Entrepreneurship is an important source of innovation, economic growth and job creation. As such, greater attention is being paid to the role of public policy in fostering entrepreneurial activity. Governments and international organizations are working to better understand and measure the factors that influence and support entrepreneurial activity. The Organization for Economic Coordination and Development (OECD), for example, has developed a framework – Indicators of Entrepreneurial Determinants – that outlines some of the different factors it has identified as influencing entrepreneurship. The framework provides international benchmarks for factors linked to business entrepreneurship. Recognizing the need to better understand and quantify entrepreneurship, Industry Canada has prepared a research series that applies the OECD framework to the Canadian context. The first in the Industry Canada series examines how Canada performs on two of the OECD’s six categories: Regulatory Framework and Market Conditions.
Regulatory environment is an area where Canada scores well. In terms of the administrative burden for establishing a new business, Canada ranked third best in the world (for ease of starting a business). Canada was first on this measure for several years up to 2007, but slipped to second from 2008 to 2010 and has been in third place since that time.
Canada scores equally well on other measures such as the number of procedures and the time and cost involved in opening a new business:
- Canada ranks first, with only one procedure required to start a business;
- Based on total time needed to start a business, Canada ranks 10th out of 185 countries, with approximately five days per business, including the time spent waiting for government approvals;
- The cost of starting a business in Canada is estimated to be about 0.4 percent of income per capita, placing us fifth internationally on this metric. The cost in the US is higher, at 1.4% of per capita income. According to Statistics Canada, the costs of corporate registration requirements in Canada are on average $181 per business, which equates to $22 per employee.
The OECD’s research on the impact of taxes on economic growth has found that levels of corporate taxation shape business incentives by affecting the expected and actual returns on investment, including returns on innovation. The work finds that lower taxes on small businesses’ income and capital gains can improve economic growth in this sector. Corporate income taxes generally discourage firms from undertaking activities that support and advance growth, such as investment in physical capital and the expansion of plants or offices. Corporate taxes also affect both entrepreneurs’ decisions around starting a business and the profits earned by businesses, especially in the case of high-growth firms. Corporate taxation also helps to determine whether foreign companies invest in Canada, and whether Canadian companies want to continue doing business here.
Canada’s small business tax rate is now among the lowest in the developed world, according to the OECD Tax Database. The average Canadian business income tax rate (including combined federal and provincial rates) has declined over the past six years and based on recent data sits around 15.3%, which is significantly lower than the comparable US rate. Within Canada BC’s corporate income tax and small business tax rates are among the lowest of any province. More problematic for BC is the provincial sales tax (PST), which is applied to business inputs, including most capital equipment and many other items that companies need to run their operations (e.g., vehicles, energy, legal services, etc.).
Market conditions are another category that the OECD benchmarks in assessing the environment for entrepreneurial activity. The work measures the burdens associated with exporting, using three indicators:
- The number of documents required to export goods;
- The time necessary to comply with all procedures required to export goods; and,
- The cost of exporting a container.
Canada ranks highly in the number of days and documents required for export (three documents placing us second among the 185 countries surveyed). Canada also does well in terms of time to export (four days for a rank of seventh). However, Canada has a poor ranking with respect to cost of exporting. On average, exporters pay $1,610 to ship a container from Canada, which puts us 141st among the surveyed countries. Alarmingly, Canada’s cost of exporting is the highest among the OECD countries. The high average cost of shipping containers likely reflects the country’s vast geography. Based on an average ranking across all three export-related indicators, Canada stood 42nd among all surveyed countries in 2013, falling from 39th in 2006.
Establishing an economic and policy environment that encourages the formation of new business ventures as well as their subsequent growth is an important ingredient in building a successful economy. Canada generally performs quite well in this area. It is useful to remember that all large and iconic enterprises originally began life as small start-ups – Google, Apple and Facebook, as well as leading local businesses such as Canfor, Ritchie Brothers and MacDonald Dettwiler.