and examine the innovation process at the firm level. today, i would like to highlight some of the major trends in firm behaviour that have given rise to vigorous debate among economists. first, i will describe how the data point to declining dynamism in the canadian economy. i will then offer some possible explanations for this trend and will review how dynamism and other factors affect economic growth. i will conclude by briefly discussing the implications for monetary policy and achieving our inflation target. declining dynamism let ’ s start with a simple intuition : in a dynamic economy, innovative companies are expected to emerge and replace companies with older business models. think of sicard, whose invention clearly brought huge long - term benefits but also led to job losses, especially the jobs of workers who cleared roads using horsedrawn snowplows. as such, a strong and dynamic economy should be driven, in part, by the entry of new firms and the exit of less - viable firms. 2 this renewal involves a needed reallocation of labour toward growing industries. 3 this dynamic process of innovation was called “ creative destruction ” by the economist joseph schumpeter in the 1930s. data collected by statistics canada show that there has been a surprising and sustained decline in the entry rate of new firms since the early 1980s. relative to total active firms, the entry rate of new firms was 24 per cent in 1984. it has decreased by half since then, which is a considerable drop ( chart 1 ). the firm exit rate has also declined — but by less — from almost 17 per cent in 1984 to about 11 per cent, according to the most recent data. the decline in entry and exit rates is also reflected in the weaker rate of labour reallocation. 4 for the past 10 years, new firms have created fewer jobs than 1 c. a. wilkins, “ blame it on the machines? ” ( speech to the toronto board of trade, toronto, april 18, 2017 ). 2 s. s. poloz, “ reconstruction : rebuilding business confidence in canada ” ( speech to the oakville chamber of commerce, burlington, ontario, june 19, 2013 ). 3 of course, this constant reorganization of economic activity can be facilitated by assistance programs such as employment insurance. 4 d. leung and s. cao, “ the changing pace of labour reallocation in canada : causes and consequences, ” bank of canada review ( summer 2009 ) : 31 – 41. - 3before. simply put

, “ reconstruction : rebuilding business confidence in canada ” ( speech to the oakville chamber of commerce, burlington, ontario, june 19, 2013 ) and “ returning to natural economic growth ” ( speech to the vancouver board of trade, vancouver, british columbia, september 18, 2013 ). - 8output would lead to a long - term improvement in the standard of living of canadians. chart 5 : the rate of entry for new firms may have finally stabilized four - quarter moving average, quarterly data % 4. 0 3. 5 3. 0 2. 5 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1 2014q1 2015q1 2016q1 2017q1 source : bank of canada calculations using statistics canada's quarterly firm creation data last observation : 2017q1 conclusion in recent quarters, canada ’ s economic growth has been strong, exceeding that of all the other g7 economies. the sharp depreciation of the canadian dollar following the drop in oil prices may have contributed to the growth of gazelles by facilitating access to external markets and increasing the benefits of greater economies of scale. what i find encouraging is that, despite the decline in dynamism, the sectoral adjustment required as a result of the fall in oil prices happened within the anticipated time frame. this episode shows that the canadian economy is still flexible enough to absorb a major shock. that said, significant challenges remain, as our productivity is still well below that observed south of the border. 18 productivity growth could certainly be increased by reducing the barriers that future gazelles may face, which would further stimulate the canadian economy. a report from the world bank notes that canada is one of the easiest countries in which to start a business. 19 on the other hand, it is nevertheless more difficult for businesses to grow beyond a certain point, possibly because of the size of our markets. the free trade agreement with europe is an encouraging example, because it can help our gazelles grow. here in canada, the agreement signed earlier this year on reducing barriers to interprovincial trade is also a good sign, although several areas are still excluded. in addition, new gazelles are likely to have more difficulty 18 centre for the study of living standards, “ aggregate income and productivity trends : canada vs united states, 1961 – 2015. ” 19 world bank, “ doing business : measuring business regulations, ” 2017. - 9financing intangible investments, which they increasingly need