Evidence of meeting #50 for International Trade in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was need.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Ernie Lynch  President, Lynch Fluid Controls
John Kalbfleisch  Chief Operating Officer, Alpha Technologies Ltd.
Rebecca Reuber  Professor of Strategic Management, University of Toronto, Rotman School of Management

4:25 p.m.

Dr. Rebecca Reuber Professor of Strategic Management, University of Toronto, Rotman School of Management

Thank you very much.

Thank you for inviting me to talk with you today. I think what you're thinking about is really important.

I am going to put my remarks into three buckets of things. First of all, I am going to provide some background as to what I see as some of the general issues. Then I am going to talk briefly about the things that we know, as a field, about the internationalization of SMEs. Finally, I am going to identify three gaps that I see, for which I think further study is essential.

By way of background, I think it's important to recognize that internationalizing their sales and business activities is really difficult for SMEs. There are business risks associated with foreign markets, foreign exchange risks, and political risks. There is difficulty in monitoring remote operations over a distance, and there is a lack of knowledge, compared with companies that are already competing in those markets. We know that the number of SMEs in Canada that stop exporting every year is roughly equal to the number of those that start, and we know that just over half of new exporters stop exporting in the first year. I think that speaks to the difficulty of doing it well, and that has to be recognized.

Because of these risks and difficulties, internationalization is uncommon even in countries with large immigrant populations, where one would expect that information about foreign markets would be readily available. Canada is doing reasonably well. One in ten Canadian SMEs exports, but about 90% export only to the U.S., and the average export sales are only 4% of total sales. They are pretty minor exporters. In my notes, I've given numbers for the U.S., the U.K., Australia, and Germany, and they are pretty much in line. Across the board, this is something that is fairly low-activity. I don't think we can assume that all of these owners and entrepreneurs are short-sighted, uninformed, or making bad decisions. I think they are right to be wary of the risks, and I think that many of them are making very sound decisions for themselves and for their firms when they decide to stay in the domestic market, or to internationalize slowly, cautiously, and even marginally.

I think it has to be said that this is not for everybody. It's really important to be able to target programs and policies to the SMEs that have the greatest likelihood of success. A failure doesn't hurt just the SME itself; I believe it hurts the whole community, because the word gets out that this is something that is hard to do and that companies fail at. I think it can make other SMEs reluctant to try. That is the background in which I am going to situate my next remarks.

The next thing I am going to talk about is what we know. What we know well is that innovation matters. The most innovative SMEs have the most success. They are most likely to export and have the most success there. There are a number of reasons for this that I think are important to understand.

The first is that these technology-based industries tend to be global industries. There are global standards and global requirements, so there is less need to adapt their products and services for local markets. If you are making medical devices, or something that goes into a USB slot, those are global standards that everybody uses. That makes it a little bit easier to enter foreign markets.

Also, if they are innovative, Canadian SMEs can charge higher prices for their products, which buffers them from some of these risks and difficulties.

A third reason is that it's harder and costlier for their rivals to imitate trailblazers. If a Canadian SME is really on the forefront of innovation, it's just going to be harder for foreign rivals to catch up, which means that intellectual property protection, which is a big issue for some, becomes less of an issue because they are always moving.

So those are three economic reasons, but there are some social reasons as well. Because innovative firms tend to become known globally through things like participation in international standards organizations or through international technical conferences, that gives them recognition with foreign players just by virtue of their participating in those global forums.

It also means that potential partners and customers in foreign markets are interested in them. I think we think of the firms as being interested in the markets, or wanting to go into markets, but it's important to realize sometimes they don't have that option because the partners and customers in foreign markets aren't that interested in them. But if they are highly reputable and innovative, it can help foreign customers get the approvals and the funding they need to do their project. It means they are able to attract the very best foreign customers—a Tata, say, in India—and the very best foreign customers have standards like multinationals everywhere, which just makes it a lot less risky and easier to do business with. It also means they are great references.

So we know that well. We know that innovative firms do better in foreign markets. The issues are, how do you increase innovation, and how do you give them a space to be profiled there?

Moving on from that, though, I think there are three important gaps in our knowledge beyond the issue of innovation. Number one is what about small to medium-size firms in multi-domestic industries? These are global industries, but there are lots of industries where local adaptation, local tastes and preferences and conditions, matter. We know a lot less about that. We know it takes a lot more time to learn about what adaptations in marketing, products, and services are required. Because what the customers want is country by country, that means the learning is country by country. We know there can be high investment costs to both adapt products and to provide a local presence. That's a whole area we don't know a lot about.

A second area we don't know a lot about is how we can stop Canadian SMEs from suffering from what's been called the “liability of outsidership”? We know that business networks are important for the transmission of information and tacit knowledge. We know that local partners are required in some countries to do business and are certainly desirable in others. But we tend to think of entering a foreign market as a one-time decision, when really it's a decision to position yourself in that market, and how do you do that? It's a much longer-term proposition that takes years rather than months.

Finally, going along with that is how to signal trustworthiness and commitment. I talked to one SME owner, and he said when he went to a market in South America, he got impatient, because people didn't want to pay attention to him. They'd had four or five Canadian SMEs showing up, starting, and then backing off because things were a lot more difficult and time-consuming than they thought it would be. So how do we stop behaviour like that?

My last point about the gap is what's the role of the Internet in all of this? It seems a no-brainer and totally obvious that the Internet should facilitate the internationalization of SMEs, but there are some reasons to believe that it can actually over the long term constrain growth. Doing business online can let SMEs do business in foreign markets without actually going to those foreign markets, so they don't meet people there, they don't develop business networks. They might miss opportunities to develop partnerships and to understand local preferences and conditions. So they may sell some there, but that may really limit their capacity to grow those markets.

Internet-based internationalization tends to be quite scattershot and ad hoc while orders come in, and again, that can limit the firm's actually building and becoming established in the market and hinder long-term ability to grow those sales and to grow in the market.

I'll leave my remarks there. Thank you for letting me start with those. I'm happy to take any questions you may have.

4:40 p.m.

Conservative

The Chair Conservative Randy Hoback

That was perfect timing. It was pretty well 10 minutes right on the nose. Thank you for doing that.

Monsieur Morin, you have the floor.

4:40 p.m.

NDP

Marc-André Morin NDP Laurentides—Labelle, QC

Good afternoon, Mrs. Reuber.

4:40 p.m.

Professor of Strategic Management, University of Toronto, Rotman School of Management

Rebecca Reuber

Good afternoon.

4:40 p.m.

NDP

Marc-André Morin NDP Laurentides—Labelle, QC

In your opinion, how important are targeted statistics in understanding our markets and the foreign markets for our exports?

4:40 p.m.

Professor of Strategic Management, University of Toronto, Rotman School of Management

Dr. Rebecca Reuber

Sorry, I'm not sure.... Do you mean to set targets?

4:40 p.m.

NDP

Marc-André Morin NDP Laurentides—Labelle, QC

Yes. To set the right targets, we have to know what the situation is in those countries, such as India, where the standard of living is evolving very fast and new markets are opening and new possibilities arising. We need to have the right comprehension.

Or sometimes it's cultural or it's inherent in the structure of those countries, as with business in Japan, let's say. In the food industry, Japan is strongly integrated. You get the same large corporations in shipbuilding, heavy equipment, transportation, and sometimes they are grain importers and they own supermarkets.

Do you think we have enough information available for our corporations on market conditions—all of that information?

4:40 p.m.

Professor of Strategic Management, University of Toronto, Rotman School of Management

Dr. Rebecca Reuber

I don't think we understand enough about the process and about how long it takes. It's one thing to set targets for what we want as outcome, but in order to understand the outcome we have to be able to understand what it takes to get it. I think that international comparisons of similar firms and of firms that are doing it well can provide some of those benchmarks.

Does that answer your question?

4:45 p.m.

NDP

Marc-André Morin NDP Laurentides—Labelle, QC

Yes.

On the other side of the coin, do you think our government agencies have enough information about our own enterprises, such as having reliable statistics to identify those with potential and actually even knowing who is already exporting and details like those? To me it seems that nothing is very reliable.

4:45 p.m.

Professor of Strategic Management, University of Toronto, Rotman School of Management

Dr. Rebecca Reuber

I think they have fantastic information about outcomes, so who is doing what.... It tends to be old. I think data from 2011 is what we're looking at now, so it tends to be old. I think there's not detailed data. Most of it doesn't have any information, say, about the owners or the entrepreneurs, which I think is absolutely crucial. A lot of the data doesn't follow firms; it doesn't highlight, as you said, high-potential firms that might be able to take it a step up.

4:45 p.m.

NDP

Marc-André Morin NDP Laurentides—Labelle, QC

Yes. I think if you don't know who you're talking to, you can't know whether what you're saying to them will mean something.

4:45 p.m.

Professor of Strategic Management, University of Toronto, Rotman School of Management

4:45 p.m.

NDP

Marc-André Morin NDP Laurentides—Labelle, QC

I have a last question, if I have time.

4:45 p.m.

Conservative

The Chair Conservative Randy Hoback

You have just under three minutes.

4:45 p.m.

NDP

Marc-André Morin NDP Laurentides—Labelle, QC

Okay.

Our goal is to increase from 11,000 to 21,000 enterprises exporting to emerging markets. Is it realistic? What do you think could be done to get such a result?

4:45 p.m.

Professor of Strategic Management, University of Toronto, Rotman School of Management

Dr. Rebecca Reuber

I think that's a stretch goal, as they call it. I did a recent study for the Conference Board on emerging markets. Emerging markets are really difficult, in particular because you need a local presence and local partners.

There are some things that can be done. My understanding is that in Quebec there is an organization that's a kind of mentorship organization, the QG100 that helps small firms. It's larger firms helping small firms.

In order to reach those goals, we'll need more study of ways to predict which firms to focus on. I don't think you can reach those goals by focusing on everybody, because some firms clearly should not be exporting and certainly shouldn't be exporting to emerging markets. We need some idea of who to pinpoint.

4:45 p.m.

NDP

Marc-André Morin NDP Laurentides—Labelle, QC

Do you think we are like prisoners of traditional export markets in the type of exporting that we've been doing forever and that we seem to want to push over and over again?

4:45 p.m.

Professor of Strategic Management, University of Toronto, Rotman School of Management

Dr. Rebecca Reuber

Well, we do; our exports seem very embedded in the United States. When their economy is doing well, that's great, but when their economy stagnates, it's not so great. We may be missing out on opportunities. I definitely would agree with that.

I think there needs to be thought around conditions for the firms that are going to be most successful, in order to help them. There are many factors, which might be personal factors on the part of the owners or on the part of the firm.

4:50 p.m.

Conservative

The Chair Conservative Randy Hoback

Okay.

Ms. Grewal.

4:50 p.m.

Conservative

Nina Grewal Conservative Fleetwood—Port Kells, BC

Thank you, Chair.

Ms. Reuber, thank you for taking time out of your busy schedule to come and share your thoughts with us today.

In your opinion, why should Canadian small and medium-sized businesses be targeting emerging and frontier markets?

4:50 p.m.

Professor of Strategic Management, University of Toronto, Rotman School of Management

Dr. Rebecca Reuber

Well, I think they offer enormous growth possibilities. Some of the firms that I talked with in this Conference Board study had such things as telecommunications technology or auto parts technology or water purification technology. There's a huge demand for those in emerging markets, and so they are able to capitalize on it and to grow by going into those markets.

4:50 p.m.

Conservative

Nina Grewal Conservative Fleetwood—Port Kells, BC

I have often argued that new Canadians and recent immigrants are a valuable resource for Canadian businesses seeking to expand their reach into international markets, as they can provide important kinds of insight into those markets and into the customs, which may differ greatly from those in Canada.

In your opinion, how important is inside knowledge of foreign markets, and how can this information be gained?

4:50 p.m.

Professor of Strategic Management, University of Toronto, Rotman School of Management

Dr. Rebecca Reuber

I think it's hugely important, and I think our recent immigrants are a huge resource in that respect. When you look at the business schools right now, we have lots of students from other countries coming and getting business education. Their knowledge of the Canadian economy and of their home economy is huge, and hugely valuable.

Another source is perhaps family businesses. There are many families that span countries, and lots of family businesses that divide up into generations and that also provide a way to internationalize.

I think our students are increasingly seeing the world as borderless, so those of us teaching in business schools are trying to say, “Don't start by thinking about the Canadian market”. The problem with it is that you get what has been known as domestic inertia. You set your whole company up to serve the local area, and then it's a huge adjustment to do something else; whereas, if we can get people to set up their company from the get-go to serve foreign markets, then, even if they don't do so right away, it's in the plan, and they're hiring people who are adept at it, and it's much easier for them to start selling internationally.

We have a very small domestic market. Look at what it takes to be, say, a games and toy producer in the U.S. and one in Canada. You have to export four times as much in Canada to be successful as you do in the U.S., because their market is so much better. Many firms there have the luxury of just selling at home, whereas that is much harder for Canadian firms.

4:50 p.m.

Conservative

Nina Grewal Conservative Fleetwood—Port Kells, BC

Mr. Chair, do I have some more time left?

4:50 p.m.

Conservative

The Chair Conservative Randy Hoback

You have about three minutes.