By Dr. Rebecca Reuber, Professor of Strategic Management, University of Toronto, Rotman School of Management

It’s important to recognize that internationalizing their sales and business activities is really difficult for small and medium-sized enterprises (SMEs). There are business risks associated with foreign markets, foreign exchange risks, and political risks. There is difficulty in monitoring remote operations over a distance, and there is a lack of knowledge, compared with companies that are already competing in those markets. We know that the number of SMEs in Canada that stop exporting every year is roughly equal to the number of those that start, and we know that just over half of new exporters stop exporting in the first year. I think that speaks to the difficulty of doing it well, and that has to be recognized.

Because of these risks and difficulties, internationalization is uncommon even in countries with large immigrant populations, where one would expect that information about foreign markets would be readily available. Canada is doing reasonably well. One in ten Canadian SMEs exports, but about 90% export only to the U.S., and the average export sales are only 4% of total sales. They are pretty minor exporters. Across the board, this is something that is fairly low-activity. I don’t think we can assume that all of these owners and entrepreneurs are short-sighted, uninformed, or making bad decisions. I think they are right to be wary of the risks, and I think that many of them are making very sound decisions for themselves and for their firms when they decide to stay in the domestic market, or to internationalize slowly, cautiously, and even marginally.

I think it has to be said that this is not for everybody. It’s really important to be able to target programs and policies to the SMEs that have the greatest likelihood of success. A failure doesn’t hurt just the SME itself; I believe it hurts the whole community, because the word gets out that this is something that is hard to do and that companies fail at. I think it can make other SMEs reluctant to try. That is the background in which I am going to situate my next remarks.

The next thing I am going to talk about is what we know. What we know well is that innovation matters. The most innovative SMEs have the most success. They are most likely to export and have the most success there. There are a number of reasons for this that I think are important to understand.

The first is that these technology-based industries tend to be global industries. There are global standards and global requirements, so there is less need to adapt their products and services for local markets. If you are making medical devices, or something that goes into a USB slot, those are global standards that everybody uses. That makes it a little bit easier to enter foreign markets.

Also, if they are innovative, Canadian SMEs can charge higher prices for their products, which buffers them from some of these risks and difficulties.

A third reason is that it’s harder and costlier for their rivals to imitate trailblazers. If a Canadian SME is really on the forefront of innovation, it’s just going to be harder for foreign rivals to catch up, which means that intellectual property protection, which is a big issue for some, becomes less of an issue because they are always moving.

So those are three economic reasons, but there are some social reasons as well. Because innovative firms tend to become known globally through things like participation in international standards organizations or through international technical conferences, that gives them recognition with foreign players just by virtue of their participating in those global forums.

It also means that potential partners and customers in foreign markets are interested in them. I think we think of the firms as being interested in the markets, or wanting to go into markets, but it’s important to realize sometimes they don’t have that option because the partners and customers in foreign markets aren’t that interested in them. But if they are highly reputable and innovative, it can help foreign customers get the approvals and the funding they need to do their project. It means they are able to attract the very best foreign customers—a Tata, say, in India—and the very best foreign customers have standards like multinationals everywhere, which just makes it a lot less risky and easier to do business with. It also means they are great references.

So we know that well. We know that innovative firms do better in foreign markets. The issues are, how do you increase innovation, and how do you give them a space to be profiled there?

Moving on from that, though, I think there are three important gaps in our knowledge beyond the issue of innovation. Number one is what about small to medium-size firms in multi-domestic industries? These are global industries, but there are lots of industries where local adaptation, local tastes and preferences and conditions, matter. We know a lot less about that. We know it takes a lot more time to learn about what adaptations in marketing, products, and services are required. Because what the customers want is country by country, that means the learning is country by country. We know there can be high investment costs to both adapt products and to provide a local presence. That’s a whole area we don’t know a lot about.

A second area we don’t know a lot about is how we can stop Canadian SMEs from suffering from what’s been called the “liability of outsidership”? We know that business networks are important for the transmission of information and tacit knowledge. We know that local partners are required in some countries to do business and are certainly desirable in others. But we tend to think of entering a foreign market as a one-time decision, when really it’s a decision to position yourself in that market, and how do you do that? It’s a much longer-term proposition that takes years rather than months.

Finally, going along with that is how to signal trustworthiness and commitment. I talked to one SME owner, and he said when he went to a market in South America, he got impatient, because people didn’t want to pay attention to him. They’d had four or five Canadian SMEs showing up, starting, and then backing off because things were a lot more difficult and time-consuming than they thought it would be. So how do we stop behaviour like that?

My last point about the gap is what’s the role of the Internet in all of this? It seems a no-brainer and totally obvious that the Internet should facilitate the internationalization of SMEs, but there are some reasons to believe that it can actually over the long term constrain growth. Doing business online can let SMEs do business in foreign markets without actually going to those foreign markets, so they don’t meet people there, they don’t develop business networks. They might miss opportunities to develop partnerships and to understand local preferences and conditions. So they may sell some there, but that may really limit their capacity to grow those markets.

Internet-based internationalization tends to be quite scattershot and ad hoc while orders come in, and again, that can limit the firm’s actually building and becoming established in the market and hinder long-term ability to grow those sales and to grow in the market.