- Alberta, P.E.I., Newfoundland and Labrador, and Saskatchewan all earn “A” grades on enterprise entry—and have entry rates higher than the overall Canadian rate of 13.1 per cent.
- Quebec is the poorest-performing province, with an entreprise entry rate of 10.5 per cent, earning a grade of “D.”
- Between 2002 and 2012, Alberta, Ontario, and B.C. had the highest net enterprise entry rates (entries less exits) in Canada, indicating a greater likelihood of firms in those provinces surviving over time.
Why are enterprise entries important to innovation?
Entrepreneurship is an important piece of innovation performance. New firms entering the market is a sign that entrepreneurs believe they have a new product or service to offer consumers, or that they have found a better way to produce or deliver existing products and services. In other words, it signals that innovation is occurring. It also suggests that entrepreneurs are optimistic about consumer demand and confident about business conditions—this, in turn, can spur others to enter the market or enhance their existing business activities. In these respects, a high or rising enterprise entry rate is one indicator of innovation health.
New firm entry also provides an indication of the competitive status of the economy. Whether new firms succeed or fail at introducing new innovations, their mere entry introduces competitive pressures for established firms to develop new or improved products, services, processes, and marketing methods in order to retain or grow their market share. Indeed, the more established firms face new entrants and competitors, the more innovation a sector or economy is likely to see.
How are enterprise entries measured?
The enterprise entry rate is measured as the number of new businesses as a per cent of the number of active (i.e., entrant + incumbent) businesses in a given year. Statistics Canada defines a business as a private-sector employer enterprise—incorporated or unincorporated—that issues one or more statements of remuneration paid (i.e., T4 slips) to their employee(s) for tax purposes. Business “entrants” are those with employees in the current year, but none in the previous year, while incumbent businesses are those with employees in the current and previous years.1
How do the provinces rank relative to each other?
With an entry rate of 16.7 per cent in 2012, Alberta earns an “A” and is the top-ranked province. P.E.I. (16 per cent), Newfoundland and Labrador (15.9 per cent), and Saskatchewan (15.5 per cent) also earn “A” grades on enterprise entry.
Three provinces earn “B” grades—B.C. (14 per cent), Ontario (13.9 per cent), and Manitoba (13.6 per cent). New Brunswick is the only “C” performer, with an enterprise entry rate of 12.2 per cent—nearly a percentage point below the overall Canadian rate of 13.1 per cent. Nova Scotia (11.2 per cent) and Quebec (10.5 per cent) rank ninth and tenth, respectively, and both earn “D” grades.
How has provincial performance changed over time?
Between 2002 and 2012, every province had an overall decline in its enterprise entry rate—albeit a small decline in most cases. Over this period, nearly every province saw its entry rate peak in 2004 and reach its lowest point in 2012. While the trend varies—with slight increases in the early part of the decade and declines in 2004–05 and during the recession in 2008–09—the long-term trend is one of general decline since the early 1980s. The enterprise entry rate in Canada gradually fell from 24.5 per cent in 1983–84 to 13.1 per cent by 2012.
Although entry and exit rates are sensitive to the business cycle, the business cycle does not explain the long-term trend. Entry and exit rates differ across industries and therefore require industry-level analysis to determine the factors influencing variations and long-term trends.2
Alberta and Newfoundland and Labrador traded the top spot repeatedly between 2002 and 2012. From 2002 to 2004, and again in 2009 and 2010, Newfoundland and Labrador was the top performer. Alberta led the field from 2005 to 2007, and again in 2011 and 2012. The two provinces had the same entry rate (17.7 per cent) in 2008. By contrast, Quebec consistently had the lowest entry rate of all the provinces every year from 2002 to 2012.
Although Newfoundland and Labrador recorded the highest one-year enterprise rate—20.3 per cent in 2004—it tied with B.C. for the largest variance over the period, with a difference of 4.4 percentage points between its highest and lowest recorded entry rates. By contrast, Manitoba was the most consistent performer, with a difference between its highest and lowest entry rates of only 2.3 percentage points.
Do new firms survive and grow?
While enterprise entry rate is an important measure of both innovative activity and competitive conditions in regional economies, whether new firms survive and grow is another key concern. In an economy driven by competition and innovation, non-innovative firms may struggle and exit the market. Indeed, some turnover is welcome to the extent that it creates the potential for human and other resources to be reallocated and used for more innovative and productive purposes by new firms and other dynamic firms. But exit rates that are high because new and established firms face an environment hostile to innovation and growth are a concern. Over the long term, a growing economy will want to see a positive net entry rate—that is, where total entries exceed total exits.
Between 2002 and 2012, most provinces had an average entry rate that exceeded its exit rate, which means that some firms managed to survive, and possibly grow, over time. Alberta’s long-term enterprise entry rate of 17.3 per cent exceeded its long-term exit rate of 14.1 per cent—for a net average enterprise entry rate of 3.3 per cent—which suggests that firms found a supportive environment in that province. Ontario (with a net average enterprise entry rate of 2.8 per cent) and B.C. (2.3 per cent) also had higher net entry rates than provincial peers over 2002 to 2012.
By contrast, entries were lower than exits in three provinces during the decade—P.E.I. (with a net average enterprise entry rate of –0.8 per cent), New Brunswick (–0.1 per cent), and Nova Scotia (–0.1 per cent)—raising questions about whether these provinces have ecosystems conducive to long-term firm survival and growth.
Despite having the lowest entry rate of all provinces, Quebec had a positive average net entry rate (0.8 per cent) over 2002 to 2012.
How does Canada rank on enterprise entry relative to international peers?
Data to make direct comparisons between the provinces and international peers are not available because Statistics Canada and the OECD—the two main sources for firm entry and exit data—use different and incompatible definitions and parameters in collecting such data. However, the OECD data reveal that Canada lags nearly all peers on enterprise entry rates. At an enterprise entry rate of just over 7 per cent (using OECD data), Canada performs better than Belgium (3.2 per cent), but worse than the 10 other peer countries for which data are available. Finland’s entry rate (16.5 per cent) is more than two times larger than the entry rate in Canada. This suggests that although some provinces appear to have healthy enterprise entry rates, these provinces may look much less positive in an international context.
What can be done to improve the provinces’ entrepreneurial performance?
Canadians have strong entrepreneurial ambition and start many new firms. These firms provide benefits not only to those who own and are employed by them, but also to the broader innovation ecosystem, which can be strengthened through the introduction of new competitors. But international comparisons suggest that Canada may not be as strong in starting new businesses as the domestic data suggest. Moreover, many firms that do launch appear to have trouble surviving and growing beyond the initial start-up stage. What explains Canada’s entrepreneurial performance and what can entrepreneurs and policy-makers do to help improve it?
Improvements in entrepreneurial performance might be achieved through initiatives focused on stimulating Canadians’ entrepreneurial ambition, such as enhancing the focus on entrepreneurship and innovation in business, management, and other areas of education, as well as celebrating entrepreneurship and risk-taking through awards and stories about entrepreneurs.
Provincial enterprise entry rates—and long-term net entry rates—are related to entrepreneurial ambition and the perceived climate for new ventures. In general, provinces with higher grades on the entrepreneurial ambition indicator have higher grades on the enterprise entry indicator. The top three provinces on entrepreneurial ambition—Alberta, B.C., and Saskatchewan—rank among the top five on enterprise entry. By contrast, the two provinces that rank lowest on entrepreneurial ambition—Quebec and Nova Scotia—also have the lowest enterprise entry rates. Newfoundland and Labrador is an exception—the province has the third-worst score on entrepreneurial ambition but the third-best score on enterprise entry.
Climate for new ventures
Whether entrepreneurs are motivated and able to start and grow new ventures also depends on a variety of environmental factors, including the size and nature of market demand; the strength of supply chains, transportation, and communication infrastructure; tax rates and tax regime clarity; regulation; and access to capital and expertise. Indeed, provinces’ enterprise entry rates are closely related to entrepreneurs’ views of the barriers—real or perceived—to entrepreneurship and innovation.
In 2014, the Canadian Federation of Independent Business surveyed over 7,100 small and medium-sized business owners and found wide variation across the provinces on whether respondents would recommend starting a business in their province.3 Large majorities of respondents in Saskatchewan (88 per cent), Alberta (72 per cent), and Newfoundland and Labrador (68 per cent) said they would likely recommend starting a business in their province. These provinces are also three of the top four provinces on enterprise entry.
By contrast, few respondents in New Brunswick (39 per cent), Nova Scotia (36 per cent), Quebec (31 per cent), and Manitoba (24 per cent) would be likely to recommend starting a business—the same four provinces that are at the bottom on enterprise entry. Interestingly, there does not appear to be a link between business tax rates and respondents’ likelihood of recommending starting a business. Consequently, policy-makers should explore not only how the realities of the business climate affect entrepreneurship but also factors that drive perceptions of the business climate among current and potential entrepreneurs.4