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Canadian SME Exporters
1. Introduction
Hamid Etemad (2004)
Canada is an export-oriented nation. The Department of Foreign Affairs and International Trade (DFAIT) (2006) reports that exports account for over 40 percent of Canada's gross domestic product. International trade is also one of the fastest-growing areas of the Canadian economy. Small and medium-sized enterprises (SMEs) play a fundamental role in Canada's export performance, given that these firms comprise the majority of organizations that sell goods and services abroad (Halabisky and Parsley, 2005). As such, SME export growth and commercial performance are linked directly to Canadian economic welfare (Henriques and Sadorsky, 1996; Lefebvre and Lefebvre, 2000; Awokuse, 2003; Baldwin and Gu, 2003).
The objective of this empirical study is to document the profiles of Canadian SME exporters. It is anticipated that this report will serve to inform federal policy discussions about the internationalization of Canadian firms and globalization strategies. It is also anticipated that this work will serve as a primer for trade commissioners, scholars, lending institutions, SME trainers and other stakeholders who seek to assist growth-oriented business owners expand into the international marketplace.
The rationale for this report stems from four roots. First, like many OECD countries, Canadian export and trade policy has been founded on the assumption that the internationalization process follows a series of stages. Young firms begin small and trade locally. Firms then expand regionally and nationally, such that they eventually become established so that they can operate internationally. Coined the "stage theory", this perspective is reflected in program eligibility criteria (for example, firm size, tenure) and forms the basis of export stimulation programs targeted primarily at manufacturers and goods producing firms (technology-based producers).Footnote 1 However, increasing anecdotal evidence suggests that some firms export from inception, particularly among service and knowledge-intensive firms. If this is true, stage theory, and hence the assumptions that underlie trade policy, may not adequately reflect the process of internationalization. Thus, this work seeks to provide readers with a better understanding of the processes by which Canadian SMEs come to engage in exporting.
Second, stage theory supposes a minimum size threshold below which it is unlikely that a firm will engage in foreign trade. Previous Canadian research has investigated export propensity by tracking the likelihood of export as a function of firm size (for example, total revenue, number of employees). This approach has at least two significant shortcomings. It may confuse cause with effect (e.g., does the firm export because it is larger — or is the firm larger because it exports?). The approach is also at odds with widely received economic theory that firms increase the level of output (so as to engage in exporting) by substituting stocks of labour with capital, through innovation and technology, and by deploying management experience. This paper expands the discussion about threshold size(s) by comparing estimates of the production function for particular categories of firms. This work provides readers with insights with respect to the relative extent to which exporters and non-exporters depend on labour, capital and experiential inputs. It is anticipated that this information will further inform discussion about Canada's lagging productivity performance (see Mobilizing Science and Technology to Canada's Advantage, 2007).
Third, this report is the first representative, cross-sector Canadian study that presents a comparative profile of exporters and non-exporter firms and the attributes and incidence of international new ventures. The authority of this work is vested in the sample data employed, work that relies on a large-scale (more than 12,000 cases), carefully stratified, comprehensive sample of SMEs. To date, related studies have drawn on non-representative samples drawn from Canadian government registries and programs,Footnote 2 commercial and industry directories,Footnote 3 organization membershipsFootnote 4 and/or specific sectors – most often manufacturing or technology-based industries. Numerous Canadian researchers have noted that it is difficult to generalize from such findings.Footnote 5 Thus, the absence of cross-sector studies has particularly limited understanding about other sectors such as services and early-stage enterprises (Conference Board of Canada, 2006).
Finally, given the plethora of potential explanations and lack of theoretical rigour, it is not surprising that there is little convergence in the literature about the attributes of export-oriented SMEs. Dhanaraj and Beamish (2003) are among many who have called for parsimonious, theory-based research, research that considers the interrelationships among managerial, organizational, entrepreneurial and technological resources (see also Lefebvre and Lefebvre, 2000; Andersson and Wictor, 2003; Zahra, 2005). Accordingly, this research seeks to derive, based on theory and previous work, an empirically-supported model of determinants of export propensity.
To accomplish these objectives, the report is organized as follows. To establish a context for the study findings, the next section of the report presents a brief summary about the market forces that stimulate exporting, barriers to international trade and four theories that may be associated with the internationalization process of SMEs (stage, resource-exchange, network and feminist theory). Canadian and international findings associated with each of these theories are also referenced. In seeking a bridge across the four theoretical perspectives, a conceptual model of export capability is presented. This work provides a foundation for discussion about thresholds of export capability. The theoretical discussion is intended to provide readers with a sense of why certain firms export while others may not, and how owner and firm attributes may be associated with propensity to export. A summary of study propositions are noted at the end of the section.
Section 3 of the report describes the research methodology employed in the report. Section 4 then presents the empirical findings of the study. The implications of these findings are discussed in Section 5 with an emphasis on the potential implications for public policy. A list of questions is also provided to stimulate future discussion about the study findings and to guide future research. The report closes with a comment about the study limitations.
Before proceeding, it is useful to define several key terms used throughout the report.
Box 1: Definitions and Terminology
Export propensity: defined as the proportion of businesses whose owners reported that the business sold or exported its products or services outside of Canada.
Export intensity reflects the degree to which firms internationalize their operations and is measured as the ratio of export revenue to total sales.
International new ventures (INVs) are defined as firms that were created in 2001 or later and which were generating 25 percent or more of their sales from foreign markets.Footnote 6
Domestic new ventures (DNVs) are defined as firms created in 2001 or later but which do not export but rely on exports for less than 25 percent of their sales.
Established exporters (EEs) are defined as firms created before 2001 and that derive some sales from exporting. In proceeding, firms that reported that exports accounted for less than 25 percent of revenues were excluded from further analysis because the extent to which such firms were frequent or consistent exporters could not be ascertained.
Footnote 1 For example, see Clendenning and Associates (2006) review of cross-border policies and programs.
Footnote 2 Examples of frequently cited papers include Kirpalani and MacIntosh, 1980; Beamish and Munro, 1986, 1986b: Calof, 1993; DFAIT, 2006; Orser et al. 2004.
Footnote 3 See Beamish et al., 1986a and b; Reuber and Fischer, 1997, 1998; Baldwin and Gu, 2003; and Bagghi-Sen, 1998.
Footnote 4 Limitations of these sample sources are evidenced in estimates about gross Canadian export activity. For example, CFIB (1998) estimate that 24 percent of SMEs sell to foreign markets, an estimate that includes tourism-related sales. Thompson Lightstone (1998) report that 15 percent of SMEs were involved in exporting activity (does not include tourism). More recently, Industry Canada has reported that approximately 2 percent of small businesses (firms with 1 to 99 employees) and 12 percent of medium-sized firms (100 to 500 employees) export (Halabisky et al., 2005).
Footnote 5 For example: Lefebvre and Lefebvre (2000) noted that studies about exporting tend to focus on manufacturing, high-tech and high-knowledge-based businesses. Reuber and Fischer (1998) point out those studies about international new ventures (INVs) have almost exclusively sampled technology-based firms. Gemunden (1991) cited by Dhanaraj and Beamish (2003: 242), reports that more than 700 variables have been associated with export propensity, an observation that makes it difficult for policy makers and scholars to understand the internationalization process.
Footnote 6 Several definitions of international new ventures (INVs) have been presented (Knight and Cavusgil, 1996; Oviatt and McGougall, 1994). For the purpose of this research, an INV is defined as: "A Born Global", a company that has achieved a foreign sales volume of at least 25 percent within 3 years of its inception and that seeks to derive significant competitive advantage from the use of resources and the sales of outputs in multiple countries. (Andersson and Wictor, 2003: 254).
