 | | Louis Theriault
Director, International Trade and Investment Centre |
No doubt—many small and medium size enterprises (SMEs) in Canada are currently under pressure. Adapting quickly to the recession, which rapidly put the brakes on sales growth last year, is an ongoing challenge. This short term focus is paramount in order to remain in business until the next quarter. That said, SMEs also need to keep an eye on their medium-term plan for when the recovery takes place. One key feature of this world economic recovery will be that global trade dynamics will again be the cornerstone on which countries build their collective wealth. The power of these trade dynamics is such that all SMEs need to understand what role they wish to play and define a plan accordingly. The specific role played is a secondary question; the key is to first understand the position of the enterprise in the global value chain (GVC) in order to determine how to refine its competitive edge in the market place. This edge is fundamental as it is directly linked to the future of our standard of living and is embedded in Canada’s future productivity growth path.
SMEs are key players in this process, given that they recently represented more than a third of Canadian exports, over 40 per cent of Canadian GDP and about 60 per cent of total private sector employment. The critical mass SMEs represent in Canada’s industrial fabric is such that all stakeholders from SMEs business owners, to industry groups and governments, need a clear understanding of how SMEs integrate into GVCs -- or in other words, how they internationalize. First, it is important to recognize that this strategy comprises many dimensions. Specifically, a business adopts one or more of the following means when becoming internationalized: it breaks down its supply chain importing inputs, invests in plants and equipment abroad, encourages investment by foreigners in its own operations, makes sales to domestic firms that are export oriented, makes use of foreign affiliates, and, finally, an internationalized firm can also export its products or services abroad directly.1
Opportunities exist for SMEs to take advantage of recent developments in global markets and become international players in their own right. The flexibility of smaller enterprises makes it possible for them to integrate into GVCs and play a role in the increased fragmentation of production across geographic boundaries. The sharp rise in services trade, where scale is less critical in determining competitive advantage, and the surge in foreign direct investment also provide a chance for SMEs to compete on a world scale. Especially in knowledge-based endeavours—where ingenuity, speed, and adaptability are crucial—smaller players can find niches in global markets.
Also, larger businesses and governments can support the internationalization of SMEs in a number of ways. In fact, the international success of larger companies can depend on how well they interact with smaller companies and include them in their value chains. Industrial clusters and networking provide a way for businesses to share ideas, resources, and risk. Through this type of cooperation, larger enterprises can help SMEs overcome some of the biggest obstacles to international participation. Governments are already active in providing business advice, financial assistance, and other kinds of support to firms seeking to increase their international presence. There might be some scope for encouraging foreign direct investment by SMEs. Governments might also consider shifting some of their emphasis from supporting established firms to encouraging “born global” SMEs. One way of doing so might be to focus government assistance on the specific attributes and objectives of SME owner-managers who have expressed an interest in foreign markets. Finally, reductions in trade barriers, improvements to transportation infrastructure, and cooperation with our trading partners on tax, security, and intellectual property matters are important to all exporters but particularly so to SMEs, since these barriers tend to affect smaller entities disproportionately.
Globalization is not an option for all SMEs. For those that do participate, however, it brings concrete benefits. Integration with global markets brings advantages in the form of technological know-how and exposure to diverse products and services. The greater competitive pressure that comes from participating in export markets can spur productivity and innovation. Access to a larger market leads to expanded sales, which can help firms achieve economies of scale and reduce unit costs. With the evolution of technology, advances in transportation, and reductions in trade barriers, all businesses have the potential to participate in global markets.
1 Going International? Insights from SMEs, Business Development Bank of Canada's Entrepreneurial Insight, Winter 2009