SMEs and International Competition: Free Trade Agreement or Globalization?

Abstract

Very little research has been done to examine the effects of globalization of the economy on small businesses, except those situated in border regions (Jeanneret 1985, Ratti 1986, Maillat 1990). The problem of small exporting firms has been analyzed on a number of occasions (Nelson 1984; Miesenbrock 1988; Kathawala, Judd, Monipallil, and Weirrich 1989; Leo, Monneyer, and Philippe 1990; Chenier and Michael 1990); however, researchers have only recently begun to pay closer attention to the effects of the opening up of national borders on regions (Lesage and De la Rochefordiere 1988, Laurencin and Rougier 1990) or on small business (Lefebvre and Lefebvre 1988, Rugman and Verbeke 1989, Filion 1990, OECD 1991). These latter authors conclude that, compared to most larger firms, small and medium-sized enterprises (SMEs) are generally less well-equipped to face increases in international trade. As a result of their lower productivity, many have found it difficult to compete. Also, given their limited resources, they have found it more difficult to take advantage of the removal of tariff barriers. The purpose of this research was to examine the impact of globalization on SMEs (those with fewer than 250 employees) in three small regions of Quebec, using as starting point their behavior with respect to the 1988 Free Trade Agreement (FTA) between Canada and the United States. More specifically, our aim was to discover how small firms in small regions viewed the opening up of the borders. Special attention was paid to how the SMEs reacted, either to face up to the increase in potential competition or to take advantage of reduced customs duties. The methodology used was an in-depth survey of small manufacturing firms in sectors seriously affected by the reduction of tariff barriers between Canada and the United States. The results, initially, were surprising: only a small number of firms knew of and had taken concrete steps to counter or take advantage of the agreement. However, further analysis revealed that different actions were taken within the wider framework of economic globalization. In other words, SMEs had taken steps to reinforce their competitive position in terms of general international trade, whether with the United States or elsewhere. Another study of the diffusion of new technologies in small manufacturing firms in Quebec (Julien 1992) supports this observation: the reduction of tariff barriers is just one element of small business strategy for survival and development. The main purpose is to adapt to world competition. In other words, this research reveals that many more SMEs than might be thought have begun to build up their defenses or seek to take advantage of market globalization. The differences between the strategies these firms use in positioning themselves lie mainly in (1) product specificities, (2) the use of new technologies often with the addition of personalized innovations, (3) the creation of marketing and distribution channels, and (4) changes in organization. All of these different strategies help develop a specific market.(1) This article will look first at the potential consequences of free trade for SMEs. The methodology used to verify the extent of these consequences in three regions of Quebec will then be described. This will be followed by a presentation of the results concerning SME behavior, first with respect to the Free Trade Agreement, and second with respect to global competitiveness. Finally, the overall research procedure will be discussed with respect to other studies, in particular our own recent study of the diffusion of new technologies in SMEs in poor economic times (Julien, Joyal, and Deshales 1992). FREE TRADE, REGIONAL ECONOMY, AND SMALL BUSINESS The trend towards easing market restrictions can be explained by the advantages, identified in neoclassical theory, of increased competition and subsequent price reductions. This should enable the resources freed to be used for other productive purposes, thus raising collective wealth (Cecchini Report 1988). …

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