1ST REPORT OF THE STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

CHAPTER FOUR
COMPETITIVENESS ISSUES

THE NEED

This inquiry has reconfirmed that the main concern of Canadian SMEs is how to access sufficient credit and working capital to explore and exploit international markets. With the enormous growth in international trade, a secondary, but increasingly important, issue is how to gain practical and useful information and advice on business opportunities and business practices in foreign countries.

Removing Disadvantageous Regulations

Both of these challenges are part of a broader concern of Canadian SMEs regarding the domestic business environment and the extent to which domestic regulations, procedures and standards affect the ability of Canadian businesses to compete internationally. Related to this issue is the extent to which government programs and services that are intended to assist SMEs to exploit international business opportunities actually have this desired effect. In other words, unless government assistance has a positive impact on the bottom line of Canadian businesses, it can actually constitute an obstacle to the exploitation of international business opportunities. In order to have this positive impact, domestic regulatory and standards regimes need to become more streamlined and effective, if not eliminated.

Witnesses appearing before this Committee, noted the adverse effects of the regulatory burden on the ability of Canadian SMEs to compete both domestically and internationally. There were some interesting examples given. Barbara Creary, Publisher and Foreign Rights Director of Les Éditions la courte échelle, pointed out that only foreign publishers are eligible for Canada Council grants to translate Canadian literature for sale abroad. In effect, Canada subsidizes foreign publishers rather than Canadian translators for the cost of translation into a language other than French or English, of literary works by Canadian authors. Susan Whitney, President of the Susan Whitney Gallery, explained how the GST regulations imposed costs on art dealers interested in importing art. The requirement that the GST be paid up front on imported art valued at under $250,000 to be sold on consignment, effectively limits the ability of many art dealers to represent foreign artists and, in return, have the works of Canadian artists sold abroad.

Representatives from the food and agriculture sectors noted that, even after they comply with high Canadian standards and regulations, they risk having their products rejected upon entry into foreign markets despite trade agreements. In his comments on the need for regulatory reform, Leonard Lee, President of Lee Valley Tools, told the Committee that:

Canadian regulation of commerce is based on the outdated premise that goods will either be manufactured in Canada or, if imported, will pass through Canadian distributors and retailers to reach the consumer. As a result, almost all Canadian regulation imposes liability for safety standards, labelling, weights and measures, etc., only on Canadian manufacturers and vendors, not on Canadian consumers or on goods imported by anyone and by any means.

The problem with this form of regulation is that it functions only in a closed economy.

The concern expressed by Mr. Lee is for the effect of regulations on the cost base of Canadian businesses, but not just in terms of red tape, duplication and/or inefficient, inflexible regulatory processes. While reduction in these costs are important, they address only the efficiency and effectiveness of the regulatory burden and not the underlying focus of regulations and how they impact on the economic fundamentals of doing business in Canada. More and more, Canadian businesses are finding that they are high cost producers relative to their global competition. Consequently, they not only face difficulties in international markets, but as barriers to imports fall, they are often losing market share in their traditional domestic markets as well. Where Canadian companies lose market share to foreign competition, they also lose the economies of scale which can be an important base in producing for export markets. Mr. Lee went on to point out that, not only have standards not been harmonized following trade treaties, such as the FTA and NAFTA, basic principles such as "country of origin" and intellectual property rights provisions have also not been harmonized. The United States, for example, takes a "material transformation" approach to determining country of origin rather than a "value added" approach as does Canada. Intellectual property in the United States is determined on a "first to invent" rather than a "first to file" basis as is the case for Canada.

Several witnesses pointed out that the application of customs, trade and inspection regulations can be a major irritant for Canadian exporters entering the US markets. The Committee is concerned about the ability of Canadian exporters to compete in the United States, given that the FTA and NAFTA are soon to come into full force with little being accomplished as far as the harmonization of regulations and standards is concerned.

To redress this situation, the Committee recommends that the Canadian government should pursue actively the harmonization through international agreements of regulations and standards that have an impact on international trade.

Strategies of SMEs for exporting

Professor Jean-Marie Toulouse, Director of l'École des hautes études commerciales, has studied the export strategies of Canadian SMEs, particularly those of Ontario and Quebec-based firms. In his opinion, "there is no genuine strategy" for success in international markets.

Studies by Professor Toulouse suggest that there are at least five distinct reasons why SMEs export:

Survival. Competing in the international marketplace is essential to the longer term success of many companies, particularly high-tech firms. For these firms, the domestic market is not sufficiently large and the growth rate of the domestic economy is not sufficiently high to enable these firms to survive solely on the domestic market;
Competition. Increasingly, a firm's suppliers, customers and competitors are as likely to be halfway around the globe as right next door. Especially when faced with a larger number of competitors, the entrepreneur must reduce factor costs, introduce new products and services or enter new markets;
Expansion. Some companies try to replicate their domestic success in other markets. For these companies, international expansion may not be necessary for survival. However, it can become essential, particularly if competition within the domestic market intensifies, or if there is a persistent decline in growth rates, or if consumer tastes and attitudes regarding the company's product or service change;
Entrepreneurial drive. Many business people are driven to create new products and enter new markets, regardless of the state of the economy or marketplace in which they currently operate. For their firms, innovation, growth and exporting are simply a part of being in business. No less important is the entrepreneurial drive, previous experience, education, personal commitment and management style, including capacity to take risks of the business owner; and
Surplus. Still other firms enter export markets on an "as needed basis." For these companies, international markets represent an opportunity to increase cash flow, to smooth out fluctuations in the demand for the company's product or service and to absorb unexpected surpluses.

Just as there are differences in how companies become involved in international markets, there are also differences in the export strategies pursued by SMEs. Experience suggests that successful exporters use a combination of the following strategies:

Indirect. An SME may be an exporter by default (for example, the SME may supply components to a major company to be incorporated into products that are exported by that company). While not the exporter of record, the SME in this case is part of an export project. In this way, the firm participates indirectly in the business of exporting;
Stand-alone. In this strategy, a company is fully responsible for production, marketing, distribution and after sales servicing. This can be a very expensive way to enter an export market, especially for an SME. As a result, it is usually adopted by companies in specialized, niche markets where a distributor or agent contributes little value to the marketing of the product. For these firms, advertising, catalogues and trade shows are an effective way to reach potential customers;
Distributors and Agents. Employing distributors and agents can prove to be a difficult strategy for an SME to initiate successfully. Finding the right representative to market, distribute and service a product can require a considerable amount of information, time and luck. However, once established, such a representative's knowledge of local market conditions and distribution networks, and his or her direct personal contact with potential customers can prove to be useful assets in establishing and sustaining a presence in the target market; and
Strategic Alliances, Joint Ventures and Networks. These types of relationships are intended to build a critical mass of resources in order to gain the competitive advantages of scale, scope and speed of innovation that are important for SMEs to succeed in international markets. These relationships may be loose, informal arrangements created on an ad hoc basis through personal relationships, or they may be longer term collaborative ventures involving licensing and other contractual arrangements administered by a management team.

Because SMEs are organized in many different ways, pursue export opportunities for a number of different reasons and adopt different strategies, it follows that public and private supported international business development services geared to SMEs need to have a significant amount of flexibility in their eligibility requirements and in the forms of assistance that they offer.

All levels of government have recognized the growing importance of SMEs in international trade and each has responded to the many and varied needs of SMEs with a range of programs and services.

FEDERAL PROGRAMS

Within the federal government responsibility for trade promotion has, since 1982, rested with the Department of Foreign Affairs and International Trade, known previously as the Department of External Affairs. Prior to that, the Department of Industry, Trade and Commerce had the mandate to manage Canada's trade relations and to promote trade development.21 Responsibility for the Trade Commissioner Service was also shifted to DFAIT in the same year.

Although DFAIT was made the central agency for the coordination of trade development, only a small fraction of overall trade development programming and sector expertise was transferred to DFAIT either from what is now known as Industry Canada or from other federal government departments. Indeed, 18 separate federal departments and agencies have been identified at this time as having some kind of responsibility for international business development programming.22 Included in this group are all four federal regional economic development agencies.23

Environment Canada's Great Lakes Cleanup Fund provides an example of a federal department that offers opportunities to small and medium-sized businesses with respect to tapping international markets. The Fund, in partnership with other government and non-government agencies, demonstrates innovative and cost-effective technologies and techniques to rehabilitate water quality by dealing with contaminated sediments, optimizing municipal sewage treatment plants, controlling urban drainage, and restoring fish and wildlife habitat in the Great Lakes. The Fund has spent $43 million on 230 projects since 1990-91. Another $79 million has been contributed by nearly 300 partners. In a number of instances, as a direct result of a demonstration project, businesses have gone on to undertake commercial jobs in the Great Lakes region, nationally and internationally.

Grants and contributions available through the IBD Branch of DFAIT represent a large proportion of the total value of grants and contributions to business available from that Ministry. The budget for the IBD Branch for 1996-97 is over $60 million. However, a comparison of trade development programming of the IBD Branch with that of other federal departments illustrates the relatively modest slice of the trade development pie that is under DFAIT's direct control. For example, the Market and Industry Services Division of Agriculture and Agri-Food Canada manages sector-specific programs and services that are very similar to the more general programs of the IBD Branch. In particular, the Division provides trade development programming and market information and market intelligence on export markets through departmental officials in Ottawa and the regional offices as well as through agricultural trade commissioners posted in eight countries. The Division's budget for 1995-96 is $184 million, of which 77 percent is allocated to grants and contributions. Under the broad mandate of fostering "the domestic and international competitiveness of Canadian industry," Industry Canada also provides financial assistance and sector expertise through its Industrial and Aboriginal Programs Division. Grants and contributions for 1995-96 under this Division are budgeted at $265 million.

The Committee also heard testimony on the effectiveness of two federal agencies which have become important to SMEs seeking to export: the Canadian Commercial Corporation (CCC) and CIDA's Industrial Cooperation Program, generally known as CIDA Inc.

FEDERAL-PROVINCIAL COOPERATION

In addition to federal programs and services to support business development abroad, the provinces and a number of major cities have their own programs. This adds to the plethora of sources of assistance to which SMEs can turn. Increasing the choices which SMEs face can add to their difficulty in making decisions.

In an effort to coordinate federal and provincial trade development programs, as well as interdepartmental programs, Canada's International Business Strategy (CIBS) was launched in October 1995. CIBS is described by DFAIT as "the centrepiece of the federal government's commitment to a Team Canada partnership with the private sector and the provinces-a partnership based on developing winning strategies in 23 key industry sectors." For each sector, the strategy describes strategic issues in competing in the international marketplace and what each public and private sector partner has agreed to do to facilitate international business success. The CIBS is complemented by a number of other initiatives, including National Sector Teams, Regional Trade Networks, and the International Business Opportunities Centre. According to the Canadian Exporters Association, "the Canadian International Trade Business Strategy consultation process provides a useful framework within which government departments and agencies, together with the provinces, can coordinate trade promotion activities." At the same time, the CEA argues that this strategy "needs to be meshed more closely with the business community, particularly on a sectoral basis."

There is sufficient flexibility in this process to accommodate different regional and/or provincial approaches to the coordination of federal and provincial trade development programs. For example, in British Columbia, the Committee heard that the BC Trade Development Corporation (recently abolished) was involved in coordinating all provincial trade development programs. It was also interested in playing a more active role in the coordination of all public sector (federal and provincial) trade development programs while leaving the federal government to concentrate on international representation and coordination:

The federal government is well placed to provide general trade information services, in-market support, and opportunities identification through its international network of embassies and consulates. But a regional agency with more immediate knowledge of local capabilities and needs is better placed to provide in-depth and long-term services to companies as they evolve as exporters. Clearly, there is a natural division of responsibilities in trade development between the two levels of government.

In Atlantic Canada, the approach to federal and provincial coordination of activities is more integrated. In the case of New Brunswick, the provincial government, and specifically its Department of Economic Development and Tourism, has been involved over the last several years with DFAIT, Industry Canada and the Atlantic Canada Opportunities Agency (ACOA) in a process of streamlining trade development services. These activities were given extra impetus in March 1995 when it was announced that they would work toward the development of a fully integrated export development strategy. At the time, it was clear to all involved that change was necessary in order to be more effective. Commenting on this process, Director of Trade and Investment Michael MacBride said everyone involved agreed that "never did so many do so much for so few."

The process has involved the identification of client needs through the development of an export ready list, sector profiles, and an international business strategy; and the coordination of the delivery of government programs and services. Respective roles have been delineated, with the provincial department having primary responsibility for assessing the export capabilities of individual companies, while the federal agencies focus on market intelligence and business opportunities. ACOA was given primary responsibility for training.

As part of this integrated export strategy, a "one-stop shop" has been implemented to deliver financial assistance and service. In order to reduce overlap and duplication, a "clearing house" approach to company assistance has been developed whereby a client can get information and service from any provincial or federal government office.

Between these two different strategies for coordinating federal and provincial programs is the approach being adopted by the Government of Alberta. In particular, Alberta has decided to examine over a five-year period with DFAIT and Industry Canada ways in which to delineate further the responsibilities of the federal and provincial governments with respect to assisting Alberta-based companies become more active in international markets. This examination is being coordinated through the Canada-Alberta Memorandum of Understanding (MOU) on Cooperation on International Business Development, which was signed in April 1995. (Most other provincial governments have also signed similar MOUs with the federal government.) This MOU established a framework for government to cooperate in providing coordinated, effective programs and services for exporters and for companies seeking investment and new technology.

In the opinion of the Canadian Exporters' Association, these MOUs hold "promise of further improvement in coordination. For their part, budgetary restraint has played an important role in reducing provincial trade initiatives, especially those that overlap with the federal government. A desire to supplement, rather than compete, seems evident in most provinces".

INVOLVEMENT OF MUNICIPALITIES IN INTERNATIONAL TRADE AND BUSINESS DEVELOPMENT

The Committee also heard about the activities of four Canadian cities - Toronto, Montreal, Calgary and Kitchener - all four of which are actively involved in international business development. The larger cities coordinate their activities with the mayors' offices and local businesses through small economic development commissions. All four cities participate in trade missions, some of which are organized independently. Others are organized with other levels of government. Twinning with foreign cities is a method commonly used to develop institutional links and personal contacts among officials. This permits cities to focus on specific markets and industrial sectors and improves the visibility of the city in key areas of the world.

In all four cities, the agendas and specific interests of local businesses drive these activities. For example, the City of Calgary undertakes a number of trade initiatives which focus on the oil and gas sector, high-tech industries related to this sector, environmental engineering, construction and hospital administration. Decisions are made and priorities set by a commission that involves the local chamber of commerce and the city. The Mayor is also advised by a committee of 80-100 local business representatives.

The Mayor of Montreal, in cooperation with the 28 other cities comprising the regional municipality, has focussed international business development activities on two large trade missions per year. Montreal concentrates on foreign cities and countries where the culture places specific importance on public institutions and official government missions. This is especially the case in many Asian countries, and, in Montreal's experience, particularly in Vietnam, China and Japan.

When she appeared before the Committee, Toronto Mayor Barbara Hall stressed the advantages of having large multicultural communities in the Metro Toronto area. She argued that "diversity and multiculturalism are important assets in developing international trading links and attracting foreign business." She described how this diversity has allowed "an extraordinary number of small businesses to flourish" in the Toronto area. Mayor Hall also argued that these businesses produce significant economic spinoffs, because they are closely linked to their cultural communities. Since most of these businesses are locally-owned, the economic benefits flow back to the community.

Mayor Hall said that Toronto strongly supported the federal government-led trade missions. However, she suggested that municipalities should become more involved in the organization of these missions.

In 1987, the City of Kitchener pooled resources with the cities of Cambridge, Waterloo and Guelph to form Canada's Technology Triangle (CTT). This economic association was established to achieve four main objectives:

to respond to new investment inquiries with one solid voice;
to provide an economic catalyst for the development and adaptation of new technology;
to offer a comprehensive forum for professional development and information sourcing; and
to capitalize on key cultural, educational and business facilities in the area.

CTT has also encouraged the development of other associations for more specific functions. Subsequently, a number of trade associations have been established, including the Computer Technology Network and Canada's Technology Triangle Export Network. A number of non-governmental research institutions have also been created, including the Canadian Institute of Technology for the Environment (CITE). CITE was established in 1992 to help facilitate the commercialization of environmental technology at home and abroad by supporting actively more than 100 environmental firms in developing and marketing globally competitive environmental technologies.

TRADE AND BUSINESS DEVELOPMENT SUPPORT:
NEED FOR CLARIFICATION

Efforts have been made, as has been noted above, to consolidate information on the many and varied sources of information and assistance available to SMEs involved in trade. Several witnesses acknowledged that there have been a number of improvements made over the past two years in the coordination and streamlining of programs and services.

One such effort was a review of the main international business development programs administered by the IBD Branch, released in June 1995 by DFAIT24 as well as those offered by the provinces and the four regional economic development agencies. It is significant that programs of other federal departments and agencies were not even covered in this survey. The number of similarities and differences in the objectives and characteristics of each of these programs makes interesting reading.

Except for the science and technology collaboration program, all DFAIT programs are targeted at SMEs. All programs administered by the Federal Office of Regional Development-Quebec (FORD-Q) are focussed exclusively on SMEs, while the other regional economic development agencies do not have a specific SME focus. Three provincial government programs (Alberta, Newfoundland and Saskatchewan) are targeted at SMEs. The remaining provincial programs do not limit eligibility according to the size of the firm:
DFAIT has 14 categories of assistance. Ontario and Quebec have 13 and 10 respectively. The other provinces have varying complements of support categories. DFAIT is currently reorganizing its programs to fit under one central program which will be called the Program for International Business Development (PIBD);
Assistance is most commonly available for advertising, promotional materials and trade fairs;
The Capital Projects Bidding Category, which assists companies in bidding on international contracts, is supported only by Ontario, Quebec and DFAIT;
Except in a few cases, the provincial assistance programs do not require repayment, whereas the federal government's assistance programs call for repayment under certain conditions. The most common cost-sharing requirement is 50 percent;
Government policy in British Columbia, Alberta and Nova Scotia is moving toward reduction or elimination of financial assistance to business. These governments are focussing more on providing "soft assistance" such as advice, market intelligence and advocacy. The new Ontario government is currently reviewing the objectives of its trade development programs; and
The definition of export varies according to the program. In most provinces, it means out-of-country. For some provinces, it means out-of-province. For the Atlantic provinces, it frequently means out-of-region.

Witnesses representing SMEs were in agreement that there is still too much duplication and overlap in the programs and services available from all levels of government, as well as from the private sector.

The problem was clearly expressed by Lindsay Gordon, Executive Vice-President of The Hongkong Bank of Canada, who summed up the views of many SMEs when he commented: "Too often the new exporter is overwhelmed by the number of programs and confused by the amount of apparent duplication between federal and provincial export development programs. There is a need to continue to streamline access to information for small exporters."

A recent federal initiative to address this problem has been the establishment of the Canada Business Development Service Centres. A Centre has been set up in each province. In cooperation with the provinces, municipalities and the private sector, they provide speedy responses by telephone, fax and E-mail to requests for information about programs and services available to SMEs. The Committee heard many favourable comments about this new service. (The addresses of the Service Centres appear as Appendix 5.)

More needs to be done, however. It is particulary important to catalogue programs offered by all the federal departments, since this does not appear to exist. Otherwise there is a risk that the plethora of programs, some of which compete with each other, may discourage SMEs from taking the time to seek assistance.

In order to guide the federal government in the further consolidation and streamlining of government-sponsored international trade and business development programs, the Committee recommends the following:

(a) The Committee welcomes the government's initiative in establishing the Canada Business Development Service Centres. To improve the effectiveness of this service, the Committee recommends that documentation on programs and services already available be synthesized in a comprehensive bibliography to assist SMEs to access more readily their particular information or service needs. Such a bibliography should cover existing programs and services being offered by the federal government and the provincial governments. The Committee was impressed by the guide prepared by Quebec authorities for their SMEs;

(b) The Committee recommends that the federal government indicate clearly in this document the roles and responsibilities of each of its departments and agencies in the area of international business development. The document should also indicate precisely what kinds of services SMEs should expect from these departments and agencies and how these services are interlinked;

(c) The bibliography lists the roles for each government, and explains how each program and service is linked to the next. SMEs should also be provided with a list of private sector contacts for services that complement those provided in federal, provincial and municipal programs; and

(d) SMEs should be provided with criteria which would help them determine their "export readiness." If they needed training or other specialized services, those would either be provided or the SME would be directed to where to access such services. In this way, SMEs would get involved in programs and services when they are ready to take advantage of them.

21O. Mary Hill, Canada's Salesman to the World: The Department of Trade and Commerce, 1892-1939, (Montreal: McGill-Queen's University Press, 1977).

22Federal departments include: DFAIT, CIDA, EDC, CCC, Agriculture and Agri-Food Canada, Environment Canada, Fisheries and Oceans, Industry Canada, National Defence, National Research Council, National Resources Canada, and the Business Development Bank of Canada.

23Atlantic Canada Opportunities Agency (ACOA), Federal Office of Regional Development - Quebec (FORD-Q), Federal Economic Development in Northern Ontario (FEDNOR), and Western Economic Diversification Canada (WD).

24Campbell Consulting Associates, Review of Financial Assistance for International Business Development, prepared for DFAIT in June 1995.

CHAPTER FOUR COMPETITIVENESS ISSUES