Study: Firm entry and exit in Canada

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Firm entry and exit are important aspects of business dynamics. In every year from 2000 to 2008, roughly 1 firm in 10 had either just entered the Canadian business sector or was about to exit.

This turnover emphasizes an important path to business innovation and productivity growth. To survive and replace incumbents, new firms aggressively adopt new ideas. This creates pressure on incumbents to innovate or exit the market.

From 2000 to 2008, an average of 10.8% of firms entered the business sector each year, while 9.0% exited.

The size distributions of entrants and exiters, as well as entry and exit rates by size, suggest that turnover predominantly involves small firms.

Firms that entered the business sector between 2000 and 2008 accounted for 1.9% of employment on average. Those that left accounted for an average of 1.6% of business sector employment.

Based on the number of firms or on employment, there was 20% more entry than exit on average from 2000 to 2008. This expansionary pattern also prevailed at the industry level, as the number of entrants surpassed the number of exiters in 16 of 18 business sector industries examined.

Rates of entry and exit, measured either by the number of firms or by employment, differed substantially across industries. Across industries, entry was positively correlated with exit. That is, an industry with higher-than-average entry rates also tended to have higher-than-average exit rates. High exit rates are the consequence of the greater degree of experimentation that is associated with high entry rates.

Calculated using the number of firms, entry rates ranged from 6.6% in non-durable manufacturing to 13.5% in professional services. Based on the share of employment, entry rates ranged from 0.7% in utilities to 3.4% in education and arts and entertainment.

The services-producing sector had higher average entry rates than did the goods-producing sector.

Note: This research paper examines firm entry and exit patterns across industries in the Canadian business sector. It investigates the relative importance of entrants and exiters in terms of both number of firms and employment, the persistence of industry entry and exit patterns over time, and the correlation between industry entry and exit. Enterprise-level data used in this study came from Statistics Canada's Longitudinal Employment Analysis Program files, which are generated from administrative payroll data filed by Canadian firms.

The research paper "Firm Dynamics: Firm entry and exit in Canada, 2000 to 2008", part of the The Canadian Economy in Transition series (11-622-M2012022), is now available from the Key resource module of our website under Publications.

Highlights of the findings of this paper are available in the article "Firm entry and exit in Canada, 2000 to 2008", part of the Economic Insights series (11-626-X2012004, free), from the Key resource module of our website under Publications.

Similar studies from the Economic Analysis Division are available online (www.statcan.gc.ca/economicanalysis).

For more information, or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588) or Weimin Wang (613-951-3606), Economic Analysis Division.