Research Blog: Immigrant entrepreneurs in Canada

August 28, 2018

Periodically, the StatCan Blog publishes a guest post on research at Statistics Canada. This post is from Yuri Ostrovsky and Garnett Picot, research analysts in the Social Analysis and Modelling Division. 

 

Why study immigrant entrepreneurs?

An important question frequently asked in academic and policy debates about the costs and benefits of immigration, is whether immigration generates economic growth in the host country. Researchers have hypothesized that immigrants can have a net positive impact on growth by contributing specific skills, lowering the average age of the workforce, and contributing to innovation. In addition, immigrant entrepreneurs have the potential to make direct contributions by starting new businesses and creating jobs. Job creation is essential for economic growth, and there is growing international literature on immigrant entrepreneurship that attempts to identify factors influencing immigrant entrepreneurship and the success of immigrant-owned firms.

Recent studies by Statistics Canada researchers used administrative data to learn more about immigrant entrepreneurship in Canada. These studies considered two broad categories of immigrant entrepreneurs: owners of incorporated private firms with employees (“incorporated self-employed”) and owners of unincorporated firms (“unincorporated self-employed”). Owners of incorporated private forms with no employees, publicly-owned incorporated companies and the unincorporated self-employed who earn less from self-employment than from paid employment are usually excluded from analysis. Most data refer to the year 2010. However, given that the Canadian economy as well as Canadian immigration policies have remained largely stable since 2010, the results continue to be relevant to current labour market conditions.

Immigrant business ownership rates

Recent research suggests that during new immigrants’ first few years of adjustment in Canada, their ownership rates are below those of the Canadian-born, but after 4 to 10 years in Canada, the situation has reversed. In 2010, about 5.8% of immigrants who had been in Canada for 10 to 30 years owned a private incorporated company (with employees) compared to 4.8% of the Canadian-born. However, the firms immigrants own tend to be smaller than those owned by the Canadian-born. Furthermore, about 10.8% of such longer-term immigrants were unincorporated self-employed compared to 7.5% of the Canadian-born.

There is some evidence indicating that the higher self-employment rate among immigrants is in part due to their inability to find a good job. Earlier research found that the majority of both immigrants and the Canadian-born were self-employed because they chose to be self-employed. However, the proportion who were self-employed because of a lack of job opportunities was higher among immigrants (33%) and recent immigrants (40%) than among the Canadian-born (20%).

The propensity for immigrants to be business owners varies according to their characteristics

The propensity to be an entrepreneur varies somewhat across sociodemographic characteristics. For instance, business ownership is somewhat higher among more highly educated immigrants. Also, ownership rates vary little by source region with one exception: immigrants from Latin America and Africa have relatively low propensities to be enterprise owners. Immigrants (and the Canadian-born) who are aged 45 to 54 have the highest likelihood of being owners among different age groups. This is likely because potential entrepreneurs have to accumulate financial resources and experience to start a new business. The propensity to be a business owner is lower among recent immigrants and increases with years in Canada, and immigrant men are twice as likely as immigrant women to be firm owners.

Immigrant entrepreneurs come from all admission categories

There are four broad classes of immigrants usually considered in Canadian studies: economic class, business class, family class and refugees. The likelihood of being a business owner is highest among business class immigrants (at 25.1%), as might be expected. However, since this is a small class, firms owned by business class immigrants accounted for only about 10% of all immigrant-owned firms. Next to the business class, economic class principle applicants have the highest tendency to be business owners, at 14.9%; this includes both incorporated and unincorporated self-employed (see definitions above). The shares of refugees and family-class immigrants who are business owners—14.4% and 14.9%, respectively—are comparable to the ownership rate among economic immigrants. A relatively high rate of unincorporated self-employment among refugees, who generally have the most difficulty in the labour market, may be due in part to the difficulty they experience trying to find a good job.

Overall, there is little difference between refugees, the economic class, and the family class in their likelihood of owning a business (incorporated and unincorporated self-employed). Looked at differently: the family and refugee classes together accounted for about 44% of immigrant-owned businesses, whereas economic class immigrants accounted for about 40%.

The main difference between economic class and family class or refugees is not their propensity to own a business, but in the type of business they own

Economic class immigrants are more likely than refugees and the family class (and as likely as the Canadian-born) to own a private incorporated company. Refugees, on the other hand, are more likely to be unincorporated self-employed than the economic class and the Canadian-born. Compared to the latter, refugee entrepreneurs tend to be overly concentrated in specialty trade contracting, ground transportation (e.g., taxis), retail trade, food services and services to dwellings (e.g., janitors). Some refugees have businesses in the knowledge-based industries, but their propensity to own a business in such industries is well below that of the Canadian-born and economic immigrants. The family class displayed a similar distribution, but child care services also played a significant role for them.

Two nodes of industrial concentration were evident among economic class immigrants: the knowledge based industries and professional services (e.g., engineering and science-based manufacturing, telecommunications, data processing, computer systems design and consulting services), and the more traditional retail trade and food services.

Economic class immigrants were about twice as likely as the Canadian-born to own a company in the knowledge-based industries, notably in architecture and engineering services, computer systems design, and management and scientific consulting. This is likely related to the fact that a high proportion of economic immigrants have degrees in engineering and computer science. Interestingly, business class immigrants tended to be concentrated in the more traditional sectors such as wholesale trade, retail trade and food service. A large proportion of the business class self-employed were in real estate leasing, a share far beyond that observed for other immigrant classes and the Canadian-born. Very few of the business class immigrants owned companies in the knowledge-based sector.

Contrary to evidence from international literature, in Canada immigrants remain entrepreneurs about as long as the Canadian born

Studies from Sweden, Norway, Germany and the U.S. find that immigrant businesses have a shorter survival time than businesses owned by the native-born. Recent Statistics Canada research suggests a different result for Canada. On average, immigrants remain owners of private incorporated companies for about as long as the Canadian-born. Roughly 80% of immigrant owners of private companies are still owners two years after becoming firm owners, and 58% are still owners after seven years. The numbers are similar for the Canadian-born. For recent immigrants, however, the survival time is somewhat shorter. Business survival times are affected by immigrant characteristics such as age, source region and industry.

Firm financing is an important determinant of success for any business

Immigrant and Canadian-born entrepreneurs finance the ongoing operations of their businesses quite similarly. There is only weak evidence to suggest that access to financing may be more of an issue for immigrant owners of small and medium-sized firms than for Canadian-born owners of such firms. Immigrant and Canadian-born entrepreneurs also seem to use similar sources of start-up financing; personal financing is the most commonly used source. However, recent immigrants are less likely to turn to a formal financial institution such as a bank for start-up financing.

The manner in which owners of small and medium-sized businesses finance their companies depends on the firm’s age, size and industry, among other things. Immigrant-owned firms tend to be smaller, younger, and more concentrated in particular industries than the firms owned by their Canadian-born counterparts. When results are adjusted for these differences, (1) firms owned by immigrants are only marginally less likely to apply for ongoing financing than firms owned by the Canadian-born; (2) all firms turn more often to debt than equity financing; (3) there is little difference in the sources of financing; and (4) applications for financing made by immigrants are fully approved as often as those submitted by Canadian-born owners. Of several possible responses to a large survey of business owners, “access to financing” was reported to be the least important obstacle by both immigrant and Canadian-born respondents, below other obstacles such as “rising costs of inputs,” “increasing competition” and “fluctuations in consumer demand.”

Forthcoming research at Statistics Canada focuses on job creation among private Canadian incorporated companies owned by immigrants. It shows that firms owned by immigrants tend to be younger, and younger firms create jobs at a higher rate than older firms. Statistics Canada research scheduled for release later this year, will provide new information on job creation among private Canadian incorporated companies owned by immigrants.

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