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Canadian SME Exporters
2. Previous Research: Internationalization of SMEs
2.1 Motives and Barriers
Canadian and international studies have documented organizational and market factors that motivate and limit exporting. Stimuli internal to the organization may include excess capacity, desire to extend seasonal sales, unique organizational resources and products, increasing costs of research and development, opportunities to lever technological advantage, the need to diversify risk and resource limitations including shortages of domestic financing. Market stimuli include a shortening product and technological life cycle, increased market pressure due to the presence of multinationals, small home markets and/or saturated or declining domestic markets, and capitalizing on export stimulation measures (Litvak, 1990; Lindqvist, 1990, 1997; McDougall and Oviatt, 1991; Coviello and Munro, 1995; Lindqvist, 1997; Madsen and Servais, 1997; Miesenbock 1988; Baggchi-Sen, 1999; Etemad, 2004; McNaughton and Bell, 2000; Rasmussen, Madsen and Evangelista, 2001; Pope, 2002; Small Business Administration, 2004). Scholars also argue the owner's growth intention is central to these internal and external dynamics and that growth ambitions held by the management team shape a firm's strategies (Morris et al., 2006; Davidsson, 1989; and Wiklund et al., 2003). For example, Heinonen et al. (2004) and De Clercq (2005) note that growth-oriented owner/managers are relatively more likely to develop a substantial presence in the international arena.
Exporting is not, of course, without multiple barriers or challenges. Internal obstacles often reflect a lack of human and financial resources and inadequate management knowledge and skill. Trade impediments are reflected in the challenges of finding local partners, obtaining foreign market intelligence, limited demand, bureaucratic procedures and regulations, costs of operating abroad, need to adopt products and services, and the risks associated with foreign exchange, legislation and politics. In response, the federal government provides various support services to SMEs. The extent to which such services address market and firm level barriers is not clear as a review of the literature found little documentation pertaining to a review of Canadian SME support programs.
To explain the export process, several theories have been advanced to explain ways in which these, and other factors, lead to export activity. Each is reviewed presently.
2.2 Stage Theory
Johanson and Vahlne (1990) are among the original proponents of stage theory: that internationalization reflects a gradual acquisition, integration and use of knowledge about foreign markets. As firms grow, the enterprise accumulates resources, builds economies of scale and excess capacity or "slack". These resources enable management to direct greater efforts to export when compared to smaller, younger firms (Bonaccorsi, 1992). The complementary argument of stage theory implies that smaller firms lack the efficiencies, economies of scale and management acumen required to survive in the international marketplace (Bates, 1989; Cromie, 1990; Kallenberg and Leicht, 1991). Firms, it is argued, follow a trajectory in which penetration of new geographic territories does not occur until well after conception, commercialization and growth (Reynolds, Storey, and Westhead (1994); Kazanjian and Drazin, 1990: 145). Lefebvre and Lefebvre (2000) described this export trajectory as a continuum flowing from non-exporters with no interest in exports to non-exporting firms with an interest in exports to exporters active in other Canadian regions to exporters active in North American markets only (USA) and ultimately to exporters active in markets beyond North America. As such, it follows that exporter firms are typified as older, larger and more resource intense compared to purely domestic counterparts.
Related to the stage theory is 'entrepreneurial learning'. Organizational learning takes place over time as owners and managers develop intellectual capital used in the development of internationalization strategies and resource allocation (Johanson and Vahlne, 2003; Slater and Narver, 1995). Moorman and Miner (1998) describe such learning as 'organizational memory'. Consequently, stage theory suggests that older managers are more likely to bring to the firm the additional experience and vision requisite to exporting. Hence, we would expect owners of exporter firms to be older and more experienced than owners of non-exporters.
The theory also implies a threshold, a point at which the firm has acquired the resources required to engage in export. Empirical findings are inconclusive with respect to the influence of firm size, age and threshold capacity on export propensity (Hirsch and Bijaoui, 1985). Drawing on a sample of Israeli firms, Hirsch et al., (2003:77) write that regardless of industry, productivity, labour and capital intensity or product characteristics "the minimum firm size needed to engage in exports is 20 employees". Canadians Lefebvre and Lefebvre (2000) and Julien, Joyal and Deshaies (1993) also examined export propensity within the manufacturing sector. Both conclude for a positive relationship between export propensity and firm size. For example, Julien and colleagues (1993) report a size threshold of approximately 40 employees among manufacturers beyond which size appears to have diminishing impact. Conversely, Calof (1993: 67) also employed Canadian data but reports an inverse correlation between firm size and degree of internationalization: "…large firms appeared to have lower levels of international sales intensity than did small- and medium-sized firms". Kirpalani and MacIntosh (1980:83) found that age is associated with export performance, but again the association was negative.
One explanation for the lack of empirical support is the observation that stage theory of internationalization was formulated in the 1980s, at a time when trade and operational barriers may well have limited the engagement of small firms in international markets. As Etemad (2004) notes, the increasing homogenization of markets, the international nature of human capital, and the speed, efficiency and decreasing cost of communication and transportation now act as catalysts that increasingly enable even the smallest of firms to export. Arguably, then the forces of change have enabled entrepreneurial firms to exploit opportunities in international markets, markets that had, heretofore, been almost exclusively the province of large firms.
The above argument is best evidenced by the existence of international new ventures (INVs), firms that export from inception and thereby challenge directly the stage model of internationalization (Oviatt and McDougall, 1994; Harveston et al., 2001; Zahra, 2005). Further discussion about INVs is presented within the discussion about network theory.
Therefore, to the extent that the stage theory is a reliable theoretical explanation of the internationalization process, we expect that older, more experienced business owners who operate larger firms are more likely to export compared to their domestic counterparts.
2.3 Resource-Exchange Theory
An alternative explanation the exporting process to stage theory is known as resource-exchange theory. Zacharakis (1997) argues that exporting is predicated on "transaction efficiency", in which "…organizations enter into [international] transactional relationships because they cannot generate all necessary resources internally". According to resource-exchange theory, international expansion is based on accumulation of firm level tangible and financial assets as well as intellectual resources that include such human attributes as growth orientation, management experience and knowledge, networks and command of foreign languages (Oviatt and McDougall, 1995; Eriksson et al., 1997; Reuber and Fischer, 1997; Dhanaraj and Beamish, 2003). To export, SMEs seek to enhance their resource base and mitigate transaction costs; for example, by partnering in foreign markets to offset market risk (Pfeffer and Salancik, 1978 as cited by Westhead et al., 1994).
This theory differs from stage theory in that it does not assume that acquisition of organizational resources proceeds in a linear manner. The theory also helps to explain differences in export propensity associated with owners' managerial or entrepreneurial experience and acumen (Dhanaraj and Beamish, 2003). For example, growth-oriented exporters are characterized as having more innovative capabilities among the management team (for example, ability to undertake R&D, knowledge intensity and unique know-how) as well as organizational resources (for example, technology, employees, revenue) compared to domestic counterparts (Lefebvre & Lefebvre, 2000; Erlich et al., 2001; Delmar et al., 2003). Technology and innovation may also be among the organizational resources that lead to foreign trade.
Resource-exchange theory is supported by empirical studies that have found that internationalization of SMEs is particularly common among technology- and intellectual-intensive (knowledge-based) enterprises as well as manufacturing firms (Beamish and Munro, 1986b; Cavusgil, 1984; Baldwin, 1994; Beamish and Munro, 1986b; Seringhaus, 1993; Therrien and Doloreux, 2007). These observations may be a product of knowledge-intensive firms being less constrained by distance or national boundaries and thus, better able to take advantage of international opportunities. By comparison, non-knowledge-based or 'traditional' firms may be more dependent on fixed, static and consequently less mobile assets (Yli-Renko et al., 2002). De Clercq (2005), Yli-Renko et al. (2002) and Nummela et al. (2005) are among those who recognize knowledge as a central resource for international growth. For example, manufacturers with particular technical and intellectual capital are export dependent and appear to rely heavily on foreign markets (Cavusgil, 1984; Beamish and Munro, 1986b; Seringhaus, 1993; Baldwin, 1994). Beamish and Munro (1986a and b) also report that "high-technology" Canadian products were positively associated with export intensity. Similarly, drawing on a sample of Canadian service firms, Therrien and Doloreux (2007: 18) conclude that exporting is positively correlated with higher sales from service innovation and that "…exporters appear to be in a better position to commercialise their innovative [service] products".
Again, however, the relationship between resources and export propensity is complex in that other studies report that the nature of technology or innovation, industry maturation and product standards also influence export propensity (Kirpalani and MacIntosh, 1980; Beamish, Craig and McLellan, 1993; Therrien and Doloreux, 2007).
To explain further the nature and importance of organizational resources, network theory provides yet another lens on the attributes of export-oriented firms.
2.4 Network Theory
Network theory is a third theoretical paradigm of internationalization, one that is often cited in explanations of international new ventures. This perspective stresses the role and impact of external resources to the firm and interdependencies among network players. Dana et al., (2004) speculate that, in an international setting, networks may be linked to actors' access to strategic resources. Direct relationships provide control over resources through ownership or knowledge while indirect relationships provide access to resources through collaboration. Networks serve to speed internationalization by providing synergistic relationships among partners at various stages in the value chain (Dana et al., 2004; Jones, 1999). To the extent that network theory holds, owner or management team knowledge may be retained outside the organization and incremental acquisition of corporate knowledge and resources would no longer be a prerequisite to exports. As such, reliance on more hybrid strategies to export circumvents lack of internal corporate export expertise. Business acumen that is reflected in network or social capital may act as substitutes for traditional financial and labour assets.
This is a rationale presented to explain the existence of international new ventures (INVs), firms that by definition defy the principles of stage theory (Knight and Cavusgil, 1996). Scholars have also argued that networks are a precondition for international growth, as they facilitate the acquisition of experiential knowledge about foreign markets (Coviello and Munro, 1995, 1997; Crick and Jones, 2000; Lindqvist, 1997). Moreover, Hallén (1992) argues that personal and business networks act as communication infrastructures through which common interests are shared.
A review of literature hints that INVs operate disproportionately in technology- and knowledge-intensive sectors, sectors in which innovation and networking are crucial. McDougall (1989: 390—391) was among the first to suggest that INVs may be concentrated in particular industries: she identified structural characteristics of industries in which INVs compete. Such industries are characterized by market interdependency, with the consequence that: "a strategic action in one country will concurrently impact other locations" (Roth and Morrison, 1990). Furthermore, some industries may be "global", where SMEs must "fit" the external export-oriented market context (Cvar, 1984; Hamel and Prahalad 1985; Bartlett 1985; Roth and Morrison, 1990). Given the above discussion, we expect that the owners of INVs will be growth oriented and operate firms primarily within manufacturing and knowledge-intensive sectors with above average investments in R&D compared to domestic new ventures. Network theory also holds implications for immigrant entrepreneurs. Amatucci and Young (1998) observed that even though immigrant entrepreneurs may face domestic challenges (for example, limited or lack of name recognition, cultural unfamiliarity and language barrier), they may bring to the firm resources such as foreign language competencies, networks and international work experience — assets associated with export propensity (Reuber and Fischer, 1997). Oviatt and McDougall (1994), Madsen and Servais (1997) and Crick et al., (2001) also argue that immigrant business owners draw on international networks to facilitate exporting during the launch phase of their ventures.
While the above three theories (stage, resource-exchange and network) provide partial explanations about the influences of owner and organizational resources on exporting, they do not address the recent empirical finding that majority female-owned businesses are significantly less likely to export compared to majority male-owned businesses (Industry Canada, 2006b). Accordingly, it is useful to consider how feminist theories might relate to export propensity.
2.5 Feminist Theory
As noted previously, the gender composition of the ownership team appears to be related to export propensity.7,8 This outcome has too quickly been dismissed by researchers and policy makers as an artefact of gender differences in systemic factors such as firm size and sector (for example, compared to firms owned by men, female-owned firms tend to the smaller, younger and concentrated in sectors in which exporting is less common). However, it is not clear to what extent the gender difference in export propensity arises from systemic factors (for example, the tendency for female-owned firms to be in the services and retail sectors) or whether female-owned firms face barriers beyond such systemic factors. There appears to be no work that has compared export propensity across gender of ownership while allowing for systemic factors. Given that women hold a share of ownership in 47 percent of Canadian SMEs, the failure to consider the influence of gender on export propensity constitutes a bias in the theoretical and empirical discourse about the internationalization process of SMEs. Moreover, in the event that female-owned firms are still less likely to export after allowing for systemic factors, opportunities for economic prosperity may be being foregone.
To understand better the association between gender and firm performance, we draw on the work of Ahl (2006: 596-7) who describes two broad schools of feminist theory that are potentially relevant to understanding export propensity: liberal feminism (where men and women are viewed as "essentially similar") and social feminism (in which men and women are viewed as "essentially different"). These perspectives are echoed in conflicting remarks made by Canadian women business owners, some of whom argue that gender does influence their export capability and others who say gender does not so affect them. Likewise, different perceptions about the need for gender-focused SME policy and programs have been noted (Orser, et al., 2004). It follows from liberal feminism that owners and firms that demonstrate equivalent motives (intentions), managerial acumen and resources perform at comparable levels and should be equally likely to export. Unexplained gender differences may be attributable to explanations presented in social feminist theory, a theory that suggests the experience of male and female business owners is essentially different. These differences may also be evidenced in the process of internationalization of the firm.
Only two peer-reviewed studies appear to have examined gender-related barriers to export. Both sought to disaggregate export related from general or operational barriers to growth. Among a study of 165 women exporters and 89 export planners, Orser, Riding and Townsend (2004) report that 60 percent indicated gender to have played a role in the management practices of their firms.Footnote 9 Principal gender issues were cultural and experiential differences, including the view that women business owners are not taken seriously; perceived lack of respect by (foreign) male business owners; businessmen who explicitly refused to do business with women; bravado, physical gestures and chauvinism; clients who verify the female business owner's decision through a male member of staff; the assumption that the business is owned by men; differences in management experience and style of doing business; and different or more limited professional networks. Other gender issues reflected perceived gender discrimination by lending institutions; differences in management experience and style of doing business; and limited professional networks. The analysis indicated that "gender aspects of export management" were generalized across sector, export readiness, and all other descriptive variables including size and age of firm, export status (start up versus emergent exporters) owner's marital status and presence of dependents.
However, not all women exporters cited gender-related barriers to international trade. For example, among one sample of 7 'award winning' women exporters, none reported that being a woman created additional challenges for them either in international trade or in maintaining work/life balance (Reavley, Litchy and McClelland, 2005). Orser et al., (2004) also noted that 24 percent of women exporters and export planners cited no gender challenges and an additional 14 percent of women owners indicated gender to be an advantage. Gender differences were also perceived to be secondary to operational and financial challenges. Finally, it is important to remember that perceptions influence decision making. For example, if a women business owner perceived that she will encounter gender-related barriers in export, she may be less inclined to seek international expansion. If a women business owner perceives that her firm is deemed 'less credible' than one owed by a male, she may forgo an international bid (Atlantic Canadian Opportunities Agency, 2003).
This discussion serves to illustrate that gender influences are closely intertwined within firm and owner attributes, as well as factors associated with firm growth. These observations present two related questions: are gender differences in export propensity associated with owner and firm level attributes; and, do women business owners experience unique gender-related barriers to international trade? Understanding the relative influence of each is critical to the development of export stimulation programs and policies. For example, if gender differences are primarily associated with firm and owner attributes, remedial strategies might best be focused on development of the firm (helping to make female-owned firms "export ready"). If however, gender differences are unexplained by firm and owner level attributes, market interventions should be targeted at identifying (external) market impediments such as gender discrimination and other barriers to international trade. Finally, theory and empirical studies document the association among owner's growth orientation, managerial experience, gender, visible minority and residency status and the likelihood to export.
To bridge these theoretical explanations of export propensity, we now turn attention to the concepts of export thresholds.
2.6 Production Functions, Thresholds and Export Capacity
Empirical studies that have examined the stage theory of internationalization have assumed the presence of size thresholds, where exporting is relatively unlikely below the threshold and relative more likely above the threshold (Julien, et al., 1993; Hirsch and Bijaoui, 1985; Mittelstaedt et al., 2003). Implicit in this literature is the direction of causality: that exporting is a consequence of being larger. However, it is not clear whether firms export because they are larger or whether firms are larger because they export. The threshold implication of stage theory seems to posit the former whereas the traditional economic theories of production imply the former. The previous sections have shown that export propensity appears to be associated with a variety of factors and that size of firm is among these but it remains unclear whether exporting is a consequence of size or if size is an outcome of exporting. In addition, the concept of a size-related threshold — especially if size is measured by the stock of the firm's labour — ignores the possibility that firms can substitute other organizational resources such as capital and technology for labour (and vice versa) and that technology and management experience can also play a role. Hence, it is arguable that a variety of combinations of inputs enable the firm to achieve the levels of output and acquire resources needed for foreign trade. These ideas have historically been embraced by the theory of production.
Production theory posits that output (in this context, the capacity necessary for export performance) depends on the combination of labour and capital deployed by the firm, moderated by the firm's technology and management capability. Production (export propensity) depends on both capital and labour (and, perhaps other resources) and that these inputs are deployed under the terms of a particular technological process. As such, it is reasonable to review the concept of a size threshold in a way that takes into account the potentially complementary roles of capital, technology/innovation and management acumen.
Various functional forms of production functions have been advanced in economics and the functional form and the values of the parameters vary across firms and industry sectors.Footnote 10 One widely-used form of production function used is the Cobb-Douglas model:
Where:Footnote 11 Y = output; L = labour input; K = capital input; A, α and β = constants determined by technology.
For a given firm, the Cobb-Douglas function can be estimated as a linear relationship by taking logarithms of both sides of the model such that:Footnote 12
This formulation lends itself to the issues being analyzed here and can be extended to account for management experience and other potential factors of production. If the stage theory of export development is true then, ceteris paribus, exporters would exhibit higher levels of production (Y) than non-exporters because they are the firms that must have grown to the level where exporting is possible. Higher levels of output associated with exporting would then be realized through higher levels of inputs (K, L), from application of different technologies (A, α, β), or from greater managerial acumen. The resulting testable proposition is that, other factors being held constant, exporters exhibit higher levels of production than non-exporters. Moreover, the firm's stocks of capital and labour, as well as management acumen, would also be factors. To the extent that production functions vary across sectors, industry would also be a factor.
2.7 Summary of Study Propositions
The above theories serve to inform this research about the anticipated relationships among firm and owner level attributes and export propensity. In summary, stage theory suggests that the likelihood of export is associated with older and larger firms. Resource-exchange theory moderates this argument by suggesting that the firm's aggregate resources (including technology and management acumen) trump time and that the linear (life cycle type) model of firm growth does not adequately account for the propensity to export. Network theory extends the resource-exchange model to include non-physical assets, including social and network capital and strategic alliances. Intellectual capital, technology and innovation are also key resources associated with early exporting. Feminist theory provides a gender lens on the above arguments, suggesting that even having accounted for multiple owners and firm level differences, women business owners confront systemic gender-based obstacles to export — obstacles not accounted for by traditional management theory. Finally, the production function serves to bridge these theoretical arguments by suggesting researchers must move away from simplistic and univariate models of export propensity (for example, where size threshold are defined as number of employees). Export performance is more accurately described through the calibration of multiple organizational resources, including capital, management acumen and technology/innovation. To examine empirical these theoretical perspectives, Table 1 presents a summary of study propositions.
*Theoretical rationale(s): (1) Stage Theory; (2) Resource-exchange Theory; (3) Network Theory; (4) Feminist Theory; and (5) Production Function.
Footnote 7 The Canadian Bankers Association estimates that in 1997 and 1998, approximately 10 percent of exporters were firms owned exclusively by women. Drawing on 2001 data, Carrington (2006) reports that 7 percent of majority, female-owned Canadian firms export goods and services compared to 13 percent of majority male-owned firms. The Washington-based National Foundation of Women Business Owners (1995: 2) reports that in 1992, 13 percent of US female-owned firms "were active in the global marketplace, either importing or exporting goods or services" and (1998, NAWBO) that in 1998, 8 percent of women business owners were involved in international trade.
Footnote 8 The bulk of evidence indicates that inputs do not fully explain gender differences in firm performance. Fischer (1992: 8) reports on differences between men and women with respect to age, experience, education: Having controlled for elements of managerial capital, "...none of the variables studied accounted for [performance defined as] the greater number of employees, higher sales, and greater sales per employee characteristic of men's firms". Subsequent work by Fischer, Reuber and Dyke, (1993: 152) found: "Regressions undertaken to examine predictors of a range of business performance indicators suggests that women's lesser experience in working in similar forms and in helping to start-up may help to explain the small size, slower income growth and less sales per employee of their firms." Similarly, Orser (1997) employed logistic regression and a composite estimate of managerial capital to 'high' and 'low' growth performance firms. Results again indicated that low growth firms were characterized as comparatively young firms, owners with less diversity of management experience, owners who did not seek to expand, and being female. Conversely, being male, diversity of management experience, intention to grow was associated with high growth performance firms. Conversely, Papadaki and Chami (2002) report no unexplained gender effects on firm growth performance, having controlled for firm-related factors (for example, age, rate of growth, sector, level of innovation, regional growth strategies, location) and owner-related factors (for example, growth motive and networks). Furthermore, Papadaki and Chami (2002: 43) report that "...Lower performance of women-owned firms was related to access to networks or economic activity the geographic markets served".
Footnote 9 The original report (by Orser, Fischer, Hooper, Reuber and Riding, 1999) can be downloaded at DFAIT: http://www.dfait-maeci.gc.ca/businesswomen/beyondborders-en.asp.
Footnote 10 Thompson, A. (1981) Economics of the Firm, Theory and Practice, 3rd edition, Prentice Hall, Englewood Cliffs.
Footnote 11 If α + β = 1, the production function has constant returns to scale. If α + β < 1, returns to scale are decreasing, and if α + β > 1 returns to scale are increasing. See http://en.wikipedia.org/wiki/Cobb-Douglas, accessed February 10, 2007.
Footnote 12 If α + β = 1, the production function has constant returns to scale (if L and K are each increased by 20%, Y increases by 20%). If α + β < 1, returns to scale are decreasing, and if α + β > 1 returns to scale are increasing. Assuming perfect competition, α and β can be shown to be labour and capital share of output. See http://en.wikipedia.org/wiki/Cobb-Douglas, accessed February 10, 2007.
