FirstPreviousNextLast

View all pages

The State of Entrepreneurship in Canada

5. How Does Canada Compare with Other Countries?

This section examines how entrepreneurial activity in Canada compares with entrepreneurial activity in other countries. This comparison provides a point of reference for interpreting the results presented in the previous section. It is useful to understand the nature of entrepreneurship in Canada today and how it has changed over the recent past, but more insights about entrepreneurial performance in Canada can be discovered by understanding how Canadian businesses compare with their counterparts in similar economies.

Despite the growing recognition that entrepreneurial activity can occur in firms of any size, no countries are yet examining entrepreneurship in large, established firms. Canadian data and data from all other comparable countries are primarily available for smaller, newer firms. Accordingly, this section of the report presents data for the same type of new and growing firms described in the previous section, and compares Canada's performance on the same five key performance indicators: birth rates, death rates, survival rates, high-growth firm rates and gazelle rates.

This section presents data on the relative rates of export contributions by SMEs. Internationalization is critical in a country like Canada that has small domestic markets, and, the OECD has suggested exporting as an important entrepreneurial performance indicator. This makes sense because firms that export are much more likely than those that don't to be high-growth firms, and they contribute proportionally more to job creation.^{Footnote 19}

A number of factors were considered in determining the countries Canada should be compared to. These factors include:

• geographic proximity;
• cultural similarity;
• similar population size;
• similar level of economic development; and
• the availability of comparable data.

Based on these considerations, Canada's performance on the five entrepreneurial indicators is compared with that of Denmark, Finland, Hungary, the Netherlands, New Zealand, Spain and the United States.^{Footnote 20} Unfortunately data for major European countries such as the United Kingdom, Germany and France were not available at the time of writing.

5. 1 Birth and Death Rates

Figure 3 shows the 2005 birth rates and 2004 death rates of manufacturing firms in Canada and the comparison countries. Figure 4 shows the same rates for service firms. Both are expressed as a percentage of the businesses with employees in each economy. The graphs show that the Canadian birth rates are slightly lower than those of most of the comparison countries, but that the numbers are close. For example, the Canadian birth rate for manufacturing firms is ranked fifth, at 6.5 percent, but the birth rate of the highest ranked country — the United States — is 7.8 percent. The birth rates for Canadian and U.S. service firms are closer: 10.0 percent (Canada) and 9.7 percent (U.S.).

Figure 3: Birth and Death Rates in Manufacturing Firms

[Description of Figure 3]

Figure 4: Birth and Death Rates in Service Firms

[Description of Figure 4]

What is perhaps more striking, however, is that the death rates of businesses with employees in the Canadian economy are lower than that in most of the other countries examined. In Canada's manufacturing sector, the rate of births and deaths is effectively equal; in our service sector, the rate of birth exceeds the rate of deaths. The offsetting of deaths by births is comparable in the United States, but in Finland and the Netherlands, the number of firms disbanded exceeds the number of new firms created.

Overall, Canada's performance in terms of birth and death rates compares very favourably with that of the comparison countries. The percentage of new firm births is slightly lower than in some, but is within one or two points of most countries. At the same time, Canada's employer enterprise death rate lags that in most countries. If we consider services and manufacturing firms together, Canada outperforms most other jurisdictions for having new enterprises come into existence to replace those that cease to exist. This ratio highlights an important entrepreneurial strength of Canada. As long as the rate of new business creation outstrips that of business demise, Canada has the basis for sustaining entrepreneurially driven growth in the economy.

5. 2 Survival Rates

Survival rates are an important indicator of the quality of new firms that are started. The OECD has suggested that the ideal time frame for examining the survival rates of employer enterprises is the three and five-year marks. Unfortunately, very few jurisdictions report on the survival of firms with employees beyond one-year. For this reason, Figure 5 shows how Canada compares with the other countries in terms of its one-year survival rate.

Figure 5: One-Year Survival Rate for 2005

[Description of Figure 5]

Canada compares quite favourably with most of the comparison countries in terms of the survival rate after one year. For example, approximately 85 percent of manufacturing firms in Canada and the U.S. survived through their first year. The survival rate of Canadian service firms (85 percent) is higher than that for service firms in the U.S. (78 percent), and is the highest among the comparison countries.

It seems noteworthy that none of these economies have markedly superior one-year survival rates. While missing data precludes any analysis of five-year survival rates, it is possible to compare the five-year survival of Canadian and U.S. firms. In the period 2001–06, the five-year survival rate for Canadian businesses with employees was just over 50 percent. This is similar to the 53 percent five-year survival rate for U.S. firms in the period 2000–05.^{Footnote 21}

In summary, in terms of business survival, Canada is again at least on par with most other countries examined, and outperforms the majority. This is good news indeed, as it means that Canadians are effective not merely at starting businesses. Many Canadian entrepreneurs are establishing firms that are sufficiently innovative in the products they offer, the processes they use, and/or the markets they target to survive the many challenges all new organizations face and the inevitable competition from established firms.

5. 3 High-Growth Firms and Gazelles

Figures 6 and 7 illustrate the proportions of high-growth firms based on employment and revenue definitions respectively. They both demonstrate that the proportion of Canada's manufacturing firms, which are high–growth, is among the best of the comparison countries. The two graphs also show that the comparison is slightly less favourable for Canadian firms in the service sector.

Figure 6 shows the proportion of firms that can be considered high-growth firms in the manufacturing and service sectors (about 900 and 3100 firms respectively^{Footnote 22}), where high growth is defined in terms of growth in the number of employees the firms have. Canadian manufacturers rank third among the comparison countries, but Canadian service firms rank at the bottom.

Figure 6: Share of High-Growth Firms (Based on Employment Growth) in 2005

[Description of Figure 6]

Figure 7 also shows the proportion of high-growth firms for both sectors, but uses the growth in total annual sales. Canada manufacturers rank second among the comparison countries, but again, Canadian service firms rank at the bottom.

Figure 7: Share of High-Growth Firms (Based on Sales Growth) in 2005

[Description of Figure 7]

These relative rankings should, however, be interpreted carefully given the low magnitude of the differences in rates. In the United States, which reports the highest rates of high-growth firms based on employment for both sectors, the rate for manufacturing is slightly above 5 percent while the rate for service is slightly greater than 4.5 percent. Canada's rate for manufacturing is slightly below 4.5 percent and its rate for service is 3 percent. The differences in percentages are, in all cases, relatively small. However, given the potency of growth firms generally, such small differences can translate into very significant impacts on employment creation and economic growth.

Together with the results from Section 5.1 Birth and Death Rates, the results suggest that overall Canada does a good job in creating firms in both manufacturing and services, but that it does a much better job in creating growth firms in manufacturing.

A comparison of Canada's share of gazelles with those of other countries yields similar results. Figure 8, where the share of gazelles is defined in terms of employment growth, and Figure 9, where it is defined in terms of sales growth, both show that Canada ranks second in the proportion of gazelles among manufacturing firms but ranks second last in the proportion of gazelles among service firms.

Figure 8: Share of Gazelles (Based on Employment Growth) in 2005

[Description of Figure 8]

Figure 9: Share of Gazelles (Based on Sales) in 2005

[Description of Figure 9]

Once again it should be noted that these rankings need to be interpreted keeping in mind the magnitude of the differences. For example, Hungary ranks first in terms of the proportion of manufacturers that are gazelles, and its share of just over 1.5 percent is only slightly higher than Canada's share of approximately 1.3 percent. Finland ranks first in terms of the proportion of service firms that are gazelles. Its share of roughly 1.7 percent is just over half a percentage point greater than Canada's share of approximately 1.1 percent.

What, then, should we conclude about Canada's relative performance on the entrepreneurial indicators relating to firm growth? The safest interpretation of these data is that Canada is doing well overall, but has room for improvement in the service sector. Canada's share of high-growth and gazelle firms in the manufacturing sector is among the best. Its share of high-growth and gazelle firms in the service sector is less than that of many comparable nations, although it is within a relatively close range. If there is an area of weakness for Canada's entrepreneurial performance, it is the paucity of high-growth and gazelle service sector firms.

5. 4 Export Contributions by Small and Medium-Sized Enterprises^{Footnote 23}

Exports play a critical role in Canada. Canada has a small domestic market for many goods and services. Exporting has a crucial link to entrepreneurship because innovative, expanding firms often need to target international buyers in order to access markets of sufficient size to fuel their growth objectives. Exports have at times accounted for more than 40 percent of the Canadian gross domestic product.^{Footnote 24} Table 4 reports the export performance of SMEs in Canada relative to the selected countries for which data are available.

This table indicates the percentage of the value of all exports in the economy that are carried out by firms with fewer than 250 employees. Cross country comparisons however, need to consider specific circumstances. For instance both Canada and the United States appear to lag behind other nations in the percentage of exports accounted for by SMEs. However, this may not be a result of a lack of international entrepreneurial capability in North American firms. Rather it should be noted that the comparison countries have lower barriers to trade because they are all members of the European Union. Comparing trade with non-European Union countries may be more appropriate. It is consistent with this explanation to note that SMEs in Australia, which is also not part of the European Union, have even lower export contributions than comparable North American businesses. In 2007–08, medium-sized businesses in Australia accounted for only 6 percent of the total value of that country's exports while small businesses contributed a mere 1 percent of the total value of goods exports.^{Footnote 26}

Furthermore, in a North American context the smaller size of domestic markets in Canada, compared to those of the U.S., means that Canadian firms are driven to be more export-focused in order to achieve the same levels of sales as their U.S. counterparts. Consequently, the fact that Canadian SMEs account for the same percentage (34 percent: 20 percent for small businesses and 14 percent for the medium ones) of total export value as U.S. means SMEs may be a source of concern for Canadian policy makers. It is certainly true that a very small proportion of Canadian small businesses (2 percent, according to the Exporter Registry) engage in exporting activity.

5. 5 Issues in Comparing Entrepreneurship Across Countries

This section has presented comparisons across countries. There are two issues inherent in such comparisons that should be taken into account when interpreting these findings and making conclusions about the relative strengths and weaknesses of Canada's performance.

• The assessments of Canada's performance relative to that of other countries are based on a single point in time. It is entirely possible that when multi-year comparisons between countries become available, there will be variability in how Canada performs relative to other nations, just as there is some variability in its absolute performance on key indicators from one year to the next, as reported in Section 4 of this report. Although it is expected that the performance on key indicators for all countries will be weaker for 2008–09 than in the years immediately prior, there is no evidence suggesting Canada will be uniformly worse in terms of its entrepreneurial performance than any country with which we might choose to compare ourselves. Indeed, this report suggests that we ought to conclude that the "state of entrepreneurship" in Canada is stable and relatively strong.
• It is important to recall that the size of the different economies results in different overall entrepreneurial efforts across different countries. This is particularly true in Canada–U.S. comparisons. While Canada compares well with other countries in terms of most of the performance indicators reported here, these measures are only relative, i.e., expressed as a percentage of the total number of enterprises. Because Canada's population — of both people and businesses — is small relative to the United States and of Spain, the total absolute numbers of entrepreneurial firms (of any size) that contribute to Canada's economy is likewise smaller than the number of such firms in the U.S. and Spain. In the U.S. and Spain, the total number of employer businesses is 3.8 million and 1.4 million, respectively, whereas in Canada the total is slightly above one million. While the rates of entry may be the same, the number of new entrepreneurial firms is correspondingly less in Canada. This can have implications for the ability to build critical entrepreneurial mass in a broad range of sectors. On the other hand, Canada's population of employer enterprises is larger than some of other countries examined here, and so there is expected to be a correspondingly larger volume of entrepreneurial activity. Such differences imply that the size of the economy itself affects the absolute magnitude and scope of the entrepreneurial activity within that economy.

FirstPreviousNextLast

View all pages