Entrepreneurship is growing in Canada. Is that good? Blog #30

14 June, 2022

Entrepreneurship is growing in Canada. Is that good?

Entrepreneurship is a measure of economic dynamism. Over the last ten years the percentage of the population involved in entrepreneurship in Canada has increased by over 50%, according to the Global Entrepreneurship Monitor. In 2021 about 20% of the adult population was involved in planning or starting up a business.

The graph below shows the evolution in Canada since 2013 using the Global Entrepreneurship Monitor (GEM) database.

TEA (Total early stage entrepreneurship activity) is a combination of two numbers – nascent entrepreneurs, those actively starting up a business and owner managers of a business less than 3.5 years old.

EB (established businesses) are owner managers of a company more than 3.5 year old.

In both cases the numbers refer to the percentage of the adult population (age 18+) engaged.

The TEA rate has crept steadily upwards since 2013, with a dip in 2020 due to COVID, while the EB rate has remained fairly constant.

Statistics Canada data confirms that the number of firms, adjusted for population growth, has remained roughly constant since 2014.

Is this just a Canadian phenomenon?  If you look at the GEM data for several other countries you see exactly the same phenomenon. TEA has risen significantly from 2013 to 2021 – in the UK (by 80%), in France (by 70%), in Germany (by 40%) and in the US (by 30%), that compares with the rise in Canada of 70%.  So this is certainly not a uniquely Canadian situation.

The EB rate in the other countries has also remained fairly constant over the same period.

So what is going on?  The real answer is that at this point we don’t know for sure. There would appear to be several possibilities at least1:

  • More people are involved in each new startup. Might this be because startups are becoming more complex requiring more diversity of skills?
  • There may be more hybrid entrepreneurs – people who work for a large company and work to develop opportunities either for their employer or for themselves.
  • More business consolidations are happening early in the life cycle.

 

Does it matter?  The negatives.

The larger question is: does this really matter?  The hard facts are that from an economy wide perspective, large businesses are much more productive than small business. In Canada 2.4 million people (15.1% of the labour force) work for large companies, and produce 48.1% of the GDP, while 13.7 million people (84.9% of the labour force) work for small and medium sized companies and produce 51.9% of GDP. So, a person working in a large company, on average, produces 5 times as much GDP as a person working in a small or medium sized company.

Do we put too much effort into encouraging entrepreneurs?  Well-known American author Scott Shane thinks so – one of his papers is entitled ”Why encouraging entrepreneurship is bad public policy”. Shane argues that the typical start-up is not innovative, creates few jobs, and generates little wealth.

If entrepreneurship is such a good thing, then why is Canada a laggard in innovation and R&D spending?  [See Blogs 24 and 29]

 

Does it matter?  The positives

However, it has been well established that entrepreneurs and other outsiders are a main vehicle for introducing radical new technologies to the marketplace.  Just think why Tesla is the leader in electric cars rather than GM or Toyota. The current rise in tech startups in Canada is likely a manifestation of this.

Several large sectors of the Canadian economy, such as retail, construction and healthcare, rely on small and medium sized firms, and they make a significant contribution to the overall economy and provide valuable employment.

Also, in a period of economic turbulence, such as we seem to be entering now, having entrepreneurial skills is a valuable attribute, whether in a large company or a startup. The key role of the entrepreneur is to identify opportunities, and then generate the enthusiasm, vision and plans needed to create a successful venture.

 

Conclusion

Although most startups don’t generate much wealth, innovation or jobs, nevertheless some of them do, and this is a key driver of economic growth.

  1. Shane, S. Why encouraging more people to become entrepreneurs is bad public policy. Small Bus Econ 33, 141–149 (2009). https://doi.org/10.1007/s11187-009-9215-5
  2. I am indebted to Marc Duhamel and Étienne St-Jean for helpful discussion on this.

Innovation Policy in Canada – Blog #29

24, May 2022

Innovation Policy in Canada.

Canada is ranked poorly for innovation in most international comparisons. For example, it is ranked #16 globally in the WIPO Global Innovation Index, 6th of the seven G7 countries.

A recent book1 casts interesting light on this. It is a rare example of a non-partisan look at innovation policy in Canada at the provincial level. It has a chapter for each province and the territories and is written by 20 mostly academics from across Canada (including me). The value of a book like this is that it doesn’t provide “the answer” to Canada’s innovation problem but it documents approaches taken recently, assesses what worked and what didn’t and stimulates further discussion.

Here are some of the topics that caught my attention from the Chapter on “Conclusions and Lessons Learned”:

  • Canada’s innovation performance. The authors describe the conundrum that while Canada has numerous advantages, including a stable political situation, well-educated population, broad socio-economic advantages such as multiculturalism, a merit-based immigration system, broad social safety nets and good social mobility, etc., and yet it performs poorly on innovation. Companies underperform on R&D spending, companies are not scaling, entrepreneurs tend to move to other jurisdictions, and so on.
  • Evaluation of policies. One of the biggest weaknesses in the Canadian policy system is the almost complete absence of structured evaluation of any policy ideas. The authors note that there are established methods that exist around the world (for example, the Maryland Scientific Methods Scale) to support policymakers in delivering evidence-based policies. The provincial chapters show no evidence of any substantive assessments of programs to support innovation.
  • Natural experiments among provinces. The authors note that provinces have powers over many of the drivers of innovation, so comparing the performance of different Provinces – reflecting the different political differences and dynamics across the county – is a natural experiment to determine what works best. It is one of the aims of the book to document this. This can be seen as one of the advantages of a federal structure in Canada.
  • Drawbacks of the federal structure. The authors note that as powers influencing innovation are very diffuse across Canada not much happens unless two or three levels of government are aligned. Generally, the federal government sets the agenda, and the provinces and territories selectively respond.  This makes it hard to get support for Canada wide efforts.
  • Diffuse focus. A review showed more than ninety program streams to support business innovation, across twenty different federal organizations. Each province also has numerous support programs, so overall there are a vast number of support programs across the country, which spreads the support very thinly.
  • Broad-based support. The authors note that there is reluctance among provincial governments to pick winners, and as a result most support programs fall back on offering general support to whichever firms can access their programming. This leads to efforts that are more incremental than transformative.
  • Big bets can pay off. One example of a sustained long-term effort to support innovation citied in the book is AOSTRA (The Alberta Oil Sands Technology and Research Authority) that led to the development of the Alberta oil sands and made a material contribution to the Canadian economy. This was led by the provincial government. Other examples include ocean industries in the Atlantic region, digital industries in New Brunswick and PEI, aerospace and transportation in Quebec, and agri-food in Manitoba and Saskatchewan.
  • SME focus. The authors note that Canada’s private sector is dominated by SMEs (small and medium sized enterprises) and that many large companies are foreign owned. This explains why many innovation programs are aimed at SMEs and startups, and why success stories are usually about small businesses doing well, while reports of innovation among Ontario’s branch plant auto industry are seldom heard.
  • Bias towards technological innovation. The book notes that Canadian innovation support programs have a strong bias towards technological innovation at both the federal and provincial levels. “The evidence that a science and technology focused research funding strategy will generate innovation in a predictable fashion is slim to none.” This bias has a couple of consequences. 1. It mainly focuses on cities, and ignores rural areas and the territories, leaving out 98% of Canada’s geography and 40% of its people and 2.  it neglects the voluntary, cultural and creative sectors that generated $169.2 billion in 2017, 8.5% of the GDP.
  • Impact of resource industries. Despite the strong orientation of policy towards SMEs, the authors note that adoption of innovation by large resource based forms generated most of the improvements. This is not surprising, as a 1% increase in productivity in a $5 billion company has more impact than a 100% increase in a 30 person startup.
  • Challenge of implementation. While provinces and territories recognize the need to create the conditions that lead to innovation driven economic growth, their ability to implement policies and programs has been more challenging. Part of the reason for this, as the authors note, is the relatively low staffing levels of innovation specialists with sufficient experience and expertise in provincial governments.
  • Role of Universities. The authors note that universities, often seen as a significant source of ideas that lead to commercialization, are not evaluated provincially or federally in a way that would account for their net economic contribution. Contributions of universities are often overestimated. Research at universities costs about $13 billion a year but generate less than $75 million annually in commercial technology transfer activity.
  • Institutional gaps. The authors identify a number of institutional gaps in Canada with their recommendations:

 

  • Raise Canada’s research and development effort. This would require support at both federal and provincial levels.
  • Develop more targeted and sustained innovation efforts. These have been demonstrated to generate successful results, e.g. AOSTRA, mentioned above.
  • Improve threat identification and hazard mitigation that can produce dual use technologies for civilian security and defence applications.
  • Focus more on digitalization. This has been described by former Bank of Canada Governor David Dodge as an “absolute imperative”. It is an area where Canada has lagged behind other countries.
  • Avoid misalignment between federal and provincial innovation policies, particularly for energy and climate.

If any of this strikes a chord with you get a copy of the book to learn more.

Peter Josty

 

  1. “Ideas, Institutions and Interests” – The Drivers of Canadian Provincial Science, Technology and Innovation Policy – Edited by Peter Phillips and David Castle, University of Toronto Press, 2022, 398 pages.

Is Canada a hewer of wood and drawer of water? – Blog #28

3, May 2022

Is Canada a hewer of wood and drawer of water?

Canada is often described as a resource based economy, or, less kindly, as a hewer of wood and drawer of water. But is this really true?  As a resource based economy Canada is often compared to countries like Australia, Norway and Russia. But look at the graphic below.

This shows a measure for each country called the Economic Complexity Index.1 The Economic Complexity Index is a ranking of countries based on the diversity and complexity of their export basket. High complexity countries are home to a range of sophisticated, specialized capabilities and are therefore able to produce a highly diversified set of complex products. Low complexity countries export more undifferentiated commodities and simpler products. The reason this index looks at exports, rather than total production, is that exports are seen to be a measure of international competitiveness, and allow better international comparisons.

So, Canada is far from being a hewer of wood and drawer of water. We have a much more complex export mix than Australia, Norway and Russia.

Broadly speaking, richer countries usually have more complex exports.  The highest ranked countries according to this index are Japan, Switzerland, Germany, South Korea and Singapore. The US ranks #11 out of 133 countries.  The lowest ranked countries are Venezuela, Cameroon, Papua New Guinea, Liberia, Guinea and Nigeria.

The comparison with Australia is particularly interesting as Australia is often seen as a twin for Canada. Canada ranks #36 out of 133 countries in this ranking (and is growing more complex), and Australia ranks #88 (and is growing less complex.) That is a huge difference, and is explained by the fact that a much larger proportion of Australia’s exports are “simple” compared to Canada. Well over half of Australia’s exports are commodities such as iron ore, coal, petroleum and gold. The corresponding number for Canada is roughly half that, with exports of petroleum, gas, gold, lumber and wheat. Canada has significant exports of complex products such as cars, car parts, ICT, machinery, medications and plastics.

The researchers place the diversity of tacit knowledge—or knowhow—that a society has at the heart of its economic growth story. Research from the Growth Lab finds that countries whose exports are more complex than expected for their income level, grow faster. So, according to this approach Canada would be expected to grow faster than Australia.  This is true, with Canada’s growth to 2029 estimated to be 3.06% per year, compared with 2.17% for Australia. (These estimates were made before COVID-19, so take them with a grain of salt.)

The Harvard Growth Lab has an interesting view on economic development. They see that countries grow by diversifying into new products of increasing complexity. So the more complex your export mix the more opportunities you have to grow into adjacent areas. Some examples from Canada could be:

  • Oil and gas firms getting into other energy sources such as geothermal energy, that exploits their drilling and energy expertise;
  • Automobile firms getting into electric vehicles, that exploits their manufacturing expertise.
  • Forestry firms using drones for reforestation exploiting their expertise in forestry.
  • Energy firms getting into hydrogen production to exploit their expertise in natural gas and related technologies such a carbon capture and storage.
  • A historical example is Shell getting into GPS technology to know where they were drilling, and subsequently spinning off the business, that seeded the formation of the Calgary GPS cluster.

Conclusion.
Canada has a much more complex economy than we realize. The idea of using the diversity of tacit knowledge to diversify into adjacent areas is an interesting one that should receive more attention. It’s probably a much more robust approach that trying to attract unrelated businesses to set up here.

Peter Josty

  1. Harvard Atlas of Economic Complexity https://atlas.cid.harvard.edu/

Canada’s new Innovation Agency – Blog #27

18, April 2022

Canada’s new Innovation Agency

The Federal government announced that it will create a “Canada Innovation and Investment Agency” in the 2022 Budget.

This is how it was described:

  • It will proactively work with new and established Canadian industries and businesses to help them make the investments they need to innovate
  • Operationally independent
  • $1 billion over five years to support its initial operations.
  • Modeled on approaches that have been successful in Finland (TEKES) and Israel (Israel Innovation Authority).
  • With private sector leadership and expertise
  • It will also enable innovation and growth within the Canadian defense sector and boost investments in Canadian defense manufacturing.

This initiative has broadly been welcomed by the business community. It is one among a suite of measures in the budget aimed at improving Canada’s dismal performance in innovation, productivity and economic growth. (See Blog 22 and 24.) It also represents a change in thinking from a passive support role (SRED) to a more active investment approach.

A key point is that it is being modeled on approaches in Finland and Israel. What have these approaches been?

First of a couple of caveats:

  • Both Finland and Israel are very small unitary countries (populations of 5.6 million and 9.2 million). Canada is a much larger country with a federal structure.
  • Transferring ideas that work in one place to another place is notoriously difficult (think of the many failed attempts to replicate Silicon Valley).

TEKES

TEKES was founded in 1983 in response to recessions in the 1970s as a funding agency to promote technology development. TEKES merged with the Finnish export promotion agency in 2018 to form Business Finland. It currently has about 750 employees. Finland joined the European Union in 1995.

Business Finland functions as a funding agency for research and technology development as well as export promotion. Receivers of the funding are universities, polytechnics, research institutes such as VTT Technical Research Centre of Finland, the European Space Agency, startups, small and medium-sized enterprises (SMEs), large corporations and public bodies. In enterprise projects, funding is given to transform research-stage ideas into viable businesses, and may combine direct unconditional funding with guaranteed loans conditional on the success of the resulting business. It funds up to 50% of project costs.

In addition to funding, Business Finland provides companies with advice on networking, finding new markets and customers, help with joint offerings and connections with international investors.

Business Finland is well regarded by SME’s in Finland. According to a survey, 38% of SMEs considered this service to be central for their business activity.

Business Finland has some current weaknesses. The Confederation of Finnish Industries says it should focus more on companies with export potential.

In 2021, Business Finland’s R&D funding is estimated to be EUR 740.4 million ($1.01 Billion CDN) that included EUR 200 due to COVID expenses.

Israel Innovation Authority (IIA).

The IIA was founded in 1965 as the Office of the Chief Scientist of Israel’s Ministry of Economy, charged with fostering the development of industrial R&D within Israel. It became the IIA in 2016.  It currently has about 150 employees.

Its mission is to assist the advancement of Israel’s knowledge-based science and technology industries in order to encourage innovation and entrepreneurship while stimulating economic growth.

“The Israel Innovation Authority, an independent publicly funded agency, was thus created to provide a variety of practical tools and funding platforms aimed at effectively addressing the dynamic and changing needs of the local and international innovation ecosystems. This includes early-stage entrepreneurs, mature companies developing new products or manufacturing processes, academic groups seeking to transfer their ideas to the market, global corporations interested in collaborating with Israeli technology, Israeli companies seeking new markets abroad and traditional factories and plants seeking to incorporate innovative and advanced manufacturing into their businesses.”

The Israel Innovation Authority produces a comprehensive annual report: https://innovationisrael.org.il/en/sites/default/files/Israel%20Innovation%20Authority%20-%202021%20Innovation%20Report%20-%20English%2017.6.pdf

In 2019 Israel joined the network of Centers for the Fourth Industrial Revolution (C4IR), a body set up by the World Economic Forum to share knowledge, experience and best practices related to innovative technologies’ regulation by establishing collaborations between governments, leading corporations, private sector, and experts from around the world. The IIA is the focus.

Annual budget is 1.6 Billion NIS, or about $630 million CDN. It describes itself as “an independent publicly funded agency”

Comparison

TEKES and the IIA have some similarities:

  • They both provide grants and loans to businesses and universities as well as advice.
  • They both operate as “independent publicly funded agencies”. Business Finland is part of the Finnish Ministry of Employment and the Economy; and the Chair of the Board of the IIA is Israel’s Chief Scientist.
  • Both have a strong international focus. Business Finland has 42 offices abroad, and the IIA has an International Collaboration Division.
  • Both have a strong R&D and technology development focus.

But there are also differences:

  • Israel has had an influx of highly skilled immigrants from various countries, including Russia, that is not the case in Finland.
  • A factor affecting Israel’s innovation performance is military spending. Israel spends 5.6% of its GDP on military spending (about four times as much as Canada), and that includes significant R&D that has spillover to the civilian economy.

Conclusion

Whatever form the Innovation Agency takes, it will be one part of a complex innovation ecosystem. To improve innovation performance other aspects of the ecosystem need to be enhanced, in particular the supply of talent and the limited competitiveness in many sectors of the economy. And announced funding for the Agency is significantly less than in Finland or Israel, which are much smaller countries.

Peter Josty


Why are mid-sized companies so important in Alberta? – Blog #25

15, March 2022

Why are mid-sized companies so important in Alberta?

Mid-sized companies play a key role in the Alberta economy due to their stability, innovation, their exporting, and contribution to the community.
In December 2021 the size distribution of firms in Alberta is shown in the table below1:

Mid-sized companies employ about 20% of the workforce in Alberta. Mid-sized firms are active in most areas of the Alberta economy. The Table below shows the percentage active in the most frequent areas1:

But the main reason they are important is because of their characteristics. Several years ago we interviewed the CEOs of mid-sized firms in Alberta. A large majority of the firms interviewed displayed the following key characteristics:

  • They are very stable. We found most medium sized companies have been in existence for 10 years and many were 50 and 60 years old and more. They are almost always privately owned so are not subject to the influence of stock markets and the pressure to produce quarter to quarter improvements, and therefore can think much longer term
  • They have deep expertise. Frequently the founders had gained industry experience in a big company before branching out by themselves. This is a common but not universal experience. Almost all CEOs interviewed had a university education and many had graduate degrees.
    They respond positively to the challenges of finding skilled people. A frequently expressed barrier to growth was lack of qualified people. Alberta MSEs have responded in various ways. One found an Alberta Innovates program very valuable. It helped to subsidize new hires (engineers) for a year or two while they learned the business and could become productive.
    There is huge attention to employee wellbeing. Likely related to the challenges of finding qualified workers, most MSEs interviewed go to great lengths to keep employees happy. This results in employee loyalty and very low attrition rates. One company had a retention rate of 99%. Another was proud to be the recipient of many “Best Place to work in Alberta” awards. Most go to great lengths not to lay off employees in a downturn.
  • They focus. Most medium sized companies have a quite a narrow and sharp business focus. They know their niche very well and don’t want to stray outside it. They tend to be deep rather than broad.
  • They innovate. Although some of the MSEs interviewed were reluctant to describe themselves as ‘innovators’, most were observed to have made significant innovations in terms of new products, new processes or new business models.
  • Access to capital is not a huge issue. MSEs are stable, profitable businesses with good prospects, so many are prime candidates for accessing normal banking instruments – loans and lines of credit. None mentioned venture capital funding.
  • Growth is not in itself a high priority. Many MSEs see themselves as being an appropriate size to serve their niche; growing beyond that would be problematic. Some saw a tradeoff between high growth and survival. Many regarded aiming for high growth as a risky strategy.
  • Use of contractors is widespread. Many of the MSEs interviewed used contractors to supplement their workforce. One design firm employed hundreds of extra people for large projects. Others contracted with software developers abroad, where costs were lower than in Alberta. However, it was often stressed that this did not reduce employment in Canada as all the core personnel remained in Alberta.
  • Many export. One firm had no customers at all in Canada for the first eight years it existed. But some served local markets and did not export at all. A majority of the firms we interviewed exported more than 30% of their sales revenue.
  • They contribute to the community. Many companies are deeply involved in community affairs, supporting local cultural institutions, charities and industrial organizations. Such involvement was often described as a defining element of the company culture.
  • MSEs operate largely outside the milieu of targeted industry supports. Use of government support programs varied considerably, but no firm interviewed was dependent on such programs. Most expressed the view that MSEs were generally not on the radar of most of these programs.
  • Flight risks are mounting. Most MSEs seem happily embedded in Alberta, and have no plans to consider moving to another jurisdiction. However several expressed concern about increasing regulation and taxes compared with the US and were starting to look at relocating their business.
  • The overall business environment is critical. SMEs have structural relationships with many sectors throughout the Alberta economy, especially but not exclusively with the resource sector. They tend to thrive best when overall conditions are favorable for the economy as a whole and can be severely affected when legislation and regulation is not synchronous with up or downturns.

Conclusion

We need more medium sized businesses in Alberta,

Peter Josty

  1. Statistics Canada. Table 33-10-0493-01  Canadian Business Counts, with employees, December 2021
  2. Businesses are counted according to the number of “statistical locations” they have. For example, a retail business with 10 stores and a head office is counted 11 times in the Canadian business counts.

The latest R&D statistics are just out. Here’s what they mean, and what to do about them. – Blog #24

1, March 2022

The latest R&D statistics are just out. Here’s what they mean, and what to do about them.

The latest headline numbers from Statistics Canada for R&D spending in Canada are:
2021 (intentions) $40.1 billion, down 1.4%;
2020 (preliminary) $40.6 billion, up 0.7%;
2019 (final) 40.3 billion, up 3.9%.

Before getting into the detail it may be worthwhile reviewing the significance of R&D (technically – gross domestic expenditure on research and development, or GERD). These statistics are often used as an indicator or proxy for innovation. However they are very imperfect indicators of innovation, for a number of reasons. First, they are input measures, not output measures. Second, they cover a multitude of different activities with very different risk/reward levels. For example, one company may be developing a new improved type of yogurt, and another may be working on nuclear fusion, and these have totally different risks, rewards and timelines. Third, several industries innovate in ways that don’t show up in R&D statistics – for example natural resource industries such as the oil sands where tweaking in the field can offer major improvements. Nevertheless, these statistics are widely followed.

International comparison

So how does Canada compare internationally?  The graph below, from the OECD, shows GERD as a percentage of GDP, for Canada, the USA and the OECD average.

Source: OECD, https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm

This doesn’t look very reassuring for Canada. However it is not that different from the UK and Australia.

Who does R&D in Canada?

Who does the R&D in Canada? The main performers of R&D in 2021 are forecast to be business (52%), higher education (40%) and the Federal government (6%).

The main funders of R&D are: business (43%), higher education (20%), the Federal government (18%) and foreign sources (9%).

How did Alberta do?

In 2019 (latest available provincial data) Alberta did $3.79 Billion of R&D. The main performers of R&D were: business (47%), higher education (45%), the provincial government (4%) and the federal government (3%).

The main funders of R&D were: business (45%), higher education (20%), federal government (15%), the provincial government (10%), and foreign sources (5%).

In terms of R&D as a percentage of GDP, Alberta’s ratio is about 1.3% of the provincial GDP, about two thirds of the corresponding rate for Canada as a whole.

Why is Canada so low?
There are a number of reasons:

  • Canada is a resource based economy and resource companies typically don’t spend much on R&D.
  • Canada has a small number of companies in industries that typically spend the most on R&D, such as pharmaceuticals and high tech companies.
  • Canada has fewer large firms than competitors and these usually spend more on R&D.
  • Canada has relatively few head offices, and there is often a ‘head office effect’ where R&D is performed near the head office. This is related to the fact than many Canadian companies are foreign owned.
  • Offsetting this, Canada’s public sector spends more on R&D than the OECD average.

It is remarkable that the five US companies in the graphic below each spend more money in 2021 than all Canada business combined. (Canada business R&D was about $17.7 USD in 2021)

Source: The Economist January 22, 2022.

Does it matter?

This topic is hotly debated. The main argument usually goes that as the world embarks on the fourth industrial revolution, with a stress on connectivity, artificial intelligence, robotics, Internet of things, and autonomous vehicles, etc., the economy is becoming more knowledge intensive and so intellectual property and R&D is becoming more and more important. That argument clearly has merit.

However, by conventional economic metrics Canada is doing well.  The table below shows a comparison between selected countries for 2020.

Country GERD as % of GDP (OECD) GDP per capita $US (World Bank)
Israel 4.93 $44,169
South Korea 4.64 $31,632
Sweden 3.39 $52,274
UK 1.76 $41,124
Canada 1.59 $43,258

So there clearly isn’t a linear relationship between R&D spending and GDP per capita.

By quality of life rankings, Canada fares very well. The table below shows the latest quality of life ranking from US New and World report:

Ranking Country
1 Canada
2 Denmark
3. Sweden
4. Norway
5. Switzerland
6. Australia
7. Netherlands
8. Finland
9. Germany
10. New Zealand

Source: https://www.usnews.com/news/best-countries/quality-of-life-rankings

What to do?

Trying to figure out what to do should be based on three ideas:

  • Canada’s low spending on R&D is primarily a business problem. Government spending on R&D is above the OECD average.
  • Low spending by businesses on R&D is part of a pattern of behavious that also includes: low spending on machinery and equipment, low spending on IT, low spending on employee training, and low productivity, all low by comparison with other countries.
  • No CEO spends money on R&D because they want to. They spend money on R&D because the have to in order to remain competive. Amazon spends $60 billion a year on R&D because their business is hyper-competitive and fast moving and if they don’t they will become uncompetitive.

So we can re-phrase the question as follows: How to incentivize companies to spend on R&D?  Clearly incentives like the SRED tax credit are not enough – Canada has among the most generous incentives in the world.

I think the best clue lies in the nature of the Canadian economy. Significant parts of it are oligopolies, with few players and low competitive pressures. Some examples:

  • Three companies dominate telecommunications;
  • Two companies dominate airlines;
  • Five companies dominate banking;
  • Three companies dominate grocery stores;
  • Two companies dominate print media;
  • There are many more examples.

So the best way to increase R&D spending – that will also improve  a host of other factor such as low spending on IT, low employee training, etc.- is to make the economy more competitive. That means more anti-trust enforcement, and updating the  Competition Act (the Canadian government has already announced some small steps in this direction). Even the the Commissioner at the Competition Bureau has noted the decline in competitiveness of the Canadian economy and called for updating the Competition Act to create a more competitive economy.

Do you agree with this approach?

Peter Josty

This blog appeared first at www.thecis.ca

 


The world’s biggest report on Entrepreneurship is just out – Blog #23

14, February 2022

The world’s biggest report on Entrepreneurship is just out. Here is how Canada stocks up.

The largest study of entrepreneurship in the world just issued its annual report. Here’s how Canada stacks up.

The Global Entrepreneurship Monitor (GEM) is the largest study of entrepreneurship in the world and in 2021 covered 47 countries. It has been around since 1999 and has a well-tested and validated methodology. It is unique in that it looks at entrepreneurship from the viewpoint of the entrepreneur rather than the business as most reports on entrepreneurship. Canada does very well in these reports. Some highlights:

TEA. The total entrepreneurship activity (TEA) is a measure of what percentage of the adult population is involved in starting up a new business or running one less than 3½ years old. By this measure Canada ranks #1 among rich countries, with 20.1 % of the adult population involved.

Total Early stage Entrepreneurship Activity (TEA)

 

Source: Global Entrepreneurship Monitor

Established business ownership (EBO). In Canada 8.2% of the adult population is involved in running an established business (one more than 3½ years old). This is middle of the pack compared with the 19 rich countries in the study, and is fairly stable in Canada. It is interesting to compare the TEA with EB rates. The TEA rate is more than twice as high as the EB rate, and that implies that more than half of new startups will fail.  This is consistent with Statistics Canada data showing that sixty three percent of new firms survived five years, and 43% survived for ten years.  It illustrates how risky startups are.

Finding opportunity in COVID. More Canadians (77%) say they see opportunities arising from COVID-19 that they wish to pursue than in any other country in the study. This is a very significant sign of optimism that bodes well for the recovery.

Motivation.  Canadian entrepreneurs are motivated by three main factors in almost equal measure:

  • To make a difference in the world (70.4%)
  • To build great wealth (68.4%)
  • To earn a living (70.7%)

A lesser motivation is to continue a family tradition (50%)

Gender mix. Historically in most countries male entrepreneurs have outnumbered female entrepreneurs by quite a wide margin. In Canada the rate of female entrepreneurship has usually been in the range of 65%-85% of the male rate. In 2021 the ratio was at the low end of that range, at 65%. The ratio for ownership of existing businesses (in business more than 3½ years) was 68%.  For comparison, in the US, the female rate for TEA was 85% of the male rate and 75% for EBO.  However, the actual TEA rate in Canada was much higher than in the US (20.1 vs. 16.5) so there were actually more female entrepreneurs in Canada as a percentage of the population than in the US (15.8% in Canada and 15.2% in the US).

Entrepreneurial Employee activity (EEA). Innovation and entrepreneurship also takes place in large companies and GEM measures that activity too. In 2021, the entrepreneurial employee rate in Canada was 4.7 % of the adult population. That is middle of the pack among 19 rich countries, slightly ahead of the US (at 4.5%) and well behind Switzerland (7.1%). The significance of the EEA is that it can be regarded as a rough measure of productivity, as it is a measure of change or improvement activity in  a large company.

Export Sales. Entrepreneurs in Canada rank very highly for export sales. About 29% of all early stage businesses plan to have 25% or more of their sales coming from outside the country. By this metric Canada ranks # 2 globally.  As a rule entrepreneurs in large countries have most of their sales domestically as their home market is so large.

What kind of businesses? According to the GEM data most startups in Canada are involved with consumer services, with a smaller proportion involved in business services.  This is typical of almost all GEM countries. In Canada about 52% of startups focus on consumer services and about 25% on business services.

Conclusion.  This report paints a very positive picture of entrepreneurship in Canada. But bear in mind that this report is about early stage entrepreneurship. It does not deal with scale up, an area where Canada is not so strong.

Peter Josty

The full report can be found at www.Gemconsortium.org

This Blog originally appeared at www.thecis.ca

 


Prescriptions for growing the economy – Blog #22

7 February 2022

Budget time in Canada is almost upon us and many organizations are making pre-budget submissions. Economic growth is a main driver of our standard of living and quality of life so growth plans are always a key part of any budget. Yet there is no consensus on how best to grow the economy. Many approaches have been proposed. Two recent approaches show some of the different ideas being proposed:

  • RBC Economics, in a recent article1 propose a focus on investment and human capital.
  • A recent book by the French economist Philippe Aghion proposes a focus on the process of creative destruction and the role of competition.

The RBC Economics approach starts by noting that real economic growth rates in Canada fell from an average of 4.1% in the 1970s to 2.1% between 2010 and 2019, and the trend is for this to continue unless we do something different. The graph below shows two scenarios – more of the same, or a better approach, with Canada’s GDP over time. The difference between their trend growth and high growth scenarios by 2035 is $200 billion.

 

    Source:  RBC Economics

For this to change they say Canada needs to see a big shift in actual business investment and innovation. There is a significant investment gap between Canada and the US, which leads to a productivity gap such that an hour’s work in Canada produces only 74% of the value of an hour in the US. They also noted Canada’s poor innovation performance, where we are poorly rated in international league tables. A shortage of talent is also slowing economic growth, and they advocate paying more attention to the untapped potential of women, visible minorities and Indigenous people.

Based on this analysis they propose a six point plan:

  1. Embrace new approaches to innovation policy.
  2. Forward-looking policy, public infrastructure and blended finance for climate action.
  3. Promote services trade and Canadian platforms; protect intellectual property and data.
  4. Increase competitiveness with tax, competition, and regulatory policy.
  5. Attract, develop and retain new sources of talent.
  6. Education and labour market policy for lifelong learning

 

The Aghion book focuses on the process of innovation itself – creative destruction, and how best to get more of it. The idea of creative destruction was first described by the Austrian economist Joseph Schumpeter. New innovations make older innovations obsolete and as they are adopted they create many new jobs but also destroy the jobs involved in producing the older innovations. This sets up a conflict between the older innovations and the new ones. So the incumbent firms have an incentive to slow down or stop the new ones getting adopted.  Which brings us to competition, as the more competitive a market is the less power the incumbents have to stop the new innovations. Research shows that the more creative destruction that takes place the higher is economic growth.

 

Different firms react to competition in different ways. Strong firms are stimulated to do better and combat the new innovations. Weaker or complacent firms do their best to impede their new competitors. The effect of these two responses is shown in the diagram below:

 

There is a large literature showing how the US has become less competitive in recent decades, and how this has slowed productivity and economic growth. A large factor has been the increase of lobbying of politicians by large incumbents to maintain the status quo. In Canada the Commissioner at the Competition Bureau has noted the decline in competitiveness of the Canadian economy and called for updating the Competition Act to create a more competitive economy. We just need to think of how major sectors of the Canadian economy are concentrated – airlines, telecommunications, digital services, etc. A particular concern is how large incumbents are able to acquire their budding competitors and so stifle competition. This is a major concern in areas of rapid technological change such as digital services.

So a proposal arising from the Aghion analysis is to create a more competitive Canadian economy by strengthening the Competition Act and preventing large incumbents acquiring budding competitors.

 

Conclusions.

So what should we think of these two approaches?

Everything is the The RBC Economics approach is useful and would help growth, but they do not spell out their “new approach” to innovation policy in detail and they do not mention competition policy.

The Aghion approach looks at the fundamental drivers of the economy, the role of creative destruction and the role that a competitive market plays in stimulating creative destruction and economic growth. It fills the gaps in the RBC approach.

 

Combining these two approaches would definitely boost economic growth.

 

Peter Josty

 

References:

  1. https://thoughtleadership.rbc.com/the-great-canadian-restart-how-2022-can-spark-an-era-of-greener-more-robust-growth/
  2. The Power of Creative Destruction by Philippe Aghion   Harvard University Press 2021

This Blog first appeared on www.thecis.ca


2022 will be a great year for entrepreneurs in Alberta – Blog #21

24, January 2022

In this blog we’ll take a look at the prospects for entrepreneurship in Alberta in 2022.

First of all, though, we’ll revisit why startups are important in the economy. Startups can be seen as experiments which introduce new ideas, new technologies and business models to the marketplace. The market then decides which of these succeed and which fail as new entrants compete with existing firms. History shows that most radical ideas come from new players rather than existing companies. For example, it is no surprise that a new entrant (Tesla) led the move for electric cars, rather than incumbents such as Ford or Toyota. Having a consistent supply of new ideas is essential for a dynamic growing economy and startups are a major source of these and the driving force for creative destruction.

So, what can we expect in 2022?

First of all, we can expect a lot of startups. Measuring the number of startups is a tricky business. When does a startup start? Is it when the business is registered? Is it when it hires its first employee? Should we count the number of people involved? What about non-registered businesses? However, by all of these metrics 2022 looks very good for Alberta, building off a strong 2021. Alberta showed 3,930 new business registrations in November (latest available), up 7.7% from 2020. The Global Entrepreneurship Monitor (GEM) showed that 20.1% of the adult population was involved in some form of entrepreneurial activity in 2021, the highest level in rich countries, up 29% from 2020. The US showed similar large increases, with startups increasing by 23% during the first 9 months of the year. We don’t really know why the activity has been so strong. One reason is probably finding new opportunities. The GEM survey showed that 67.1% of Canadian entrepreneurs saw new opportunities as a result of the pandemic, the highest rate among high income countries and a big increase from the previous year. Another might necessity, as so many people lost their jobs in 2021.

Who will the new entrepreneurs be? Based on previous years, the largest age group will be 25-34. They will be highly educated – about 20% will have a degree, and almost a quarter will have graduate experience.  About 45% of them will be women. One thing to look out for:  will there be older entrepreneurs?  Anecdotally many baby boomers have retired early due to COVID and it will be interesting to see if they decide to start something.

What will their new businesses be? Again, based on previous years, they will be in business services (30-35%), consumer services (30-35%), manufacturing (around 25%) and extractive services (around 10%).  The tech sector will be very strong. Edmonton was recently named the fastest-growing tech sector in North America. Innovate Edmonton reports that there are more than 930 start ups and scale ups in Edmonton. Calgary is home to roughly 700 tech companies, according to Platform Calgary, and has plans to reach 3,000 by 2031. There have been four unicorns in Calgary in recent years– startups with a market value of $1 billion. These are Benevity, Parvus Therapeutics, Shareworks and Enverus Intelligence Research.

Will they export? According to GEM, 2021 saw a big rise in startups that generated 25% or more of their income from exports.

What motivates entrepreneurs?  There have consistently been three main motivations for entrepreneurs in Canada: a desire to change the world, a desire to build great wealth, and the need to earn a living. A lesser motivation is the desire to continue a family tradition.

What challenges will they face? Finding financing is always the biggest concern of startups, but in 2022 it is likely that finding qualified staff will also be a major challenge. According to the Alberta government, by December full time and part time employment was back to pre-pandemic levels.  The job vacancy rate was 4.7%, which equates to about unfilled 100,000 jobs in Alberta. It is also likely that supply chain disruptions will also affect many entrepreneurs in 2022.

What can history tell us?  During the Spanish flu in 1918/1919 startups boomed from 1919 in the middle of the pandemic onwards. This was very likely for similar reasons we see in the COVID-19 pandemic – entrepreneurs seeing new opportunities.

All of this will be underpinned by robust economic growth.  The Conference Board projects Alberta’s GDP will grow by 6.1% in 2022.

So, all the signs are pointing towards an awesome year for entrepreneurs in Alberta in 2022.

 

Peter Josty

This blog first appeared on www.thecis.ca