions remain favourable in Canada, with interest rates remaining low by historical standards.”
There is growing concern by SMEs about the future of the Canadian economy. Respondents said that higher interest rates, trade uncertainties and commodity price fluctuations are starting to weigh confidence, particularly in the Prairies. But there is confidence and optimism in Manitoba, Newfoundland and Labrador and Quebec.
“We observe that a lower number of business owners show high confidence in both the Canadian and world economies compared to last year,” said the BDC.
The BDC study is available for download at https://www.bdc.ca/en/about/sme_research/pages/investment-intentions-canadian-entrepreneurs-outlook-2019.aspx.
“It is encouraging to see some optimism from Canadian businesses as they adapt to the labour shortage and digital technology,” said Pierre Cléroux, BDC vice president, research and chief economist. “SMEs make up 99.7 per cent of Canadian companies, so their success is crucial to the economy. Companies can better meet today’s challenges if they invest in retaining workers, hiring newcomers to Canada and adopting new technology.”