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Motivation for this study

• Entrepreneurship has been shown to be a powerful force driving innovation, productivity, job creation and economic growth

• It is often claimed that Canada lags in terms of entrepreneurial performance

• This report was commissioned to use available evidence to examine the state of our country’s entrepreneurial performance

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Entrepreneurship is a process that starts with someone – the entrepreneur – recognizing an opportunity to create something new

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Our focus is on entrepreneurial performance

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Indicators of entrepreneurial performance

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Indicator DefinitionEmployer enterprise births The proportion of all firms that are new

enterprises in a given year. Includes only firms with employees.

Employer enterprise deaths The proportion of all firms with employees that cease operation in a given year. Includes only firms with employees.

Survival rates for employer enterprises The proportion of firms existing in year y which had not died within each of the first 5 years. Includes only firms with employees in year y.

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% a year, over a three-year period. Includes only firms with ten or more employees at the beginning of the 3 year period.

“Gazelle” rates based on employment or sales growth

“Gazelles” are the subset of high growth enterprises born 5 years or less before the end of the growth observation period.

Assessing performance in Canada over time

• Unfortunately, do not have data on entrepreneurial performance in larger established firms

• Fortunately, do have indicators of entrepreneurial performance in newer, smaller firms

• Used data collected by Statistics Canada and analyzed by Statistics Canada and Industry Canada

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Entrepreneurial Performance Indicator

2003 2004 2005 2006

Birth rate 9% 10% 10% 12%

Death rate 9% 8% 9%

5-year survival rate 51%

Proportion of high growth firms (employment)

4% 4% 4%

Proportion of high growth firms (sales) 7% 7% 8%

Proportion of gazelles (employment) 0.5%

Proportion of gazelles (sales) 1.1%

What does the data mean?• Births rates consistently offset or outweigh death

rates: each year, the number of businesses stays the same or increases

• Over half of new businesses survive 5 years• There are a number of high growth and even of

gazelle firms in the country: the percentage of high growth firms appears relatively stable

• More inferences are possible with comparative data

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Choosing countries for comparison with Canada

• Selection criteria:– Geographic proximity– Cultural similarity– Similar population size– Similar level of economic development– The availability of comparable data

• Countries selected:– Denmark, Finland, Hungary, the Netherlands, New

Zealand, Spain and the United States

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Birth and death rates for manufacturers

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Some comments on birth and death rates

• Canada’s relative performance for service firms is comparable to our performance for manufacturers

• Canadian birth rates are slightly lower than those of most of the comparison countries, but the percentages are very close

• Death rates of businesses in the Canadian economy is lower than that in most of the other countries examined, and birth rates always meet or exceed death rates

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Survival rates

Some comments on survival rates

• Unfortunately, comparative data is only available for one year survival

• Canada compares quite favorably with most of the comparison countries in terms of the survival rate after one year. – E.g. 85% of manufacturing firms in Canada and the

U.S. survived through their first year. – Survival rate of Canadian service firms (85%) is higher

than that for service firms in the U.S. (78%), and is the highest among the comparison countries.

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Proportion of high growth firms (based on employees)

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Proportion of high growth firms (based on sales)

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Some comments on proportion of high growth firms and gazelles

• Our relative performance for gazelles is quite similar to our performance for high growth firms

• In manufacturing sector we rank third among the comparison countries, but in service sector we have the lowest proportion of firms with high employment growth

• In manufacturing we rank second among the comparison countries, but in service sector we have the lowest proportion of firms with high sales growth

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What about exporting?

• Best available indicator is percentage of exports accounted for by SMEs (not ideal)

• Canadian SMEs accounted for 34% of exports in 2005.

• We compare favorably with U.S. (34%) but not with European countries such as Spain (66%) or Scandinavian countries e.g. Denmark (62%)

• We outperform countries with comparable trade agreements (e.g. Australia, 6%)

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Some additional relevant information

• About 1 in 15 Canadians is self employed in an incorporated business. – Compared with working Americans, a larger percentage of

working Canadians were self-employed and had an incorporated business.

• Over 1/3 of SME owners are women – Higher percent than in countries such as U.K.

• The ownership of our SMEs increasingly reflects the demographic diversity of our population

• Over the past decade, average education, experience levels and ages of Canadian SME owners have been rising

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• Owners of larger businesses are wealthier

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• Most Canadian business owners start their businesses from scratch

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Where Canadians found funding to start their firms

Source: Industry Canada, 2007

(3%)

Where Canadians found money to operate their firms

0% 20% 40% 60% 80%

Loans from employeesMicro-credit

Other sources of financingLoans from unrelated individuals

Government lending agencies/grantsLoans from friends and relatives

Tade credit owing to suppliersLeasing

Personal savingsRetained earnings

Commercial or personal loans

Fina

ncin

g U

sed

for

Ong

oing

Ope

ratio

ns

% of Business Owners

Source: Industry Canada, 2007

(3%)

What about venture capital?

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Venture Capital as a Percentage of GDP 2008

Source: Global Entrepreneurship Monitor 2009

Conclusions: areas of strength• Pool of entrepreneurial ventures – The birth rate of new

firms with paid employees is higher than the death rate, which means that the pool of businesses with entrepreneurial potential is being replenished regularly.

• Sustainability of entrepreneurial ventures –businesses created by Canadians have desirable characteristics that enable them to attain and maintain a competitive advantage in their markets.

• High growth rates for manufacturers – The growth rates and gazelle rates achieved by Canadian manufacturers rank among the best of the countries examined for this report. These indicators of growth suggest that Canadian manufacturers are developing innovative products, processes and/or markets.

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Conclusions: areas where we need to improve

• Growth of service firms – Canada generates a lower proportion of high growth and gazelle businesses in the service sectors than do most of the comparison countries considered here

• investigating the reasons underlying this relative weakness is a priority for further study, given the increasing prominence of the service sector in most economies.

• Exporting – The percentage of exports accounted for by Canadian SMEs is lower than in European nations examined for this report and comparable to that of the U.S.

• Investigating the reasons behind Canada’s ranking in this regard is also a priority for further study, given the small Canadian domestic market size is many sectors and the general increasing globalization of business.

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Final thoughts• Is this report consistent with other assessments of the

state of entrepreneurship in Canada?– We focus on performance indicators that others have not

always considered … based on recent advice from OECD– We do not look at “inputs to innovation” (e.g. R & D) but

arguably look at an output thereof (growth)– We do not make assumptions about the “culture” but

rather report facts about the economy• While we come to generally favorable conclusions here

we end with cautionary notes about the limitations of what we can infer from the data we have and with a call for specific research that will help us understand both our performance and how it could be improved

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