Trade and small and medium-sized enterprises

Trade liberalization has been a significant stimulus to economic growth and prosperity around the world, including in Canada. However, trade affects segments of the economy differently, based on a wide range of factors. In this context, the ability of small and medium-sized enterprises (SMEs) to leverage economic opportunities abroad is an important consideration for trade policy-makers as they negotiate free trade agreements (FTAs).

Incorporating a SME perspective into macroeconomic policy, including trade policy, is key to pursuing inclusive and sustainable economic development and to achieving outcomes that are more fair and beneficial for all. This approach is consistent with the Government of Canada’s broader commitment to supporting the growth and development of SMEs and their ability to export products and services abroad.

The role of SMEs in the Canadian economy

SMEs make up the vast majority of companies in Canada and are an important source of innovation and job creation. As of December 2017 ^{Footnote 1}:

• 97.9% (1.15 million) were small businesses (1 to 99 employees)
• 1.9% (almost 22,000) were medium-sized firms (100 to 499 employees)
• 0.2% (2,939) were large businesses

SMEs employed over 10.6 million Canadians, representing almost 90% of the private-sector workforce^{Footnote 2}:

• small businesses employed 8.3 million individuals
• medium-sized businesses employed 2.4 million individuals

Representation by sector

Trade can affect SMEs differently depending upon the industry or sector in which they operate. For example, in Canada, SMEs are overrepresented in lower-growth and lower-wage industries, such as retail trade, and in non-tradeable services, such as health care and social assistance.

More than half (55.4%) of SMEs are present in 5 industries^{Footnote 3}:

• construction (12.3%)
• retail trade (12.2%)
• professional, scientific and technical services (12.2%)
• other services (except public administration) (9.5%)
• health care and social assistance (9.2%)

In 2017, Canada’s exports of goods increased to $483.6 billion, of which 41.9% was attributable to SMEs. More than 48,000 Canadian establishments exported goods, the vast majority of which were SMEs (97.4%). These SMEs only accounted for a small portion of the total number of SMEs in Canada (11.7%).

SMEs also accounted for a similar share of Canada’s services exports in 2017: 42% of total commercial services exports was performed by SMEs, totalling $48 billion. Most SMEs are focused on providing local services, as approximately 93% of all SMEs report their sale destination to be within their local municipality or region and only 11.7% to be outside of Canada (export sales). A significant opportunity rests in supporting more SMEs to think global.

Out of the 11.7% of SMEs that do export, top sectors include^{Footnote 4}:

• manufacturing (14.2%)
• wholesale trade (9.0%)
• transportation and warehousing (8.8%)
• professional, scientific and technical services (7.8%)

Trade and innovation

The fastest way for SMEs to boost productivity and economic growth is to innovate. Innovative business behaviour encompasses a broad range of practices, including technological inventions and optimizing operations, to turn creative ideas into innovations. SME exporters are significant innovators. Companies that export, on average, innovate almost twice as much as their counterparts that do not.

Trade-related challenges for SMEs

Decreased telecommunications and transportation costs, reduced tariffs and more open trade policies have enabled businesses of all sizes and sectors to export. Yet, there are still many challenges that SMEs face when exporting including^{Footnote 5}:

• protecting intellectual property
• administrative and border issues inside and outside Canada
• logistics
• market knowledge
• financing and insurance

Why address these challenges?

By increasing SME participation in international trade and by eliminating the challenges they face accessing global markets, the Government of Canada can use trade to provide SMEs with the opportunity to enhance their competitive and innovative edge, spur productivity and provide higher paying jobs for Canadians^{Footnote 6}. Evidence shows that exporting firms compared to non-exporting firms have, on average, the following important characteristics^{Footnote 7}:

• They are larger, more productive and more innovative.
• They have higher growth and revenues.
• They are more resilient to market shocks.
• They hire more workers, including women and other diverse population groups, pay higher wages and invest more in employee training.
• They invest more in research and development, information and communications technologies, and machinery and equipment.

Trade policies can have different effects on SMEs. For this reason, the Government of Canada wishes to ensure that trade policies take SME-related factors into account during FTA negotiations to understand the risks and opportunities and mitigate potential negative effects on particular demographics in the economy. Looking for solutions to the challenges faced by SMEs and increasing the number of SMEs that export has important socio-economic benefits for both Canadian society and the individual SMEs within it.