William Polushin is founding director of the Program for International Competitiveness at the Desautels Faculty of Management, McGill University, and President of AMAXIS, an international business and operational development services firm. The Competing to Win blog series can be found here.
The announcement of the Canada-U.S. perimeter security and economic competitiveness agreement represents a positive step forward in improving the efficiency of Canada-U.S. trade. For Canada: The Trading Nation, that's good news. For Canada: A Nation of Traders, the jury is still out. Lost in the excitement is a stark reality -- we now operate in a 'Made in the World' model, something that is still very much a work in progress in Canada.
As previously indicated in the Competing to Win blog, the path to profits in an increasingly integrated and competitive global economy is complex. It is by no means business as usual. While enhanced border co-operation and the reduction of regulatory barriers should result in significant savings for Canadian and U.S. enterprises engaged in cross-border trade (Canadian Manufacturers & Exporters estimates that Canadian companies could save between $15-billion and $30-billion annually), these same enterprises must still contend with considerable and growing competition from around the world.
This means our companies must not only determine how to best leverage the Canada-U.S. trade and investment environment to create competitive advantage, they must also determine how to structure their operations. From design design to production to marketing to distribution, companies must optimize the use of human, capital, and natural resources -- internal and external to the enterprise -- in Canada and internationally (including the U.S.). This is the essence of a global value chain, which describes the full range of activities undertaken to bring a product or service from its conception to its end use and how these activities are distributed over geographic space and across international borders. 1
In Canada: A Nation of Traders, our Canadian enterprise will be headquartered in Canada, but it may carry out research and development in the U.S, source raw materials from Brazil, assemble in and distribute from China, and maintain call centre support from India. The choice of where specific activities are located is a function of the value (i.e. return on assets) and strategic benefit (i.e. strengthening of the competitive position of the enterprise in its industry).
International consumer demand, lower applied tariffs and trade policy incentives, development of infrastructure and technological progress around the world, the creation of export processing zones in emerging markets, outsourcing and offshoring strategies, and foreign direct investment (FDI) flows 2 have all been contributing factors to the creation of these global production chains; and despite the current economic stress that is being felt in the European Union and, to a lesser extent, the U.S., they will continue to represent a key element in competitive strategy and international business in the global economy.
A look at the production dynamics of the Boeing 787 Dreamliner illustrates this point.
In this case, final assembly of the aircraft takes place in the United States, but production of the Dreamliner's various parts is shared amongst manufacturers in seven different countries (including the U.S.).
Based on the results of the Survey of Innovation and Business Strategy (a joint initiative of Industry Canada, DFAIT, and Statistics Canada)*, between 2007 and 2009, only 1.9 per cent of all enterprises located in Canada (including foreign companies) and 5.2 per cent of manufacturers conducted business activities offshore. For this same period, a similar proportion of companies - 1.8 per cent of total enterprises and 5 per cent of manufacturers - moved (inshored) business activities into Canada.
So while our politicians, pundits, and business analysts extol the benefits of the Canada-U.S. perimeter agreement, remember this: The game is now global.
Author's note: For my next two blogs, I will be sharing my insights from the streets of New Delhi and Kolkata. While India is an increasingly important economic and political partner to Canada, our bilateral trade and investment relationship with the subcontinent has considerable room for growth still.
* 6,233 enterprises - with at least 20 employees and $250,000 in annual revenues - representing 67 unique industries in Canada were surveyed for the SIBS Project.
Sources:
1 -- As defined by Foreign Affairs and International Trade Canada
2 -- World Trade Organization
William Polushin