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INTRODUCTION

In its Report, the Special Joint Committee Reviewing Canadian Foreign Policy devoted a chapter and a position paper to Canada's position in the world economy.1 The Report examined the key challenges facing Canada as a result of the globalization of trade, investment and finance and the extent to which a number of technological developments have revolutionized the way that businesses compete domestically and around the world. The Report explicitly recognized the differences between small and medium-sized enterprises (SMEs)2 and larger companies in the kinds of assistance they require in international markets. However, the focus of this analysis was generally on larger Canadian companies and the impact of globalization on how they are organized, how they compete, and the relative influence of national government policies on their international competitiveness.

This study on Canadian business is not about the Bombardiers, McCains and MacMillan Bloedels of this world; it is about what government can do to assist SMEs in becoming the next generation of these internationally-recognized Canadian success stories. This Report is about appropriate roles and responsibilities of the federal government in relation to the other levels of government as well as the private sector and non-governmental organizations (NGOs) in assisting SMEs to compete effectively in international markets. It is concerned with promoting partnerships between different sectors of the economy, and with how business, government and NGOs can work together to help build a more prosperous economy on the drive and determination of Canadian entrepreneurs. It also focusses on the expectations and the respective responsibilities of both the private sector and government in assisting SMEs to succeed in the international marketplace.

Many of the government policies and programs that helped Canada's current generation of multinational enterprises become large and successful in international markets may not be compatible with the world in which SMEs compete today. Most of Canada's larger companies developed in a competitive environment that was characterized by high tariffs and other regulations which effectively shut out foreign competition from the domestic market. These companies also benefited from a whole range of industrial policies and programs, including subsidies, preferential treatment, and loose application of competition laws, which limited and, in some cases, eliminated domestic competition. This allocation of government resources to a select group of companies and sectors was fiscally possible due to sustained economic growth during the first decades of the postwar era.

Today's generation of SMEs operate in a different market environment. As a result of the obligations that form part of the regional and multilateral trade and investment arrangements that have been negotiated during the postwar period, many of the government policies and programs that sheltered the previous generation of Canadian companies from foreign and domestic competition have either been eliminated or severely curtailed. Furthermore, the Canadian government implemented a number of domestic economic policies (e.g., deregulation and privatization) that increased competition in a number of areas. Finally, current fiscal constraints also limit the range of options available to government. Canadian SMEs face a situation where government assistance is sometimes available to satisfy specific and practical needs, but it can no longer be relied upon for long-term success in domestic or international markets.

It is in this context that the House of Commons Standing Committee on Foreign Affairs and International Trade launched in September 1995 this study of the experience of Canadian SMEs in the world economy. This study focussed on three key issues:

This study follows up on the key policy issues raised about Canadian SMEs in the Report of the Special Joint Committee Reviewing Canadian Foreign Policy, the Government Response to this review, the government foreign policy statement Canada in the World, the private sector review of Canada's international business development programs (the Wilson Report), and issues raised during recent parliamentary inquiries, particularly by the House of Commons Standing Committee on Industry in its report Taking Care of Small Business.

To address the needs of SMEs and the most effective ways in which government programs can meet these needs, the study began with a series of panel discussions with representatives from Canadian SMEs from five sectors of the economy:

This was followed by a series of hearings on market information/intelligence and export finance and insurance services. These discussions provided the basis for an examination by the Committee of established programs of the Department of Foreign Affairs and International Trade (DFAIT), the Canadian International Development Agency (CIDA), the Export Development Corporation (EDC) and the Canadian Commercial Corporation (CCC). The Committee also reviewed recent initiatives of these departments and agencies in the form of international business development programs designedto assist SMEs. The study involved 26 meetings with more than52 representatives of different private and public sector organizations.

The discussions have focussed on the following general questions:

The Committee has heard that the process of globalization, coupled with the liberalization of trade and investment through the North American Free Trade Agreement (NAFTA) and the establishment of the World Trade Organization (WTO), has opened up new markets for Canadian SMEs, while also exposing them to increased competition in the domestic market from foreign-based firms. Fiscal constraints have led governments to cut programs and services, a situation which has forced them to make difficult choices. In this new environment, the recognition that SMEs play a substantial role in the growth of the domestic economy has led the federal government to take a number of steps to assist SMEs in both the domestic economy and in the international marketplace.

Large companies also have a direct interest in the longer term success of SMEs in domestic and international markets. From the perspective of Canada's large firms, SMEs are not only important customers for their products and services but also, increasingly, key suppliers of components and services. Indeed, many SMEs that do not consider themselves exporters have actually been producing for the world market for years in their role as suppliers of essential components to larger, more internationally-oriented firms.

Large companies are increasingly adopting the practices of successful SMEs. For example, decentralization, empowerment, and "quality circles" are all attempts to inject "entrepreneurship" into larger firms. A whole generation of successful Canadian immigrants who set up family stores and restaurants and became community leaders knew what service and group effort meant long before "focussing on the customer" and "flexible workforce" became the mantra of management gurus. Many of the world's largest firms are also breaking themselves up into smaller pieces in order to be more efficient and more responsive to changes in the market.

From the perspective of government's international business development policies and programs, there is no clear consensus about what government should and should not do, who should do what, what kinds of resources should be devoted to what activities, what kinds of services firms should realistically expect from government, and what kinds of responsibilities private firms should undertake themselves to become more competitive internationally. This study addresses these issues and provides policy recommendations.

ORGANIZATION OF THE REPORT

In the first chapter, we look at why SMEs are increasingly focussed on their relative international competitiveness and why government is concerned about assisting SMEs in their international business development strategies. The witnesses who appeared before the Committee identified a number of programs and services that can assist SMEs in international markets. These needs fall into three general categories:

In each of the next three chapters, this Report examines:

This analysis suggests that business and government are both partners and competitors in what can be described as Canada's international business development industry. They are partners in a number of joint consultations and other activities as well as in government services that complement and reinforce services available from private firms. Good examples of this include recent initiatives such as the Progress Payment Program administered by CCC and the Master Accounts Receivable Program that is available through EDC.

At the same time, business and government are increasingly becoming competitors in the provision of international business development services. While there are many examples, the clearest one came from finance and insurance broker Ron Doyle of Millenium Credit Risk Management Ltd. Mr. Doyle explained that when he tries to finance a deal for a client, EDC is in direct competition with both Canadian and foreign-based financial services firms. Sometimes EDC gets the deal; other times its price and level of service misses the mark.

In the final chapter, the Report provides some general conclusions about the main features of the Canadian international business development industry and some specific recommendations to the federal government on its international business development strategy.

1For further reading on the "globalized economy" see Report of the Special Joint Committee Reviewing Canadian Foreign Policy, especially position paper by Sylvia Ostry and Alan S. Alexandroff, "The Challenge of Global Trade, Investment and Finance for Canada."

2Unless otherwise stated, "small enterprises" refers to any firm with fewer than 100 paid employees in the manufacturing sector, and fewer than 50 paid employees in all other sectors. Medium-sized enterprises are generally described as those having between 100 and 500 employees.

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