GEM's mandate was to examine and obtain answers to the following:
Does the level of entrepreneurial activity vary between countries, and, if so, to what extent?
Does the level of entrepreneurial activity affect a country's rate of economic growth and prosperity?
What makes a country entrepreneurial?
Basically, the business startup rate was used as the measure of entrepreneurship.
The report says 'the evidence is compelling... The level of entrepreneurial activity is positively correlated with recent gains in GNP for the 10 countries in the study. Variation in rates of startups may account for as much as one-third of the variation in economic growth.'
Canada comes off relatively well, coming in third behind the US and Israel. In these countries, the report says 'entrepreneurial activity is an integral and accepted feature of economic and personal life.'
In the other countries, 'entrepreneurship...remains a structural and cultural anomaly. In such countries it may take decades of sustained changes in many national, cultural political and economic institutions if they are to join the "elite" of entrepreneurial economies and accelerate their economic growth rates.'
It is interesting to note the differences between Canada and the other economies. Your columnist, with the assistance of Paul Martin and John Manley, has finally persuaded StatsCan to launch a study to measure startup rates by community, which Inc. magazine in the US publishes annually as a matter of course. However, the Canadian supplement to the GEM report did look at startups by region and comments that 'startup rates in Western Canada and Quebec matched the US rate, but Ontario and Eastern Canada trailed both the Canadian average and the US rates. Overall, too few Canadian startups become mid-sized firms or fast-growing gazelles.'
The difference between regions is fairly readily explainable. Access to equity capital is cited by the report as the single most critical barrier to business startups and growth in Canada. Quebec's venture capital system is the most sophisticated in the country. Canada rates low (even lower than France,
Germany and Israel, as well as far below the US) in the prevalence of personal investors. This may account for some of the regional differences between Ontario and the western provinces. In my last column I talked about the new rules being proposed by the Ontario Securities Commission. What I did not mention was that the so called 'exempt investor' level has for some time been far below the Ontario level of $150,000, varying between $25,000 in some provinces and $97,000 in Alberta!
(Where this particular number came from historically I have no idea; maybe some Alberta reader can enlighten me.) I think that may partially account for the higher startup rate out west. I also think that cultural and social factors may account for both the low performance in the eastern Provinces and the higher rates out west.
In some ways, the low performance of Ontario is puzzling. Certainly the OSC rules have been a barrier to angel investors. The Canadian report talks about the high rates of profit-insensitive taxes being a barrier, leaving less in the way of retained earnings for reinvestment in growing firms. In a column last year, I talked about the Daly study showing declining productivity over the past five years in smaller Canadian-owned manufacturing companies. Would that have an affect? It is hard to say. On the face of it, Toronto is the centre of all the new innovative entries to Canada's capital markets and,
on the face of it, has a good supply of venture capital, if not angels. It is still a puzzle.
Gordon Sharwood founded his 'investment bank for entrepreneurs' in 1976 after a distinguished career in banking (chief general manager of CIBC) and business (president of Acres/Traders Group
and Guaranty Trust). Among many pro bono affiliations, he is honorary director of Public Policy Forum and a founding director and honorary chair of the Canadian Association of Family Enterprise. He may be reached at 416-869-1598 and by e-mail at gordshar@idirect.com.
