By Steven Globerman
and Jason Clemens
The Fraser Institute
Entrepreneurship is widely acknowledged as the basis for innovation, technological advancement and economic progress – and, subsequently, a driving force for improved living standards. Yet there’s little discussion, let alone action, among governments in Canada to stem the adverse effects of demographic change on entrepreneurship, specifically the aging of our population.
Most Canadians are aware that our population is aging. However, it’s not generally understood that as our population ages, the share of the population best positioned to be successful entrepreneurs – individuals in their late 20s through to their early 40s – will shrink. People in this age group drive entrepreneurship because they are both willing to take risks to start their own business while also possessing real-world business experience, which increases the likelihood of success.
The share of Canadians between the ages of 30 and 39 has already declined 16.6 per cent since the 1980s, and is expected to decline by another 11.4 per cent by the 2040s.
There has also been a corresponding decline in the rate of small business startups, a key measure of entrepreneurship. The rate of small business startups declined by 8.5 per cent when comparing the six years (2001-07) before the Great Recession to the following six years (2008-14), the most recent data available.
And this is not a uniquely Canadian experience. Almost all industrialized countries have seen declines in small business startups. For example, the United States experienced an 18.6 per cent decline over the same period, as did Australia (20.3 per cent) and the United Kingdom (7.5 cent).
It’s also worthwhile noting that the total productivity performance of many Organization for Economic Co-operation and Development (OECD) countries, including Canada, has declined along with the observed fall in entrepreneurship, which highlights the far-reaching effects and implications of less entrepreneurship.
No doubt there are a host of country-specific explanations for the varying rates of decline in entrepreneurship. However, the fact that all industrialized countries are experiencing population aging – at the same time entrepreneurship is declining – underscores the potential adverse effects of demographic changes on entrepreneurship.
While there’s little that governments can do to stem populations aging, a number of policy levers are available to strengthen incentives for entrepreneurship and improve the likelihood of successful new business startups. A recent set of essays by leading scholars in Canada, the U.S. and Europe explored possible policy reforms to promote and improve entrepreneurship.
Key among potential policy reforms is tax relief, both in the form of reductions in marginal tax rates for individuals and businesses, and reductions (or even the elimination) of capital gains taxes. These reforms were broadly determined to strengthen the incentives for people to start and grow businesses (i.e. take risks) and expand the pool of entrepreneurial capital.
Other key potential reforms include reducing red tape to make it easier to start new businesses and grow existing ones, changes to banking and financial regulations that would make it easier for entrepreneurs to access the financial capital needed to start and grow their businesses, and policies encouraging increased immigration of individuals with skills and other attributes that make them potential entrepreneurs.
Moreover, improving educational programs that help build entrepreneurial skills, and strengthening networks connecting universities to businesses and researchers in other institutions, could also increase the supply of entrepreneurial talent.
Finally, in one of the set’s more provocative essays, noted economists Deirdre McCloskey and Art Carden explored the positive effects of a culture that values and promotes enterprise and entrepreneurship, as opposed to disparaging such activities. The importance of their essay can’t be overstated given the recent anti-business rhetoric in Canada and many other industrialized countries.
The various policy initiatives to encourage entrepreneurship put forth by scholars in the essay series apply to different countries in varying degrees. It’s clear, however, that developed countries, including Canada, face a long-term decline in entrepreneurship that is at least partially driven by demographics.
Since demographic trends can’t be easily reversed, countries will have to improve the environment in which entrepreneurs and businesses operate to encourage more and better entrepreneurs.
Steven Globerman and Jason Clemens are editors of the just-released Demographics and Entrepreneurship: Mitigating the Effects of an Aging Population available at www.fraserinstitute.org.
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