ARCHIVED—Financing Profile: Exporter SMEs

September 2006

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Report Summary:
This article presents a profile of Canadian SMEs that exported in 2004. The profile examines the distinguishing features of SME exporters and their financing needs, and provides insight into the differences between exporters in the manufacturing and service sectors.

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Dr. Barbara Orser, University of Ottawa
Christine Carrington, Industry Canada

Small and medium-sized enterprises (SMEs) comprise the majority of Canadian firms that sell goods and services abroad. Because their exports are linked to increased productivity, job creation and economic growth (Baldwin and Gu, 2003; Lefebvre and Lefebvre, 2000), these SME exporters merit closer study.

This article presents a profile of Canadian SMEs that exported in 2004, using the comprehensive database of the SME Financing Data Initiative and two measures: "export propensity," the percentage of firms that export, and "export intensity," the percentage of total sales these firms derived from exports.

The profile examines the distinguishing features of SME exporters and their financing needs, and provides insight into the differences between exporters in the manufacturing and service sectors. It also challenges some assumptions about how Canadian businesses expand.

Importance of Exports to the Canadian Economy

In 2004, exports of goods and services accounted for over 40 percent of the Canadian Gross Domestic Product (Statistics Canada, 2004). Between 1993 and 2002, the total value of goods exported from Canada more than doubled (Industry Canada, February 2006). Export-oriented firms account for one in three Canadian jobs (Export Development Canada, 2005). SMEs make a significant contribution to this export market, accounting for 97 percent of exporter firms.

Export Activity of Canadian SMEs

The decision to export can be motivated by many factors, including the intention to increase firm revenue; extend seasonal sales; offset limited or declining Canadian markets; diversify risk across several markets; increase operational economies of scale; and capitalize on perceived competitive advantages, organizational skills and resources. In 2004, 8 percent of Canadian SMEs exported goods or services — down 3 percent from 2000.^{Footnote 1} While it is not clear why proportionately fewer businesses reported having export sales, exporters in the smallest size classes accounted for most of the decline.^{Footnote 2} Canadian exporters reported a third of their sales were generated from exports in 2004.

Definitions
There are four categories of international trade: goods or services that cross the Canadian border, including transportation and travel; customers, such as tourists, who cross the border into Canada; Canadian firms that establish a commercial presence abroad; and revenue generated when Canadian personnel do business abroad.

For the purposes of this profile, small and medium-sized enterprise (SME) exporters are defined as businesses with fewer than 500 employees and less than $50 million in annual revenues that sold goods or services outside Canada during 2004. This definition of an SME excludes non-profit and government organizations, schools, hospitals, subsidiaries, co-operatives, and financing and leasing companies.

Export propensity is defined as the proportion of businesses reporting sales of goods or services outside Canada.

Export intensity is defined as the ratio of revenue from exports to total sales revenue.

Market Proximity a Factor for Exporter SMEs

Among all Canadian regions, SMEs located in British Columbia and the Atlantic provinces were most likely to export in 2004. As Figure 1 illustrates, 10 percent of SMEs in British Columbia and 9 percent of businesses in the Atlantic provinces operated in the international market. This may reflect the flow of Canadian goods and services through these coastal provinces for export to the Pacific Rim or Europe (Schrier, 2001).

Throughout Ontario and Quebec, 8 percent of SMEs exported in 2004. Given that these two provinces have the highest concentrations of manufacturing firms, however, the impact of SMEs on export activity may be underestimated. A significant proportion of manufacturing-based SMEs in Ontario and Quebec are integrated into the supply chains of larger firms (e.g. the automobile industry and its suppliers) that would then export worldwide. Additional research is required to fully understand the contribution of SMEs to Canadian exports through supply chains.

SMEs operating in urban locations were also more likely to export than rural-based firms. In 2004, 9 percent of urban-based SMEs reported export sales compared with 6 percent of rural-based SMEs. This compares with 12 percent of urban firms and 7 percent of rural businesses that exported in 2000.

^{Footnote 1} While the scale of the decrease is different, the trend is consistent with Statistics Canada's findings drawn from the Canadian Exporter Registry, which reports that the total number of Canadian establishments that exported goods declined for the first time in 2002, down 2 percent from 2001. Note that the Survey on Financing of Small and Medium Enterprises captures information on export sales of both goods and services, meaning these figures are not directly comparable.

^{Footnote 2} Statistics Canada reports that the value of exports from the total wholesale trade industry fell almost 10 percent between 2001 and 2002 and that the wholesale trade industry accounted for the largest drop in the number of exporters ("Profile of Canadian Exporters," 1993 to 2002. The Daily, Monday, March 22, 2004.)