Enterprise Entry

Key Messages

Why are enterprise entries important to innovation?

Entrepreneurship is an important part 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 that 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

There are no comparable international data for enterprise entry rates.

How do the provinces rank relative to each other?

With an entry rate of 15.5 per cent in 2014, Alberta earns an A and is the top-ranked province—a spot it held in the previous innovation report card as well. Newfoundland and Labrador and P.E.I. swap positions, with Newfoundland and Labrador ranking second with an entry rate of 15.0 per cent and P.E.I. third with a rate of 14.6 per cent. British Columbia moves from fifth to fourth and advances a grade, from B to A, with an entry rate of 14.2 per cent in 2014.

Three provinces earn B grades—Saskatchewan (14.1 per cent), Ontario (13.9 per cent), and Manitoba (13.2 per cent). New Brunswick and Nova Scotia earn C grades, with enterprise entry rates of 11.9 per cent and 11.6 per cent, respectively. This marks an improvement for Nova Scotia, as it climbs from a D to a C grade over the previous report card. Quebec maintains its position as the lowest-ranked province, with an enterprise entry rate of 10.2 per cent in 2014 and a grade of D.

How has provincial performance changed over time?

Between 2004 and 2014, every province had an overall decline in its enterprise entry rate—although the rate of decline has slowed in recent years. Over this period, nearly every province saw its rate peak in 2004 and reach its lowest point in 2013. Some provinces posted small improvements in 2014 over 2013. Nevertheless, the long-term trend is one of general decline since the 1980s.

The enterprise entry rate in Canada overall fell from 24.5 per cent in 1983–84 to 12.8 per cent by 2014. The enterprise exit rate in Canada also fell—albeit not as dramatically as the entry rate—from 16.5 per cent in 1983–84 to 11.4 per cent by 2014.

Although entry and exit rates are sensitive to the business cycle, the business cycle does not explain the long-term secular 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 2014. From 2002 to 2004, and again in 2009 and 2010, Newfoundland and Labrador was the top performer; it recorded the highest one-year enterprise entry rate of 20.3 per cent in 2004. Alberta led the field from 2005 to 2007 and has maintained the highest enterprise entry rate of all provinces since 2011; it recorded the second highest rate, at 19.5 per cent, in 2007. The two provinces had the same entry rate (17.7 per cent) in 2008.

Quebec has had the lowest entry rate of all provinces consistently since 2002.

In terms of consistency between 2004 and 2014, Newfoundland and Labrador had the greatest variance, with a difference of 5.8 percentage points between its highest (20.3 per cent in 2004) and lowest (14.5 per cent in 2013) years. The province also experienced the sharpest decline from 2004 to 2014. Saskatchewan saw the smallest decline over 2004 to 2014—a fall of 1.1 percentage points from 15.2 per cent in 2004 to 14.1 per cent in 2014.

Do new firms survive and grow?

While enterprise entry rate is an important measure of both innovative activity and competitive conditions, 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 turnover is a concern if exit rates are high because new and established firms are facing an environment hostile to innovation and growth. 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 2004 and 2014, most provinces had an average entry rate that exceeded its exit rate, which means that some firms likely managed to survive, and possibly grow, over time. Over the period, Alberta’s average net entry rate was 3.2 per cent—that is, on average, Alberta’s enterprise entries exceed exits by 3.2 percentage points. Only in 2009 did Alberta see a higher exit rate (15.3 per cent) than entry rate (15.2 per cent). In general, then, firms found a supportive environment in Alberta over the period. Ontario (with a net average enterprise entry rate of 2.74 per cent) and B.C. (2.08 per cent) also had higher net entry rates than provincial peers from 2004 to 2014.

By contrast, entries were lower than exits in three provinces during the decade: P.E.I. (with a net average enterprise entry rate of –0.5 per cent), Nova Scotia (–0.2 per cent), and New Brunswick (–0.1 per cent). Although these gaps are small, they are persistent—raising concerns about whether these provinces have ecosystems conducive to long-term firm survival and growth.

Despite having the lowest entry rate of all provinces in 2014, Quebec had a positive net entry rate (0.7 per cent) from 2004 to 2014.

How does Canada rank on enterprise entry relative to international peers?

Data to directly compare the provinces and international peers are not available. 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 7.8 per cent (using the OECD data), Canada performs better than four peers—Switzerland (5.1 per cent), Japan (5.1 per cent), Ireland (4.1 per cent), and Belgium (2.2 per cent)—but worse than the 10 other peer countries for which data are available. The U.K.’s entry rate (15.7 per cent) is more than twice as high as Canada’s entry rate. This suggests that although some provinces appear to have healthy enterprise rates, these provinces may look less impressive in a comparable 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?

Entrepreneurial skills

One part of a strategy to improve entrepreneurial performance is to enhance Canadians’ entrepreneurial and innovation skills, including business, management, fundraising, and other skills and behaviours. There are increasingly positive signs in this regard. Many universities, colleges, and polytechnics have established start-up accelerators, incubators, and labs to help students acquire and develop skills for starting and growing new ventures. The Creative Destruction Lab at the University of Toronto’s Rotman School of Management is a prominent example that is already showing signs of success. Although programs and curricula for these initiatives are still being developed and improved (often through trial and error), the intensity of activity has increased in recent years.

Initiatives to help highly educated graduates from a wide range of fields acquire and develop business, management, entrepreneurial, and innovation skills are growing. Mitacs, a not-for-profit organization, has expanded the opportunities it offers master’s and doctoral students to work with employers in the public and private sector to apply their research skills and knowledge, contribute to organizational innovation and problem-solving, and develop entrepreneurial attitudes and behaviours that can be applied to their own ventures or in other organizations.

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:

Indeed, the 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 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 five 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 four provinces that are at the bottom of the rankings on enterprise entry.

Interestingly, there does not appear to be a link between business tax rates (at the time of the survey) 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 the perceptions of the business climate among current and potential entrepreneurs.⁴

Footnotes

1     Statistics Canada, CANSIM table 527-0007, Business Dynamics Measures, by North American Industry Classification System (NAICS), Provinces and the Territories.

2    Oana Ciobanu and Weimin Wang, Firm Dynamics: Firm Entry and Exit in Canada, 2000 to 2008 (Ottawa: Statistics Canada, 2012); Ryan Macdonald, Business Entry and Exit Rates in Canada: A 30-Year Perspective (Ottawa: Statistics Canada, 2014).

3    Amber Ruddy, Kimball Kastelen, and Jennifer English, Wanted: Government Vision for Small Business: A Cross-Country Analysis of Small Business Friendliness (Toronto: Canadian Federation of Independent Business, 2014).

4    Daniel Munro, From Perception to Performance: How Canadian Business Leaders View the Innovation Environment (Ottawa: The Conference Board of Canada, 2012).