New markets
Danielle Goldfarb on small business,
The federal government’s new Global Markets Action Plan released this week grabbed headlines mainly because it explicitly stated that Canada’s diplomatic resources would be marshalled to advance trade interests.
Included in the latter part of the plan was an objective to almost double the share of Canada’s small business exporters in emerging markets — from 11,000 companies today to 21,000 by 2018.
Emerging markets will represent half of the global economy this year, according to the International Monetary Fund. Yet Canada’s exports still largely go to slow-growth industrial countries. About 70 per cent of our exports still flow to the U.S., where the economic recovery is just beginning to solidify.
So the government’s focus on emerging economies is appropriate, and setting targets is one way to measure how well small businesses are doing in fast-growth markets. Similarly, the action plan rightly pays special attention to the role of smaller businesses.
Smaller players need to overcome 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. They will value help from government in navigating barriers, opening doors and learning about how particular markets work.
On-going Conference Board research shows that, on average, profits and sales of Canada’s small and medium-sized business are higher when they export. Exporting to BRIC (Brazil, Russia, India, China) economic powerhouses boosts company financial performance more than sales to advanced economies. And, counter to common wisdom that only large companies can make it in these markets, Canada’s smaller businesses are leading the charge in many fastgrowth markets. Companies with fewer than 200 employees account for far more than half of Canada’s export growth to India and Thailand.
But fast-growth markets can be extremely challenging if companies are not well prepared.
Conference Board research has examined the performance of all Canadian small and mediumsized businesses from 1994 to 2008. Our research shows that those smaller goods exporters tend to divide into two dramatically different camps.
In the first camp are top performers who not only succeeded, but did extremely well. These companies boost their overall business and financial performance dramatically as a result of exporting. On average they grew their company’s total profits by 25 per cent and total sales by 19 per cent annually.
But the second camp — the weak performers — had the opposite experience. Their profits fell by 20 per cent and company sales by 17 per cent annually, on average. Moreover, the performance gap between the best and the worst became extremely pronounced in fast-growth markets.
For weak performers, sales to growth markets dropped by 70 per cent annually on average, and they exited these markets after less than a year. In contrast, top performers almost doubled their sales in fast-growth markets every year.
Why the huge performance gap? The operating characteristics of the most successful smalland-medium firms are evident: they are experienced at home or in advanced country markets, have technological advantages and a world-leading product or service, are highly productive, and are constantly innovating. They also have a realistic understanding of the challenges and a long-term perspective to developing sustainable relationships.
Going to emerging markets is, by itself, not enough to boost company performance or ensure small players can sustain their success in fast-growth markets. In addition to targeting increased small business penetration of fast-growth markets, the federal government has a role in the underlying factors that would increase these firms’ success rates.
This approach could potentially mean an increased time to achieve the target number of small businesses going to fastgrowth markets, but businesses already active in these markets might sell more. Many of our small businesses will have to beef up their staff expertise, business strategy and operating capabilities before they go to fastgrowth markets, which would increase their chances of success.
In addition, the federal government has a role as an information provider where there may be a gap: educating Canadian businesses and policy-makers to increase “global economic literacy” about the dramatically changed global landscape and what it means. This role could include understanding that exporting directly to fast-growth markets is not the only way to seize the benefits of growth in the developing world. Other strategies may be less risky, such as selling into the supply chains of multinationals based in Canada or the U.S. that are also active in fastgrowth markets.
In short, the rewards on offer in fast-growth markets are tremendous, but there are clear challenges, and companies will fail to succeed if they are not prepared. The federal government’s Global Markets Action Plan recognizes the important role that small businesses are playing and have the potential to play. But, in addition to setting targets, both companies and governments will need to work to ensure our firms are truly ready to win the game.