I was in graduate school at the University of Ottawa and my major was business cycles.But my assigned mentor was Mrs.Spry and she gave me two classes in Canadian Economic History.She had her Ph.D from the University of Toronto.She knew what all the staff at U.of T were writing and we had to read most of it.I knew of and read Mel Watkins and James Laxer.They wrote about the branch plant economy.Canada was a country with little of it's own companies;they were merely subsidiaries of American or European companies.Companies like Ford and Siemens.
She taught and we read that these plants were usually smaller than the home plants.They had little economies of scale.Consequently their costs of production were higher than the plant in Detroit or Munich.However there was little competition and so Canadian prices were higher;the consumer paid more.
We also read about Harold Innis and the staple theory.The manufacturing industry was built on the resource sector.Profits from lumber and copper and uranium built the banks and the manufacturers.As they helped to build infrastructure.As a result little research and development was required nor obtained in Canada.
The Governor agreed
Mark Carney,in his speeches, always pointed out to Canadians that our research and development was the lowest of the G-8 countries as a percentage of GDP.He didn't point out that applied research was high in Canada in relation to our G-8 partners.Canada likes to buy or import technology and slightly modify it so that it works better in our workplace.This is a cheap way of getting basic products but it will not get new products nor new processes.
Small caps have new technology
Most of the large Canadian companies have almost the same technology and processes as their G-8partners.There is very little new in companies like Roger's cable or even Bell Canada.Qualcomm has it and so does Vodaphone(in Europe).But the new companies in Canada get started based on new technology.They have no market share to start but they have a new gadget or a new process.Most, at first, have high growth rates but after two or three years only one or two out of twenty-five will survive.So the new technologies that are embedded are lost.
My program combines "small cap" companies and tries to create combinations that have synergies.The newly acquired company will infuse it's technology into the acquiring company and it's cost of doing business will go down even if there is more debt.This results in a "mini-merger".The results will not be obvious as sometimes the company being acquired will start to thrive and sometimes the acquiring company will start to grow.
The Success Rate
Many "small caps" simply fold as new revenues do not cover new expenses. Sometimes one or two workers will get a job with a competititor.In general, much of the new technology and expertise is lost.Many more "small cap" companies grow for one or two years and then stagnate.These are companies with growth rates that plateau and most of the workers have low to medium incomes.There are few highly expert workers and only a little profit.The industry is full of "small cap" companies like this.But once in awhile a "small cap" company becomes a" mid-cap" company.It has started to innovate and make it's own niche and this brings higher growth and higher profits and higher salaries.I believe there are a few small "mid-cap" companies around in this category such as Mitel and Aastra Technology and a few others.
