- Ontario, Alberta, and B.C. score A+ grades on entrepreneurial ambition, placing ahead of the top-ranked peer country.
- Canada as a whole earns an A and ranks first among peer countries—up from third in 2014.
- Nova Scotia is the lowest-ranking province, earning a C grade, but outperforms 11 of the 16 peer countries.
Why is early-stage entrepreneurialism important to innovation?
Entrepreneurship and innovation are tightly intertwined. Start-up firms are often the mechanisms through which new innovations (both products and services) are developed, commercialized, and sold, especially where larger, more established firms may be too inflexible to innovate. New ventures are also often at the forefront of experimenting with new business models and marketing methods, which, when proven, are frequently adopted or adapted by other firms.
Whether new firms succeed or fail at introducing new innovations, their mere entry into the market generates 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. As the economist Joseph Schumpeter argued, the task of the entrepreneur is “creative destruction,” and the “dynamic disequilibrium brought on by the innovating entrepreneur ... is the ‘norm’ of a healthy economy.”1
Entrepreneurial ambition helps shape the entrepreneurial and innovation performance of an economy. Effective entrepreneurship requires not only ambition but also business skills and experience, as well as supportive economic and policy environments. Entrepreneurial individuals can have their ambitions thwarted by weak markets, supply chain challenges, geographic constraints, restrictions on competition, and tax and regulatory regimes that impede new and growing ventures. However, an economy and policy environment that supports entrepreneurship but lacks people with the motivation and willingness to start and grow new businesses will not get very far either. Entrepreneurial ambition is a key ingredient.
The distinction between entrepreneurial ambition and entrepreneurial outcomes is important because it can help to identify barriers to success. Many analyses suggest that part of Canada’s innovation problem is due to weak entrepreneurial ambition and high aversion to risk.2
But this report card reveals that Canadians across all provinces appear to have healthy entrepreneurial ambition as measured by their reported early-stage entrepreneurial activities. In that case, attention can turn to the other factors that might explain Canada’s innovation weakness.
How is entrepreneurial ambition measured?
Entrepreneurial ambition is measured as the percentage of the population, aged 18 to 64, who report being involved in early-stage entrepreneurial activity, including:
- nascent entrepreneurs—those actively involved in setting up a business that they will own or co-own but that has not yet paid wages, salaries, or any other payments to owners for more than three months
- owner-managers of a new business—an owner (or part-owner) and manager of a running business that has paid salaries, wages, and other payments for more than three but fewer than 42 months3
The Global Enterprise Monitor conducts an annual survey in more than 100 countries. More than 2,000 people are surveyed in each country, something that, in many cases, allows for analyses at regional levels. In Canada, the sample size is sufficient to produce results for eight provinces, but insufficient to produce reliable results for P.E.I. and New Brunswick.
An important limitation of the survey is that it captures what survey respondents report about their activities, rather than their actual activities. Reports of entrepreneurial activity may be higher or lower than actual entrepreneurial activity. For example, some people will say they are starting businesses when in fact they are not because they believe that this is what a surveyor wants to hear. By contrast, some people who have started businesses may not want to report this to a surveyor for a variety of reasons, including privacy and proprietary concerns. Across the comparator jurisdictions, there appears to be no reason to believe that a given country’s residents would be any more or less likely to do these things than another country’s residents, so concerns about cross-country comparisons are low.
Still, given that the data are based on reported activity rather than actual business starts, we use the results as an indicator not of entrepreneurial activity, but of respondents’ enthusiasm for entrepreneurship—that is, an indicator of entrepreneurial ambition or intention.
How do the provinces rank relative to international peers?
Canadians are world leaders on entrepreneurial ambition. With 17.4 per cent of respondents reporting early-stage entrepreneurial activity, Ontario earns an A+ and takes the top spot among all provinces and peer countries. Alberta (17.0 per cent) and B.C. (17.0 per cent) also earn A+ grades and take second and third place overall.
Three provinces—Quebec (14.9 per cent), Saskatchewan (14.0 per cent), and Manitoba (13.7 per cent)—earn A grades and rank fifth, seventh, and eighth, respectively. Australia (14.6 per cent) ranks sixth and is the only A country other than Canada. Canada as a whole earns an A and ranks first among the peer countries—rising from third in 2014—with an early-stage entrepreneurial activity score of 16.7 per cent—a full 4 percentage points higher over the previous report card.
Newfoundland and Labrador (10.9 per cent) earns a B grade and ranks 11th, while Nova Scotia (10.0 per cent) earns a C grade—one grade lower than the previous report card—and ranks 13th. Still, Nova Scotia outperforms 11 of the 16 peer countries. Four countries earn C grades, with early-stage entrepreneurial activity ranging from 7.6 per cent in Sweden to 9.6 per cent in Austria. The remaining seven countries earn D grades, with entrepreneurial activity rates ranging from 6.7 per cent in Finland to a low of 3.8 per cent in Japan—less than one-quarter the rate in top-ranked Ontario.
How do the provinces rank relative to each other?
With a 4 percentage point increase over its previous rate of entrepreneurial ambition (from 13 to 17.4 per cent), Ontario leaps from eighth to first and improves its grade from A to A+. With a slight dip of 1 percentage point over the previous report card, Alberta falls from first to second place in the rankings but maintains its A+ grade. Maintaining its rate at 17.0 per cent, B.C. rounds out the top three provinces and earns an A+.
Three provinces earn As for entrepreneurial ambition—Quebec (14.9 per cent), Saskatchewan (14.0 per cent), and Manitoba (13.7 per cent)—putting them slightly behind average entrepreneurial ambition in Canada overall (16.7 per cent). Quebec has improved its rate and ranking dramatically. In the previous report card, Quebec had an entrepreneurial ambition rate of 10.5 per cent and ranked 11th with a B grade.
Newfoundland and Labrador (10.9 per cent) maintains a B grade but falls from ninth to 11th in the rankings, while Nova Scotia (10.0 per cent) slips to a C grade and falls from 12th to 13th in the rankings—not because its rate has changed, but because leading jurisdictions have improved theirs. Data are not available for P.E.I. and New Brunswick.
Does actual business creation match Canadians’ entrepreneurial ambition?
No. Although Canada ranks first among international peers and earns an A on entrepreneurial ambition, Canada ranks near the bottom relative to its peers when it comes to actual enterprise creation.
In 2015, 7.8 new employer enterprises were created in Canada for every 100 active firms. By contrast, the U.K. had an enterprise entry rate of 15.7 per 100 active firms—twice the Canadian rate—followed by Denmark (12.4), Australia (11.8), and France (11.3). But Switzerland (5.1), Japan (5.1), Ireland (4.1), and Belgium (2.2) trailed Canada in 2015.
Canadians may be more likely than international peers to fall into the “nascent entrepreneur” category of entrepreneurial ambition. These are individuals who report being actively involved in setting up a business that has not paid wages, salaries, and any other payment for more than three months. In these cases, formal registration of the business may not yet have occurred and therefore would not show up in the enterprise entry data. However, the Global Entrepreneurship Monitor survey shows that the proportion of nascent entrepreneurs among Canadians reporting any early-stage entrepreneurial activity is equal to the proportion among international peers (61 per cent), so this fails to explain the discrepancy between entrepreneurial ambition and enterprise entry.4
There are a few possible explanations for the divergence between entrepreneurial ambition and enterprise entry:
- The enterprise entry data do not capture businesses older than 12 months, whereas the “owner-manager” category of the entrepreneurial ambition indicator allows for businesses that are up to 42 months old. If businesses in Canada are more likely to be older than 12 months but younger than 42 months than businesses in peer countries, then the discrepancy can be explained. Unfortunately, reliable and comparable data are not available to assess whether or not this is the case.
- Another possibility is that nascent entrepreneurs in Canada quickly abandon their efforts in the face of challenges in the business environment. That is, they may start businesses but abandon them before formally registering them. This is consistent with the widely held view that Canadians are generally strong at starting businesses but face difficulties in growing them—though the rate of failed businesses less than a year old would have to be substantially higher in Canada than elsewhere for this explanation to hold. Data to assess this possibility are not available.
- A less charitable explanation may be that Canadians’ actions do not match what they claim to be doing. It could be that Canadians are more likely than international peers to say they are starting or operating new businesses without in fact doing so. Alternatively, it may be that Canadians are more likely than international peers to say to surveyors that they are starting or operating a business but less likely to register those businesses formally.
How can provinces better align entrepreneurial ambition and reality?
While it is good to see that Canadians have entrepreneurial ambition, what ultimately matters for innovation performance is whether they are willing and able to act on that ambition—that is, whether they actually start and grow new ventures.
Numerous studies have highlighted the challenges facing Canadian entrepreneurs in growing small businesses beyond the start-up stage to become high-growth medium-sized and large enterprises. One recent study noted that “Canada has a high level of entrepreneurial activity, but over time several factors—such as risk aversion, low export activity, and weak R&D spending—stifle firm growth.”5 The study points out that compared with OECD nations, “Canada produces more than its fair share of fast-growing firms under five years old. As firms age, however, few Canadian companies are able to sustain growth, while those in countries like the U.S., Sweden and Israel accelerate.”6
Others suggest a key barrier to Canadians growing businesses to scale is the business tax regime. That is, because the marginal tax rate increases as firms grow from small to medium-sized enterprises, many entrepreneurs may be content with keeping their businesses small or breaking them up into multiple small businesses to maintain a lower tax rate.7
A key challenge for Canadian entrepreneurs and policy-makers, then, is to find ways to overcome barriers that stand in the way of Canadians’ exceptionally strong entrepreneurial ambition. Identifying and addressing those barriers should be central to Canadian and provincial innovation strategies.