Growth Firms Project Chris Parsley, Manager Small Business Policy Branch Industry Canada From Data to Research for Policy OECD Growth Firms Meeting

2 Growth Firms Project began in 2002 with the aim of 1) Understanding growth firms: who they are, where they are located, how much do they contribute to employment growth 2) What are some of the factors that are associated with growth firms: exporting, age of firm, innovation etc., 3) Gain some insights into the process of growth Is High Growth = High tech? Does firm growth have a “Hockey Stick” profile Are there risks to growth? Work was undertaken jointly with Statistics Canada Introduction

3 Growth of What for What? Policy Goal determines the unit of analysis –Employment –Revenue/Turnover –Payroll –Exports –Productivity Research of Ontario growth firms finds that sales grows twice as fast as employment in high growth firms –High growth firms were defined as having at least 50% growth in sales over 3 years, and this was equivalent to at least 22% growth in employment

4 Industry Canada Work on Growth Firms Industry Canada’s work was constrained by data availability; growth was measured with employment Employment measure was Individual Labour Unit –One ILU is assigned to each person that receives a T4 (income summary statement for personal income taxes) –If somebody receives more than one T4 slip, their “unit” is distributed among issuing businesses in proportion to income earned Strengths: –direct count, independent of industry average wages –no double counting in case of multiple employers Weaknesses: –hours of work are not accounted for (i.e. there is no distinction between part- time, seasonal work and full-time work) –Working-owners that are not on their own payroll are not counted

5 Methodology and Employment Growth Definition Private and public sectors were separated Firms assigned to growth category based on their growth over first 4 years of observed period (10+ years): Employment growth criterion (first 4 years) Hyper-growth: 150%+ Strong growth: % Slow growth: 0-50%Declining: negative Firms then tracked over medium term and examined by growth category, size, industry, province, etc One phase linked to Exporter Registry to examine relationship between growth and exporting Able to also examine: –growth over different segments of the business cycle –the ability of businesses to maintain growth –growth by firm age –firm survival –growth patterns of different cohorts of business start-ups

6 Data Sources: Primary (LEAP) Longitudinal Employment Analysis Program (“LEAP”) was principal data source Administrative database that covers all employer firms –Constructed from tax records –Annual data –Longitudinal –Covers all regions, industries and firm sizes –Variables include: Industry, Province, Employment, Payrolls Strengths: –Comprehensive –Longitudinal –Firm-level data: enterprise Weaknesses: –Very large database; “noise” –No age of firm variable (except for start-ups)

7 Data Sources: Linkages (Exporter Registry) Export data were linked to LEAP data by matching business numbers, business names and pools of employees Exporter Registry covers virtually all merchandise exports; annual data Variables include: value of exports, destination of exports, product, industry Strengths –Complete –Firm level Weakness –Covers only merchandise trade; not possible to capture other cross border activities

8 Data Detail By Size (employees): –Firm size categories can be defined according to user needs By Industry: –70 2-digit SIC-1980 (early phases of the project) –3-digit NAICS mapped onto 2-digit SIC scheme to reduce data suppression due to confidentiality –Easy to approximate the private sector By Provinces and region: –Covers all provinces and territories –It is possible to move to a sub-provincial level, subject to confidentiality restrictions. Time Period: –Annual data, longitudinal –Initial study used SIC –Using NAICS data, the first usable year is 1993; most recent year is 2005 –Sub-periods can be defined according to user needs Wage and wage growth data also available

9 Data Challenges Ensuring that false entries and exits are corrected Hours worked data not available Working owners that are not on their own payroll are not captured in the data Revenue/turnover data are not readily available Data linkages are possible, but gaining access to the data is not always easy Export data cannot fully capture international business activities

10 Insights and Policy Implications Growth firms are very important to the economy: A small number of firms create a huge number of jobs Small businesses are important in the growth process Growth firms found in all industries, not only high tech The growth cycle is not always continuous: some declining firms reinvent themselves, some high growth firms go through slower periods of growth Strategies for growth suggest there is often a risk-high growth trade off Start-up is not the key, but ensuring conditions for growth Particular challenges for growth in small firms, e.g. financing, management skills No picking winners Difficult to apply universal policy prescriptions as business strategies for vary from firm to firm Role for government is to ensure that the conditions for growth are such that firms can maximize their opportunities for growth.

11 Concluding Remarks There are important implications from this work: –Getting policy for growth firms right will have huge payoffs for the economy –Increasing small business’ participation in exporting can help diversify Canada’s exports –Entry into emerging markets will become increasingly vital Next Steps: –Explore other data linkages to get information on revenue and other financial data and R&D data –Examine different strategies for internationalization, not simply exporting Web site for further information:

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