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Canadian SME Exporters

Executive Summary

Corporate Canada, policy makers, and not-for-profit organizations have expressed concern about the quality and scope of data about both commercial businesses in the services sectors and about small- and medium-sized enterprises (SMEs) that are exporter firms (Conference Board of Canada, 2006). This report represents the first comprehensive cross-sectoral analysis of Canadian SME exporters and international new ventures (INVs), i.e., firms with significant export revenues within three years of start-up. This work draws on data from large-scale survey data to challenge several widely held beliefs about the internationalization process of Canadian SMEs, particularly within the services sectors.

To explain why some firms export while the vast majority do not, the research also draws on five economic and management theories. This information is useful for two reasons. From the research perspective, theory helps to establish the context in which to examine empirically the export propensity of Canadian SMEs. From the policy development perspective, this information may inform discussion about the assumptions embedded in Canadian export stimulation programs and policies.

The following are selected highlights from among the empirical findings from this work:

• In 2004, 8 percent of Canadian SMEs exported goods or services.
  
  
• There are substantially more firms in the professional and "other" services sectors that export than there are exporter firms in the manufacturing sector.
  • It is true that, among all sectors, exporting is relatively more prevalent among manufacturing firms (31 percent of manufacturing firms export). Because of this, considerable export policy is predicated on the manufacturing context. However, manufacturing firms account for less than five percent (approximately 64,000) of the 1.3 million Canadian SMEs as defined here. SMEs in the professional and "other" services sectors account for more 530,000 enterprises. Thus, there are more than 40,000 services firms that export compared with approximately 21,000 manufacturing exporters.
    
    
  • 21.4 percent of exporter firms operate in the wholesale and retail sectors. Knowledge-based firms, firms that have garnered considerable policy and program attention comprise 15.1 percent of exporter firms.
  
  
• Both established exporters (enterprises that export and that began trading before 2001) and international new ventures (enterprises that export and that began trading in 2001 or later) derive an average of 33 percent of sales revenues from exports.
  
  
• A high proportion of exporters earn a relatively small proportion of revenues from exports: 44 percent of exporter firms report export sales of less than ten percent of total revenue; for 52.3 percent of Canadian SME exporter businesses export sales accounts for less than 25 percent of total revenue; 15 percent of exporters report export revenues of between 25 and 49 percent of total revenues.
  • One-third of firms were deemed "export intensive" (defined as firms with export sales that exceed 50 percent of total revenue).
  
  

Owners of exporter and non-exporter firms differ significantly on three important attributes: growth intentions, gender and Canadian residency status.

• Owners of exporter firms are much more likely to profess the intention to seek growth of their firms than are owners on non-exporter businesses. After controlling for firm size and sector, firms whose owners had expressed growth intentions were more than twice as likely to be among exporter firms as firms whose owners did not seek growth.
  
  
• Owner gender was significantly associated with the propensity to export. Having controlled for potential systemic explanatory factors, majority female-owned firms were still less likely to export compared to majority male-owned firms. In other words, significant gender differences in export propensity are not fully explained by systemic differences in owner and business attributes.
  • Among established exporters, gender differences were particularly striking: majority female-owned firms are less than half as likely to export compared to firms where men comprise the majority of the ownership teams.
  
  
• Among established exporters, immigrants who have resided in Canada for less than 5 years were disproportionately more likely to be the primary owners of exporter firms.
  
  

With respect to firm-level attributes, firms that report investment in R&D are more than twice as likely to be exporter firms as firms that did not invest in R&D. Exporter firms were also significantly more likely to apply for external financing and business loans.

Among the (approximately) 287,100 SMEs that began trading in 2001 or later, approximately 21,300 reported exporting. Hence, more than seven percent of new Canadian firms are "international new ventures" (INVs). INVs operate across all industry sectors, an observation that suggests there may have been sampling biases in previous studies that have focused almost exclusively on manufacturing, technology and knowledge-based industries.

• While international new ventures are significantly smaller than established exporters their size, as measured by the number of employees, does not preclude export trade. This study finds that international new ventures achieve comparable levels of export intensity to established exporters with a smaller work force, younger and less experienced owners, and fewer assets.
  
  
• Owner profiles of international and domestic new ventures did not differ significantly in terms of age.
  
  
• Owners of international new ventures were disproportionately more likely to be new Canadian residents (or immigrants): approximately 10 percent of INV owners were new Canadians compared with less than five percent of owners of new firms that did not export.
  
  

Previous research has documented a link between export propensity and firm size: that the likelihood of exporting increases substantially once a firm has passed a minimum size threshold of more than 40 employees (Julien et al., 1997). This work confirmed this link for manufacturing firms, although it did not hold for firms in the services sectors. Moreover, it is not clear whether firms export because they are larger or whether they are larger because they export. Classical economic theory argues that labour is an input to the production process and that other factors of production (capital, management, technology) can substitute for labour: that output depends on the combination of labour and capital deployed by the firm, moderated by the firm's technology and management capability. Empirical results suggest that the production function differed significantly among exporter and non-export firms and between goods producers and services firms.

• Among both goods producers and services firms, labour and capital inputs were related to revenues to a statistically and materially significant extent. Among services firms the role of management experience was also a significant factor of production and that management experience was a particularly relevant factor of production for services exporters. The primary difference between services exporters and services non-exporters was in terms of the role of managerial experience.
  
  
• Exporter firms, both goods producers and services firms, rely slightly less on labour and more on capital compared to non-exporters.
  
  

The research team sought to consider these findings in the context of current export stimulation programs. A review of the literature found surprisingly few detailed descriptions of such initiatives. We were unable, therefore, to comment on how these findings are reflected in support programs and practices. A key recommendation of this study is the need to re-evaluate international trade initiatives in light of these findings. To encourage such research and stimulate discussion among researchers, senior policy makers and trade commissioners, a series of questions about policy and programs is presented.

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