Demographics and Entrepreneurship blog series: Entry rates for startups are falling, due partly to demography
As part of the blog series summarizing the Fraser Institute’s Demographics and Entrepreneurship essays, this post examines small business startup rates in Canada and beyond.
Small business startups are an essential feature of what the great economist Joseph Schumpeter called the process of "creative destruction," which involves the entry of new and relatively efficient business organizations, which in turn forces existing firms to become more efficient or go out of business.
Startup businesses are usually small and often vehicles for introducing new products and new ways of doing business into the economy. As such, small business startup rates are highly important to the long-term growth of any economy’s productivity and standard of living.
A worrisome statistic, therefore, is the fall in small business startup rates in Canada and several other developed economies (as summarized in the table below). The data are discussed and reported in Chapter 3 of the essay series.
The data above report small business entry rates per 100 small business incumbents for three-year periods. While the sample countries differ somewhat in how they define small business startups, the main point is that entry rates of small businesses are uniformly lower in the latest period for which data are available (2012-2014) compared to 2003-2005.
Also worrisome, but perhaps unsurprising, productivity growth has slowed substantially over the past two decades for virtually all developed countries. For example, multifactor productivity (a measure of the productivity of all inputs) in Canada increased at an annual rate of around 1.35 per cent from 1996 to 2000. However, the average annual increase was only 0.67 per cent from 2011 to 2015. While there are multiple causes of slower productivity growth, the linkage between the fall in small business entry rates and slower productivity growth is unlikely coincidental.
There are also likely to be different causes of the decline in small business startup rates. One cause that has not received much public policy attention is the aging of populations in Canada and other developed economies. Prominent research suggests that the prime age group for entrepreneurs is 30-39 years old. Individuals in this age group are more likely to take risks than older people and also have business experience that younger people may not have. This research is discussed in Chapter 2 of the essay series.
For the same countries listed in the table above, data show a decline in this age cohort as a share of the total population from the 1990s to the present. For example, in Canada, about 17.4 per cent of the population was in the 30-39 age cohort for the 1990s, on average. More recently, the percentage is around 13.6 per cent. By the 2040s, the relative share of 30-39 year age group is projected to decline to around 12 per cent.
Governments are obviously limited in what they can do to reverse the aging of populations. However, they can implement policies that make it more attractive for people to start businesses and make it more likely that startup businesses will succeed. The Fraser Institute essay series discusses several promising policies including slashing or even eliminating capital gains taxes, lowering personal and corporate tax rates and diminishing regulatory red tape. Declining startup rates are a canary in the coal mine, warning governments that entrepreneurship should not be taken for granted.