Not for Beginners: Should Small Players Go to Fast-Growth Markets?
While there is a new emphasis on smaller Canadian companies becoming more active in emerging markets and developing countries, not all small- and medium-sized businesses will succeed, argue Danielle Goldfarb and Sui Sui.
Several Canadian business and policy commentators have argued for more businesses to export beyond the U.S. and for larger businesses to mentor smaller businesses to succeed in export markets. The federal government’s 2013 Global Markets Action Plan also makes a similar case for a larger number of smaller companies to be active in emerging markets and particularly in developing countries whose combined markets now represent fully half of the global economy.
We agree with a refocusing on high-growth emerging markets, but they may not be for everyone. The actual experience of Canadian small- and medium-sized businesses suggests that while fast-growth markets offer tremendous rewards, they can be extremely challenging and risky. Conference Board of Canada research shows that smaller companies are unlikely to last long in global markets – particularly in fast-growing, developing economies – without a strong set of capabilities, products, and strategies.
Our briefing, Not for Beginners: Should SMEs Go to Fast-Growth Markets?, examined how Canadian companies with fewer than 500 employees performed when their companies expanded globally. As the first to examine the performance of Canada’s smaller players in fast-growth markets, this study provided a fresh perspective. Rather than examining the experience of a sample of Canadian SMEs, we examined the experience of all Canadian SMEs, and over a long period (1994 to 2008).
A group of smaller players has successfully penetrated these highly challenging markets. Top performers stayed in these markets and almost doubled their sales in fast-growth markets every year.
Moreover, the operating characteristics of these successful small and medium-sized companies are clear. When the impact of company size and other factors is removed, we see that companies had a greater chance of boosting their sales and staying in fast-growth markets if they:
- gained experience in Canada or other advanced economies first, rather than trying to make their first sales in fast-growth markets;
- introduced new products frequently to these markets (a sign of innovation);
- paid higher wages (a sign of higher productivity and higher-skilled employees);
- exported to a larger number of markets;
- had greater access to financing.
Unfortunately, only a tiny group of small- and medium-sized exporters accounts for most of Canada’s SME exports, as measured by value (dollars of revenue earned). Most of the exporters in this group remain in the U.S. market rather than in fast-growth markets.
Moreover, our analysis shows that there was a wide gap between the best- and worst-performing firms. For the weakest performers, sales to fast-growth markets dropped by 70 per cent annually after initial success, and they exited these markets after less than a year.
With the right capabilities, a world-leading technology, product, or service, and constant innovation, some of Canada’s smaller players are able to experience tremendous success in rapidly growing markets beyond the United States. Smaller businesses without these strengths may need to pursue other strategies to take advantage of fast-growth developing economies. These strategies could include selling into U.S. or Canadian multinationals that are active in global markets, or building up capabilities in Canada or other advanced markets first.
In short, companies that have strong capabilities should look to emerging markets to improve their company performance. But governments and larger businesses should aim to ensure that companies have strong capabilities first, instead of giving blanket advice for all smaller businesses to go global or to fast-growth markets.