Here's some good news to help kick off the New Year. Canadians do pretty well when it comes to creating small businesses of up to nine employees, just as well, it seems, as Americans.
But the flipside of that coin isn't quite so pretty. Canadians are nowhere near as successful as their southern neighbours at keeping fledgling companies afloat. These are two early and intriguing findings from a large research project into entrepreneurship that is underway at Vancouver's Fraser Institute.
Jason Clemens, the institute's resident scholar in fiscal studies, and his fellow investigator Keith Godin looked at the number of small businesses created annually between 2002 and 2004 in all 10 Canadian provinces and the 50 American states.
Nevada surpassed the other jurisdictions with startups accounting for 22.9 per cent of all companies with one to nine employees.
Newfoundland was the top Canadian province with a business creation rate of 16.9 per cent and it ranked ninth overall. Quebec ranked last in Canada and 54th overall with a rate of 11.9 per cent. The rest of the provinces were scattered in between with no discernible pattern.
A clear trend emerged when Clemens and Godin measured net business creation, which they arrived at by subtracting the number of failures from the number of startups.
Alberta surpassed the other provinces with a net survival rate of 2.4 per cent of existing small firms and ranked 11th overall. Ontario was 21st and B.C. 24th.
The other seven provinces were in the bottom half.
In fact, Newfoundland, Saskatchewan, Nova Scotia, New Brunswick and Prince Edward Island were ranked from 55th to 60th and four of the five had negative rates.
That is, the number of companies going out of business exceeded those that were starting up.
"We have higher rates of failure in Canada than the U.S.," says Clemens. "The data tells us we have problems succeeding."
This may seem like an arcane statistical exercise, but it isn't.
"Entrepreneurialism is what separates capitalism and free markets from other systems," says Clemens. "Small startup firms challenge existing companies through the creation of new products, innovations and better service. The continual pressure to improve keeps the system going."
Therefore, if Canada presents an unfavourable climate for small-business startups, that can't be good for the long-term well-being of the economy.
It also begs a question: What is it about this country that makes it tough to start a company and stay in business?
Clemens says he and his partner are in the early phases of their study of entrepreneurialism, but he does have a few ideas about the causes of the problem.
For one thing, Canada is a much more resource-dependent economy and mid-size to large companies tend to do better in resource industries.
He also thinks that high personal tax rates, labour laws, the unemployment insurance program and other government initiatives either discourage entrepreneurialism or make it more difficult to succeed, especially for those who are on the margins.
"Our (unemployment insurance) system pays people not to work to a much greater extent than in the U.S.," he says. "If you add our employment-standard laws and labour-relations laws for the unionized sector, there is much more safety in being an employee in Canada than in the U.S."
All of this undermines initiative and risk-taking.
"The safer the labour market is for employees, the costlier the decision to remove yourself from paid employment and go on your own," he adds.
Clemens dismisses the notion that Canadians are inherently less entrepreneurial and more risk-averse than Americans.
He also thinks that many of our governments recognize the importance of business creation and have begun to adopt more favourable policies.
For instance, the federal corporate income tax rate has been cut to 15 per cent from 28, a significant reduction. "We've just had a debate between the Conservatives and Liberals about who would do the most to cut business taxes," says Clemens. "That's a watershed change from 10 years ago."
In the West, he adds, Saskatchewan's former NDP government, the Conservatives in Alberta and Liberals in B.C. have all slashed taxes on business, despite vociferous opposition from union members and their representatives.
Despite all that, governments must still be wary about introducing policies that are too pro-business, especially if their actions will help big firms as well as small ones.
"Polling data show that there is a great deal of support for policies that encourage small- business development and success," Clemens notes. "People will oppose the very same policies if they are aimed at large companies.
"That is indicative of a culture of envy and a suspicion of success. People want equality more than they want opportunity."
(D'Arcy Jenish can be reached at jenish@businessedge.ca)
