Risk tolerance for innovation in line with ability to absorb financial losses for most Canadian businesses

Only a tenth of Canadian businesses are truly risk averse, with the majority’s risk appetite for innovation matching their ability to withstand potential financial losses, according to a new survey report form the Conference Board of Canada.

Based on a telephone survey, the organization says that more than 70% of Canadian businesses have a risk tolerance in line with their financial capacity to withstand losses from those risks. The survey was conducted in May and June 2014 and received just over 1,000 responses.

About 15% of businesses have both the willingness and financial capacity to take significant risks and absorb potential losses, the report suggests.

Meanwhile, roughly 10% of businesses are “truly risk averse in that their financial capacity exceeds their willingness to take risks,” while about 5% are considered the opposite, or “wishful thinkers,” the organization said.

Overall, barriers to innovation such as regulations, financing and lack of time ranked higher than risk aversion.

The findings were based on a question asking survey participants to imagine having $100,000 to invest in innovation. Businesses were given four best and worst-case outcome choices to choose from, including:

• $200,000 gain or $0 gain/loss
• $800,000 return or $200,000 loss
• $2.6 million return or $800,000 loss
• $4.8 million return or $.24 million loss

Almost half the businesses would go the most conservative route, with 35% going the second most conservative, the Conference Board reported. “Based on the survey responses, there is about a 1 in 17 change of a Canadian company taking the big bet,” the report notes.

Responses were then cross-tabulated with 2013 sales figures as a proxy for enterprise size and capacity to absorb losses to understand risk appetite.

“Our study found that the majority of Canadian businesses are willing to take risks—the problem is that they have limited financial means to absorb potential losses,” Michael Grant, research director for the Conference Board of Canada said in a statement on the report findings.

“Rather than assume all Canadian businesses are risk averse or that Canadians should fund businesses with greater risk appetites, to improve Canada’s innovation performance we need to increase the number of Canadian businesses who are willing to take significant risks and have the financial capacity to do so,” he added.