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Average new plant operates only 9 years (June 10, 2005)

Ottawa, ON -- More than one-half of all new manufacturing plants cease production and go out of business within onl...


Ottawa, ON — More than one-half of all new manufacturing plants cease production and go out of business within only six years of starting up, according to a new study by Statistics Canada that shows manufacturing plants have relatively short lives.

The study, <I>Death in the Industrial World: Plant Closures and Capital Retirement,</I> measures the closure rate over a 40-year period for new plants in the Canadian manufacturing sector.

It uses a database developed from the Annual Survey of Manufactures for 1960 to 1999 to provide information on the likely length of life of capital invested in plants.

The study found that on average, 14% of new plants die in their first year. Over half of new plants die by the time they are six years old, while by the age of 15, less than 20% of new plants are still operational.

The average new plant operates for only nine years, or 17 years if the average is weighted on the basis of employment. These rates vary by industry.

Plants lasted 13 years, the longest average period, in two industries: primary metals, and paper and allied products. The shortest average life, fewer than eight years, occurred in wood industries.

Plant closures result from failure when firms exit an industry. But they are also associated with renewal, such as when existing firms close down plants, modernize their production facilities and start up new ones.

The high rate of plant closure has several ramifications, the most immediate of which is its impact on labour markets. It means that a job within one production facility is not likely to last a lifetime.

The closure process also results in capital losses, that is, it leads to the loss of earlier investments that the industrial system had made in productive capacity. Resources that had been used to make equipment or to construct plants to house machinery are lost.

The capital that has been invested in a plant that is suddenly shut down loses some, or most, of its value. This exit process has consequences in terms of the amount of capital that the industrial system has available to it.

The research paper Death in the Industrial World: Plant Closures and Capital Retirement, no. 33 is available free at www.statcan.ca. From the ‘Our products and services’ page, under ‘Browse our Internet publications’, choose ‘Free’, then ‘National accounts’.