Study: Business entry and exit rates in Canada: A 30-year perspective
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The rate at which businesses both entered and exited industry in Canada fell between 1983/1984 and 2011/2012, according to a new study. The entry rate, the number of entrants divided by the population of all active firms, declined over the study period, falling from 24.5% to 13.1%. The exit rate, the number of firms leaving an industry relative to the sector's total population, also declined, falling from 16.5% to 11.6%.
The study focused on firm entry and exit rates, which illustrate one aspect of the dynamism that is essential to a well-functioning economy. The entry of new firms is a source of productivity growth and technology adoption, while exits remove less productive firms. Other measures of dynamism, such as employment re-allocation, were not examined. As a result, even though entry and exit rates in Canada declined over the last three decades, this does not suggest that Canada's economy has become less dynamic overall.
The study, based on a new set of experimental, linked data, revealed that the largest differences between entry and exit rates occurred in the 1980s, when entry rates declined but exit rates increased. The entry rate declined by 5.7 percentage points between 1983/1984 and 1990/1991, while the exit rate increased by 2.6 percentage points. Over subsequent decades, both entry and exit rates declined.
By 1995/1996, a more stable difference between entry and exit rates had been established. The difference averaged 1.98 percentage points between 1996/1997 and the end of the study period in 2011/2012.
Declines in entry and exit rates were widespread across industries. From 1983/1984 to 2011/2012, entry rates in many industries declined by between 7 and 11 percentage points, while exit rates declined by between 2 and 7 percentage points. These were similar to the magnitude of the overall decline found in the business sector over the 30-year period examined.
Note to readers
The business sector is defined as all firms excluding those in North American Industrial Classification System (NAICS) 61 (education), NAICS 62 (health care and social services) and NAICS 91 (public administration). Estimates for NAICS 22 (utilities) were not deemed to be of sufficient quality for publication at this time.
Estimates of entrants and exits are based on two-year intervals. An exit is a firm present in a given year that is not present in the following year. An entrant is a firm present in a given year but not present in the preceding year. Active firms in a given year are those present that year. Because the number of firms differs between years (unless the number of exits and entrants is equal), no natural base is available against which to compare entrants and exits. Consequently, the number of firms used to calculate the entry and exit rates is the average of the active firm population between two given years. This use of two-year intervals is expressed in the text and charts by representing the two years used to calculate entry rates and exit rates as Y(t)/Y(t+1). The first set of estimates uses the years 1983 and 1984, and is thus reported as 1983/1984.
The research paper "Business Entry and Exit Rates in Canada: A 30-year Perspective," part of Economic Insights (Catalogue number11-626-X), is now available from the Browse by key resource module of our website under Publications.
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