ARCHIVED—Profile of Growth Firms: A Summary of Industry Canada Research

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Chris Parsley, Industry Canada
David Halabisky, Industry Canada

The pioneering work of Birch (1989) demonstrated that employment growth in the United States was predominately created by small firms. As a result, attention has concentrated on the growth potential of small firms and since the mid-1990s, Canada's federal small business policy framework has focused on ensuring that the business environment is conducive to small business growth and enhancing competitiveness in the economy. However, basic information and analysis on Canadian growth firms has generally been lacking, concentrated only in certain sectors or based on small select samples of growth firms.

This project grew out of the need for data to objectively analyze firm growth in order to support policy development. The multi-year project involved several partners, including Statistics Canada, the National Research Council's Industrial Research Assistance Program and the Government of Ontario. This profile on growth firms summarizes and highlights the work of Industry Canada's Small Business Branch. Details on each of the four phases of the project appear under Summary of Work.

The disproportionate contribution to job creation by hyper and strong growth firms indicates the economic significance of these businesses and has caught the attention of researchers and policy-makers around the world. Studying these firms brings valuable insights into what makes them successful and the barriers they face, and will help policy-makers provide advice on how to further encourage growth firms.

Definitions

Hyper Growth Firms: those with at least 150 percent growth in employment over 4 years;

Strong Growth Firms: those with between 50 and 150 percent growth in employment over 4 years;

Slow Growth Firms: those with positive growth in employment of less than 50 percent over 4 years;

Declining Firms: those with negative employment growth over 4 years.

SUMMARY OF KEY FINDINGS

Growth firms are defined as having at least 50 percent growth in employment over a 4-year period.
Growth firms are very important to the Canadian economy; hyper growth firms accounted for 4 percent of continuing businesses between 1993 and 2003, but were responsible for 45 percent of net jobs created by continuing firms.
Although small businesses accounted for nearly 80 percent of net job creation between 1993 and 2003, high growth was found in all firm sizes.
Growth did not appear to be disproportionately concentrated in any particular industry or region. Furthermore, high growth firms were not concentrated in high-tech or high-knowledge industries.
Tracing growth over the medium term suggests that there is a risk trade-off between growth and survival; hyper growth firms had a lower survival rate than businesses with lower employment growth.
Among micro firms (firms with fewer than five employees), strong growth firms had the highest survival rates. For all other firm sizes, slow growth firms had the highest survival rates.
Firms that use strategies such as exporting can achieve much higher growth than firms that do not employ such strategies.

Summary of Work

Phase I

Covers 1985 to 1999 (Standard Industrial Classification (SIC) industrial coding)
Sensitivity testing on triage period
Examined different periods of the business cycle

Phase III

Covers 1993 to 2002 (North American Industrial Classification System (NAICS) industrial coding)
Examined the job creation performance of exporters

Phase II

Covers 1985 to 2000 (SIC industrial coding)
Examined growth by firm age
Examined different cohorts of start-ups

Phase IV

Covers 1993 to 2003 (NAICS industrial coding)
Examined growth by firm age
Examined firm survival and survival by growth groups
Examined the ability of firms to maintain their level of growth

Data and Methodology

This project uses a firm-level, longitudinal universe database known as the Longitudinal Employment Analysis Program (LEAP). It includes all employer firms in Canada and can track individual firms or employees from year-to-year. Each phase of this project covered a different time period, but the majority of results reported here cover the 1993 to 2003 period. Results for firm age cover the period from 1999 to 2003 because the first part of the observation period was used to construct the firm age variable. Finally, export results cover 1993 to 2002 because of data availability.

Regardless of the time period examined, the methodology used was consistent. Firms in the private sector were selected by removing those that operate in public administration, health and education sectors, along with Canada Post. Results for these public industries are generally not reported; however, they are used as a point of reference in the examination of firm survival. Private sector firms were then triaged into one of the four growth groups based on their employment growth over the first 4 years of the observation period. All businesses were tracked to the end of the period to measure their employment growth over the medium term. Results are broken down by firm size, growth group, region and industry and, in some cases, the results are compared across subsections of the observation period.

The employment unit used in this work is called an Individual Labour Unit (ILU). An ILU is assigned to each person who receives a T4 slip. If an employee receives more than one ILU, their "unit" is distributed among their employers in proportion to the wages paid by each employer.

Aspects of this work take advantage of the ability to link data files together — the Exporter Registry was linked to LEAP to examine job creation by exporters and to see whether exporters were more likely to be high growth firms. File linkage is a complex process that involves matching business numbers in both databases and merging the records. This process cannot match all records perfectly, however, because of incomplete records and different data collecting/reporting schemes in different databases, so additional attempts are made by matching business names and addresses. The success rate of matching the LEAP database and the Exporter Registry was approximately 65 percent, but there are several reasons why businesses may not match. Firstly, exporters can be employer or non-employer businesses, whereas LEAP only contains records on employer businesses. Secondly, businesses may be registered differently in each database and some businesses may have complex operational structures that report exports in different legal entities than their payroll accounts.