Entrepreneurship has rapidly reached buzzword status in the world of economic development. Cities use the word as a policy goal (“We want more entrepreneurs!”) and as a marketing slogan (“We’re the most entrepreneurial city in Canada!”). But how can we measure a city’s level of entrepreneurship? You would hope we’d be able to, so that we can see our progress against policy goals or back up our marketing efforts with some facts. Unfortunately, it’s more challenging than you might imagine.
First, we need to consider who we define as an entrepreneur. The most basic definition is probably the one that first comes to mind: an entrepreneur is someone who owns a business. Using this definition, an entrepreneurial city is one where a high share of the population is self-employed. This is how Edmonton stacks up against other Canadian cities in terms of self-employment:
On this measure of entrepreneurship, Edmonton is not doing so well relative to our peers. But something about this ranking doesn’t make intuitive sense: should Kitchener-Cambridge-Waterloo, home of Blackberry and a strong tech startup sector, really be near the bottom of the ranking while Victoria, home of government workers and retirees, is on top? The problem with the self-employment measure is we’re not really using the right definition of an entrepreneur.
Typically when people talk about entrepreneurs in the economic policy context, they’re referring to a state of mind or type of person rather than a labour market status – an entrepreneur is a risk-taker, an innovator, someone who builds fast-growing businesses. A city’s level of self-employment doesn’t really capture these attributes because individuals move into self-employment for a variety of reasons including job loss, semi-retirement, or lifestyle choices. Further, small business data shows that the majority of self-employed individuals are not engaged in innovative activities and have no plans to substantially grow their business. There’s nothing inherently wrong with this type of ‘mom and pop’ or lifestyle self-employment, but it’s not what cities are targeting when they talk about entrepreneurship.
In theory we could also look at the rate of new business creation to measure entrepreneurship. This type of data forms the basis for the Kauffman Index of Entrepreneurial Activity, a prominent US-based indicator of startup activity. This data improves slightly on the self-employment measure, but does suffer from the same issue of not capturing intentions. Either way, it’s a moot point for our purposes because data for Canadian cities just isn’t available.
What cities really want to foster when they talk about entrepreneurship are the innovative, disruptive entrepreneurs who deliver economic growth and job creation through starting fast-growing companies. Using this definition, an ideal dataset would give us a city’s number of self-employed individuals, their reasons for being self-employed, and their expectations about the future growth of their business. As you can probably guess, there is no ideal dataset. If we want to measure this type of entrepreneur, we need to look for some indicator of high-impact entrepreneurship, essentially focusing on results – whether a city’s entrepreneurs have created large, innovative businesses – rather than intentions.
Swedish researchers Magnus Henrekson and Tino Sanandaji have done just that, using data on the world’s billionaire entrepreneurs to estimate entrepreneurship across countries. Their research equates billionaire entrepreneurs with the type of high-impact entrepreneur we’re interested in measuring, which makes some intuitive sense given that their data includes the founders of many of the world’s biggest entrepreneurial success stories from Microsoft to Starbucks. Henrekson and Sanandaji have generously shared their data on Canadian billionaires with me, and I’ll be using that data to estimate entrepreneurship in Canada’s cities in Part Two of this post.