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.
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.