Executive summary
Archived Content
Information identified as archived is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please "contact us" to request a format other than those available.
This paper describes the patterns of firm entry and exit across provinces in Canada, the relationship of these patterns to differences in industrial structure and the response of firm entry and exit to changes in the economic environment.
Firm entry and exit play an important role in shaping industrial structure and dynamics. Although entry and exit are ubiquitous, new firms are often associated with new ideas and the provision of innovative goods and services that enhance competition and force incumbents to become more innovative and efficient. Studies have shown the considerable role played by entry and exit in resource reallocation and productivity improvement.
Empirical studies on firm entry and exit are usually restricted to specific industries, often manufacturing or retail, or to simple cross-country comparisons, due to the scarcity and quality of firm-level longitudinal datasets. Statistics Canada has developed a database from its Longitudinal Employment Analysis Program (LEAP) which makes it possible to derive statistics on firm dynamics for all industries in the business sector at the provincial level. The labour-tracking feature in the LEAP dataset allows us to distinguish ‘organic’ entry and exit from merger and acquisition activities.
Entry and exit patterns across provinces may be similar in some aspects and different in others because provincial economic conditions are important determinants of firm entry and exit and provincial circumstances differ. By providing an overview of entry and exit patterns in the Canadian provinces, this paper examines similarities and differences and links these to provincial industrial structure and economic development.
This paper finds that entry and exit patterns in many provinces are similar to those at the national level in a number of ways. First, the number of entering firms generally outpaced the number of exiting firms in all provinces over the period from 2000 to 2009. Second, the entry and exit rates calculated using number of firms appeared to be stationary, except in Manitoba, Quebec, and the Atlantic provinces, where both rates trended downward. Third, the entry and exit rates when calculated by employment declined over time in all provinces. Last, the entry and exit rates when calculated using the number of firms were negatively correlated with each other. Negative correlations are to be expected when cyclical effects on entry and exit predominate; positive correlations are expected when cyclical effects are relatively unimportant—because then the normal operation of creative destruction occurs.
Economic growth increases demand for goods and services and hence corporate profits, which in turn encourages entry and protects against exit; therefore, it is expected that gross domestic product (GDP) growth would be positively related to entry and negatively related to exit.
In Alberta, British Columbia, and Quebec, the signs of both correlations are as expected. Over the period from 2000 to 2009, the correlation coefficient between GDP growth and the entry rate calculated using the number of firms was 0.67 for Alberta, 0.83 for British Columbia, and 0.17 for Quebec, and that between GDP growth and the exit rate calculated using the number of firms was -0.72, -0.54, and -0.17 for the three provinces, respectively. Both correlations for Quebec, although possessing expected signs, are relatively weak.
In all other provinces, either one or both of the expected signs are not present. GDP growth was found to be negatively correlated with entry in Manitoba and the Atlantic provinces, and positively correlated with exit in Ontario, Saskatchewan, and the Atlantic provinces.
The level of entry and exit is expected to be province-specific when local economic conditions and other regional factors such as industrial structure and public policies play a major role in firms’ entry and exit decisions.
This paper finds that the entry rate when calculated using the number of firms varies considerably across provinces and was generally higher where the provincial economy grew more rapidly. The average entry rate over 2000 to 2009 ranged from a high of 12.5% in Alberta to a low of 9.2% in Quebec. The variations in the exit rate were much smaller. The exit rate was highest at 9.6% in British Columbia and lowest at 8.5% in Quebec during the study period. These differences in the two rates confirm other work (Baldwin 1995) that suggests the exit rate tends to be relatively more stable across time and jurisdictions (when not influenced by major macro events or industrial restructuring) because the underlying probability of failure is invariant to minor differences in economic climate while entry rates respond to growth opportunities and these can vary more across jurisdictions or over time.
The entry rate and the turnover rate (the sum of entry and exit rates) are positively correlated. Alberta and British Columbia are the top two provinces with the highest entry and turnover rates, while Quebec ranked at the bottom for both rates. Provinces with higher entry rates on average tend also to have higher exit rates on average, and therefore a higher overall turnover rate because entry involves experimentation and new entrants are prone to higher failure rates.
Net entry (the differences between entry and exit) makes positive contributions to the growth in the business population. The contribution to the increase in number of firms was largest in Alberta over the period from 2000 to 2009, with an annual growth rate of 3.1% on average. It was the second-highest in Ontario and British Columbia, 2.4% and 2.3% on average per year, respectively. Net entry contributed less to the business population in Saskatchewan and Quebec. Atlantic Canada was last, with only 0.3% per year on average over the same time period.
Net entry contributes significantly more to employment growth than it does to growth in the number of firms. Despite the small shares of entrants and exits in total employment in all provinces, net entry contributes significantly to overall employment growth, except in the Atlantic provinces as a whole. Over 2000 to 2009, the contribution of net entry to overall employment growth averaged more than 21% in Ontario and Saskatchewan, 19% in British Columbia, and around 16% in Alberta, Manitoba, and Quebec. It was negligible in the Atlantic provinces.
Differences in entry and exit rates across industries for each province are similar. In Alberta, firm-number-based entry and exit rates were highest across the sectors where Canadian restructuring was leading to an increased importance of industries—mining, oil and gas, construction, transportation, and finance. The same is true for the other Western provinces—Saskatchewan, British Columbia, and Manitoba—which also experienced the effects of the post-2000 resource boom in varying degrees. It holds to a lesser, but still notable, degree in the Eastern provinces of Ontario and Quebec. This is in accord with the pattern reported in Brown and Gellatly (forthcoming) that growth in these industries was generally spread across most provinces.
Despite similarities in the cross-industry patterns within provinces, the levels of entry activity for particular industries (i.e., mining, oil and gas) are not the same. The growth of the mining, oil and gas industry in Western Canada was associated with the highest gross and net entry rates; however, rates were quite high in this industry even in Ontario and Atlantic Canada, which demonstrates the strength of this industry across the country. Quebec had the lowest entry rate in this sector.
Construction also saw growth across the country. But once again, the Western provinces outpaced the rest of the country in net entry and in the contribution that net entry made to the total business population. As was the case with the resource sector, Quebec lagged the other provinces.
All provinces except Quebec experienced a growing or slightly growing finance industry. This industry growth was reflected in high gross entry rates across Ontario and the Western provinces.
For most provinces, manufacturing declined or was flat over the period. Ontario, Quebec, and Atlantic Canada saw a higher exit rate than entry rate. Alberta and Saskatchewan were the only provinces where manufacturing grew slightly over the period.
While the retail sector generally increased its relative size over the period (Brown and Gellatly forthcoming), Alberta and British Columbia were the only two provinces that experienced more entry than exit in this sector.
- Date modified: