Why Firms Grow—or Don’t: Friction, Fit, Size, and Growth

Popular startup lore celebrates hyperscaling disruptors, which often leads policy debates to focus narrowly on growth. For sure, scaling frequently becomes essential to reach higher productivity, to spread the cost of new tools or systems, and to meet the expectations of larger buyers in complex supply chains. In these situations, it is simply the practical way to stay competitive. But the high growth firm is only one business model among many, with many friction-led and fit-led reasons explaining why not all firms will dramatically scale.

The growth frictions holding firms back

External headwinds are essential to understanding why growth isn’t practical for every firm. In an April 2024 survey ⁽¹⁾, CFIB asked members why their business is at its current size. Among 634 unique size‑relevant, open‑ended comments, owners most often cited: costs/inputs (44%), labour/skills (42%), market demand & competition (25%), financing (15%), tax burden (12%), space/capacity (9%), and regulation/red tape (6%). (Totals exceed 100% since many mentioned more than one reason.)  

These growth frictions—also likely major contributors to Canada’s current entrepreneurial drought—align with well‑documented constraints:  

1. Macroeconomic headwinds such as uncertainty, supply chain issues, inflation, and tariffs.
2. Market access and competition including export barriers, lack of distribution networks, dominant large competitors, information gaps and infrastructure limitations.
3. Labour constraints, from shortages, management skills, training capacity, large competitors, or housing affordability.
4. Innovation and technology challenges, including high costs, digital skills, cybersecurity, or an uncertain return on investment.
5. Financing constraints including limited access, high costs, or collateral requirements.
6. Regulatory and administrative burden from taxation to permits, procurement and compliance.

When firms are right-sized by fit

Although growth is a priority for some, many small businesses are built around models and owners’ values and goals that don’t revolve around getting bigger. Purposeful right‑sizing is real: in the CFIB survey, another roughly one in four comments (24%) referenced fit—some by design (values, quality, specialization), others by context (place, season, role). This share is likely still understated, given the survey framing, a social desirability tilt toward “growth” that will influence answers, and the limits of response coding when motives are implied or mixed.

 1. Efficiency

Some firms have found their efficiency frontier—the size at which quality, costs, and team cohesion are balanced. For example, in partner‑led services (law/accounting/clinics/design studios, etc.), supervision and quality control set a natural span of control that’s “right” long before “big.” Owners also sometimes keep units small because additional capital would earn lower risk‑adjusted returns than deepening capability at the current scale.  

“Since 2009 we have been awarded five times "distributor of the year" awards by two separate suppliers, recognized for our expertise, and have become known for our ability to optimize processes while increasing efficiencies for our customers. This is value added commercial excellence with big returns to our customers!”

— Wholesale, 5-19 employees, Manitoba

 2. Personalization and authenticity

Many customers prefer businesses that offer one‑of‑a‑kind, owner‑led experiences where authenticity and human scale are part of the value—the B&B with personal tips over breakfast, the chef owned restaurant with an unusual menu, the hyperlocal craft shop. Entrepreneurs often keep operations small because that intimacy is exactly what their customers want. Legacy brands take a similar approach, right‑sizing to preserve mission credibility and community connection.  

“I've made a conscious decision to limit my business to 10 employees. This is a good size to keep my staff’s morale up and clients to continue to have personalized relationships with my staff. We could grow and the demand is there but we are trying to hold to our vision.”

— Auto service, 5-19 employees, Ontario

3. Fragmented demand

Not everyone wants the same thing. From ethnic food to designer micro‑labels to ultra‑specific B2B services, customer preferences splinter into segments too small for mass players to serve profitably. People want different features at different price points—creating niches where focus beats scale. Here, the constraint comes from the size and splintering of the market itself, not from the firm’s expertise or craft.  

“We have a niche business that relies on local businesses, artists, galleries, corporations, and walk-ins for our revenue. In order to provide a service that is affordable to all incomes we are likely to keep our current size as it is. Payroll is a huge factor.”

— Retail, 0-4 employees, Ontario

 4. Deep specialization

Canadian SMEs often succeed by going narrow and deep—whether it’s a Camino de Santiago outfitter, water‑reuse systems for Prairie oilfields, a women‑riders saddlery, forensic engineering, or custom clarinets. These firms thrive where expertise and customization matter more than volume. Scaling up would add overhead or dilute the craftsmanship and lead‑time that define their value. Unlike fragmented demand, they stay small not because the market is thin, but because growth would undermine the specialized skill at their core.

“Our small business is its current size because we operate in a very small niche market. I like operating a very small business (1 full-time equivalent employee besides me) meeting very specialized needs of a relatively small percentage of the overall population.”

— Retail, Saskatchewan

 5. Ecosystem roles  

Modern supply chains—from agriculture to aerospace—depend on specialized component makers, local distributors, contract service firms, and niche logistics operators. Large manufacturers rely on webs of smaller providers performing precise functions that aren’t economical to internalize. The system stays fragmented because distributed specialization is more efficient than vertical integration.

“Home based business (mom & pop model) supplying a specialist product to industry.”

— Wholesale, 0-4 employees, British Columbia

 6. Franchises

Franchising scales footprint while keeping local ownership and accountability. Franchisees bring capital and market feel; franchisors gain speed and stable royalties—growth without corporate bloat.

“[We are a] restaurant franchise with currently 185 employees between 4 locations. Numbers will grow to approximately 225 in summer during our busy season to keep up with demand.”

— Food services, New Brunswick

 7. Territory constraints

Some firms operate under supplier‑assigned territories (such as brand or distribution agreements) or sell into thin, place‑bound markets where travel time and delivery costs set natural bounds. In these cases, competitiveness inside the territory—not willingness to grow—often determines feasible scale.

“Our business size is dictated in part by our ‘territory’ area according to some of our key suppliers; our geographic area also limits which clients we can reach and still be competitive in certain markets.”

— Wholesale, 20-49 employees, Ontario

8. Geography

Would you drive hours for a carton of milk or an oil change if your nearest local option disappeared? Most city‑dwellers will never face that trade-off—but it is a real risk for many Canadians. Statistics Canada’s Index of Remoteness shows that one in nine Canadians live in municipalities that are moderately, more, or most remote—nearly two‑thirds of all municipalities and three‑quarters of the country’s landmass. And geography isn’t limited to “remote” places: rural, peri‑urban, island, and corridor communities also deal with thinner demand and longer travel times. In all these areas, distance and small populations make scale economics hard. SMEs fill the gap where larger firms can’t make it work.

“We have about 50 employees. Operate in 2 provinces. We serve a relatively small market in each town so I would say our size has been dictated by the size of our towns.”

— Retail, British Columbia & Alberta

9. Seasonality

Some firms stay small because demand is seasonal. Tourism, fishing, agriculture, recreation and weather‑dependent trades all face strong peaks and long off‑seasons. Scaling staff or equipment would only inflate fixed costs and risk. Small is the safer, more viable fit. Many seasonal operators also manage multiple complementary ventures, so each business stays right‑sized to match demand and owner bandwidth.

“4-5 employees that is because I am a fishermen owner/operator. I hire 4-5 people for the 9 weeks my season is.”

— Fishing, Nova Scotia

10. Family businesses

For many owner‑managed firms, family priorities shape optimal scale—keeping decision‑making tight, protecting culture, and balancing work–life across generations. In the survey comments, several owners explicitly tie their preferred size to family stewardship and transfer plans.

“Our farm is in transition to the next generation, so growth is more challenging. Growth decisions rest more on the shoulders of our son and family and what they are comfortable with. Also, the farm now has to support two families. Business planning is paramount and cash flow becomes most important. Time of adjustment so caution is our focus for now.”

— Agriculture, 0-4 employees, Alberta

11. Succession

Survey comments also highlighted succession. Many owners keep operations small or downsize as they near retirement, lacking a successor or wanting less managerial burden. Others say growth isn’t worth the complexity when they plan to exit soon. Several noted being “past retirement age” or “moving toward semi‑retirement,” and aim mainly to maintain a stable, saleable business. These cases simply reflect a fact of life and the power of demographics that will be driving one of the largest inter-generational wealth transfers in Canada these next few years.

“Our business is at its current size because it is a professional services firm (law office) located in a rural area and it is hard to attract younger professionals into this environment. I am nearing retirement now, and now is not the time to be risking capital by expanding.”

— Professional services, 0-4 employees, Alberta

Firm size diversity: a feature, not a flaw, of a strong Canada

Critics will argue that some of the businesses above would simply be better off regrouped into larger entities to capture economies of scale, increase productivity, and reach deeper market penetration. Putting aside textbook debates (and any quest for custom‑clarinet world domination), real‑world economics shows that maintaining many small and medium‑sized firms across sectors has various benefits (or, as economists would put it, “positive externalities”). In practice, a diverse firm‑size mix strengthens the economy and society by:

• Enhancing resilience. A wider base of firms diversifies risk: when large players retrench, smaller firms help sustain services and jobs—especially during downturns.
• Reinforcing supply chains. Distributed networks of specialized SMEs add flexibility and redundancy, reducing single‑point‑of‑failure risks for major manufacturers and service systems.
• Promoting healthy competition. Numerous independent firms prevent market dominance by a few players, helping maintain fair pricing and strong service standards.
• Spreading jobs and incomes across communities. Employment and purchasing power are more evenly distributed, rather than concentrated in a handful of economic hubs.
• Accelerating innovation and adaptability. SMEs often experiment, pivot, and iterate more quickly, enabling markets to respond faster to changing preferences, local trends, and unexpected shocks.
• Expanding market coverage. Niche providers fill gaps with tailored solutions that are uneconomical for large, standardized players.
• Improving consumer welfare. More choice, proximity, and convenience—often with higher‑touch service quality—benefit customers directly.
• Preserving diversity and authenticity. Owner‑led firms reflect local culture, products, and traditions, enriching the economic and social fabric.
• Strengthening community vitality. Local SMEs act as anchors—sponsoring youth activities, mentoring apprentices, sometimes serving as gathering places and keeping ownership and decisions rooted in the community.
• Supporting inclusive entrepreneurship. Smaller‑scale, right‑sized business models lower barriers to entry for newcomers, women, Indigenous entrepreneurs, and rural founders, broadening participation in growth.

This helps explain why SMEs keep playing a pivotal role in Canada’s economy, representing 99.7% of all employer businesses, 64% of the total private-sector workforce, 38% of the value of exported goods and 47% of private-sector GDP, according to the government of Canada (ISED).  

Conclusion and Recommendations

Whether it is a matter of growth barriers, geographical reality, customer preferences, industrial structure, succession plans, etc., there are many reasons for a business to be at a small or medium size. Not every entrepreneur wants to rule the world, and that decision often benefits their customers, the community, and the economy at large. For this reason, let’s avoid looking at entrepreneurial policy exclusively through the growth lens. A balanced view of entrepreneurship by policy‑makers is relatively simple to achieve: enable firm growth where it lifts productivity, remove frictions that block it, and respect right‑sizing where it maximizes economic and social value. Here are some of the ways policy can help with that:

• Maintain a progressive tax system for all businesses, including by expanding and modernizing (not eliminating) the small business deduction and payroll tax thresholds.
• Recognize that the regulatory burden disproportionately impacts smaller businesses and simplify their path to conformity and access to government services.
• Ensure there is fair, affordable, and sufficient access to capital for Canadian SMEs.
• Support local and independent ownership during succession by giving exiting entrepreneurs more tools to keep their business in the family, with staff, or in the community.
• Ensure big government, big unions, or big companies do not abuse their size to exert undue competitive, financial, or labour market pressure on smaller businesses.