FYI: We may not be as entrepreneurial as you think

I wanted to follow up on three comments I received after my TJ column on Saturday about entrepreneurship including a guy who wrote me a thoughtful letter on the subject.  The three issues were: 1) Government should give its grant money to small business, not large business; 2) Why do I talk about the total small business population when the focus should be on the 1 percent; and 3) Where does the local ‘demand’ (new opportunities) come from mentioned near the end of the column.

1. Just last week I wrote that people should not equate government grants/loans with economic development.  If there are gaps in the local capital market for small businesses, then maybe there should be a role for government.   I would argue that ACOA, CBDC, BDC, DED, NRC-IRAP, NBIF and other public sector funding organizations cover most bases.   In my view, the NB government needs an all-of-the-above strategy for economic development.  We need more ambitious entrepreneurs.  We need to attract national and international investment where there is a clear value proposition to do so.  We need to develop our natural resources.  We need to attract far more immigrants.

2. It is true that the vast majority of small businesses – maybe 95-97% – are ‘lifestyle’ entrepreneurs that own a business and want to earn a living.   These include lawyers, accountants, electricians, coffee shop owners, consultants, massage therapists, dentists, etc. among hundreds of others.  It is also true that we want an economy that is developing export-oriented entrepreneurs (trade industries) because the grow the size of the economic pie.  However, in recent years I have put more importance on the 97% (or 99%) as they are key to a vibrant local, competitive and innovative economy.  If we just had a few large firms in a place like Saint John or Halifax – providing all the goods and services it would make for a weak economy, IMO (I am a declared Schumpeterian – going back to my university days).

3. I was asked if it is a ‘virtuous entrepreneurial cycle’ where does it get started.  This is why we need to see brand new industries (as I have also written about extensively).  In many cases, what seems to be new economic activity is really only shifting it around (i.e. when Costco booms, others hurt).  The aquaculture industry was brand new when it came along.  The call centre industry was brand new.  The IT sector – is mostly brand new – but a lot of it is based on government projects.  While this is great, it is not necessary brand new economic activity.  The shale gas industry, if developed, would be brand new.  Brand new industries create brand new local demand in supply chains (indirect) and in the broader economy (induced).  Immigrants can and should be a source of brand new demand but there has to be an economic rationale for them to be here – although as I have written recently, for every 1,000 new immigrants, we need something like 400 people working in various industries to support the demand created by the 1,000.

 

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From my Saturday TJ column:

It is likely most New Brunswickers, including yours truly, consider New Brunswick a fairly entrepreneurial place.  After all, the province produced two of the largest business dynasties in Canada and there are many more examples across the province including a newish round of technology start-up companies.

The data; however, suggests New Brunswick may not be as entrepreneurial as we think.  

From Statistics Canada’s Labour Force Survey (LFS), we know the number of persons in New Brunswick who define themselves as self-employed with paid employees.  In 2003 there were 18,200 persons in this category.  By 2013, the number had declined to 14,700 – a 19 per cent drop.

We also know from Statistics Canada’s Survey of Employment, Payrolls and Hours (SEPH) that total employment among small employers has been declining in recent years.  In 2003, there were 66,400 persons across the province working for organizations with fewer than 20 employees.  By 2012, that number had declined to 62,700.   Through the first 11 months of 2013, small firms shed another 5,000 employees.

Rural New Brunswick has relatively more small businesses than our urban centres.  From the National Household Survey in 2011, we know that there were 82 self-employed persons across the province out of every 1,000 workers.  That figure drops to 73 per 1,000 in Moncton and 71 per 1,000 in Saint John.

Self-employment among young New Brunswickers is even worse.  In 2011, there were only 46 persons aged 25-34 that work for themselves out of every 1,000 which is 34 per cent lower than the national self-employment rate among this age group.  Moncton, Saint John and Fredericton are among the worst performing urban centres in Canada for young entrepreneurship.  Out of 1,800 employed persons in the Miramichi aged 25-34, only 40 people were self-employed in 2011.

Despite recent high profile successes, we even have far fewer information technology (IT) firms than most other provinces in Canada.  In 2012, across New Brunswick there were 48 firms per 100,000 in the provincial population classified as operating in the two main information technology (IT) sectors  – software publishing and computer systems design services.  Across Canada, there were 182 per 100,000 and in Ontario there were 251 IT firms per 100,000 in the population. 

Why are so many more tech start-ups making it big in Ontario compared to New Brunswick?  It must have something to do with having five times as many start-ups from which successful firms can emerge.  The odds are stacked in their favour.  In fact, given New Brunswick’s low rate of tech start-ups, it is pretty remarkable just how many have made the big time.

Why does it matter? 

First, as I have argued many times before a dynamic small business sector is critical to healthy, local economies.  They provide healthy competition to the bigger national and international firms and they encourage innovation by exploiting niche markets and opportunities. 

Second, a tiny number of today’s small businesses will be tomorrow’s national or international success stories.  If we have a dormant or declining start-up environment, it will be more difficult to see these breakout firms emerge.

There is no easy solution to this challenge.   In a chronically weak economy, people will gravitate to the comfort and stability of a job in the public sector or with large firms. Once they get in, they won’t leave.

By definition, entrepreneurs are risk-takers and there are many cultural and demographic factors that could be limiting our appetite for risk in this province.

Most of all, entrepreneurs step in when they see new opportunities.  If there are five restaurants in the town that are full for supper every day, an enterprising entrepreneur will see the opportunity and open number six. 

These opportunities are created by new demand which comes from expanding industries and a growing population.  This feeds a virtuous entrepreneurial cycle leading to dynamic local markets, job creation and increased taxes to pay for public services.

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One Response to FYI: We may not be as entrepreneurial as you think

  1. keith scott says:

    Entrepreneur-a person who is successful in organizing a business with initiative and risk.

    Why did you ever think NB has an entrepreneurial culture?

    The Irving and McCain companies predate the era of big government (BG). Young people do not want to emulate them. They aspire to a BG job and why not. BG offers them job security for life, promotion without merit to a middle/upper class life style and retirement with a generous pension. Nevertheless, it is sad to see lives reduced to the pursuit of mediocrity by the lure of a “no risk” existence.

    We do not have an innovative culture either and it is aggressively suppressed by BG, big unions and big business. That is how the leaders of all three stay in power. I offer the following example to illustrate how debilitating this is for an economy.

    Several years ago we invested in technology development and presented our product to the Canadian monopoly aerospace company. It would reduce the maintenance costs and down time for the Sea King helicopters. After the presentation they were open and brutally honest–Keith, why would we do this? We would make less money.

    There are very large road blocks to reviving the NB economy. The leaders of big government, big unions and monopoly business maintain their positions by promoting the fear of change. That creates the lack of will to be innovative and accept risk. In other words, it creates a culture lacking entrepreneurship. The following example demonstrates this point.

    The chicken marketing board in NB is a symbiotic relationship among politicians, unions and business to protect their interests to the detriment of consumers and the economy. It is well known that when farm marketing boards have been abolished consumer prices fall and the agriculture sector grows.

    There are lots of public pronouncements that all parties are committed to innovation and growth of the economy but that it is only talk. To avoid the impending economic disaster in NB will require more fundamental changes than round tables discussing innovation and entrepreneurship as the solution.

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