Accessing emerging markets and global supply chains the key to growth
Canada’s small business sector needs to focus more on export opportunities if it is to maintain its strength and contribution to the Canadian economy, finds a new small business report from CIBC.
Currently, only nine per cent of Canadian Small and Mid-Size Enterprises (SMEs) are engaged in exporting activity, down from 10.7 per cent in 2000. The report notes that this low level of internationalization carries a significant macro economic cost given the importance of emerging markets to the global economic recovery.
“Canadian SMEs have not responded to globalization in a way that optimizes their long-term growth potential and their contribution to the Canadian economy as a whole,” says Benjamin Tal, deputy chief economist at CIBC. However, he believes that “strong growth in emerging markets and increased opportunities to participate in global supply chains due to the greater export orientation of the U.S. economy provide Canadian SMEs with an opportunity to remedy this imbalance.”
Mr. Tal notes that despite one of the deepest recessions on record, Canada’s SMEs are in a relatively strong position to take advantage of these opportunities. For the first time in the post-war era, this sector outperformed its larger corporate counterparts during the last recession thanks to a greater focus on the domestic market, which was less affected by the global downturn. This is a complete reversal of the traditional cyclical dynamics in which SMEs underperformed during recessions and outperformed during economic recoveries.
However, he says that “what shielded SMEs during the recession is impairing them during the recovery. Despite the accelerating pace of globalization over the past decade, the number of jobs created by SMEs has risen by less than ten per cent. This is half the advance seen among larger firms.”
He notes that a number of global studies have shown that internationally active SMEs outperform their domestic-focused counterparts. Recent reports in the EU found that international SMEs create significantly more jobs, and are far more innovative. Similar results were found by Industry Canada in a 2006 report which indicates that no less than 65 per cent of fast growing SMEs in Canada were engaged in exports compared with only a third who were domestically oriented.
Currently, SMEs are estimated to be responsible for roughly one-third of the total value of Canadian exports with an average value of $4.6 million per firm. Canadian SMEs contribute roughly the same percentage to national exports as we see in the U.S.
“While on the surface this seems to be comforting, one should not lose sight of the fact that exports represent 30-40 per cent of Canadian GDP compared with less than 15 per cent in the U.S.,” adds Mr. Tal. “Given this discrepancy, the export propensity among Canadian SMEs should be much higher than in the U.S. We estimate that the moderate decline in SMEs’ trade activity during the decade was sufficient to impact no less than 300,000 jobs in terms of actual job loss and foregone opportunities.”
Mr. Tal found that only an estimated three per cent and five per cent of SMEs’ revenues and jobs, respectively, are directly linked to trade with emerging markets.
“These numbers are obviously too low given the growing importance of emerging markets in the global scene. And on that front, there is some reason for optimism. One of the most important attributes of SMEs that have been successful in penetrating foreign markets is the international experience of the firms’ senior managers. Given the rising number of new immigrants from emerging markets in general, and China in particular, there is a clear opportunity to capitalize on this trend.”
The reorganization of production at the international level, through increased outsourcing and the development of global value chains, can also provide Canadian SMEs with new opportunities, he adds. The fragmentation of production paves the way to new niches for the supply of products and services where SMEs can quickly take advantage of their flexibility.
“The key to success here is for SMEs to increase specialization and invest mainly in multi-purpose solutions,” says Mr. Tal. “Furthermore, operating in a relatively familiar business environment can significantly reduce entry barriers and power asymmetry. This is where we see the most significant near-term opportunity for Canadian SMEs given the projected increase of outsourcing activity in the U.S.”
The report finds that the post-recession reality in the U.S. suggests that the traditional engines of growth during recoveries (housing and consumer) will not be able to fulfill their usual role. For the first time on record, the contribution of business investment and exports to overall U.S. GDP growth during a recovery was larger than the combined contribution of housing and consumption. Today, no less than one-third of U.S. exports go to emerging markets, and with these markets likely to continue to outpace developed economies, this share will continue to rise.
“Increased U.S. exports to emerging markets means increased options for Canadian SMEs to participate in the supply chain momentum that this trend generates,” adds Mr. Tal. “Currently close to 30 per cent of Canada’s trade is being sold as inputs into global supply chains. The changing engine of growth south of the border can provide SMEs with a golden opportunity to become a larger player in this expanding space.”
Additional facts about Canadian SMEs:
– Even firms with an export focus still generate more than half of their revenue domestically with the vast majority of their external revenues coming from the U.S.
– The propensity to export rises with the size of operation. Less than ten per cent of firms with fewer than 20 employees are engaged in export activity vs. more than 30 per cent among firms with 100-499 employees.
– By province, SMEs in Ontario and BC have the highest propensity to export with roughly 10 per cent of SMEs engaged in exporting activity. SMEs in the Prairies are the least internationally oriented with only six per cent selling their products abroad.
– SMEs in the manufacturing sector have the highest propensity to export followed by knowledge-based industries.
The complete CIBC World Markets Inc. report is available at: http://research.cibcwm.com/economic_public/download/sme-20101012.pdf
CIBC World Markets Inc. is the corporate and investment banking arm of CIBC. To deliver on our mandate as a premier client-focused and Canadian-based wholesale bank, we provide a wide range of credit, capital markets, investment banking, merchant banking and research products and services to government, institutional, corporate and retail clients in Canada and in key markets around the world.
For further information: Benjamin Tal, Senior Economist, CIBC World Markets Inc. at 416-956-3698, [email protected]; or Kevin Dove, Communications and Public Affairs at 416-980-8835, [email protected]