For decades, tapping into export markets outside the United States has been an objective for Canadian businesses and policy makers. As Canada-U.S. trade has stagnanted in the past decade – while developing markets grew rapidly – the objective has become an imperative.
Policy makers and analysts have called on businesses of all sizes to enter fast-growth, developing countries.
Refocusing on emerging markets is a good strategy, but it's not for everyone, and the experiences of Canadian small and medium-sized businesses (SMBs) illustrates this point. Before taking a step into fast-growth emerging markets, smaller firms must have the capabilities to succeed – they primarily need prior experience in export markets, they need to offer world-leading products or services, and they have to constantly innovate.
Conference Board of Canada research, Not for Beginners: Should SMEs Go to Fast-Growth Markets?, shows that the financial rewards for successful companies are tremendous. But smaller companies are unlikely to last long in fast-growing, developing economies without a strong set of capabilities, products and strategies. They should find a way to get these skills before venturing into these new, rapidly expanding markets.
Developing countries represent half of the global economy, and growth opportunities are no longer limited to the BRICs (Brazil, Russia, India and China). Fast-growth markets that are likeliest to hold future promise for Canadian companies include South Korea and South Africa, markets in Latin America (such as Mexico, Chile and Colombia), Eastern Europe (such as Poland and Hungary), and the Southeast Asian economies of Indonesia, Malaysia, Thailand, Singapore and Vietnam.
The BRICs and these next-tier markets, while full of opportunities, are also highly challenging, as revealed consistently in international rankings such as the World Banks' Doing Business indicators. To succeed, smaller players need to overcome a host of policy barriers, rapidly gain knowledge about local markets, and find trusted local partners – and do so with relatively fewer resources and talent compared with larger companies.
Only a small share of SMBs actually sell in foreign markets. And only a small share of those businesses account for most of our SMB exports. Most of this revenue – almost three-quarters – is generated in the United States.
Despite the challenges of foreign markets and the comfort offered by selling to the United States, a small group of SMBs have gone to fast-growth markets. The Conference Board analysis provides a fresh perspective on their outcomes, because it is one of the first to examine the effect of exports to fast-growth markets on company performance. And rather than using a sample group of firms, the study examines all SMB exporters to fast-growth markets over a long period (1994 to2008).
The analysis found that exporting boosts sales and profits for Canadian SMBs. And a small group of top performers almost doubled their sales in fast-growth markets every year.
What made these firms successful? The profile of successful SMB exporters to fast-growth markets is remarkably similar.
- Gained experience in Canada or in other advanced economies, rather than trying to make their first sales in fast-growth markets.
- Introduced new products frequently to these markets, a sign of innovation.
- Paid higher wages, a sign of higher productivity and higher-skilled employees.
- Exported to a larger number of markets, which may have reduced overall risk.
- Had greater access to financing.
- Were relatively larger (closer to 500 employees than not).
Smaller firms without these strengths may need to pursue other strategies to take advantage of developing economies. Such steps could include selling to U.S. or Canadian multinationals that are active in global markets, or initially building up capabilities in Canada or in other advanced countries – making expansion to fast-growth markets a longer-term goal.
The Conference Board analysis also shows the perils of fast-growth markets when SMB exporters are not fully prepared. The gap between the best- and worst-performing firms is enormous. Among the group of SMB exporters with the weakest results, sales to fast-growth markets dropped by 70 per cent annually on average, and the firms exited these markets after less than a year.
Compared with the still-struggling developed economies of the United States, Europe and Japan, developing countries represent a huge growth opportunity for Canadian exporters of all sizes. But moving into fast-growth markets without the right capabilities will fail to position our businesses for sustained success. These markets are not for beginners.
Danielle Goldfarb is the associate director of the Global Commerce Centre at the Conference Board of Canada. Dr. Sui Sui, is an assistant professor in the Global Management Studies Department of the Ted Rogers School of Management at Ryerson University in Toronto.