State of entrepreneurship in Canada looks positive

Peter Josty is Executive Director of the Centre for Innovation Studies in Calgary.

Entrepreneurship is alive and thriving in Canada, according to a recent report by the Global Entrepreneurship Monitor. The report is the 10^th in a series of reports on entrepreneurship in Canada and shows a generally very positive situation, particularly in comparison with some other G7 countries.

The Global Entrepreneurship Monitor (GEM) Project is widely recognized as the most comprehensive long-term study of entrepreneurship in the world. GEM offers a portrait of the individual entrepreneur in terms of attitudes, activities, and aspirations and allows for a more detailed demographic breakdown of how factors like age, education and gender play a role in entrepreneurial activity. GEM reports focus on the individual, whereas most entrepreneurship reports focus on the business.

The key findings from the report are:

Perceived opportunities – 59 per cent of Canadians see opportunities to start a business, compared with 46 per cent in the U.S. and only 13 per cent in Japan. That number is down from 71 per cent in 2021 but up from 49 per cent in 2019.

Perceived capabilities – 55 per cent believe they have the knowledge and skills to start a business, compared with 67 per cent in the U.S. and 54 per cent in the U.K.

Entrepreneurial intentions – 20 per cent of Canadian have a plan to start a business in the next three years, compared with 23 per cent in the U.S. and 13 per cent in the U.K.

Entrepreneurial activity – One of the most important GEM measures is TEA (Total early-stage entrepreneurs), a measure of what per cent of the adult population is actively engaged in starting a business. Another measure is Established Business, those that have been around for more than 42 months.  The graphic below shows Canada's TEA rate and Established Business rate in 2022 compared with five other major industrial countries.

In 2021 Canada had a TEA rate of more than 20 per cent higher than the U.S., but the number declined by 4 per cent in 2022.

Entrepreneurs’ motivation – The study probes what motivates people to start a business. The main reasons are:

• To build great wealth or a very high income – 66 per cent
• To make a difference in the world – 64 per cent
• To earn a living because jobs are scarce – 59 per cent
• To continue a family tradition – 38 per cent

This pattern is similar across most major comparator countries. The motivation “to earn a living because jobs are scarce” decreased by 12 per cent between 2021 and 2022, suggesting a decline in “necessity entrepreneurship.”

Angel investors – 11 per cent of Canadians said they had provided money towards a startup in 2022, proving an average amount of $8,200. This compares with the U.S., where a similar number provided funding (12.7 per cent), but the average funding was much higher ($41,000). Across the G6 (G7 minus Canada) the average amount varied widely from a high of $48,000 in Germany to a low of $9,000 in France. (All in US dollars).

Industry sector – GEM divides the sector in which entrepreneurs operate into four categories – consumer services, business services, transformation (manufacturing) and the extractive sector (agriculture, mining, oil and gas)

The breakdown for TEA in Canada is shown below (right).

Technology sector – 5.6 per cent of the TEA group reported that they were active in the high or medium technology sectors in Canada, compared with 8.6 per cent of the Established Businesses.

Growth  – Within the TEA group, 2.2 per cent in Canada expect to create 19 jobs in the next 5 years. That compares with 3.1 per cent in the U.S., 1.4 per cent in the U.K., 0.7 per cent in Germany, 1.3 per cent in France, and 0.5 per cent in Japan.

Export orientation – two per cent of the TEA startups have more than 50 per cent of their revenue coming from exports. This compares favorably with the other comparator countries, shown below. Seventy-one per cent of startups do not export at all, similar to the other comparator countries.

Age – The 25-34 age group is the largest contributor to TEA, with 35 per cent of the total activity. The 35-44 age group is next with 23 per cent, followed by 18-24 at 16.7 per cent, 45-54 at 16.5 per cent and 8.7 per cent for the 55-64 age group. That pattern is similar in all the comparator countries.

Gender – As in virtually all GEM countries, the rate of male TEA is higher than the rate of female TEA. In Canada the male TEA rate was 18.4, which was below the five-year average of 20.4. The female TEA rate was 14.8, also below the five-year average of 15.3. The story with Established Businesses (EB) is similar. The rate of male EB is 7, compared with a female EB rate of 5.4.

In terms of international comparisons, the Canadian TEA for females is 81 per cent of the male TEA rate. That is behind the U.S. (89 per cent) but well ahead of all the other comparator countries.  It is similar with Established Businesses, but there the Canadian rate (77 per cent) is higher than the U.S. rate (75 per cent).

Framework conditions – GEM computes a score based on experts’ evaluations of the context for entrepreneurship in each country. Canada scored 5.1 in 2022, unchanged from 2021. Among the G7 countries, the U.S. ranks first (with 5.2), with Canada, Germany and France tied for second.

The disconnect between entrepreneurship and productivity performance

Canada’s strong performance in startup entrepreneurship stands in stark contrast to its poor performance in innovation and productivity. Canada ranked 23^rd out of 132 countries for innovation outputs, according to the Global Innovation Index, and Canadian productivity has diminished by nine per cent between 2000 and 2022, falling to roughly 72 per cent of that of the U.S.

The most likely reason for the disconnect lies in the inability to grow promising startups to scale in sufficient numbers to affect the innovation and productivity statistics.  It has been widely noted that Canada has a scale-up problem, and this disconnect is another aspect of that problem.  However, the good news is that putting more effort into scaling promising startups should be one way to improve the innovation and productivity rankings.

Recommendations

The report concluded with four recommendations:

1. Promote public awareness of the benefits of entrepreneurship.
2. Support entrepreneurial activity and business growth in the extractive and transforming sectors.
3. Target “ease of entry” framework conditions that limits trade for entrepreneurs and established businesses.
4. Address under-representation in entrepreneurial activity in Canada.

The full report is being launched by webinar on November 22 at noon EST. To register email martha@thecis.ca       

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