19, September 2024

Who is an entrepreneur in Canada?

Discussion of entrepreneurship is all around us. There are entrepreneurs of the year competitions, professors of entrepreneurship, awards of excellence for entrepreneurship, strategies for encouraging entrepreneurship in certain groups, even government Ministers of entrepreneurship.  Yet the concept of entrepreneurship is difficult to nail down.

Start with the total labour force in Canada. That is about 20 million people at the end of 2023.  Of that group, 17.5 million, or about 88% are employees. So, they are definitely not entrepreneurs. The caveat is that there are some “intrapreneurs” who do entrepreneurial things in an organization. But generally speaking, if you have a regular paycheck and a boss you are not an entrepreneur.

The other big category is” self-employed”. There were 2.6 million self-employed people in Canada in 2023, or about 13% of the labour force. It is not straightforward to determine if someone is an employee or self-employed. The Canada Revenue Agency has detailed rules to determine if someone is self employed or an employee. These include consideration of the following factors:

  • Control
  • Tools and equipment
  • Subcontracting work or hiring assistants
  • Financial risk
  • Responsibility for investment and management
  • Opportunity for profit

You might think that all self-employed people are entrepreneurs. But a large proportion of self-employed are sole practitioners. In Statistics Canada terminology they are “self employed without paid help”. There were 1.9 million “self-employed with no paid help” in Canada in 2023, or about 10% of the labour force. I think most people would not consider “self employed with no paid help” to be entrepreneurs. They could be your doctor, dentist or accountant. However, that’s what Bill Gates and Paul Allen, the founders of Microsoft,  were in 1975, so it’s not a black and white issue.

That leaves us with “Self-employed with paid help. “This is what most people would consider to be an entrepreneur. It is the definition the Business Development Bank of Canada used in a recent report. This category has been declining for the last two decades as shown in the report.

The report concluded that entrepreneurship has been declining for many years. There were 750,000 “self-employed with paid help” in Canada in 2023, or about 4% of the total workforce.

However, there is one more layer of the onion to peel. “Self-employed with paid help” can be either incorporated or unincorporated. The unincorporated group has declined by 50% in the last 20 years, while the incorporated group has increased modestly.

These trends are shown in the graphic below, from the Canadian Federation of Independent Business

 

According to ISED, there are several benefits to incorporating:

  • Easier access to capital
  • Limited liability
  • Lower tax rate
  • It creates a separate legal entity
  • Continuous existence.

It could be that these benefits have become better known and business owners have chosen to incorporate to take advantage of them.

A complication here relates to gig work. Statistics Canada has been working to clarify this area and has three core concepts:

  • Gig work (e.g. a Uber driver)
  • Digital platform employment (e.g. selling on eBay)
  • Dependent self-employment (with one main client)

I think most people would not consider gig workers to be entrepreneurs.

A closely related issue is a side hustle, where you work for one employer and do something else on the side. A large proportion of these are likely to be in the gig economy, but some may well be nascent entrepreneurs starting a business.

Another source of information about entrepreneurship is surveys such as the Global Entrepreneurship Monitor GEM), the largest study of entrepreneurship in the world.  GEM data shows a significant increase in entrepreneurial activity in Canada in the last 10 years, as shown below.

TEA is the total early-stage entrepreneurship, the percentage of the adult population who are starting or running a new business.  The fact that this number is increasing while the number of businesses is decreasing speaks to the difficulties entrepreneurs have in creating viable ongoing businesses.

An entirely different way of measuring entrepreneurship was reported in the Economist, where two Swedish economists wrote a paper titled “Small Business Activity does not measure entrepreneurship”. They concluded that the best way to measure entrepreneurship was to count the number of billionaires per million population. That was much more consistent with Schumpeter’s definition of entrepreneurship -entrepreneurs are innovators: people who come up with ideas and embody those ideas in high-growth companies.  Their results are shown below. Canada ranks #9 globally.

Conclusion.

I can’t do better than repeat a paragraph from the Economist:

“There are two distinctive views (about entrepreneurship). The first is the popular view: that entrepreneurs are people who run their own companies, self-employed or small-business people. The second is Joseph Schumpeter’s view that entrepreneurs are innovators: people who come up with ideas and embody those ideas in high-growth companies.”

Perhaps the best way to think of entrepreneurship is as a spectrum. At one end is the small business owner (who provide valuable local services, the vast majority of entrepreneurs), at the other end are the Bill Gates, Elon Musks and Steve Jobs of this world (the tiny minority who build scalable companies with huge economic impact). In between there is an enormous variety of entrepreneurs.

 

Peter Josty