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Canada's economic future tied to global competitiveness: report

According to a new study from the Certified General Accountants Association of Canada, the country's small and medium-sized businesses can play a large role in expanding and diversifying Canada's international trade

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The following report, compiled by the Certified General Accountants Association of Canada (CGA-Canada) argues that improving Canada’s trade performance will require increasing the number of small and medium-sized businesses engaged in international trade, and overcoming the constraints and obstacles faced by companies that are already conducting business in global markets

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While exports fuelled Canada’s economic growth heading into the 21st century, over the past decade, the country's export performance has been lackluster, in large part due to:

1. The strength of the Canadian dollar
2. Poor productivity growth compared with other countries
3. What Canada exports and where it exports

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Canadian businesses need to shift their focus away from slow-growing, developed markets such as the United States, and toward fast-growing, emerging markets. Sustaining the country’s future prosperity depends on the ability of companies to meet the challenge of global competition.

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Research shows that small and medium-sized enterprises have been relatively more successful than larger firms at taking advantage of opportunities in global markets. Building the ranks of SMEs engaged in global trade could play an important role in improving Canada’s trade performance, especially in fast-growing emerging markets. It could also make a significant difference in diversifying trade beyond the manufacturing sector.

SMEs here are defined as any business with fewer than 500 employees and less than $50-million in revenue

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Improving Canada’s trade performance will require:

1. Growing the number of Canadian businesses engaged in international trade
2. Overcoming the constraints and obstacles faced by those already conducting business in global markets
3. Helping businesses acquire business intelligence
4. Improving their domestic competitiveness

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Canada’s global economic performance has been attracting a lot of attention recently - especially since the end of the last recession, as the economy is still struggling to hit pre-recession export levels. There is a growing perception that Canadian businesses need to turn their attention to overseas markets and shift their business strategies to adapt to a new global environment.

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Factors driving this push to globalization include:

1. The emergence of competition from new entrants into the world trading system
2. Weaker demand from Canada’s traditional export markets
3. The fact that emerging markets account for more than half of global trade growth.  

For a trade-dependent economy such as Canada’s, the ability to compete and win against the best in the world is critical to the country’s capacity to generate wealth and sustain increased standards of living for future generations of citizens.

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Exports account for 19.2 per cent of all jobs and 26.1 per cent of the gross domestic product (GDP) when calculated on a value-added basis (when removing the import content of gross exports, for example).

As the federal government pointed out in its 2012 report on Canada’s State of Trade,

exports fuelled growth during the 1990s. Over that decade, Canada’s merchandise exports more than doubled, growing from $148-billion in 1990 to $413-billion in 2000.

But since then, Canada’s global share of merchandise exports has been declining markedly, from 4.5 per cent in 2000 to 2.7 per cent 10 years later

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The challenge for Canada today is to "rotate the sources of growth toward net exports and business investment. Exports are currently more than $130-billion less than they would have been had this been a ‘typical’ postwar recovery," said Mark Carney, former governor of the Bank of Canada, in his farewell address

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Besides their relative importance to the Canadian economy, SMEs are an essential part of the solution to Canada’s trade woes for two reasons.

1. The emergence of global value chains (GVCs)
2. They have had more success in fast-growing markets beyond the U.S. and the European Union (EU)

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GVCs are international supply chains characterized by the fragmentation of activities involved in producing a good or a service, from conception to end-use, across sites and borders.

Under this model, each activity that adds value to the production process can take place where it makes the most economic sense to do so. This fragmentation provides an opportunity for smaller firms to specialize, capitalize on their unique skills and grow, by entering GVCs from their home market. Also, with less than 2 per cent of Canadian SMEs currently exporting, there is much potential for growth by helping more of them enter new markets.

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The second reason why SMEs are key to improving Canada’s trade performance is that, in general, they have had more success in fast-growing markets beyond the U.S. and the European Union (EU). According to Industry Canada figures (Industry Canada, 2011a), small businesses (firms with fewer than 100 employees) account for a significant proportion of Canada’s exports to markets beyond the U.S. and the EU — 40 per cent — compared with 20 per cent of Canada’s exports to the U.S. and the EU. Small companies account for a particularly high proportion of Canadian exports in many large, growing markets, such as South Korea (52.8 per cent), India (65.1 per cent), Indonesia (44 per cent), Turkey (60.6 per cent), and Egypt (63.3 per cent).

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Over the past 10 years, while Canada’s exports and global export market share have diminished, Canadian SMEs have actually increased their total exports. Small firms have increased their exports by 19.6 per cent over that period, and medium-sized firms have increased their exports by 15.1 per cent. Meanwhile, large businesses (with 500 or more employees) have seen their exports drop by 18.3 per cent over that period.

It is also worth noting that according to the latest statistics, small businesses engaged in international trade represent 87.5 per cent of all Canadian exporters.

Together, these companies account for 44.8 per cent of the value of Canada’s exports, a significant share

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Finally, if we look at the exports of SMEs by sector, we observe that they account for a greater share of exporters in sectors outside of manufacturing. Given the Conference Board of Canada’s assessment that the country’s trade strengths are shifting from manufacturing toward services and natural resources, this signals further opportunities for SMEs

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It is also worth noting again that smaller Canadian companies have fared better than larger ones when it comes to expanding sales in fast-growing emerging markets. Other Statistics Canada data also indicates that the number of SMEs exporting to the U.S. market has been on a declining trend — while the number of SMEs exporting to markets beyond the U.S. and the EU has been on an upward trend in recent years

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The OECD recently examined its member countries’ participation in GVCs and published a report benchmarking Canada against OECD members; the report confirms that Canada is the ninth-largest exporter in absolute terms, in other words it has the ninth-largest share of the world export market. By this account, Canada ranks 37th out of 40 countries, in terms of its participation in GVCs. Two Canadian industries stand out for their higher level of participation: mining and transportation equipment. Mining scores higher because a significant part of Canada’s mining production is processed and re-exported by firms in other countries, while transportation equipment stands out because a significant part of Canadian production uses imports sourced from other countries

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In its report on Canadian Small Business Exporters released in 2011, Industry Canada reports data from a 2007 Statistics Canada survey of approximately 25,000 businesses. This report indicates the top-five obstacles to business growth facing Canadian SMEs were (in order):

1. Rising business costs
2. Finding qualified labour
3. Increased competition
4. Unstable customer demand
5. Insurance premiums

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In 2008, The Conference Board of Canada also released a summary and analysis of various SME surveys conducted by third parties, such as the Canadian Federation of Independent Business (CFIB), UPS Canada and others (Macmillan, 2008).

This analysis concluded that the most critical challenges Canadian SMEs face when addressing the international marketplace are:

1. Identifying good market opportunities
2. Finding reliable business partners
3. Managing supply-chain relationships and the demands of complying with quality control and systems requirements
4. Getting access to financing 5. Handling authentication and security
6. Protecting intellectual assets and business information
7. Overcoming trade and regulatory barriers

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More recently, Canadian Manufacturers & Exporters (CME) released the results of its annual Management Issues Survey. The survey asked companies to identify the most significant external challenges they currently face to growing sales in foreign markets. Besides the top answer — foreign competition — for all other external challenges reported by companies, governments can (and often already do) either provide programs and services (such as the Trade Commissioner Service) or adopt policy instruments (such as trade agreements) to help businesses overcome those challenges

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If we are to increase the number of Canadian businesses that currently engage in international trade — only 1.4 per cent of small businesses currently export — it is doubtful that trade agreements alone will have a meaningful effect on SMEs’ willingness and ability to start internationalizing their activities.

By all accounts, the proportion of small companies that export is relatively small. According to Industry Canada, a majority of Canadian exporters (86 per cent) are small businesses, but a minority of small Canadian businesses (1.4 per cent) are exporters

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The Conference Board of Canada (Macmillan, 2008) examined that question by looking at relevant third-party surveys and policy analyses. It leads to the conclusion that SMEs’ reluctance to internationalize is due to a combination of factors, the most important ones being that:

• They do not perceive their products or services as exportable
• They perceive foreign markets as too risky
• They do not feel they have the skill or resource capability to internationalize
• They are not interested in expanding their customer base because they wish to stay small and keep their operations "manageable"

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The good news is that governments already provide resources to companies seeking to overcome the challenges of growing their exports. The Trade Commissioner Service and EDC both provide services to help companies assess risk. Organizations such as the Forum for International Trade Training provide training through colleges and universities across the country. Various educational institutions provide training to help executives acquire international business skills. Some governments provide match funding to companies looking to expand internationally (albeit, there are fewer such programs remaining), and to industry associations to organize trade missions. Canadian post-secondary institutions attract students from around the world, many of whom have the skills and local-market knowledge needed to succeed in emerging markets

While some government agencies provide consulting services to SMEs that may help them consider various expansion modes (the BDC and the Industrial Research Assistance Program are two examples, and several provincial governments also provide advisory services to SMEs), a more targeted approach might be warranted to help SMEs overcome this barrier and to explore other means of expanding their business, besides exporting

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International trade agreements also respond to more than the need to eliminate trade barriers; they can also help overcome the challenge expressed by 47 per cent of the companies surveyed by CME —competition from third countries. If Canada is able to conclude preferential trade agreements faster than other countries, or negotiate better deals than those obtained by other countries, Canadian companies will gain a competitive advantage over foreign competitors

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The federal government and the provinces should continue to pursue an aggressive trade liberalization agenda through the negotiation of comprehensive economic and trade agreements that significantly facilitate the flow of goods, services, capital and skills, and address the concerns expressed by business. Moreover, additional efforts should be made to encourage direct contact between trade negotiators and SMEs on an ongoing basis —at both strategic and technical levels — to ensure each negotiating team has detailed and up-to-date information on issues faced by Canadian firms in foreign markets. Engaging SMEs will become especially important, as negotiations try to tackle more complex "behind the border" issues

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Every business executive in the country likely knows that emerging markets are forecast to grow at faster rates than the Canadian or U.S. economy in the near future. Doing something about the opportunities in emerging markets, however, requires companies to know about specific opportunities, and to be able to reasonably assess their commercial value and the risks associated with pursuing them.

If governments are serious about helping SMEs overcome this challenge, a more concerted approach among all levels of government will be required. This coordination should include third parties such as trade associations and other organizations providing services in this area. This more organized, coordinated approach should enhance companies’ ability to overcome key obstacles, which include:

• Lack of expertise or knowledge of new markets, both internally and externally
• Difficulties identifying market opportunities
• Lack or difficulty identifying qualified local business partners • Difficulties associated with managing exchange rates
• Difficulties assessing and addressing the risks associated with security and political instability

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Many of the challenges and constraints Canadian businesses say they face when doing business beyond Canada are domestic in nature. These are both limitations within the company, such as human, financial or operational resource constraints —and limitations within the domestic economy tied to those internal constraints, such as:

• Financial constraints
• Streamlined and efficient regulatory regimes
• World-class logistics infrastructure
• Skills development

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Canada’s SMEs can play a large role in expanding and diversifying Canada’s international trade. Of course, it must be acknowledged that the majority of small business operators have a limited desire to expand internationally for a variety of legitimate reasons. But for those that do have high-growth potential, accessing larger markets beyond Canada’s borders may be the only way to achieve those goals. As well, with such a tiny proportion of SMEs currently involved in export activity, even small increases in this number can have a significant economic impact.

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