The State of Entrepreneurship in Canada

3. Measuring Entrepreneurial Activity

There are many facets of entrepreneurship and many ways to measure entrepreneurial activity. The OECD has provided a useful framework for thinking through these issues, which is shown in Figure 2. In this report, we are interested in the centre box — in entrepreneurial performance itself, and the survival and growth of individual businesses. In taking this focus, however, it is important to keep in mind that the fate of individual businesses is influenced by factors in the broader economy, and also that the performance of individual businesses can influence broader economic outcomes.

Figure 2: Aspects of Entrepreneurial Activity^{Footnote 6}

[Description of Figure 2]

Factors that influence the entrepreneurial activity in a country are called the determinants of entrepreneurial activity. These factors influence the performance of individual businesses by establishing the overall context in which the managers of firms acquire resources and make decisions. These factors can vary considerably among countries. Indeed, the World Bank produces annual reports on the process and conditions associated with doing business in about 140 countries.^{Footnote 5} In turn, when the extent of entrepreneurship is healthy in a country — and individual businesses are thriving — there are positive impacts on the whole economy. These businesses are hiring employees to fuel their growth, buying supplies from other companies, participating in their communities and paying taxes.

Examples of the impacts of entrepreneurship include:

more highly skilled jobs;
more business creation;
more volunteer activity;
higher standard of living; and
larger tax base.

Examples of the determinants of entrepreneurship include:

access to skilled labour;
the patent system;
attitudes towards risk;
the banking system;
consumer spending; and
business taxes.

In examining the state of entrepreneurial performance in Canada, this report relies mainly on five types of indicators that can tell us how Canadian businesses are performing over time, and in comparison with businesses in other countries.^{Footnote 7} These indicators are described in Table 2.

Table 2: Indicators of Entrepreneurial Performance

Indicator

Definition

Rationale for Using

Employer enterprise births

The proportion of all firms that are new enterprises in a given year. Includes only firms with employees.

This reflects the potential pool of new companies that might be entrepreneurial. Businesses that have employees at start-up are the ones with the greatest growth potential.^{Footnote 8}

Employer enterprise deaths

The proportion of all firms that are new enterprises in a given year. Includes only firms with employees.

Economies with healthy entrepreneurial performance generate new employers at a rate that more than replaces the businesses that have disbanded.

Survival rates for employer enterprises

The proportion of firms that had entered in a given year and that had not died at the end of each calculated year of business. Includes only firms with employees in the starting year.

The survival of businesses reflects their productivity, innovation and resourcefulness, as well as their adaptability to changing market conditions.

High-growth firm rates based on employment or sales growth

The proportion of firms with average annual growth in either employees or in sales greater than 20 percent a year, over a three-year period. Includes only firms with ten or more employees at the beginning of the three-year period.

The high-growth rate indicates exceptional innovativeness. Firms that have higher growth rates are more beneficial to the economy in terms of job creation and general economic growth.

"Gazelle" rates based on employment or sales growth

"Gazelles" are the subset of high-growth enterprises born five years or less before the end of the growth observation period.

The high growth rate indicates exceptional innovativeness at a very early age. These firms provide economic benefits to the economy even as they are becoming established.

The reason for examining a variety of indicators is that no single indicator can provide a full picture of entrepreneurship in Canada. For example, a high business survival rate is generally positive, but if it is accompanied by low growth, then businesses could be stagnant. As much as possible, this report compares performance indicators over different points in time because that tells us how stable they are. However, in many cases, data are available for only a single year.