Economic and Social Reports
The long-run evolution of business entry and exit rates in Canada

Abstract

Since the 1980s, the entry and exit rates of firms have declined significantly worldwide, including in Canada and the United States, signalling a reduction in business dynamism. This paper builds on a study by MacDonald (2014) by extending the analysis of Canadian entry and exit trends from 1983 to 2012 up to 2021 and comparing these results with those from the United States. While Canadian entry and exit rates previously declined more sharply than those in the United States, this decline largely ceased in the late 2010s, with rates approaching levels similar to their U.S. counterparts. The Canadian declines are not attributable to sectoral shifts but rather affect all sectors. This paper further finds that sector-specific increases in industrial concentration do not appear to explain the decline in Canadian entry and exit rates.

Author

Li Li is with the Economic and Social Analysis and Modelling Division, Analytical Studies and Modelling Branch, at Statistics Canada.

Acknowledgments

I would like to extend my gratitude to Mark Brown, Thibaut Duprey, Amélie Lafrance-Cooke, Jiang Beryl Li, Ryan MacDonald, Pourkarimi Parisa, Jianmin Tang and the participants of the Economic Analysis Division seminar. I deeply appreciate the time and effort they dedicated to reviewing this paper.

Introduction

Since the 1980s, there has been a notable decline in the entry and exit rates of firms globally, including in Canada and the United States. This decline reflects a general decrease in business dynamism, a key indicator of economic vitality. The Schumpeterian theory of creative destruction posits that economic growth is driven by the continuous process of old, unproductive firms exiting the market and new, innovative firms entering (Aghion, Akcigit, and Howitt 2015). The presence of “zombie” firms—those that remain in operation despite being unproductive—can negatively impact overall productivity (Amundsen, Lafrance, and Leung 2023).

Previous Canadian studies, including those by Ciobanu and Wang (2012); Baldwin, Liu and Wang (2013); MacDonald (2014); and the Bank of Canada (2015), have documented trends in Canadian firm entry and exit. Notably, MacDonald (2014) identified a remarkable long-run decline in Canadian entry and exit rates from 1983 to 2012. During this period, the entry rate fell from 24.5% to 13.1%, and the exit rate decreased from 16.5% to 11.6%. This long-run decline was observed across various sectors. The Bank of Canada (2015) extended the analysis to 2013, performing a shift-share analysis that reached similar conclusions.^Note  It remains unclear whether the long-run decline of Canadian business dynamism continued beyond the early 2010s. Although Statistics Canada provides publicly available tables of entry and exit rates for years after 2012,^Note  no systematic follow-up analysis has been conducted so far.

This paper extends the documentation of Canadian trends to 2021. The main finding of this exercise is that Canada’s entry and exit rates declined significantly more than those of the United States, but with the declines essentially halting in the late 2010s.^Note  Among all sectors, manufacturing experienced the most acute decline in the entry rate during the 2008/2009 recession, aligning with its significant decline in gross domestic product (GDP) share during that period. Overall, for both goods and service sectors, the decline in entry and exit rates in Canadian sectors is stronger than in their U.S. counterparts. The consistent pattern of more pronounced declines in Canada across all sectors suggests that the aforementioned main finding is not caused by sectoral shifts.

Another possible explanation of the long-run decline of business dynamism in the United States is the prevalent rise of industrial concentration: once-successful firms may become entrenched over time and prevent further market entry. However, the evidence for this hypothesis is mixed.^Note  This paper shows that, unlike in the United States, industrial concentration did not rise prevalently across industries in Canada. As noted by the Competition Bureau of Canada (2023), certain sectors have experienced a significant increase in industrial concentration, warranting further attention. However, there is no widespread increase in industrial concentration across all sectors, unlike in the United States. Further regression analyses at the four-digit level of the North American Industry Classification System (NAICS) indicate that, in Canada, the sector-specific increase in industrial concentration does not appear to explain the overall decline in entry and exit rates across all sectors.

This paper is organized as follows. Section 2 explains the data sources used, the calculation procedure for entry and exit rates, and presents the main plots for the business sector. Section 3 presents the plots by NAICS two-digit sectors. Section 4 studies the relationship between entry and exit and industry concentration, and Section 5 concludes.

Entry and exit rates of the business sector

Data source and calculation procedure

Most previous work on Canadian entry and exit, such as MacDonald (2014), uses the Longitudinal Employment Analysis Program (LEAP), which contains mostly employment information based on T4 tax filings.

By contrast, this paper uses the National Accounts Longitudinal Microdata File (NALMF) to calculate entry and exit rates because NALMF enables the examination of the correlation between these rates and the Herfindahl-Hirschman Index (HHI)—a measure of industrial concentration. HHI requires sales revenue data for computation, which justifies the use of NALMF because it contains these data and LEAP does not.

This paper uses data from the NALMF as of 2022.^Note  Since NALMF data go back to 2000, this paper relies on the LEAP-based estimates of MacDonald (2014) for years prior to and including 2000. Despite some minor differences in the set of firms included, the entry and exit rates calculated using LEAP and NALMF for the overlapping years (2001 to 2012) are largely consistent with each other, both for the business sector as a whole and across industries, supporting their joint consideration.^Note 

Following MacDonald (2014), for the calculation of the entry rate, the set of entering firms consists of firms that are operating in year $t$ and not found in the year t-1 dataset. The entry rate is the ratio between the number of entering firms and the total number of operating firms (averaged across year $t$ and year $t-1$). The exit rate is calculated similarly: the set of exiting firms consists of firms that are operating in year t-1 and not found in the year $t$ dataset. The exit rate is the ratio between the number of exiting firms and the number of entering firms (also averaged across year $t$ and year t-1). The rationale behind taking a two-year average of total operating firms in the denominators is that there is no natural base for the calculation of entry and exit rates, whose universes differ in timing. Using the averaged total operating firms as the common base allows for the comparison of entry and exit rates.^Note  Because of the involvement of t-1 data in the calculation of the two rates, one year is lost and the NALMF series in this paper starts from 2001.

The focus of this paper is on the business sector, which includes all two-digit NAICS industries except 61 (educational services), 62 (health care and social assistance), and 91 (public administration).^Note  The unit of analysis is an enterprise, which is the highest level of the Business Register statistical hierarchy. An enterprise is a legal entity that independently reports financial data and has autonomy in decision making. In this paper, a Canadian firm refers to an enterprise.^Note  For the United States, this paper uses data from the Business Dynamics Statistics (BDS) from the U.S. Census Bureau. The BDS of the United States measures business dynamism at the establishment level instead of the enterprise level. The key difference between the two levels is that an enterprise with multiple establishments shutting down one establishment still remains operational at the enterprise level. However, at the establishment level, this counts as one exit. Despite this distinction, the entry and exit rates of businesses in Canada and the United States are comparable because most enterprises in the NALMF consist of only a single establishment.

By operating in year $t$, a firm has a strictly positive number of employees as measured by either the averaged PD7 employment, the T4 employment^Note  or both. PD7 reports monthly payroll deductions, such as income tax, Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums. NALMF’s PD7 variable is non-zero whenever there is employment reported in any month of the associated year. By contrast, the T4 reports the total annual income of employees. The PD7 and T4 employment variables complement each other, since some data may be missing for one but not the other.^Note 

Two adjustments are adopted. The first adjustment is labour tracking. Both LEAP and NALMF provide information that identifies firms with false entries and exits occurring between two years. These false entries and exits may result from organizational restructuring, or mergers and acquisitions, causing mismatches in their enterprise ID over time. The second adjustment concerns the NAICS code. NALMF contains rich information about the NAICS classification, derived from the Business Register. Nevertheless, many new entrants are yet to be classified in NAICS in year $t$. Imputation using data from future years does not produce qualitatively important differences. To preserve observations, this paper employs one-period-ahead imputation and loses one year of observations, ending the NALMF series in 2021.

Entry and exit rate plots

Chart 1 illustrates the calculated entry and exit rates for Canada, alongside the corresponding rates for the United States. In the figure, the overlapping years between the LEAP data from MacDonald( 2014), as well as the NALMF, span from 2001 to 2012. The entry and exit rates for the United States are derived from the 2021 BDS datasets.

Data table for Chart 1

Data table for Chart 1
Table summary
The information is grouped by Year (appearing as row headers), Entry (LEAP), Entry (NALMF), Exit (LEAP), Exit (NALMF), United States (Entry) and United States (Exit), calculated using percent units of measure (appearing as column headers).

Year	Entry (LEAP)	Entry (NALMF)	Exit (LEAP)	Exit (NALMF)	United States (Entry)	United States (Exit)
	percent
Note ... not applicable Notes: LEAP stands for Longitudinal Employment Analysis Program; NALMF stands for National Accounts Longitudinal Microdata File. This figure shows the overall evolution of Canadian business dynamism (business sector) from 1984 to 2021. The entry and exit rates computed using NALMF and LEAP data are closely aligned. Sources: Longitudinal Employment Analysis Program (LEAP), National Accounts Longitudinal Microdata File (NALMF), Business Dynamics Statistics (BDS).
1984	0.24	... not applicable	0.16	... not applicable	0.15	0.11
1985	0.22	... not applicable	0.16	... not applicable	0.14	0.12
1986	0.20	... not applicable	0.16	... not applicable	0.14	0.12
1987	0.21	... not applicable	0.15	... not applicable	0.14	0.12
1988	0.20	... not applicable	0.16	... not applicable	0.14	0.12
1989	0.19	... not applicable	0.17	... not applicable	0.13	0.11
1990	0.20	... not applicable	0.18	... not applicable	0.13	0.11
1991	0.19	... not applicable	0.19	... not applicable	0.12	0.12
1992	0.18	... not applicable	0.17	... not applicable	0.12	0.11
1993	0.17	... not applicable	0.17	... not applicable	0.12	0.10
1994	0.17	... not applicable	0.17	... not applicable	0.12	0.10
1995	0.17	... not applicable	0.17	... not applicable	0.12	0.10
1996	0.18	... not applicable	0.18	... not applicable	0.12	0.10
1997	0.18	... not applicable	0.15	... not applicable	0.12	0.11
1998	0.17	... not applicable	0.14	... not applicable	0.11	0.10
1999	0.15	... not applicable	0.14	... not applicable	0.11	0.10
2000	0.15	... not applicable	0.14	... not applicable	0.11	0.10
2001	0.14	0.13	0.13	0.13	0.11	0.10
2002	0.14	0.13	0.13	0.13	0.12	0.11
2003	0.14	0.13	0.12	0.12	0.11	0.10
2004	0.15	0.14	0.12	0.12	0.12	0.10
2005	0.15	0.14	0.12	0.12	0.12	0.10
2006	0.14	0.14	0.13	0.12	0.12	0.10
2007	0.15	0.15	0.12	0.12	0.12	0.11
2008	0.15	0.14	0.12	0.12	0.10	0.11
2009	0.13	0.13	0.12	0.12	0.09	0.12
2010	0.14	0.13	0.12	0.12	0.10	0.11
2011	0.13	0.13	0.12	0.12	0.10	0.10
2012	0.13	0.13	0.12	0.12	0.10	0.09
2013	... not applicable	0.12	... not applicable	0.13	0.10	0.09
2014	... not applicable	0.13	... not applicable	0.12	0.10	0.09
2015	... not applicable	0.12	... not applicable	0.11	0.10	0.09
2016	... not applicable	0.12	... not applicable	0.12	0.10	0.08
2017	... not applicable	0.12	... not applicable	0.12	0.10	0.09
2018	... not applicable	0.12	... not applicable	0.12	0.09	0.09
2019	... not applicable	0.14	... not applicable	0.11	0.09	0.09
2020	... not applicable	0.11	... not applicable	0.13	0.09	0.09
2021	... not applicable	0.13	... not applicable	0.12	0.10	0.10

As shown in Chart 1, the entry and exit rates computed using NALMF and LEAP data are closely aligned. This suggests that the combination of PD7 and T4 data, while significantly increasing the number of operating firms after correction, does not materially affect the calculation of entry and exit rates as fractions. This result reassures the validity of the LEAP entry and exit rates of the earlier years.

The next observation is that, by extending the study by MacDonald (2014) to the year 2021 using NALMF, the slowdown of the decline in entry and exit rates in recent years becomes clear. From 2001 to 2012, the entry rate remains around 13%; it temporarily fell to 12% in 2016 but eventually rebounded to 13%. Similarly, from 2001 to 2012, the exit rate stays around 12%, with a very subtle decline over the subsequent years.

By comparing the long-run time trends of entry and exit rates in Canada against those in the United States, it is evident that Canada experienced a much more dramatic decline in entry and exit compared with the United States, and that this decline happened mostly before 2000.

Although the two countries fundamentally differ in levels, their ratios of entry to exit are similar, except in several episodes.^Note  Chart 2 shows the results. In interpreting this graph, note that a higher ratio implies more entries relative to exits compared with the other country. As shown, the ratios of the two countries almost overlap for the majority of the period. One possible reason for this overlap is that the United States is Canada’s most important trade partner and geographical neighbour (Statistics Canada 2024a). In April 2024, the United States accounted for 62.7% of all Canadian imports ($40,842.7 million out of $65,154.8 million) and 75.4% of all Canadian exports ($48,495.3 million out of $64,337.6 million) (Statistics Canada 2024b). Because of this close tie, the two countries are subject to common macroeconomic shocks.

However, there are a few episodes where the ratios of the two countries show temporary divergence. These episodes relate to the differential severity of recessions in the two countries. The first notable episode occurred in the early 1990s, with the Canadian ratio below that of the United States. This episode corresponds to Canada’s more severe recession in the early 1990s (Fortin 1996). The second notable episode occurred in the late 2000s, with the Canadian ratio above that of the United States. The timing of the second episode corresponds to the 2008/2009 recession, during which Canada is known to have recovered faster than the United States.

Data table for Chart 2

Data table for Chart 2
Table summary
The information is grouped by Year (appearing as row headers), Canada entry–exit ratio and United States entry–exit ratio, calculated using entry–exit ratio units of measure (appearing as column headers).

Year	Canada entry–exit ratio	United States entry–exit ratio
	entry–exit ratio
Notes: This figure shows the ratios of entry and exit rates by year in the business sector of Canada and the United States from 1984 to 2021. During episodes of recessions, this ratio temporarily drop below 1. Sources: Longitudinal Employment Analysis Program, National Accounts Longitudinal Microdata File, Business Dynamics Statistics.
1984	1.48	1.37
1985	1.38	1.14
1986	1.31	1.22
1987	1.37	1.18
1988	1.24	1.21
1989	1.16	1.18
1990	1.07	1.16
1991	0.98	1.06
1992	1.06	1.02
1993	1.02	1.12
1994	1.04	1.17
1995	1.01	1.23
1996	1.00	1.17
1997	1.18	1.11
1998	1.16	1.15
1999	1.12	1.09
2000	1.09	1.08
2001	1.08	1.05
2002	1.09	1.06
2003	1.13	1.11
2004	1.24	1.17
2005	1.24	1.16
2006	1.13	1.24
2007	1.28	1.11
2008	1.20	0.95
2009	1.08	0.80
2010	1.12	0.90
2011	1.15	1.00
2012	1.10	1.07
2013	0.98	1.07
2014	1.07	1.12
2015	1.08	1.14
2016	1.03	1.22
2017	1.07	1.06
2018	1.07	1.05
2019	1.25	1.11
2020	0.82	1.02
2021	1.13	1.02

It is important to note that in both countries, entry rates usually exceed exit rates.^Note  However, during the 2008/2009 recession, the entry–exit ratio in the United States fell below 1 for a few years, indicating that exit exceeds entry. Similarly, during the COVID-19 pandemic, Canada’s ratio dropped below 1. This phenomenon can be interpreted as a sign of the significant impact of these shocks on business dynamism. The findings agree with reports that the United States was hit harder by the 2008/2009 recession and Canada was hit harder by the COVID-19 pandemic (Statistics Canada 2022b).

Analysis by sector

Goods sectors

Chart 3 shows the plots of the goods sectors. These sectors include agriculture, forestry, fishing and hunting (NAICS 11); mining, quarrying, and oil and gas extraction (NAICS 21); construction (NAICS 23); and manufacturing (NAICS 31-33). Following MacDonald (2014), utilities (NAICS 22) is excluded from this analysis.^Note 

For each of the goods sectors, the entry and exit rates computed using LEAP and NALMF are closely aligned, similar to those of the business sector as a whole. To avoid cluttering the plots, the time series data are combined, plotting only the LEAP values for the overlapping years. The same approach is applied to the service sectors in the next subsection.

Data table for Chart 3

Data table for Chart 3
Table summary
The information is grouped by Year (appearing as row headers), A - Agriculture, forestry, fishing and hunting, B - Mining, quarrying, and oil and gas extraction , C - Construction, D - Manufacturing, Canada entry, Canada exit, United States entry, United States exit, Canada entry, Canada exit, United States entry, United States exit, Canada entry, Canada exit, United States entry, United States exit, Canada entry, Canada exit, United States entry and United States exit, calculated using percent units of measure (appearing as column headers).

Year	A - Agriculture, forestry, fishing and hunting				B - Mining, quarrying, and oil and gas extraction				C - Construction				D - Manufacturing
	Canada entry	Canada exit	United States entry	United States exit	Canada entry	Canada exit	United States entry	United States exit	Canada entry	Canada exit	United States entry	United States exit	Canada entry	Canada exit	United States entry	United States exit
	percent
Sources: Longitudinal Employment Analysis Program (LEAP), National Accounts Longitudinal Microdata File (NALMF), Business Dynamics Statistics (BDS).
1984	0.24	0.14	0.17	0.13	0.21	0.12	0.14	0.14	0.16	0.08	0.11	0.09	0.23	0.14	0.20	0.13
1985	0.18	0.14	0.15	0.15	0.18	0.12	0.13	0.14	0.16	0.09	0.10	0.09	0.20	0.14	0.19	0.14
1986	0.18	0.14	0.15	0.17	0.16	0.12	0.11	0.16	0.16	0.09	0.10	0.10	0.21	0.13	0.18	0.14
1987	0.16	0.15	0.16	0.15	0.16	0.15	0.12	0.21	0.15	0.09	0.11	0.10	0.21	0.14	0.19	0.14
1988	0.13	0.17	0.17	0.15	0.12	0.14	0.13	0.15	0.12	0.10	0.11	0.09	0.17	0.15	0.17	0.15
1989	0.14	0.16	0.16	0.14	0.11	0.15	0.11	0.14	0.12	0.10	0.10	0.09	0.17	0.15	0.16	0.14
1990	0.17	0.19	0.17	0.13	0.15	0.15	0.12	0.13	0.14	0.11	0.10	0.09	0.20	0.16	0.16	0.14
1991	0.18	0.18	0.14	0.14	0.15	0.15	0.12	0.12	0.12	0.13	0.09	0.10	0.17	0.21	0.14	0.16
1992	0.17	0.17	0.15	0.14	0.13	0.16	0.10	0.15	0.12	0.12	0.08	0.10	0.18	0.18	0.14	0.16
1993	0.16	0.17	0.14	0.13	0.18	0.14	0.11	0.13	0.12	0.12	0.09	0.09	0.17	0.18	0.16	0.14
1994	0.17	0.18	0.16	0.12	0.19	0.13	0.11	0.12	0.13	0.10	0.09	0.09	0.17	0.18	0.16	0.13
1995	0.17	0.18	0.15	0.13	0.17	0.14	0.10	0.12	0.14	0.11	0.09	0.08	0.15	0.20	0.16	0.12
1996	0.18	0.19	0.14	0.13	0.22	0.14	0.10	0.12	0.13	0.12	0.08	0.08	0.16	0.20	0.15	0.13
1997	0.18	0.16	0.13	0.13	0.23	0.11	0.11	0.12	0.16	0.10	0.08	0.09	0.18	0.16	0.15	0.12
1998	0.15	0.14	0.14	0.13	0.16	0.16	0.10	0.11	0.16	0.10	0.08	0.08	0.16	0.15	0.14	0.12
1999	0.13	0.13	0.13	0.13	0.13	0.14	0.09	0.13	0.13	0.12	0.07	0.08	0.15	0.14	0.14	0.11
2000	0.12	0.13	0.12	0.13	0.15	0.12	0.10	0.10	0.11	0.11	0.07	0.08	0.14	0.14	0.13	0.11
2001	0.12	0.13	0.12	0.13	0.16	0.12	0.11	0.09	0.10	0.10	0.07	0.08	0.14	0.12	0.12	0.12
2002	0.11	0.13	0.11	0.15	0.13	0.13	0.12	0.11	0.09	0.10	0.07	0.10	0.15	0.12	0.13	0.13
2003	0.10	0.13	0.12	0.13	0.14	0.11	0.09	0.11	0.08	0.09	0.07	0.09	0.14	0.12	0.14	0.13
2004	0.11	0.12	0.13	0.13	0.18	0.11	0.10	0.09	0.08	0.09	0.07	0.08	0.17	0.11	0.16	0.12
2005	0.10	0.12	0.13	0.13	0.18	0.10	0.10	0.08	0.08	0.09	0.07	0.08	0.16	0.12	0.16	0.12
2006	0.09	0.13	0.13	0.13	0.17	0.11	0.13	0.08	0.08	0.09	0.08	0.08	0.16	0.13	0.17	0.12
2007	0.10	0.12	0.12	0.13	0.13	0.11	0.14	0.09	0.06	0.09	0.07	0.08	0.14	0.12	0.14	0.13
2008	0.10	0.12	0.10	0.14	0.12	0.11	0.11	0.09	0.05	0.08	0.06	0.08	0.12	0.12	0.12	0.16
2009	0.10	0.12	0.10	0.14	0.09	0.14	0.11	0.10	0.05	0.09	0.06	0.09	0.12	0.13	0.10	0.20
2010	0.10	0.11	0.11	0.12	0.10	0.12	0.09	0.10	0.05	0.08	0.06	0.09	0.11	0.12	0.12	0.18
2011	0.09	0.11	0.11	0.12	0.12	0.11	0.11	0.09	0.05	0.07	0.06	0.08	0.11	0.12	0.13	0.16
2012	0.10	0.10	0.11	0.10	0.14	0.11	0.12	0.08	0.07	0.08	0.07	0.07	0.13	0.12	0.14	0.13
2013	0.10	0.10	0.11	0.11	0.12	0.13	0.10	0.10	0.07	0.08	0.06	0.07	0.13	0.12	0.13	0.13
2014	0.09	0.09	0.11	0.10	0.12	0.12	0.11	0.09	0.07	0.08	0.06	0.07	0.12	0.11	0.13	0.12
2015	0.10	0.09	0.12	0.09	0.09	0.14	0.11	0.10	0.06	0.07	0.07	0.07	0.12	0.11	0.13	0.11
2016	0.09	0.09	0.12	0.10	0.08	0.16	0.08	0.15	0.06	0.08	0.07	0.07	0.11	0.11	0.13	0.10
2017	0.09	0.09	0.11	0.11	0.10	0.15	0.10	0.14	0.07	0.07	0.06	0.07	0.12	0.11	0.13	0.11
2018	0.09	0.09	0.11	0.11	0.09	0.12	0.09	0.11	0.07	0.07	0.07	0.07	0.11	0.11	0.13	0.10
2019	0.09	0.09	0.11	0.11	0.09	0.13	0.09	0.09	0.07	0.07	0.06	0.07	0.12	0.11	0.13	0.11
2020	0.08	0.09	0.11	0.11	0.07	0.14	0.08	0.12	0.06	0.08	0.06	0.08	0.10	0.13	0.12	0.11
2021	0.08	0.08	0.12	0.10	0.09	0.12	0.07	0.13	0.07	0.07	0.07	0.08	0.12	0.10	0.13	0.11

In the 1980s, the entry rate for the agriculture, forestry, fishing and hunting sector (NAICS 11) in Canada was higher than that of the United States. However, beginning in 2000, Canada experienced a significant decline in the entry rate, resulting in a lower entry rate compared with the United States. During the 2000s, the Canadian exit rate declined at a much slower pace than the entry rate, leading to a widening gap between the two rates. This gap indicates a contraction in the number of firms within the sector. The entry and exit rates converged again in the 2010s. This trend is consistent with findings from various reports on the agricultural sector. Agreeing with these results, Statistics Canada (2022a) provides a comprehensive analysis of the ongoing consolidation of farms in Canada. According to Chen (2022), the average farm size in Canada is approximately double that in the United States, with Canadian farms averaging 809.4 acres compared with 445.0 acres in the United States.

The Canadian mining, quarrying, and oil and gas extraction sector (NAICS 21) plays a vital role in Canada’s GDP. However, fluctuations in international natural resource prices, particularly oil, adversely affect the survival of Canadian firms in this sector and discourage potential new entrants. As shown in the accompanying figure, the exit rate of Canadian firms in this sector remains relatively stable, while the entry rate exhibits significant variability. In contrast, their United States counterparts appear more stable. Focusing the discussion on oil, this difference can be partly explained by the composition of Canada’s oil resources—over half of which are crude bitumen (heavy oil) (Statistics Canada 2023). By comparison, the primary oil source in the United States is shale oil. Converting bitumen into usable products, such as gasoline, is more expensive than processing shale oil. Additionally, the higher transportation costs of Canadian crude oil to United States refineries contribute to this disparity. Because of these cost differences, Canada’s oil industry may operate on narrower break-even margins, making it more vulnerable to international oil demand shocks than the United States. It should be noted that, although the Canadian dollar acts as a shock absorber through depreciation, this absorption is less than perfect because of the high extraction costs, with the exit spike during the 2014-to-2016 oil price decline serving as a prime example.

The construction and manufacturing sectors in both Canada and the United States experienced downturns during the early 1990s recession, though with varying severity. Canada was more significantly affected, with exit rates exceeding entry rates for several years. The reverse occurred during the 2008/2009 recession, when the United States experienced a substantially lower entry rate than exit rate. Overall, business dynamism in these sectors has been declining. While Baldwin and MacDonald (2009) found that the nominal GDP share of the Canadian manufacturing sector decreased because of relatively slow price growth, Clarke and Couture (2017) demonstrated that the real share also declined. This decline in entry rates suggests that potential entrants, likely anticipating lower profitability, chose not to enter these sectors.

Broadly, as discussed by Almon and Tang (2014), both Canada and the United States experienced declines in the share of economic activity in manufacturing during the period, leading to a lower share of activity in the goods sector and an expansion in the service sector. Their analysis indicates that manufacturing has been the primary factor behind the low GDP and labour productivity growth during this period, with the impact being more severe in Canada. The results in Chart 3 illustrate similar trends in entry and exit rates. The decline in these rates is generally more pronounced in Canada than in the United States, with the Canadian manufacturing sector experiencing the most significant drop in the entry rate.

Service sectors

The service sectors include wholesale trade (NAICS 41 in Canada, NAICS 42 in the United States); retail trade (NAICS 44-45); transportation and warehousing (NAICS 48-49); information and cultural industries (NAICS 51); finance and insurance, and real estate and rental and leasing (NAICS 52 and 53); professional, scientific and technical services (NAICS 54); and accommodation and food services (NAICS 72). To maintain focus and better match U.S. counterparts, some service sectors are excluded.^Note 

Chart 4 presents the results. Generally, the Canadian sectoral entry and exit rates were initially higher than their U.S. counterparts but eventually converged to approximately 0.1 (i.e., 10%).

Across the sectors, the Canadian wholesale trade (NAICS 41 in Canada) and retail trade (NAICS 44-45) entry rates experienced relatively large drops during the 2008/2009 recession, falling significantly below the corresponding exit rates. Notably, the phenomenon persisted beyond the 2008/2009 recession, possibly indicating structural changes in the two sectors.

Data table for Chart 4

Data table for Chart 4
Table summary
The information is grouped by Year (appearing as row headers), A - Wholesale Trade, B - Retail Trade , C - Transportation and Warehousing , D - Information and Cultural Industries , E - Finance, Insurance, Real Estate, Rental and Leasing , F - Professional, Scientific and Technical Services , G - Accommodation and Food Services, Canada entry, Canada exit, United States entry, United States exit, Canada entry, Canada exit, United States entry, United States exit, Canada entry, Canada exit, United States entry, United States exit, Canada entry, Canada exit, United States entry, United States exit, Canada entry, Canada exit, United States entry, United States exit, Canada entry, Canada exit, United States entry, United States exit, Canada entry, Canada exit, United States entry and United States exit, calculated using percent units of measure (appearing as column headers).

Year	A - Wholesale Trade				B - Retail Trade				C - Transportation and Warehousing				D - Information and Cultural Industries				E - Finance, Insurance, Real Estate, Rental and Leasing				F - Professional, Scientific and Technical Services				G - Accommodation and Food Services
	Canada entry	Canada exit	United States entry	United States exit	Canada entry	Canada exit	United States entry	United States exit	Canada entry	Canada exit	United States entry	United States exit	Canada entry	Canada exit	United States entry	United States exit	Canada entry	Canada exit	United States entry	United States exit	Canada entry	Canada exit	United States entry	United States exit	Canada entry	Canada exit	United States entry	United States exit
	percent
Sources: Longitudinal Employment Analysis Program (LEAP), National Accounts Longitudinal Microdata File (NALMF), Business Dynamics Statistics (BDS).
1984	0.15	0.10	0.12	0.10	0.18	0.12	0.12	0.10	0.24	0.14	0.16	0.13	0.22	0.15	0.19	0.12	0.22	0.13	0.14	0.11	0.21	0.12	0.17	0.11	0.22	0.14	0.16	0.15
1985	0.13	0.10	0.12	0.11	0.17	0.13	0.12	0.12	0.22	0.14	0.16	0.14	0.20	0.15	0.15	0.12	0.18	0.12	0.14	0.12	0.20	0.12	0.17	0.13	0.21	0.15	0.16	0.16
1986	0.13	0.09	0.12	0.11	0.17	0.13	0.13	0.11	0.22	0.14	0.17	0.15	0.21	0.16	0.14	0.13	0.18	0.12	0.14	0.11	0.19	0.12	0.17	0.12	0.21	0.15	0.18	0.15
1987	0.14	0.10	0.12	0.12	0.16	0.14	0.13	0.12	0.21	0.15	0.18	0.15	0.19	0.16	0.16	0.15	0.16	0.13	0.15	0.12	0.18	0.12	0.16	0.13	0.20	0.16	0.18	0.15
1988	0.12	0.11	0.12	0.10	0.14	0.14	0.13	0.11	0.17	0.16	0.17	0.15	0.15	0.17	0.14	0.13	0.15	0.14	0.15	0.11	0.15	0.13	0.16	0.13	0.17	0.17	0.17	0.14
1989	0.12	0.10	0.11	0.10	0.14	0.15	0.12	0.11	0.16	0.16	0.16	0.14	0.17	0.16	0.17	0.12	0.15	0.13	0.15	0.13	0.16	0.12	0.15	0.12	0.17	0.17	0.16	0.14
1990	0.15	0.11	0.11	0.10	0.17	0.14	0.11	0.11	0.20	0.17	0.15	0.14	0.20	0.16	0.14	0.12	0.17	0.14	0.13	0.11	0.19	0.13	0.15	0.12	0.22	0.17	0.15	0.14
1991	0.15	0.13	0.11	0.11	0.15	0.16	0.10	0.12	0.19	0.18	0.15	0.14	0.19	0.18	0.17	0.13	0.18	0.16	0.17	0.12	0.19	0.15	0.14	0.12	0.19	0.17	0.15	0.14
1992	0.14	0.13	0.10	0.11	0.15	0.15	0.10	0.12	0.18	0.17	0.15	0.13	0.19	0.18	0.13	0.12	0.17	0.15	0.12	0.11	0.18	0.14	0.14	0.11	0.19	0.17	0.14	0.13
1993	0.14	0.13	0.10	0.10	0.15	0.16	0.10	0.10	0.18	0.16	0.15	0.12	0.18	0.17	0.13	0.11	0.15	0.14	0.11	0.11	0.18	0.14	0.14	0.11	0.19	0.17	0.14	0.12
1994	0.14	0.13	0.11	0.10	0.15	0.15	0.10	0.10	0.19	0.15	0.15	0.12	0.18	0.17	0.14	0.11	0.14	0.14	0.13	0.11	0.18	0.14	0.14	0.10	0.20	0.18	0.14	0.12
1995	0.15	0.13	0.11	0.09	0.15	0.16	0.10	0.10	0.19	0.16	0.16	0.12	0.20	0.18	0.15	0.10	0.15	0.14	0.12	0.10	0.19	0.14	0.14	0.10	0.20	0.18	0.14	0.12
1996	0.15	0.14	0.11	0.10	0.15	0.17	0.10	0.10	0.20	0.18	0.15	0.13	0.21	0.19	0.16	0.12	0.16	0.15	0.12	0.10	0.20	0.15	0.14	0.10	0.21	0.20	0.14	0.12
1997	0.14	0.13	0.11	0.11	0.14	0.15	0.11	0.11	0.21	0.15	0.15	0.14	0.21	0.17	0.15	0.13	0.17	0.13	0.14	0.11	0.20	0.13	0.15	0.11	0.19	0.17	0.15	0.13
1998	0.14	0.13	0.10	0.10	0.13	0.14	0.09	0.09	0.19	0.15	0.15	0.12	0.21	0.16	0.17	0.12	0.17	0.13	0.13	0.10	0.20	0.13	0.15	0.10	0.17	0.17	0.12	0.12
1999	0.13	0.13	0.09	0.10	0.12	0.12	0.09	0.09	0.18	0.15	0.15	0.12	0.19	0.13	0.17	0.14	0.15	0.13	0.13	0.11	0.18	0.13	0.14	0.11	0.16	0.16	0.12	0.12
2000	0.11	0.13	0.09	0.10	0.12	0.12	0.09	0.09	0.16	0.15	0.14	0.13	0.19	0.15	0.18	0.12	0.14	0.13	0.12	0.11	0.18	0.14	0.13	0.11	0.15	0.15	0.11	0.11
2001	0.10	0.13	0.10	0.10	0.11	0.11	0.09	0.10	0.15	0.16	0.14	0.14	0.16	0.15	0.19	0.14	0.14	0.12	0.13	0.13	0.17	0.14	0.14	0.12	0.14	0.14	0.12	0.11
2002	0.10	0.10	0.10	0.12	0.11	0.11	0.11	0.11	0.14	0.14	0.14	0.14	0.14	0.14	0.17	0.18	0.13	0.13	0.13	0.10	0.16	0.13	0.14	0.13	0.15	0.14	0.14	0.12
2003	0.09	0.10	0.09	0.10	0.11	0.11	0.10	0.10	0.14	0.14	0.15	0.14	0.13	0.14	0.14	0.14	0.12	0.13	0.13	0.10	0.15	0.13	0.13	0.12	0.14	0.14	0.13	0.11
2004	0.10	0.10	0.09	0.09	0.12	0.11	0.10	0.09	0.16	0.14	0.14	0.13	0.14	0.13	0.15	0.14	0.14	0.12	0.13	0.10	0.16	0.12	0.13	0.11	0.15	0.14	0.13	0.11
2005	0.10	0.09	0.09	0.09	0.11	0.11	0.10	0.09	0.16	0.13	0.14	0.12	0.15	0.12	0.13	0.12	0.14	0.12	0.14	0.11	0.16	0.12	0.13	0.11	0.14	0.14	0.13	0.11
2006	0.09	0.10	0.10	0.09	0.10	0.12	0.10	0.10	0.16	0.14	0.15	0.13	0.15	0.12	0.14	0.12	0.14	0.12	0.15	0.11	0.16	0.12	0.15	0.11	0.13	0.15	0.14	0.11
2007	0.07	0.09	0.09	0.09	0.09	0.11	0.11	0.10	0.16	0.12	0.15	0.13	0.12	0.12	0.13	0.14	0.13	0.12	0.14	0.12	0.14	0.12	0.13	0.11	0.11	0.13	0.14	0.11
2008	0.06	0.09	0.09	0.09	0.08	0.11	0.08	0.09	0.13	0.13	0.13	0.14	0.12	0.13	0.13	0.13	0.12	0.13	0.11	0.13	0.12	0.12	0.12	0.12	0.10	0.13	0.13	0.11
2009	0.06	0.09	0.08	0.10	0.08	0.11	0.08	0.10	0.12	0.14	0.12	0.15	0.13	0.13	0.13	0.16	0.12	0.14	0.09	0.13	0.12	0.12	0.11	0.13	0.10	0.12	0.11	0.11
2010	0.05	0.09	0.08	0.09	0.08	0.10	0.08	0.09	0.11	0.12	0.11	0.13	0.12	0.13	0.11	0.12	0.12	0.13	0.10	0.12	0.12	0.12	0.12	0.12	0.10	0.11	0.11	0.10
2011	0.06	0.08	0.08	0.08	0.08	0.10	0.08	0.08	0.12	0.10	0.14	0.12	0.12	0.12	0.13	0.12	0.11	0.13	0.10	0.11	0.12	0.12	0.12	0.12	0.10	0.11	0.11	0.09
2012	0.07	0.08	0.08	0.09	0.09	0.10	0.08	0.08	0.17	0.11	0.13	0.11	0.14	0.12	0.12	0.12	0.12	0.13	0.11	0.10	0.14	0.12	0.12	0.11	0.12	0.11	0.11	0.10
2013	0.06	0.08	0.08	0.08	0.09	0.10	0.08	0.08	0.15	0.11	0.12	0.12	0.13	0.13	0.12	0.12	0.11	0.13	0.10	0.10	0.14	0.12	0.12	0.11	0.12	0.11	0.11	0.09
2014	0.06	0.08	0.08	0.08	0.09	0.10	0.08	0.08	0.14	0.10	0.12	0.11	0.12	0.13	0.14	0.11	0.11	0.13	0.10	0.09	0.13	0.12	0.12	0.11	0.11	0.11	0.11	0.09
2015	0.06	0.08	0.08	0.08	0.08	0.09	0.08	0.07	0.14	0.10	0.14	0.11	0.11	0.12	0.11	0.10	0.12	0.12	0.10	0.09	0.12	0.12	0.12	0.11	0.11	0.11	0.11	0.10
2016	0.05	0.08	0.07	0.08	0.08	0.09	0.08	0.07	0.13	0.11	0.13	0.11	0.12	0.13	0.13	0.09	0.11	0.13	0.11	0.08	0.12	0.12	0.12	0.11	0.11	0.11	0.11	0.08
2017	0.06	0.08	0.07	0.08	0.09	0.09	0.08	0.08	0.14	0.11	0.12	0.12	0.11	0.13	0.12	0.12	0.13	0.13	0.10	0.09	0.13	0.13	0.11	0.11	0.11	0.11	0.11	0.09
2018	0.06	0.08	0.07	0.08	0.09	0.09	0.07	0.08	0.15	0.10	0.13	0.11	0.12	0.13	0.11	0.09	0.13	0.14	0.10	0.09	0.13	0.12	0.11	0.11	0.11	0.11	0.10	0.09
2019	0.07	0.08	0.06	0.07	0.10	0.09	0.07	0.07	0.19	0.10	0.13	0.10	0.13	0.12	0.12	0.10	0.13	0.13	0.10	0.09	0.14	0.12	0.11	0.10	0.11	0.11	0.10	0.09
2020	0.05	0.09	0.06	0.08	0.08	0.10	0.07	0.08	0.12	0.15	0.13	0.13	0.10	0.13	0.10	0.09	0.11	0.15	0.09	0.09	0.11	0.14	0.12	0.11	0.08	0.12	0.10	0.09
2021	0.05	0.08	0.07	0.08	0.10	0.10	0.08	0.09	0.15	0.12	0.17	0.12	0.12	0.12	0.11	0.13	0.15	0.13	0.11	0.10	0.12	0.12	0.13	0.11	0.10	0.12	0.10	0.12

The professional, scientific and technical services sector (NAICS 54) deserves special mention. This sector is unique because of its reliance on human input with specialized skills, such as legal and accounting services, and scientific research. In both Canada and the United States, this sector experienced a prolonged period where the entry rate significantly exceeded the exit rate, indicating a large influx of firms. However, as shown by the later NALMF data and the BDS counterpart, this trend essentially ceased in the 2010s.

Conversely, the transportation and warehousing sector (NAICS 48-49) experienced an expansion during the 2010s in both countries, with entry rates significantly exceeding exit rates. This continued until the COVID-19 pandemic, which severely impacted the sector because of the decline in economic activities, particularly trade.

The relationship between entry and exit and industry concentration

The decline in business dynamism often raises concerns about the possibility of entrenched large firms. These industry giants can wield significant market power, potentially hindering new entrants and distorting market shares. The HHI serves as one tool to assess concentration levels within industries.^Note  Higher HHI values indicate greater economic concentration, while lower values suggest a more competitive landscape. This section uses NALMF data. Because the HHI varies significantly across sectors, it is scaled by dividing by its value in 2000, resulting in an index for better comparison.

In Canada, the story of industry concentration is multi-faceted. While specific sectors exhibit notable concentration patterns, there is no uniform trend across all sectors. Some notable instances include the following:

• The retail trade sector has experienced increasing concentration. This could be the result of large retail chains dominating the market, driving smaller competitors out.
• The manufacturing sector maintains relatively stable concentration levels.
• The transportation and warehousing sector shows a trend of declining concentration. Factors such as increased competition from new entrants under technological change may play a role.
• The finance and insurance and real estate and rental and leasing sectors exhibit fluctuating concentration levels. Mergers and acquisitions could possibly contribute to the variability.

The above is unlike the situation in the United States, where many sectors show an increasing trend of concentration over time since the 2000s as well as signs of increasing market power (Furman 2015).

Data table for Chart 5

Data table for Chart 5
Table summary
The information is grouped by Year (appearing as row headers), A - Herfindahl-Hirschman Index of NAICS 11, 21, 23, B - Herfindahl-Hirschman Index of NAICS 31-33, 41, 44-45 , C - Herfindahl-Hirschman Index of NAICS 48-49, 51, 52-53 , D - Herfindahl-Hirschman Index of NAICS 54, 71, 72 , Agriculture, Forestry, Fishing and Hunting (11), Mining, Quarrying, and Oil and Gas Extraction (21), Construction (23), Manufacturing (31-33), Wholesale Trade (41), Retail Trade (44-45), Transportation and Warehousing (48-49), Information and Cultural Industries (51), Finance and Insurance, Real Estate and Rental and Leasing (52-53), Professional, Scientific, and Technical Services (54), Arts, Entertainment and Recreation (71) and Accommodation and Food Services (72), calculated using index units of measure (appearing as column headers).

Year	A - Herfindahl-Hirschman Index of NAICS 11, 21, 23			B - Herfindahl-Hirschman Index of NAICS 31-33, 41, 44-45			C - Herfindahl-Hirschman Index of NAICS 48-49, 51, 52-53			D - Herfindahl-Hirschman Index of NAICS 54, 71, 72
	Agriculture, Forestry, Fishing and Hunting (11)	Mining, Quarrying, and Oil and Gas Extraction (21)	Construction (23)	Manufacturing (31-33)	Wholesale Trade (41)	Retail Trade (44-45)	Transportation and Warehousing (48-49)	Information and Cultural Industries (51)	Finance and Insurance, Real Estate and Rental and Leasing (52-53)	Professional, Scientific, and Technical Services (54)	Arts, Entertainment and Recreation (71)	Accommodation and Food Services (72)
	index
Source: National Accounts Longitudinal Microdata File.
2001	1.00	1.00	1.00	1.00	1.00	1.00	1.00	1.00	1.00	1.00	1.00	1.00
2002	0.89	1.04	1.10	1.09	1.09	0.89	0.96	0.74	0.96	1.51	0.95	1.19
2003	0.99	1.02	0.96	1.13	1.18	0.93	0.96	1.05	0.84	1.22	0.94	1.16
2004	0.98	1.20	0.60	1.03	1.13	0.96	0.87	0.74	0.78	1.04	0.98	2.53
2005	0.95	1.33	0.57	0.87	1.02	0.96	0.85	0.65	0.98	0.51	0.87	2.42
2006	1.00	1.23	0.40	0.92	0.96	1.01	0.82	0.67	0.81	0.47	0.36	2.67
2007	1.01	1.10	1.46	0.94	1.26	0.94	0.77	0.67	0.58	0.50	0.73	2.40
2008	0.94	0.99	1.52	1.02	1.32	1.11	0.79	0.66	0.54	0.47	0.82	2.82
2009	0.90	1.17	1.74	0.98	1.17	1.15	0.78	0.85	1.32	0.59	0.92	3.15
2010	0.93	1.19	1.85	1.00	1.23	1.14	0.82	0.82	1.36	0.67	1.04	3.02
2011	1.51	1.63	0.56	0.94	1.22	1.24	0.72	0.37	0.84	0.68	0.60	3.11
2012	1.48	1.15	0.52	0.97	1.32	1.27	0.64	0.32	1.14	0.52	0.42	3.42
2013	1.34	1.32	0.59	0.95	1.28	1.28	0.70	0.36	1.46	0.50	0.47	2.99
2014	1.53	0.91	0.53	0.95	1.30	1.33	0.75	0.50	1.15	0.43	0.43	2.88
2015	0.97	1.15	0.43	0.95	1.21	1.43	0.74	0.48	1.00	0.32	0.37	1.73
2016	0.95	1.36	0.47	0.95	1.13	1.48	0.85	0.55	0.93	0.33	0.46	1.80
2017	1.14	1.68	0.29	0.96	1.17	1.27	0.73	0.62	0.98	0.27	0.64	2.07
2018	1.49	1.04	0.31	1.00	1.21	1.35	0.75	0.66	1.30	0.33	0.58	1.37
2019	0.97	1.11	0.27	1.03	1.35	1.58	0.83	0.70	1.46	0.32	0.55	1.37
2020	1.11	1.03	0.38	0.94	1.46	1.62	0.77	0.66	1.37	0.29	0.89	1.82
2021	1.26	0.97	0.31	0.93	1.47	1.55	0.74	0.61	0.85	0.39	0.34	1.36

There does not seem to be an immediately clear relationship between the multi-faceted nature of industry concentration and the uniform decline of business dynamism in Canada.

To further investigate this issue, this paper divides markets by four-digit NAICS codes and consider a two-way fixed effect regression of the entry rate on the log HHI as follows:

$$r_{st}=\beta \text{log}\left(h_{st}\right)+{\gamma }_s+{\xi }_t+{\epsilon }_{st}$$

where $s$ indexes four-digit NAICS industry groups, $t$ indexes time (year), $r_{st}$ is the entry rate, $\text{log}\left(h_{st}\right)$ is the HHI in logs, ${\gamma }_s$ is a sector fixed effect, ${\xi }_t$ is a year effect, ${\epsilon }_{st}$ is an error term. This paper imposes the exogeneity assumption $E\left[{\epsilon }_{st}|\text{log}\left(h_{st}\right),{\gamma }_s,{\xi }_t\right]=0$. A similar regression with respect to the exit rate is also run. Because each four-digit industry group varies in size, this paper uses weighted least squares instead of ordinary least squares, with current total revenue of the industry group as weights. One possible concern is that a change in industry concentration may have a time lag in affecting business entry and exit, so an alternate specification with a one-period lag is also considered.

The results of the entry and exit regressions and their alternative specifications are shown in Table 1. The focus is on the main specifications since the results from the alternatives are similar. With the independent variable in logs, the mean log HHI decreases by approximately 27.6% from 2001 to 2021. Consequently, the predicted average changes in entry and exit rates are minimal (for entry rate: $-0.0004\times 27.6/100=-0.0001104$; for exit rate: $0.0003\times 27.6/100=0.0000828$), which contrasts with the relatively large declines observed in actual data. Therefore, similar to the United States, the regressions suggest that industrial concentration is not correlated with entry or exit in Canada. Other factors, such as business cycles, regulatory changes and other external influences, may be more significant. Further investigation of these factors is beyond the scope of this paper.

Summary and conclusions

The decline in entry and exit rates is a key phenomenon in the study of firm dynamics. Extending the study by MacDonald (2014) using data from NALMF, the longer time series reveals that Canadian entry and exit rates essentially halted their over-30-year decline in the late 2010s. By comparing these trends with those in the United States, this paper shows that Canadian entry and exit rates actually experienced a greater decline than their U.S. counterparts. One possible explanation of this difference is the expanding productivity gap between Canada and the United States.

Another significant observation is that these patterns are robust across sectors, implying they are not primarily the result of sectoral shifts. The weak correlation between HHI and entry and exit rates suggests that the decline in Canada is likely not due to the increasing entrenchment of large firms. Given that these two explanations do not work well, further research is needed to identify possible channels that can explain this decades-long decline and the subsequent halt.

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