Thank you so much.
I appreciate the invitation to attend this meeting and the opportunity to speak today in front of the committee members. My name is Dr. Yelena Larkin, and I am an associate professor of finance at the Schulich School of Business at York University. I study issues related to product market structure and industry concentrations through the lenses of academic research in corporate finance. This statement is an integration of my own research work on the topic of concentration, as well as academic work by my fellow finance and economic researchers.
Corporate finance research focuses primarily on publicly traded firms, which are obviously very different from SMEs in multiple aspects. However, I believe that the analysis of publicly traded firms, which are both industry leaders and the largest players in the overall economy, can be of interest to this committee, as it helps us better understand the overall economic environments within which SMEs operate these days.
My main focus is the declining nature of Canadian business dynamism as it is reflected in the universe of publicly traded Canadian firms. The number of firms listed on TSX that are not set as an investment vehicle, which excludes mutual funds, closed-end funds and so on, has dropped by around 30% since its peak in 2008, whereas the remaining firms have grown older and also bigger. Importantly, the growth size has been skewed so that large firms have grown at a much steeper rate. For example, the inflation-adjusted market cap of firms in the top quartile of size distribution has swelled from a quarter of a billion dollars in 2008 to almost one billion dollars in 2016.
The outbreak of pandemics has not reversed these trends. While the number of publicly traded firms on TSX has changed little, the average firm value grew by another 30% between 2019 and 2021. Other important trends that have been characterizing Canadian financial markets in the past two decades include low entry rate through IPOs—the process through which a private firm becomes publicly traded—and high level of exits though mergers and acquisitions.
Combined, these trends signal a structural change. Existing research based on international data demonstrates that concentrated stock markets are associated with less efficient capital allocation, sluggish innovation activity and slower overall economic growth. I have tested the validity of this argument within the Canadian economy and found consistent results. Canadian firms operating in industries with more concentrated market cap distribution end up being more profitable, but at the same time, they do not invest more in either tangible capital or R and D. Taken together, the increase in dominance of large firms is consistent with an increase in barriers to entry and potentially a decline in product market competition. This in turn hurts smaller firms, and SMEs in particular.
Going forward, I believe it is important to safeguard a consistent economic policy framework that would support the growth and development of SMEs along multiple channels. I also think it is necessary to ensure that various policies complement each other and not interfere with each other. As an example, on the one side, government's broad suite of funding measures has been supporting small businesses across Canada, especially during COVID-19. On the other side, however, the existing legal environment for mergers and acquisitions has been quite lenient towards anti-competitive mergers.
The existing Competition Act has been lacking clear guidelines as to what merger would be considered anti-competitive. The idea of examining the trade-off between efficiency gains and the competitive harm from the merger in order to determine whether a proposed merger should go through has also put consumers and small businesses at a disadvantage. I therefore welcome the recently proposed initiatives to amend and update the Competition Act in a way that better reflects today's unique challenges.
Additional strategies aimed at reducing barriers to entry and costs of business operation that are particularly acute for SMEs can further promote growth. Reducing regulatory costs that disproportionally hurt small businesses could be one such strategy. Another approach could focus on providing small businesses with better access to labour capital. Again, SMEs have borne the brunt of the COVID-related labour shortages.
Finally, I believe further academic research is needed to understand the drivers of the current trends in the Canadian economic environment and their implications for SMEs. Establishment of research programs that could bridge between academic researchers on one side and agencies with access to granular data on the other side could create valuable new advancements with direct policy implications for both SMEs and the Canadian economy in general.
Thank you very much for your attention. I'm looking forward to your comments.