Study on Assistance with the Internationalization of Small and Medium-Size Quebec Enterprises

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About this publication

Publication author : Université de Québec à Montréal - Canada Research Chair on the Management of Technology

Collaborator : Canada Economic Development for Quebec regions

Publish date : March 15, 2012

Summary :

This research was partially financed by the Economic Development Agency of Canada for the Regions of Quebec through the Regional Development Study program.

The opinions expressed in this report are strictly those of the authors and in no way reflect those of the Agency.

Table of Contents

  1. Executive Summary
  2. 1. Introduction
  3. 2. Conceptual framework of the study
  4. 3. Methodology
  5. 4. Internationalization profile of Quebec manufacturing firms
  6. 5. Assistance with the internationalization of Quebec SMEs
  7. 6. Improving practices of assistance with internationalization in Quebec SMEs
  8. 7. Conclusion and recommendations
  9. Bibliography

Executive Summary

It has become mandatory for the small and medium enterprises (SME) of Quebec’s manufacturing sector to adopt an internationalization strategy in order to acquire new markets and increase sales. At present, SMEs account for a low percentage of Canadian and Quebec exports: SMEs face greater barriers than large corporations, due to their lack of resources. The present study aims at understanding the modes of internationalization of Quebec SMEs, in order to identify the best practices, define the needs of these companies in terms of international expansion, identify barriers to expansion, and be able to recognize suitable practices of assistance with internationalization in Canada, in Quebec and abroad.

Based on analysis of the literature concerning the practices of business firms and assistance organizations, we created a questionnaire and sent it by mail to a sample of over 300 manufacturing sector SMEs in Quebec. We also conducted personal interviews with another, smaller sample of firms at an advanced stage of internationalization. Finally, we interviewed the heads of a dozen federal and provincial programs, and of community agencies assisting Quebec SMEs with their international activities.

The postal survey found that in older enterprises with over 30 employees on average, two thirds conducted R-D and 57% conducted international activities. Our sample was biased in favor of innovating and internationalized enterprises. In these companies, exporting was the most frequently found activity. The second most common internationalization activity was importing. A small proportion of companies became internationalized through direct foreign investment, alliances or participation in supply chains.

The main obstacles encountered by business firms are the high costs of internationalization, a lack of information about overseas opportunities, and the laws and regulations governing foreign markets. However, a large proportion of companies encountered problems related to the strong Canadian dollar, the American economic crisis and competition from South-East Asia, particularly China.

We found that enterprises that have internationalized their activities the most are those that innovate the most. Innovation allows them to have new products or better products than their foreign competitors. Moreover, innovation requires that they examine the products of their foreign competitors, as well as the markets for which these products are intended.

Examination of the activities of financial and support institutions showed that a wide range of assistance mechanisms is available to Quebec SMEs. However, the latter might not be using these mechanisms to their full potential. First, many SMEs do not know these services, although all the companies have dealt with one of the institutions at some time. Second, because of lack of knowledge of the programs and of the fact that each program is aimed at a different stage of company development, SME directors sometimes apply to agencies that do not provide the assistance they desire, and their applications are denied. The agencies most often solicited by the SMEs in our sample were, in this order, EDC, Quebec’s MDEIE, DBC, Quebec’s SADC network and Industry Canada. Company directors with a university education made the most use of these various services. The SMEs in our sample were not aware of some of the assistance agencies. But most of the companies used R-D tax credits.

We have suggested that the programs of assistance to enterprises be maintained, and that the managers of these programs visit business firms regularly to acquaint them with the available programs. Methods of assistance with internationalization should become as widespread as possible, and become part of all assistance programs offered to business firms. Financing program managers in the various institutions should have greater awareness of the other assistance agencies, so as to direct enterprises to the programs best suited to their needs, when SME executives come to see them. In addition, agencies must stress the importance of innovating and developing quality control programs, since both these activities are crucial for internationalization.

We have also proposed the creation of a unique Internet portal serving to centralize the information needed by SMEs. This portal would explain in a simple and clear fashion the many programs available and the stages of company development for which they are intended. The portal should also provide information on the people to contact in each agency. Certain assistance measures are the responsibility of specific institutions. Quebec’s CRIQ and the CNRC institutes give advice to companies concerning innovation and quality control. Emploi Quebec provides assistance with hiring management-level personnel, and with training existing personnel. CEDCs assist companies at the start-up stage. These institutions often play a major role in the early stages of the life cycle of SMEs. Other public agencies contribute assistance at later stages. Once an enterprise has tested an innovative product or group of products on a market or markets, expansion becomes the next logical step. The Development Bank of Canada (DBC), the Canadian Trade Corporation (CTC), the Department of Foreign Affairs and International Trade of Canada (DFAIT), Invest Quebec (IQ) and the Board of Trade of Metropolitan Montreal (BTMM) are among the institutions that provide assistance to companies at later stages.

In summary, the abundance of assistance programs and agencies is both an asset (because it answers almost all the needs of SMEs) and a challenge, because firms must learn about a large number of programs, each with its own conditions and requirements. What remains to be done is to make these services easily accessible to business companies.

1. Introduction

This study examines the internationalization of small and medium-size manufacturing enterprises (SME) in Quebec. The objectives of the study project were:

The study was conducted in four stages. First, in order to identify the major factors involved, we described the international activities of Quebec manufacturing SMEs. We drew on the business and economic literature of the field. The data were taken from a large-scale survey conducted on a sample comprised of 360 Quebec manufacturing SMEs. Second, we focused on new mechanisms and policies of assistance with internationalization, available to Quebec SMEs. To do so, we first analyzed various existing federal and provincial programs of assistance with internationalization, and then compared their evaluation by the agencies that create and implement them with their evaluation by the SMEs intended to benefit from them. At the same time, we studied previous experiments of assistance to enterprises in other OECD countries, in order to assess their relevance to the Quebec context. The third stage consisted of in-depth analysis of the success factors encountered in the best internationalization experiments in manufacturing SMEs. The data were obtained by conducting 40 semi-structured interviews with highly internationalized Quebec SMEs, and with heads of federal and provincial assistance programs. The final stage of the project presents a detailed implementation program of measures for the dissemination of the best internationalization practices observed in Quebec manufacturing SMEs. Concrete measures will be suggested to the various participants in economic development, in order to facilitate networking and the creation of synergies between the different participants.

2. Conceptual framework of the study

2.1 Research context

Is internationalization a condition for the survival and growth of small and medium-size manufacturing enterprises (SMEs)? What are the incentives, obstacles, opportunities and risks inherent to this process? The objective of the present project is to identify the best practices of SMEs, as well as the best policies and means of assistance with internationalization available to Quebec manufacturing SMEs, and to propose a program for the dissemination and adoption of these practices by enterprises concerned by this phenomenon.

Globalization exerts such strong pressure on the manufacturing sector that deindustrialization appeared as a possible threat in developed countries (Cowie et al, 2003; Doyle, 2002; Pilat et al, 2006). The situation worsened as a consequence of the economic recession, which caused a significant fall of all key indicators of the health of the Canadian manufacturing sector (Kowaluk and Larmour, 2008). Statistics Canada figures confirm the trend (Statistics Canada, 2009). Free trade demanded reorganization of the manufacturing sector, involving the closing of the least productive plants and the opening of more productive factories (Lileeva, 2008). Moreover, product range reorganization was implemented in order to reduce the number of products manufactured and to prolong their life cycle (Baldwin and MacDonald, 2005). Internationalization has also led to a structural reorganization of the manufacturing industry, whose durable goods production sector grew despite a reduction in the production of nondurable goods (Baldwin and MacDonald, 2009).

What is the situation in Quebec? The SMEs of the manufacturing sector constitute a mainstay of Quebec economic development. According to the Quebec Institute of Statistics, in 2007 SMEs represented 45% of employment in the province's manufacturing sector, and their contribution to the value added of the manufacturing sector represented 30%. However, globalization rendered the economic context more complex, and required a significant adjustment on the part of the entire manufacturing sector, which accounted for 77% of Quebec exports in 2006. But only 39% of the production of the Quebec manufacturing sector is exported, and 83% of this production is intended for the American market. The contribution of SMEs to exports in the manufacturing sector is low. Moreover, internationalization strategies in Quebec SMEs are centered mainly on exports and neglect other modes of internalization.

Numerous studies show that, compared to large corporations, SMEs face more barriers that hinder or slow down their internationalization process and decrease their profitability (OECD, 2009). The present project combines reflection, analysis and action intended to increase the overall competitiveness of Quebec SMEs in the manufacturing sector.

2.2 Theoretical and comparative aspects

SME internationalization—just as that of large corporations—depends on the resources these companies can invest to explore international opportunities. Resource-centered business theory suggests that SMEs often lack the resources needed to obtain information about international markets, and that this constitutes an obstacle to their development (Alvarez, 2004). SMEs can compensate for this lack of resources in several ways. The most innovating companies generate resources (revenues, knowledge, information, training methods) by creating innovative products, by placing them first in domestic markets and then in international markets. Other companies are less inventive and require government assistance with entering export markets, the assistance of foreign market data collection and dissemination agencies, subsidies for prospecting tours, or export insurance and financing. Governments attempt to bolster these enterprises through exports, enabling them to create employment, increase their profitability and contribute to state revenues (Eisinger, 1988).

A research study involving a sample of 73 highly internationalized Canadian manufacturing enterprises has shown that their R-D investments are more than double those of their industry, and that they often have original products in international markets. Thanks to their highly innovative activities, these SMEs are often active in niche oligopolies: they are very profitable, have acquired a large portion of the international market for their innovative products, and know their competitors. These SMEs have clear priorities concerning foreign market development (Niosi and Rivard, 1990). Their first choice is to export products made in Canada using existing facilities. Some firms found it difficult to export, either because their products were too expensive for local markets, because legal restrictions such as the Buy American Act prevented them from exporting to the United States, or because language or culture was seen as a major obstacle. Their second choice is to create an entirely controlled subsidiary abroad and transfer their technology to it. This insures that they maintain ownership of their innovations. But authorities in some countries, like China and India, favour co-ownership with local companies. In that case, the third choice is to create joint ventures with firms already present in the desired market. In cases where this option proved difficult or impossible to implement, enterprises considered transferring their technology to companies in the host country. These enterprises (several of whom still exist in Quebec) were particularly active in industries characterized by relatively intensive or intensive technological activity, such as the chemical industry, machinery, as well as electrical and electronic equipment.

Other studies confirmed the relation between innovation and internationalization. In a study on the internationalization of about 302 Australian manufacturing enterprises (173 of which were exporters), O'Cass and Weerawardena (2009) found a relation between innovation and exporting, and found that larger companies tended to innovate and export more than smaller firms.

Nevertheless, international development of SMEs encounters numerous obstacles. This explains the fact that few small and medium-size enterprises attempt internationalization. Governments assist SMEs to export, and this assistance is an important factor in their ability to enter foreign markets. A study of 203 Asian SMEs has shown the importance of public assistance for the international performance of SMEs (Shamsuddoha et al, 2009). Another study on 187 Canadian computer technology SMEs found that these public programs of assistance with exporting1 had greater impact on potential exporters and small-scale exporters than on enterprises with an established presence in international markets (Francis and Collins-Dodd, 2004). Other authors have expressed skepticism regarding the ability of governments to assist enterprises with exporting activities (Kotake and Czincota, 1992). Still other authors consider the subject as a whole to be insufficiently studied, and believe that it deserves greater attention (Gillespie and Riddle, 2004). The theoretical model developed by these authors points out two other important factors affecting business performance: trade environment and SME characteristics. The trade environment affects the international performance of SMEs in several ways: exchange rates may make their products more or less competitive, the economic context (expansion, recession) makes their markets more or less receptive, external competition may reduce their market share. As we will see, these characteristics of the trade environment affect the performance of Quebec companies.

Internal characteristics have an impact on the performance of enterprises and on their recourse to export assistance programs. Two of these characteristics merit further discussion. The first is absorptive capacity, which depends on the educational level of company directors and on the firm's ability to carry out R-D (Zarah and George, 2002). Absorptive capacity is defined as the ability to acquire external information, integrate it and use it to achieve trade objectives (Cohen and Levinthal, 1990). On the operational level, absorptive capacity has often been measured by the intensity of R-D activity, that is, by R-D investment divided by sales. However, empirical studies have shown that absorptive capacity impact on new product development shows an inversed U-curve, suggesting that returns on R-D expenditures increase up to a point and subsequently decrease (Stock et al, 2001).2

Finally, the second noteworthy characteristic is internationalization strategy. Studies have confirmed the relation between technology development and international expansion, but have also stressed that this expansion requires a coherent internationalization strategy. In other words, firms receiving assistance to explore international markets while remaining unaware of the conditions and restrictions involved tend to make "fishing expeditions" rather than insure sustained international expansion (McDougall and Oviett, 1996).

3. Methodology

A questionnaire was prepared and tested before being sent to several hundred manufacturing SMEs in Quebec. The Quebec Industrial Research Center (CRIQ) website displays a repertory of about 12 000 enterprises. When we tried to contact them by telephone, we discovered that several hundred of these SMEs no longer exist, although they have remained in the CRIQ database. We sent out nearly 3 000 questionnaires and received 306 usable completed questionnaires, as well as about one hundred marked "wrong address" or "moved". We coded these questionnaires and built an Excel base subsequently transformed into an SPSS data file for analysis.

We then prepared a second questionnaire with semi-structured questions and personally interviewed about forty SMEs across Quebec, giving priority to exporting companies.

Finally, an interview protocol was drafted and used for interviewing federal and provincial government agencies providing assistance with SME internationalization; these included the Development Bank of Canada, Invest Quebec and the Department of Foreign Affairs and International Trade Canada.

4. Internationalization profile of Quebec manufacturing firms

4.1 Profile of enterprises participating in the study

We must first outline the characteristics of the responding companies.

Age

Most of the responding enterprises were mature: the mean age since their foundation was 26.8 years, the median was 22 years and the mode was 15 years.

Size

The mean size of the SMEs was 33 employees in 2009 and 35 in 2008, with a median of 15 employees over the two years. There were multiple modes. Average annual turnover for 2008 was 6.2 million dollars, and 6.4 million for 2009. However, during the same period, median turnover decreased from 1.96 to 1.73 million dollars. In about one third of enterprises turnover decreased, while it increased in half of the firms.

Innovation and R-D

Two thirds (195 companies or 65%) of the responding enterprises conducted R-D, most of them for specific projects, but 21% as a permanent activity. Only 35% of responding enterprises conducted no R-D at all. It must be noted that according to the CRIQ database in combination with that of the Quebec Statistics Institute, about 26.6% out of the 12 008 manufacturing SMEs in Quebec showed R-D activity in 2010; therefore, our sample is strongly biased in favor of innovating enterprises.

In companies conducting R-D, R&D on sales was 7.27% in 2008, and 8.25% in 2009, and the median increased from 3% to 4% during the same period.

About 60 SMEs had not launched a new product or an upgraded product in the past three years. Among companies reporting innovations, 120 stated that their products were “a first” in Quebec, 106 stated that their products were new in Canada, 80 reported “a first” in North America, and 53 SMEs claimed at least one worldwide innovation. Of course, some firms had local or Canadian “firsts”, while others placed new products in more extended markets (Figure 1).

Figure 1. Innovation in Quebec manufacturing SMEs

Figure 1 Innovation in Quebec manufacturing SMEs - Innovation in Quebec manufacturing SMEs by number of enterprises: new product in Quebec approximately 125, new product in Canada approximately 105, new product in North America approximately 80, and new product in the world approximately 55.

Once again, we observed that the sample of our respondents was biased in favor of innovators: according to the OECD (OECD, 2006), about 53% of Canadian manufacturing companies conduct R-D and about 65% innovate. In our sample, 65% of companies conducted R-D and 80% of them innovated.

Business environment

About 173 enterprises (57% of the sample) considered the business environment of their industry turbulent. The sources of turbulence were diverse, but almost 73% of those who found the environment turbulent related this to customers, almost 63% attributed it to competitors, and a minority of companies related it to suppliers, to the government, to employees or to various other factors (Figure 2).

Figure 2. Turbulence and its causes in the business environment of SMEs

Figure 2. Turbulence and its causes in the business environment of SMEs - Turbulence and its causes in the business environment of SMEs by number of enterprises: turbulent approximately 170, client approximately 125, competitor approximately 110, supplier approximately 45, state approximately 45, employees approximately 25, others approximately 60.

4.2 International activities of Quebec manufacturing SMEs

Presence and interest of Quebec SMEs in international activities

Among the enterprises in our sample, 57% already conduct international activities; 43% of SMEs have no international presence (Figure 3).

This study concerned Quebec manufacturing SMEs in all industrial sectors. In our sample, only one sector, specifically the beverage and tobacco product manufacturing industry (NAICS code 312000)3 showed no internationalization activity whatsoever (Table 1).

In fact, it must be noted that in some sectors the tendency not to internationalize is stronger than in others. This is the case for the apparel manufacturing industry (NAICS code 315000), the furniture products manufacturing industry (NAICS code 337000) and the food manufacturing industry (NAICS code 311000).

Between 63 and 71% of responding firms operating in these sectors did not conduct international activities. By contrast, 88% of companies in the machinery manufacturing sector (NAICS code 333000) and the computer and electronic product manufacturing industry (NAICS code 334000) conducted international activities. Moreover, in several industrial sectors the number of firms with international activities is about the same as that of companies focusing on domestic markets. This is the case for the metal product manufacturing industry (NAICS code 332000), for wood products manufacturing (NAICS code 321000) and the miscellaneous manufacturing sector (NAICS code 339000). Consequently, considering the activity sector to be the main factor determining manufacturing SME internationalization constitutes taking a perspective that is too narrow.

Figure 3. Presence of international activity in Quebec manufacturing SMEs

Figure 3. Presence of international activity in Quebec manufacturing SMEs in percentage: 43 % of firms do not conduct international activity and 57 % of firms conduct international activities.

Our survey data revealed significant interest in internationalization on the part of companies having already conducted activities of this type. Out of 174 firms with international activities, 13% wanted to maintain the same level of internationalization, and 82% intended to increase their international activities in the future (Figure 4). By contrast, of the 132 surveyed companies with no international activities, only 30% wanted to increase internationalization activities in the future.

Table 1. Distribution of responding firms based on activity sector and presence of international activities
Classification NAISC Number of responding firms
No international activity Engages in international activities
31 1000 - Food manufacturing 15 9
31 2000 - Beverage and tobacco products manufacturing 2 0
31 3000 - Textile mills 0 1
31 4000 - Textile product mills 3 3
31 5000 - Apparel manufacturing 5 2
31 6000 - Leather and allied product manufacturing 0 2
32 1000 - Wood product manufacturing 16 16
32 2000 - Pulp and paper 0 2
32 3000 - Printing and related support activities 9 5
32 5000 - Chemical product manufacturing 7 6
32 6000 - Plastics and rubber products manufacturing 4 8
32 7000 - Nonmetallic mineral products manufacturing 2 8
33 1000 - Fabricated metal product manufacturing 1 1
33 2000 - Metal product manufacturing 23 23
33 3000 - Machinery manufacturing 4 29
33 4000 - Computer and electronic product manufacturing 2 15
33 5000 - Electrical equipment, appliance and components manufacturing 0 8
33 6000 - Transportation equipment 1 2
33 7000 - Furniture and fixtures 17 7
33 9000 - Miscellaneous manufacturing 21 23
Unclassified companies 0 4
Total number of responding firms 132 174

Figure 4. Forecast of international activities in SMEs with previous international experience

Figure 4. Forecast of international activities in SMEs with previous international experience in percentage: 6 % will reduce international activities in the future, 4 % will maintain the same level of international activity, and 90 % will increase international activity in the future.

Modes of internationalization in Quebec SMEs

Exporting is the most commonly conducted international activity in the enterprises comprising our sample. About 55% of SMEs exported products; exporting was carried out on a regular basis in over one third of the sample. Companies export primarily to American markets (52%), the European Union (22%), Asia and the Middle East (13%), and Latin America (12%). In the course of the personal interviews conducted after the postal survey, a number of companies described difficulties affecting exporting, due to the strength of the Canadian dollar, the weak position of clients (particularly in the United States) following recession, and competition from South-East Asia and primarily China.

The second most frequent international activity was importing. About 42% of SMEs imported finished products or raw material. One out of five SMEs in the sample conducted this activity regularly (Table 2).

Table 2. Exporting and importing activities in manufacturing SMEs
Frequency of activities Exporting Importing
Frequency
(Nb. of firms)
Percentages Frequency
(Nb. of firms)
Percentages
Never 139 45% 178 58%
Sometimes 56 18% 66 22%
Often 111 37% 62 20%
Total 306 100% 306 100%

The other international activities of SMEs were much less frequent: only 4.2% of SMEs acquired permits abroad; only 2% granted permits to foreign companies; 55 SMEs made strategic alliances (but only 7 did this on a regular basis), and 8.6% of the companies currently had or had previously had a foreign subsidiary.

In addition, a number of companies were part of supply chains for foreign clients: 61 SMEs belonged to a product supply chain for a foreign manufacturer, 13 were part of a supply chain for distributors, and about twenty other firms supplied foreign clients with general services, R-D or other services.

Very few SMEs in our sample subcontracted general services (6 companies) or R-D (8 firms) abroad. However, 27% developed their own international supply chain. 33 SMEs had assembly divisions abroad and 42 firms had established distribution centers abroad.

The average international experience of executives was ten years, with a median of six years. Satisfaction among executives regarding the degree of internationalization was variable: out of 215 companies that answered this question, 60% were dissatisfied with the present degree of their international activities and 40% were satisfied. 59% of the 236 respondents wished to increase international activities in the future, 16% wished to maintain them at the current level, and only 2% thought that they should be reduced.

Reasons for, and barriers to, internationalization in Quebec manufacturing SMEs

Our survey data shows that companies conduct internationalization activities mainly to acquire access to new markets (Figure 5).

Figure 5. Reasons for Quebec manufacturing SME internationalization

Figure 5. Reasons for Quebec manufacturing SME internationalization by percentage of companies that considered the reason either important or very important: Access to labour approximately 5 %, access to know-how and technology approximately 10 %, access to capital approximately 10 %, high production costs on the national market approximately 15 %, increased production capacity approximately 15 %, strict laws and regulations on the national market approximately 20 %, and access to new markets approximately 70 %.

Legend: % of companies that considered the reason either important or very important

Barriers to internationalization are numerous (Figure 6). The greatest barriers are the high cost of internationalization, inadequate knowledge of marketplace opportunities, market regulation legislation in countries that are potential importers of a firm’s products, and a lack of advisory and support services.

Figure 6. Barriers to Quebec manufacturing SMEs internationalization

Figure 6. Barriers to Quebec manufacturing SMEs internationalization by percentage of companies that consider the barrier important or very important: no market for their products approximately 15 %, language and cultural differences approximately 30 %, employee skills approximately 35 %, lack of capital or financing approximately 35 %, lack of support or advice approximately 40 %, laws and regulations approximately 45 %, inadequate knowledge of opportunities approximately 45 %, and high cost of internationalization approximately 50 %.

Legend: % of companies that consider the barrier important or very important

Educational level of executives

SME executives were fairly well educated. In 47 enterprises, representing 15% of our sample, executives had a secondary level education; executives with a college education headed 101 SMEs, or 33% of the sample, and in 147 companies, or 48% of the sample, executives had university education.

Use of government support institutions

The companies responding to the survey made moderate use of government support programs and institutions. Recourse to R-D tax credit programs is seen most often; they were used by 54% of firms). R-D subsidy programs followed and were used by 21% of SMEs. Exporting support programs were used by 18%, technical assistance was used by 17%, training support was used by 16.3% of companies, networking services were used by 14% of SMEs and government information services were solicited by 13%. The least requested services are foreign investment support, used by 4% of companies, and risk capital, used by 7.2% (Table 3).

Table 3. Public programs of internationalization assistance used by responding firms
Source of programs R-D
credit
R-D
subsidy
Training
support
Technical assistance Information
service
Exporting
support
Advisory
network
Federal 28 18 5 23 10 40 2
Provincial 6 12 33 15 13 4 31
Other 3 1 9 11 15 7 6
Several 128 31 3 3 3 3 4
Total 165 62 50 52 41 54 43
Percentage of total number of responding firms 54% 21% 16% 17% 13% 18% 14%

Table 4. Evaluation of public internationalization assistance programs by responding firms.
Evaluation of services R-D
credit
R-D
subsidy
Exporting
support
Training
support
Technical
assistance
Information
service
Advisory
network
Not useful 11 12 6 8 10 7 8
Slightly useful 11 5 10 11 9 9 10
Useful 44 25 24 23 26 26 21
Very useful 95 41 31 26 20 16 16
Total 165 83 71 68 65 58 55
Percentage of total number of responding SMEs (53%) (27%) (23%) (22%) (21%) (19%) (18%)

The vast majority of responding companies considered these services useful or very useful. It is interesting to note that an evaluation was made by a greater number of firms than the number actually using these services (Table 4).

When specific institutions were mentioned, Export Development Canada (EDC) was used by 21% of respondents, followed by Quebec’s Ministry of Economic Development, Innovation and Export (MDEIE) mentioned by 20% of respondents. The other institutions, in decreasing order, were the Development Bank of Canada (BDB) with 16.3%, the Canadian Deposit Insurance Corporation (CDIC) with 12%, the Department of Foreign Affairs and International Trade Canada (FAITC) with 10% and Industry Canada with 7.5% (Table 5).

Table 5. Internationalization assistance agencies most frequently solicited by responding firms
Institution Frequency
Number of firms Percentage of total number of respondents
Export Development Canada 65 21%
Quebec’s MDEIE 61 20%
Development Bank of Canada 50 16%
CDIC 37 12%
DFAIT 31 10%
Industry Canada 23 8%

We questioned SMEs about services of assistance with internalization offered by various agencies such as the DBC, CCC, EDC, IQ, MDEIE, DFAIT and others. Company directors’ awareness of them was found to be directly proportional to their educational level, as seen in Figure 7. Recourse to the services offered by the main agencies and government departments was related to the educational level of these executives. Executives with a secondary education rarely used them (statistical probability of use was 0% to 9%, as opposed to 0% to 18% among executives with a college degree, and 4% to 32% among university graduates). In addition, there are differences of accessibility between the various agencies: the DBC, EDC and MDEIE appear to be the most accessible; by contrast, advanced academic expertise seems to be required to use the services of the Canadian Commercial Corporation (CCC).

Figure 7. Educational level of company directors having had previous recourse to services of assistance with internationalization offered by various government departments and agencies

Figure 7. Educational level of company directors having had previous recourse to services of assis­tance with internationalization offered by various government departments and agencies: EDC secondary approximately 5 %, EDC college approximately 15 %, EDC universitary approximately 45 %, MDEIE secondary approximately 0 %, MDEIE college approximately 20 %, MDEIE universitary approximately 40 %, DBC secondary approximately 5 %, DBC college approximately15 %, DBC universitary approximately 30 %, DFAIT secondary approximately 0 %, DFAIT college approximately 5 %, DFAIT universitary approximately 35 %, IC secondary approximately 5 %, IC college approximately 10 %, IC universitary approximately 15 %, CCC secondary approximately 0 %, CCC college approximately 0 %, and CCC universitary approximately 5 %.

4.3 Explanatory analysis of Quebec SME internationalization

Once a first description has been made, an explanatory analysis is needed. First, it is important to understand what type of firm exports. We differentiated companies that export from those that do not export. Several factors explain exporting activities. Three of them stand out: the innovative nature of the firm (it conducts R-D), international experience of executives, and size (larger corporations are more likely to export). However, exports also result in increased sales and personnel, creating a virtuous cycle of export and growth. The probability of exporting increases with a knowledge of English. Probabilities do not seem to be increased by participation in supply chains or strategic alliances. These variables explain between 35% and 48% of the dependent variable representing exports.

The “innovation” variable, used in regression analysis, is the one that best explains exporting and international activities (Tables 6 and 7). Innovative enterprises conduct more international activities and exporting than non-innovative ones.

It is interesting to note that adding the variable “recourse to EDC” increases export explanatory value from 86% to 91%, but decreases explanatory value for non-exporters from 68% to 58%. However, the overall explanatory value increases slightly, rising from 79% to 81%, when this EDC variable is added. Explanatory value is further increased by the addition of the “assistance from DBC” variable. The overall explanatory value increases to 84%, and the value for exporters reaches 91%, while the value for non-exporters increases to 67%. These two institutions are the only ones exerting an influence on the export variable. But we do not know how to interpret this relation: do the DBC and the EDC choose winning companies, or do they transform SMEs into exporters?

Innovating companies use R-D tax credits efficiently. The correlation coefficient between innovation (conducting R-D) and using R-D tax credits is 0.543. However, about 44 companies reported conducting R-D without recourse to tax credits, and 9 others stated that they used tax credit without conducting R-D activities. 95 out of the 105 companies not conducting R-D, or 90%, do not use tax credits. Most, specifically 77% of the 195 companies conducting this innovative activity use tax credits from both levels of government (Table 8). However, innovating firms use R-D direct subsidies much less frequently: less than one third (62/195) of firms reporting R-D activities request and obtain R-D subsidies. In summary, innovative activities are fueled by tax incentives and direct subsidies.

Table 6. Correlations between export and innovation
Correlations
Variables Export Innovation First in Quebec Innovation First in North America World-first Innovation Innovation First in Canada
Export Pearson's correlation 1 0,474** 0,374** 0,274** 0,459**
Significant (bilateral) - 0 0 0 0
N 306 305 299 296 304
Innovation First in Quebec Pearson's correlation 0,474** 1 0,733** 0,574** 0,870**
Significant (bilateral) 0 - 0 0 0
N 305 305 299 296 304
Innovation First in North America Pearson's correlation 0,374** 0,733** 1 0,788** 0,846**
Significant (bilateral) 0 0 - 0 0
N 299 299 299 296 299
World-first Innovation Pearson's correlation 0,274** 0,574** 0,788** 1 0,664**
Significant (bilateral) 0 0 0 - 0
N 296 296 296 296 296
Innovation

First in Canada
Pearson's correlation 0,459** 0,870** 0,846** 0,664** 1
Significant (bilateral) 0 0 0 0 -
N 304 304 299 296 304
** The correlation is significant at the 0.01 level (bilateral).

Table 7. Correlation between international activities and innovation
Presence of innovating activities Number of enterprises Number of enterprises not conducting international activities Number of enterprises conducting international activities
R-D conducted as a permanent activity 63 13 50
R-D conducted for specific projects 132 38 94
Firm does not conduct R-D 105 78 27
Total 300 129 171

About 20% of the companies in our sample used both types of incentives. Does this intensify innovative activities? The correlation between innovation and multiple incitements is weak (0.247). Moreover, the correlation between exports (dichotomized) and use of the double incentive is also rather weak (0.195).

Table 8. Use of R-D tax credit programs by respondents
Presence of innovating activities Number of enterprises Number of enterprises
A) B) C) D) E)
R-D conducted as a permanent activity 63 11 8 1 0 43
R-D conducted for specific projects 132 33 17 4 0 78
Firm does not conduct R-D 105 95 3 1 1 5
Total 300 139 28 6 1 126
Legend:
  1. Does not use any tax credit program.
  2. Uses the federal tax credit program.
  3. Uses the provincial tax credit program.
  4. Uses other tax credit programs (abroad).
  5. Uses several tax credit programs.

4.4 Best internationalization practices in surveyed firms

After having drawn an overall profile of the interest shown by Quebec manufacturing SMEs in internationalization, we conducted personal interviews with company directors who had successfully established international activities. The objective of these interviews was to identify the best business practices having contributed to the international success of these companies. It must be said, from the start, that there is no winning formula for SME internationalization that could apply to all their different activity sectors. We should also add that all the company directors interviewed, without exception, consider that they could do better in terms of expanding their international activities, and most of them plan to increase these activities in the future. Based on our observations of the current situation, it is possible to identify the common characteristics of enterprises that seem to conduct successful international activities.

The data resulting from the interviews in the second part of the study confirmed the findings of the postal survey. For example, as illustrated in Table 9, the average age of interviewed firms was 24 years, with a median of 17 years. The number of employees varied between 7 and 300, with an average of 61 employees and a median of 53.

Among the companies in our sample, only 4 did not innovate. R-D expenditures in five of the sample firms represented between 10 and 95% of the turnover, and these expenditures were located in a range of 1% to 9% in 22 of the firms. In the companies we interviewed, company directors had 16 years of international experience on average. It is noteworthy that most of the executives interviewed were university graduates. Only three had a secondary level education, and two had college degrees.

Our data indicate that a certain number of obstacles have to be overcome in order to increase international activities in SMEs. In 60% of firms, the turnover for 2010 remained the same or increased compared to that for 2008. The other firms, comprising 40% of our sample, felt that the economic recession had affected their activities negatively. But the world recession with its ensuing uncertainties is a concern for most of the company directors interviewed. Half of these executives perceived the business environment in their sector as stable, while the other half saw the environment as turbulent. Factors related to market dynamics and to competition constitute the main sources of turbulence. One reason for concern is that the manufacturing SMEs in the sample shows a high degree of dependence on clients. On average, in our sample, three major clients are the source of 40% of the firm's turnover.

Table 9. Statistical profile of enterprises interviewed.
Firm characteristics Average Median Mode
Age 24 17 15
Number of employees 61 53 20
Percentage of turnover invested in R-D 10 2 2
Years of international experience of executives 16 19 20
Percentage of turnover dedicated to exporting 34 25 25

Overall, the turnover percentages related to international activities in the companies comprising the sample vary between 1% and 95%, with the median recorded at 33%. Both parts of the survey found a low degree of diversification of international activities. In 26 companies, international activities are limited to exports and imports. Only three companies created international alliances, one entered into co-ownership with a Chinese firm, and a fifth subcontracts for a European enterprise. However, a general tendency toward geographical diversification of international activities was observed in the companies interviewed. Seven of them developed international markets in a single region (typically the United States), but the other twenty-four targeted two or more regions.

Another common characteristic of companies with successful international activities was rapid internationalization starting in the early stages of their life cycle. Half of the companies interviewed stated that they developed exports and imports at the same time. The limited size of the domestic market was what constrained Quebec companies to look for international outlets from the start of their operations. For the same reason, 15 other enterprises began their international activities by exporting. Only 4 companies started their international activities by importing. It should be noted that these findings seem more congruent with rapid internationalization theory than with the theory stipulating a gradual approach to internationalization of SMEs. 17 out of the 30 enterprises interviewed implemented an active internationalization strategy based on a pre-established plan. However, 11 companies do not have a pre-established internationalization strategy, but attempt instead to take advantage of opportunities that present themselves. There appears to be a strong correlation between type of strategy and growth: enterprises with an active strategy are the ones experiencing growth.

One other good internationalization practice seems to be related to the ability of executives to multiply and diversify sources of information and knowledge. Internet has become the major source of information for business companies. All executives report using it on a regular basis and consider it an essential tool. As far as good business practices are concerned, the SMEs interviewed focus on practices of continuous supplier evaluation, quality control, the introduction of continuous improvement processes, continued training and employees with multiple skills. When asked what business practices contribute the most to the success of their international activities, half the companies mentioned innovation and specific know-how first; five company directors considered product quality and continued effort to meet the latest quality standards as their major asset. Six executives stressed the need to develop long-term, personalized, relations with clients in a direct manner (without intermediaries). While these relations are easier to develop in a market characterized by geographical, institutional and cultural proximity, such as the United States, as the distance from international clients grows, these relations become more difficult to develop and maintain. Finally, two of the company directors who succeeded in consolidating their international markets considered the key to their success to lie in having offered a wide range of products and services, including product design and co-development with their clients, until a personalized customer service department was created. This helped to differentiate them from their competitors, particularly Asian, and rendered them irreplaceable for their customers. Both these executives drew attention to the disappearance of several companies in their sector over the past three years, pointing out that these companies offered a limited number of specialized services.

5. Assistance with the internationalization of Quebec SMEs

The main contribution of the present research is that it presents the various perspectives of the different actors involved in assistance with internationalization in the Quebec manufacturing sector. The findings of our postal survey revealed that once companies acquire international experience, they wish to extend their international activities in the future.

5.1 Perspective of SMEs

Both parts of the study identified a difference between firms with established international activities and companies serving only the domestic market. This situation presents a double challenge for institutions offering assistance with the internationalization of Quebec SMEs. On the one hand, companies versed in international activity must be offered access to personalized, long-term programs; on the other hand, good internationalization practices must be made widely available to companies that do not yet have any international experience. The very different nature of the problems and needs of these two groups of SMEs requires the introduction or reinforcement of a series of programs that can assist companies during all the stages of their decision-making process and international activity. The types of needs and necessary means vary significantly, making the assistance process more complex.

In this context, our research relied on understanding assistance with SME internationalization from several descriptive and analytic perspectives. In the course of our interviews, we solicited the opinions of the companies regarding various programs of assistance with internationalization, as well as their suggestions about desirable improvements to these programs.

A list of twelve institutions and agencies offering Quebec SMEs programs of assistance with internationalization was presented to the company directors interviewed. Although these executives seem to know most of the institutions listed, they have only had recourse to a small number of them. Four companies already conducting international activities declared themselves not interested in assistance programs. The first of these companies is a subsidiary of a large corporation and its director stated that it is the mother company that defines internationalization strategies, programs and mechanisms. Two of the other companies not interested in assistance consider that they have sufficient internal resources to proceed with internationalization. These two companies have, in fact, been conducting very successful international activities. The director of the fourth firm not interested in assistance programs considers that his priority should be to deal with internal management problems hindering better development of international markets. According to him, these internal problems prevent him from benefiting from the various programs available. The other companies report being interested in the various agencies and their assistance programs. However, ten company directors stated that they had recourse to the services of one out of the twelve agencies listed; five companies used the services of two agencies, three companies used the services of three agencies, and two companies used the services of four agencies. Three of the most dynamic enterprises used the services of five agencies. In decreasing order of importance, the assistance agencies cited by Quebec enterprises were the DBC (10 respondents), Export Development Canada (8), Emploi-Québec (7), MDEIE (6), EDC (4), DFAIT and IRAP (3 companies each). It is noteworthy that company directors mention about twenty agencies and associations, most of them industry-based, as important sources of information and support for internationalization. In two cases, these agencies were international professional associations (based in the United States).

In addition, it must be noted that the information held by company directors on the numerous programs available is very vague and approximate. By far the best-known and most used program (25 companies) is the R-D tax credit program. Seven companies used research grant programs. Training, promotion and information programs were each mentioned twice.

Perception of the usefulness of programs of assistance with internationalization is not in accord with the expectations of the agencies offering them. The observations of the company directors interviewed regarding this divergence can be classified as follows:

In the course of the interviews, companies often reported several obstacles to international development. The most common of these was the fact that companies are not aware of the programs intended for them. Often, SMEs had to hire consultants to have the programs explained to them, fill out the forms or carry out the procedures required by federal or provincial agencies. Consequently, they asked:

Secondly, some companies that had used various programs found that the amounts granted were limited. This was the case for:

Thirdly, some users of government assistance programs found that the procedures were bureaucratic and complex because of the forms to be filled and the terms and conditions to be respected. These users wanted to see a simplification of the procedures required for receiving this assistance.

Fourth, a number of the smaller SMEs, as well as those whose directors did not have a university degree, complained of being ignored by public agencies: their telephone calls were not returned, their applications were not approved. In this regard, they had the impression that, due to a lack of means or of time, government employees tended to focus on the most dynamic enterprises, on companies in the most technology-intensive sectors, or on companies headed by executives with an educational level equivalent to their own.

Finally, several company directors would have found it beneficial to have a conversation with the government employees entrusted with these programs, whose advice was assumed to be valuable per se. These company directors did not have time to go to Montreal, Quebec or Ottawa, and would have liked the government employees to come to them to explain the programs, advise them and show them what assistance they can offer. When the agencies had regional offices, company directors did not know where they were located. But the main point is that the companies appeared to value advice as much as financial assistance.

It was our impression that firm characteristics were related to the concerns of the companies. The firms most active in R-D, as well as those with directors having the most international experience or the highest level of education, tended to know the programs and use them. These companies were less likely to ask for additional explanations about their programs, for advice or for help. In addition, a number of the most internationally active firms expressed the opinion that assistance is too limited.

At the other end of the spectrum, the most traditional companies, firms with the least international experience or those whose directors had the lowest level of education, tended not to know the programs, to ask for simplified programs or to wish that those in charge of programs visit their companies.

5.2 Perspective of assistance institutions

We interviewed several institutions assisting enterprises with their international activities: Development Bank Canada, Export Development Canada, Department of Foreign Affairs and International Trade Canada, Invest Quebec, Quebec’s Ministry of Economic Development, Innovation and Export, Emploi Québec, Community Economic Development Corporations and the Board of Trade of Metropolitan Montreal.

The Development Bank of Canada

The Development Bank of Canada (DBC) is a federal bank mandated to finance Canadian companies and provide consulting services. The DBC borrows in financial markets, issuing debt securities guaranteed by the federal government, to finance Canadian SMEs. The financing it offers includes risk capital funds for new enterprises, as well as the financing needed to acquire assets (equipment, real estate, machinery), operating funds for start-up and growth, and for sales development in foreign markets and in Canada. As far as exports are concerned, the DBC can finance (with funds of $100 000) market prospecting tours, participation in trade shows and exhibitions, the development of export plans, and innovation related to entering new international markets. The DBC offers refund periods up to 8 years, personalized refund schedules, an early repayment option, and capital repayment forwarding up to 12 months after the loan is approved and paid out by the Bank. In terms of advice regarding export activity, the DBC offers courses on the most appropriate markets for the products of the companies, the possible use of local distribution networks, competition, prices suggested to business houses for the products of the firm, advertisement and other activities. Over the years, the DBC acquired an enlarged mandate which now allows it to serve not only the manufacturing sector, but other sectors as well.

Each year, the DBC helps about 28 000 companies across Canada. In Quebec, the DBC has 22 branches that have provided assistance to over 9 700 SMEs in the province, in all industrial sectors. We visited one of these branches, which reported having a 25% penetration rate among the manufacturing SMEs in its region. This branch has a so-called “offensive” strategy: it makes direct contact with the SMEs in its region and also offers services by Internet, by mail, through professionals (lawyers, accountants, management consultants and others). It works in conjunction with other agencies such as Invest Quebec, which offers loan guarantees to SMEs. It also participates in an arrangement with private banks, offering long-term funds while the private banks offer short and middle term financing. In addition, private banks provide support and advice, while the DBC accompanies SMEs over time. Finally, following the economic crisis that struck in 2008, private banks have reduced their loans to SMEs, and the DBC asks SMEs for higher interest rates, since it makes long-term loans that involve higher risk. The highest risk clients pay higher interest rates than average.

Export Development Canada

Export Development Canada (EDC) provides exporting companies with financing, insurance and bond insurance services, as well as foreign market expertise. Each year, EDC serves over 8 000 Canadian enterprises, most of them in the manufacturing sector. In terms of insurance, EDC offers political risk insurance, insures client accounts (covering losses due to nonpayment related to political and commercial risks), offers so-called contract frustration insurance related to non-performing export contracts, as well as other types of insurance. In terms of financing, EDC offers export guarantees enabling Canadian SMEs to obtain loans from private banks to finance exports or investments abroad. It offers financing to suppliers by advancing the funds that the SME expects to receive from foreign clients, and also offers financing to buyers (foreign clients of the Canadian SME). In terms of bond insurance, EDC issues guarantees allowing banks to grant SMEs more flexible security terms. These financial services involve a cost for the SME, but they are not generally available to it in the private sector. EDC collects interest on its loans and premiums on its insurance products. Like the DBC, EDC is a self-financing corporation and does not rely on government subsidies. Its role is particularly important given the fact that Canada exports 40% of its GNP and that SMEs often find it difficult to gain access to export markets. EDC has 17 offices across Canada, four of them in Quebec: in Montreal, Quebec, Drummondville and Ville Saint-Laurent. EDC also has 15 branches overseas, in Latin America, Asia, Western and Eastern Europe, and the Middle East.

During the current crisis, in 2009 and 2010, EDC increased its volume of financing to $82.8 billion, an unprecedented figure, and the number of its clients reached 8 438, a record number as well. 80% of these clients are SMEs. It must be stressed that these increases occurred while Canadian exports declined, and employment in the Canadian manufacturing industry was also clearly in decline.

EDC works jointly with Investment Quebec to provide financing solutions to Quebec enterprises.

The Department of Foreign Affairs and International Trade

The Department of Foreign Affairs and International Trade of Canada (DFAIT) offers a number of services to companies wishing to conduct international activities; embassies and consulates in foreign countries provide some of these services, and Department personnel in Quebec and elsewhere in Canada provide other services. Four types of support are available: for exporting; for the development of science, technology and innovation; for direct Canadian investment abroad; and for direct foreign investment in Canada.

The Department offers five programs to implement these services:

  • Invest Canada–Community Initiatives (ICCI): these funds are given to municipalities and regional organizations (i.e. Montreal International) and represent 3 to 4 million dollars a year for all of Canada. They are intended to attract or to keep direct Canadian investments.
  • Global Opportunities Program: this program is offered to sectorial associations to explore international markets (i.e. Canadian Plastics Association); it pays out about 2.3 million dollars a year for all of Canada. These are non-refundable subsidies of up to $150 000 per association.
  • Global Innovation, a program providing support to innovating companies, for the marketing of their products and/or for participation in industrial conferences.
  • International Science and Technology Partnerships Program (ISTPP): these funds are intended for programs associated with treaties signed with Brazil, China, India and Israel.
  • The Investment Cooperation Program (INC) is the major SME financing program, offering 20 million dollars per year. It is intended for firms wishing to invest abroad, in developing countries. Until 2010, this program was administered by CIDA, and was entrusted to the DFAIT one year ago. CIDA still has the mandate to help developing countries improve their business environment. The DFAIT is only involved with Canadian enterprises. The program does not finance the investment as such; it finances the preparatory training leading to this investment. If products are modified to adapt them to a foreign market, the program can finance up to 50% of R-D costs. Assistance can also be provided with the financing of the local supply chain. Each stage takes approximately one year; a maximum of $500 000 per firm can be financed over four or five years. The DFAIT finances up to 50% of the projects. Thus, the program finances about 200 companies per year, but only one out of three of them completed all the stages. SMEs in the manufacturing sector represent 65% of the clients of the program. Over 50% of projects submitted to this program come from Quebec, according to provincial program managers. The foreign investment must be at least $500 000, and must provide gross revenues of at least 2 million dollars. The industries typically applying to the program are middle or high technology, such as the plastics, machine tools, and metal products industries. The DFAIT is proactive and looks for clients for the program, as well as working jointly with agencies like the Board of Trade of Metropolitan Montreal, the Canadian Council on Africa and the Canada China Business Council. The Department also publishes bulletins and advertises through the various media. In addition, the DFAIT works in conjunction with NRCC, the CRIQ, Canada Economic Development and Industry Canada by exchanging information on enterprises that could be interested in their services. The DFAIT assists enterprises over long periods, since the budgets cover several years. The assistance has no set limit and is of unlimited duration.

Invest Quebec

This institution replaced the Industrial Development Association, which officially became Invest Quebec (IQ) in 1988. Since then, its primary mandate is to assist SMEs, including those in the manufacturing sector.

First, Invest Quebec offers financing that is complementary to that of the banks, including the DBC. IQ deals with risk (such as export risk). When the banks refuse financing, IQ often granted it. This business model originated locally and has developed over the years. IQ assists companies in conducting start-up, expansion, R-D and export activities, as well as increasing working capital and effecting change of ownership. In 2009-10, IQ approved 974 projects involving a spending of 341.7 million dollars; the average amount paid out was $351 000, and the mean value of the projects was 1.1 million dollars.

Second, IQ has economic development tools, financial incentives intended to increase investment in Quebec, and to consolidate industries or companies faced with difficulties. In the above-mentioned period, IQ paid out 1.2 billion dollars for 1 058 financing operations, enabling enterprises to invest 5 billion dollars.

IQ assists SMEs: 95% of its financing operations benefited SMEs with less than 200 employees. In total, 2 032 projects were approved and 1.566 billion dollars were paid out. Of the total financing operations recorded, 1 935 concerned SMEs and represented 60% of spending.

Ministère du Développement économique de l'innovation et des exportations du Québec (MDEIE)

The MDEIE provides financing for numerous enterprise activities such as equipment purchasing, expansion, marketing, start-up, design, exporting, labour, product and process innovation, opening of offices abroad, training courses, development and transfer of research results. It also offers risk capital to enterprises. The MDEIE also offers companies support with training, information, market studies and strategic advice, to enable them to enter international markets.

The MDEIE has built a wide network of support agencies. Its seventeen regional offices prepare, train and assist companies in the first stages of their internationalization activities. One of the important tasks of the advisors in these offices is to create ties and reinforce cooperation with other actors offering services to enterprises extending their operations into the international sphere. One example is the cooperation between the Regional Network of Export Commissioners (RECOMEX) and MDEIE advisors in Quebec regional offices. In addition, the four international agencies and the twenty-five Quebec offices abroad offer personalized assistance to companies establishing themselves in a foreign country.

Emploi Québec

Emploi Québec (EQ) provides assistance with labor concerns in SMEs. EQ is not involved directly with exports or other international activities of the firm. But it is often solicited by SMEs in the context of international development projects financed by other agencies. For example, if a firm is granted a loan of one million dollars by DBC to increase its production in view of exporting, the firm will probably have to purchase equipment and machinery, and hire more employees using the services of EQ. The latter will find these new employees or assist with their training, if trained personnel are not available on the job market. In order to do so, EQ makes agreements with CEGEPS or other training institutions, and the firm seeking employees pays only minimal training costs (2 dollars per hour).

EQ may also pay half the salary of a manager for several months. This is useful to certain SMEs with insufficient managerial staff. In addition, EQ can have recourse to the services of external consultants. It can also organize seminars for companies that request them.

Emploi-Québec has developed a regional network. In 2009-10, it assisted about 12 000 SMEs. But since the agency does not collect specific data for the manufacturing sector, we could not obtain more specific information for our research.

Community Economic Development Corporations (CEDC)

CEDCs are entrusted with offering services to the enterprises in their regions or districts. In Montreal, there are 24 CEDCs, some of which are called Local Development Centers (LDC). The federal, provincial and municipal governments finance CDECs and LDCs. The City is the primary backer of CEDCs, with Economic Development Canada acting as secondary backer. They provide two types of services:

  • Technical services: meetings with consultants for start-up or reinforcement of existing companies. These services are free.
  • Financial support: this takes the form of subsidies and loans. In addition, the CEDC offers several financing programs in the form of bursaries for young entrepreneurs, in the amount of $6 000, and loans and securities up to $75 000 provided by the Local Investment Fund, and $100 000 provided by the Montreal Economic Development Fund.

Taken together, the funds of assistance to enterprises can add up to 1 million dollars per district, for a total of 24 million dollars for the City of Montreal. CEDCs exist since 2002, and can assist 15 to 17 companies per district. The SMEs in question belong to all sectors of activity, and no one has geographical data (by district) or data by industry.

CEDCs are intended to work more closely with enterprises than all other support agencies. In addition, thanks to their geographical proximity, they offer participating SMEs support over the long term.

CEDC programs are presented to enterprises during visits made by the executives of these corporations. In the various districts, the information is transmitted by word of mouth among the directors of local SMEs.

The Board of Trade of Metropolitan Montreal (BTMM)

The BTMM works in conjunction with both levels of government and other federal and provincial agencies such as DBC and EDC. The BTMM manages several SME support programs, including:

  • Info-entrepreneurs: this is a Website jointly financed by the federal and provincial governments, offering information on different opportunities, programs, rules and restrictions. The site has 500 000 visitors per year.
  • Training: the BTMM provides training for establishing operations abroad. Fifteen subjects are discussed: how to pass through customs, how to find financing for export and import, insurance requirements, etc. A half a day is dedicated to each subject.
  • Foreign market awareness: international business practices outside the United States, in countries like China, India or Mexico, are discussed with lawyers, accountants and other experts.
  • Invited buyers: the BTMM invites major buyers such as department stores or major Innovation: In October 2011, the BTMM will give a course on the importance of organizations (i.e. United Nations).
  • Innovation, as a means of achieving differentiation from competitors.
  • Trade missions: the BTMM has organized missions to China, the United Arab Emirates, India and elsewhere. This activity serves to complement awareness of business opportunities. In these countries, the entrepreneurs have a chance to make personal business contacts.
  • Follow-up: the BTMM is now adding “follow-up” to its activities. Sometimes, during foreign missions or visits by buyers, entrepreneurs meet but there is no follow-up. The BTMM organizes follow-up, but enterprises do not.

The BTMM looks for SMEs whose size allows them to deliver goods and services in large quantities (i.e. 100 employees).

Table 10. Export promotion agencies and their primary activities.
Agency
BDC
Activities
Risk capital, loans for asset purchases, start-up and international expansion funds
 
Agency
CCC
Activities
Export and import assistance, assistance with concluding international agreements
 
Agency
CEDCs
Activities
Provide technical services and financial support (grants, loans) to companies at start-up stage
 
Agency
BTMM
Activities
Provides information, training, opportunity awareness; invites potential foreign buyers and organizes trade missions
 
Agency
NRCC
Activities
Conducts R-D in research institutes across Canada; provides R-D subsidies (IRAP)
 
Agency
CRIQ
Activities
Conducts R-D, technological surveillance, contributes to standardization
 
Agency
EDC
Activities
Financing, insurance, backing and information support on foreign markets
 
Agency
EQ
Activities
Support with hiring managerial staff; training assistance
 
Agency
IC
Activities
Provides companies with information, particularly concerning permits and licenses for entrepreneurs, government services and markets
 
Agency
IQ
Activities
Finances export risk, start-up projects, R-D, export, increased operation costs and company handover
 
Agency
DFAIT
Activities
Assistance with export, direct foreign investment, and direct foreign investment in Canada
 
Agency
MDEIE
Activities
Finances equipment purchases, marketing, start-up, design, export, labour, innovation, studies, increased valuation and transfer of research results
 
Agency
SADC
Activities
Assistance and advice for establishing a company and financing.
 

Interpretation of interviews with these institutions

The degree of assistance offered to SMEs by institutions is no doubt related to the amounts lent or given by government agencies. It is understandable that a bank that generally lends sums of about one million dollars should monitor the borrower's activities regularly. However, there appears to be no real justification for conducting a close follow-up of the activities of a firm granted a non-refundable subsidy (or training) worth several thousand dollars. The cost of such assistance might turn out to be higher than the amount of the subsidy. But, in effect, our interviews revealed that company directors valued the assistance process per se: advice, orientation and information on foreign markets were considered as valuable as the subsidies and loans themselves. These executives often stressed the fact that they lacked awareness of the international opportunities that could benefit their companies, and that they would welcome discussions about foreign markets, meetings with potential clients and the chance to inquire personally about possible support for exploring international markets.

Contrary to large corporations, SMEs often lack available managers to investigate the programs, visit government Departments or agencies, gather information about foreign markets, build client databases or potential foreign partner databases, or establish internationalization strategy. Therefore, assistance processes have intrinsic value, since they compensate for lacking administrative resources.

According to the CRIQ data, including about 14 000 business firms, less than half of Quebec manufacturing SMEs export their products. A very small proportion has foreign direct investment, or makes international alliances in view of exporting. Several SMEs could export if they had better knowledge of their potential markets, and if they improved the products they offer. These firms are often interested in exporting and it is our opinion that public institutions should focus on them particularly. We found some of these companies to be in the metal products machining sector; the closing of several large Quebec corporations in this industry has resulted in considerably reduced local demand. Firms wishing to export were also located in the textile and apparel industry, and furniture manufacturing, among others.

6. Improving practices of assistance with internationalization in Quebec SMEs

Canada has a wealth of programs of assistance with SME internationalization. However, in order to assist a greater number of companies, and increase the effectiveness of the support services offered to SMEs, it is essential to insure better coordination between the various institutions of assistance with internationalization.

6.1 The internationalization portal

As an important and very useful step in this direction, we propose the creation of the “Internationalization Window”, a multifunctional Internet portal serving to centralize the information and services offered to SMEs. The main objective of this interactive tool would be to bring together at a single Internet address all the information on programs of assistance with SME internationalization, and simplify exchanges between SMEs and the institutions and agencies offering this type of support.

The Internationalization Window would constitute a genuine One-Stop Shop portal that would satisfy the obvious need of businesses to gain access to information and to quality services as quickly as possible. As our surveys in the field demonstrated, SMEs have too little time and too limited resources to look for information and participate in the various programs available to them. In addition, agencies offering assistance also have limited resources for promoting their programs. All company directors reported using Internet for activities of their choice, usually outside business hours. This gives Internet an enormous advantage as a platform. As things stand now, Internet services for assisting with SME internationalization are clearly not being used to their full potential.

Several websites providing information have already been created. Some even claim to be One-Stop Shop websites. Among them, Info-Entrepreneurs seems to come closest to this definition. However, much remains to be done to transform it into a website that will be taken as a reference by SMEs wishing to develop international activities. Company directors and assistance agency representatives we interviewed described it mainly as a source of information for companies starting their international activities. Companies that have gone beyond this stage no longer consult this website. Moreover, in most cases, after the Internet user navigates on the site for a long period, Info-Entrepreneur directs him to other sites. Once he is on these other websites, the company director is unable to find concrete and precise answers to his questions, feels that he has been losing his time and gives up the search. Finally, while Info-Entrepreneur is an information site, what is really needed is a user-friendly, interactive site offering concrete services as well.

In this regard, in April 2011, the Quebec Minister of Finance announced the creation of “Exportation Québec”, a One-Stop Shop website intended to offer Quebec exporters access to MDEIE services. According to the Minister, the mandate of “Exportation Québec” will be to facilitate access to government assistance programs, to create business opportunities and to increase the participation of Quebec companies in trade events. The Export Program, presented on the same occasion, will bring together and double the assistance to export currently offered by the MDEIE, in order to provide exporting companies with a more flexible and effective tool. It remains to be seen how this tool will be designed.

Internet is a multifaceted tool that is becoming a factor of success for a growing number of SMEs all over the world (OECD, 2003). In this context, we have identified several international projects (public or conducted by consulting groups) that have created successful One-Stop Shop websites. What all these projects have in common is that a single website centralizes the offer of services in a simple, rapid and effective manner. In Canada BizPal, hosted by Industry Canada, helps the SME to accede to governmental services. Another interesting experience is the One-Stop Shop website designed for Luxembourg companies. This portal is the result of a joint effort involving several public participants, and partnerships with private agencies. The portal allows easy access to online information and services offered by the State. The essential administrative procedures are described, forms can be downloaded and some of them can be sent back signed by E-mail to the appropriate agency. Finally, the portal also offers the possibility of carrying out administrative procedures by E-mail through online applications.

The Toutaide portal is another useful tool to search for and benefit from the public support offered to enterprises; it lists about 5 860 assistance programs, totaling approximately 2.2 billion Euros.

Based on the types of needs identified through interviews with enterprises, and on the types of support offered by the various participating agencies, we have designed, as an example, a tool that would help the organizations involved to achieve their objectives effectively. This tool will also serve to illustrate the International Compass concept to participants in the activities planned for the dissemination of the results of our study.

As the product of such a collaboration, BizPal is a great success. The website informs companies of all permits and licenses needed to start or grow in Canada. The site is managed jointly by all levels of government.

6.2 Assistance measures

The needed assistance measures must be industry specific. They will not be the same in the textile and apparel industry, and in the metal products manufacturing industry. However, certain aspects remain constant and apply to all industries:

Some of these assistance measures are the responsibility of specific institutions. Quebec’s CRIQ and institutes of the NRCC offer advice concerning innovation and quality control. Emploi Québec provides support with hiring managerial staff and training company personnel. CEDCs offer assistance at the start-up stage. These institutions should play a major role in the early stages of a firm’s life cycle.

The support of other public agencies should come later. Once companies have an innovative product or family of products tested on the markets, they should seek expansion. In these latter phases, the institutions assisting business companies include: DBC, CCC, DFAIT, BTMM and Invest Quebec.

Several caveats are necessary here. First, the multiplicity of support agencies is not always a boon for SMEs. If newly created companies approach agencies that support expansion, such as the DBC, IQ or DFAIT, assistance may be refused. Each agency must be aware of the fact that its intervention does not take place at the same stage in the development of the firm. Therefore, they should redirect the SME towards the organizations that can assist them at their stage of development. We hope that this document, and documents ensuing from it, will clarify these specific concerns. Each agency must know which institutions provide assistance at each stage of development.

Second, institutions that play a key role at the beginning of the expansion phase should not lose sight of the companies they assisted. In some cases, exporting SMEs at the expansion stage were refused R-D support because they had received previous help and because support institutions have limited resources. Increasing the budget of these institutions (CRIQ, NRCC) is advisable, in order to maintain assistance over time, if necessary.

Third, given the fact that the disappearance of manufacturing SMEs seems more rapid than the creation of new companies, all assistance institutions, and particularly those assisting companies in the early stages of their life cycle, must make an effort to support emerging companies and small-size companies. We understand that these institutions have limited budgets, but this should not prevent them from supporting new business companies with strong potential.

Finally, a government institution should take the initiative of producing one or several short documents (about ten pages) explaining to business companies and to public agencies which institution can best assist the SME at each stage of its development, and for each specific need.

7. Conclusion and recommendations

Quebec manufacturing sector companies (and most likely those in the rest of Canada) have been hard hit by the recent economic context, and particularly by recession in their primary export market (the United States), by the increase in the value of the Canadian dollar relative to the currency of their primary markets (United States and European Union) and by international competition, specifically from South-East Asia and primarily from China. Several agencies have observed efforts on the part of the United States government to attract Canadian businesses by offering financial incentives that include various types of subsidies and tax exemptions. Numerous government officials consider this situation a cause for concern.

One conclusion of the present study is that enterprises seldom have recourse to the assistance governments make available to them. Only R-D tax credits were used by over 50% of companies. The three surveys showed that most SMEs were not aware of most financing programs or had not used them, that they had not often contacted the various support agencies, and had not often used consulting services offered by either federal or provincial agencies. However, when asked about barriers, they cited internationalization costs and lack of advice. During the personal interviews, a number of companies stated that the programs were too complex and too numerous, difficult to understand and difficult to access because of the associated restrictions and conditions.

To solve this problem, our study recommends that information be simplified and addressed directly to businesses in a proactive manner, as many SMEs suggested. Often, a lack of resources prevents company directors from learning about many existing programs. In addition, nothing can be stated with certainty about the effectiveness of public support programs, other than the fact that they are not well known and not sufficiently used: agencies would be well-advised to make information on these programs more easily accessible.

Our second conclusion is that exports of the Quebec manufacturing sector SMEs in our sample are related to certain internal characteristics of the companies: the tendency to export depends on R&D activity—in companies conducting R-D, the probability of exports is higher. Exports are also higher if company directors speak English. Finally, the more extensive the international experience of executives, the more their companies export overseas. However, R-D intensity is not related to the probability of exporting, a finding that confirms the conclusions of previous studies (Stock et al, 2001).

A third conclusion is that public assistance programs are highly varied and cover a wide range of international activities: from providing information to financing trips to participate in industry fairs, as well as insuring exports, financing new equipment needed to increase production, or hiring and training personnel needed for exporting activities. Exporting companies pointed out two federal agencies that contributed significantly to their international development through export: the Development Bank of Canada and Export Development Canada. These public agencies are not the only ones that offer assistance programs to Quebec SMEs. Invest Quebec, Quebec economic development corporations and other institutions offer other programs. Support from these institutions was probably not a significant factor due to the size of our sample. But it is also possible that the agencies having the greatest impact (DBC and EDC) are those that have invested more funds to help enterprises develop and export.

One way of better understanding the impact and success of the programs would be to send questionnaires directly to assistance beneficiaries, with quantitative questions concerning the sales volumes the companies consider to be directly related to the support received.

Our last conclusion is that given the fact that few new manufacturing companies are created in Quebec, while existing firms are disappearing, governments would be well advised to make a greater effort to reinforce the remaining SMEs and offer them more help to export and to internationalize their activities.

In addition, international experience shows that most governments in developed countries started establishing programs of assistance with SME internationalization long ago.4 However, as the OECD observed (2004), SMEs are still relatively under-represented in world economy. They only represent from a quarter to a third of manufacturing product exports. Extensive research has shown that a number of barriers to SME internationalization exist (Ruzzier et al, 2006). Governments tried to counteract the most common barriers, such as lack of resources and skills for starting international projects, inequalities in computer competency, and significant cultural and institutional differences. According to studies on the efficiency of government assistance measures, these efforts results usually produce positive but modest results (OECD, 2004; Francis and Collins-Dodd, 2004; Lederman et al, 2006).

Compared to other OECD member countries, Canada offers a large number of programs of assistance with SME internationalization. Recently, the European Commission (2008) published a study of the best practices of assistance with European SME internationalization. Although this study contributes some interesting experiences, several of the recent programs are already offered in Canada. However, much remains to be done to make this assistance more effective. How can assistance to SME internationalization in the Quebec manufacturing sector be improved? A few suggestions follow:

Recommendation #1: Maintaining assistance

North America has not yet come out of the recession. The budgets of programs intended for SMEs, which have often been increased over the past three years, should maintain this level of financing or, better still, raise it. This recommendation applies to IRAP, as well as to the programs Economic Development Canada, the DFAIT and the Board of Trade of Metropolitan Montreal offer to SMEs. These increases would allow more companies to take part in the programs, and would reduce costs for already participating firms.

Recommendation #2: More frequent visits to companies

SMEs, particularly those that do not ask the various agencies for advice or financing, should receive more frequent visits from program managers. The latter can identify the companies in question by comparing the lists in the CRIQ database with the lists of the enterprises they are assisting. This would also allow them to become better known and to launch an assistance process that could consolidate thousands of Quebec manufacturing SMEs and save thousands of jobs. At the same time, this procedure would make it possible to increase the number of clients of the programs, which now appear to serve a chosen segment of mid-size companies and advanced technology enterprises.

Recommendation #3: Developing assistance adapted to the various stages of SME internationalization—personalized support is possible

Analysis of the numerous Canadian programs of assistance with SME internationalization reveals that these programs share a flaw with programs of many other OECD countries. In effect, the principle of these support programs is based, in most cases, on the assumption that internationalization is the end stage of a development process in SMEs. In fact, however, according to the OECD, internationalization is, in most cases, the starting point of growth, and the two processes evolve in parallel. This new approach to growth and internationalization makes it necessary to create assistance programs adapted to the various stages of this joint evolution. In fact, empirical studies on the effectiveness of export promotion programs in Canadian high technology companies show that these ones benefit more from the programs than SMEs with extensive international experience, where exports generate the major portion of turnover (Francis and Collins-Dodd, 2004). It is also a fact that most programs are intended to support firms taking their first steps toward internationalization. A number of company directors we interviewed reported that increased international activity is associated with problems that are rarely addressed by most current programs of assistance with internationalization.

Recommendation #4: Developing support programs aimed at diversification of international activities in SMEs

As shown by the results of our surveys, the international activities conducted by Quebec manufacturing firms are not very diversified. Exporting and importing constitute the bulk of these activities. The same is true of assistance programs, whose stated primary aim is to promote SME exports. This is another limitation shared by support programs all over the world. At present, export promotion activities are the focus of 70% of programs of assistance with SME internationalization the world over (European Commission, 2008). But in fact other forms of internationalization have been found to be very useful for improving SME competitiveness. Thus, according to the OECD (2007), assistance with SME internationalization should reinforce the role that foreign direct investment (FDI) can play as a facilitator of SME access to international markets, should support the integration of Quebec SMEs into global value chains, and should encourage cooperation with local multinationals. Encouraging and developing collective and joint action at the local, national and international level will contribute to international growth in Quebec SMEs. The Tokyo action principles suggest the implementation of various programs to help SMEs create consortia, submit tenders, produce and sell. Other programs can be designed to promote relations between multinationals and SMEs through identification and linking of potential partners.

Recommendation #5: Developing a collaborative approach to SME internationalization

Our interviews with assistance institutions revealed the tendency of the different actors to work in isolation. For example, cooperation between provincial officials in charge of preparing support programs and their federal counterparts is sporadic and established on an individual basis, without formal guidelines. This causes redundancy, as well as multiplication and dispersion of information sources and programs designed for the various participants. Considerable time constraints force most SME executives to focus on a limited number of programs, or to completely overlook the existence of other forms and sources of internationalization. In addition, during individual interviews with the companies, we noted their tendency to participate actively in local associative networks specific to their industry. However, it is often the case that the missions of these organizations do not explicitly include an international facet. Nevertheless, given the rather disappointing ratio of enterprise access to the programs, institutional actors should build relations with these associations and encourage their involvement in view of defining and implementing better programs of assistance with SME internationalization.

Recommendation #6: Developing better management of support programs

The micro-management of support programs must be improved. Certain actors seem to prefer joint participation assistance programs, which have the advantage of giving companies greater responsibility in the process. Other actors draw attention to the fact that the assistance granted to SMEs is broken down into small amounts, a practice which tends to reduce the effectiveness of this assistance. According to some participants, there is a need to better target the enterprises receiving support, giving clear preference to “fast-runners” (rapid growth companies). In addition, those in charge of assistance programs hold diverging opinions about the flexibility of the criteria used to attribute support. Ontario favors Internet application forms, so that the criteria for selecting companies eligible for assistance programs are invariable. Quebec agencies have chosen a more flexible procedure, preferring personalized contact through local advisers. One limitation of this flexible approach is that, given limited resources, public advisors have only limited access to the targeted enterprises. According to Lederman et al. (2006), export promotion agencies disposing of public funds but operated by the private sector show better performance than strictly public agencies.

Recommendation #7: Insuring better dissemination of good practices of international management

According to a Swedish study, as far as internationalization is concerned, company directors can generally be described as focusing on technology, marketing and structure, and paying less attention to strategy and planning. A German study has recently confirmed this conclusion concerning the limited importance of internal strategic management in the internationalization process (Business Observatory, 2003). A number of business advisers we interviewed stressed the lack of preparation and training needed by executives to successfully conduct international projects. On the other hand, they deplored the fact that it is very difficult to transmit the business expertise acquired by various participants in the course of their experience with assistance programs. For this reason, we propose that future managers receive better training in international management.

At the same time, it would be useful to review the dissemination mechanisms of best internationalization practices in companies wishing to develop in international markets. Possible measures designed to strengthen relations between universities, business companies and support institutions could include training programs and other initiatives that would expose firms to the best contemporary management practices, and would allow young managers to gain awareness of the concrete issues businesses have to face. As part of its new “Cap export” project of assistance with internationalization, France has recently introduced a program of international business volunteers (VIE). They are financed by public funds (managed by UbiFrance) and participate actively in the development of a concrete international project for French SMEs. This project has three objectives: it aims to stimulate export employment, particularly among young managers; to motivate and assist companies in finding foreign markets; and to increase collective activities.

It should be noted that among the companies we interviewed individually, two have already hired French trainees. This came about by chance in both cases, when French university graduates got in contact them, looking for in-service training. But, in both cases, company directors considered the experience to have been very positive. During our own interviewing process, we mentioned these experiences to the other company directors, most of which reacted with great interest. This indicates that an initiative of this type would be desirable and useful as a means of allowing Quebec SMEs to benefit from the business knowledge and expertise available in their environment.

Recommendation #8: Developing more active international cooperation

According to the OECD (2004), if governments wishing to reduce obstacles to SME internationalization would submit their proposals to WTO negotiations and carry out their efforts through other appropriate channels, SME participation in trade and in the EDI would be improved. To achieve this, active cooperation between governments, international institutions and the private sector should be promoted and facilitated. The relevant issues would then be treated in a manner making it possible to reap the potentially considerable benefits likely to result from the creation of a simpler economy, more favorable to business companies and better integrated in the international environment. Although Canada has always participated actively in joint initiatives, more innovative and more numerous measures can be taken. This is illustrated by recent cross-border agreements such as those concluded by Germany to help businesses wishing to export to neighboring countries.

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