Growing exports: A possibly contrarian view

I’m going to revisit a topic I look at least once or twice a year:  Fostering exports as an economic development goal.

I would say that the majority of economic development folks in Atlantic Canada mostly agree with my main tenets. In general they see my writing and advocacy as aligned with their view of what is the appropriate role for government and other organizations to help foster a strong economy.

When it comes to exports development, I think many of my colleagues – and many reading this post – may disagree with me and that’s okay.  I don’t have a monopoly on good ideas. 

If a province or country (or city) wants to grow the total value of exports (i.e. increase the amount of goods and services that are developed in the jurisdiction but sold to markets outside the jurisdiction) what is the best way to do it based on actual evidence specific to Atlantic Canada?

1. Set up a program to help small firms export more – help them become ‘export ready’, take them to trade shows, give them grants and loans to develop international markets, help them hire a marketing person, etc.

2. Help nurture a few large firms or large-scale sector export growth opportunities (i.e. a $600 million tungsten mine, an LNG export terminal, the expansion of a large manufacturing facility, etc.).

3. Attract national or international firms with existing global markets and sales channels in place to either set up a greenfield operation in your province or acquire a smaller firm giving it access to the global markets and sales channels.

4. And, of course, some variation of the all of the above. 

Let’s start with #1 – trying to help small and slightly larger business grow their export markets. This is very common – there are provincial and federal programs and dozens and dozens of economic developers trying to help small firms become export ready, explore new markets, etc.  Indeed, if you read the economic development plans, this seems to be the backbone of export development strategies. 

The problem is that other than some anecdotes – there is no evidence this works.  I’ve been involved in economic development in Atlantic Canada for over 25 years and in that time I have seen dozens of export development schemes come and go.  And the result?  There are fewer international exporter companies in Atlantic Canada now than 15-20 years ago.  Three of the four Atlantic Provinces have seen a fairly steep decline in the number of exporters, in fact. 

Just ignore PEI.  That province has been an outlier across the board for a decade or more – leading in the country in export growth, immigration, population growth, etc. They have attracted hundreds of immigrant business investors – many many who never really got properly going – but some that did so it is not surprising that province has seen a modest increase in exporting firms but remember the number of exporters only rose from 182 in 2005 to 234 in 2019 – hardly a massive increase in the number of exporters.

I don’t have recent data on the breakdown of export revenue by firm size but nationally establishments with between 20-99 employees only account for 14% of the value of all international exports and only 11% of the value of interprovincial exports.

I’m just not sure that if your goal is “to grow export revenue” then the strategy of helping small businesses export makes sense – particularly in much of Atlantic Canada.  If you take a long term view of the total value of international exports, New Brunswick and Nova Scotia are at the bottom of the pile for growth (again forget about PEI there’s something in the soil over there) and Newfoundland and Labrador’s export growth is driven by two things: oil and minerals.

And despite 30 years of trying to help small firms export more, this region still has considerably few exporters – adjusted for size than the country overall. 

The typical provincial export strategy will talk about ‘diversifying exports’ or ‘boosting the number of exporters’ or other similar statements.  When I ask economic developers they will tell me that large firms don’t want or shouldn’t need our help and, in fact, we get political blowback when we give money to large firms.  Whereas, the little firms need our help and the public is far more supportive of helping the little entrepreneur. This may be the case.  But then you should call your strategy the “help small businesses export” strategy and not a strategy that is meant to grow the overall aggregate export revenue for the jurisdiction.

The second broad way to grow exports is to nurture a few large firms or large-scale sector export growth opportunities (i.e. a new mining project, an LNG export terminal, the expansion of a large manufacturing facility, etc.).  Many provinces and states have done this successfully including PEI, Saskatchewan and Manitoba.  Normally, in Canada, this revolves around natural resources but not always (aerospace on PEI, for one example).  This is decidedly different than a small business-focused export strategy.

The third broad way is to attract national or international firms with existing global markets and sales channels in place to either set up a greenfield operation in your province or acquire a smaller firm giving it access to the global markets and sales channels.  This has been particularly successful in this region among services-based export sectors.  In New Brunswick, if you add up all the export revenue from national or international firms that have set up here directly or through acquisitions in business services and ICT, it is approaching $2 billion/year (international and interprovincial).  There is a high correlation between FDI (or external investment) and exports growth but governments tend to look at them as distinct.

And finally I want to revisit what we define as exports in the first place.  There is a tendency to narrowly define what we think of as exports and that is just not aligned with reality.

I have been saying we should not restrict our definition of exports to the obvious (pewter, French Fries and maple syrup). If we have a really good understanding of what we are actually exporting and we correlate that to growth in global market demand we will have a better change of success.

Take a look at the export values for selected New Brunswick industries (2016) – interprovincial and international exports combined.

I just threw in ‘used motor vehicles’ for kicks.  Portfolio management services is a $100 million industry for New Brunswick-based financial services firms.  Universities generated $64 million in tuition in 2016 from students outside New Brunswick – role in their living and other expenses and that likely triples or more.  NB-based data centres are generating $100 million in export revenue.  Management and consulting firms are a $32 million export sector for New Brunswick (my firm accounts for a portion of that revenue).  Lawyers generate $31 million in export revenue.  Architects and engineering firms $125 million.

Of course, you are saying those numbers mean nothing out of context.  They could be large or small.  So let’s compare a few with Nova Scotia – a province that is moderately larger in size but not by much.  Nova Scotia generates 3.5 times as much export revenue from universities, 4.7 times as much from custom software development, 3.2 times as much from management and related consulting services, 2.3 times as much from legal services, 2.4 times as much from R&D services, and 3.3 times as much from advertising and PR services.  New Brunswick, by contrast, dominates in the call centre-related export areas.  NB generated $1.1 billion more export revenue from business support services and office administrative services than Nova Scotia in 2016.

In conclusion, if a jurisdiction’s goal is to help small businesses export -that is fine but not the same thing as an export strategy.  In fact, I would argue that if we put the bulk of the effort on helping small businesses export and we lose out on big sector or FDI-based opportunities, we will hurt our economic development outcomes.

Questions to ask if you want to develop a successful export strategy:

  1. In which sectors or opportunities does our region have a strong comparative advantage?  What can we do to bolster the value proposition (while avoiding massive subsidies or market distorting policies)? 
  2. Which of these sectors or opportunities have growing global demand?  Do those sectors with declining global demand have emerging alternatives or new niche areas? 
  3. Do we have enough firms at scale that have global market reach? If yes, what can be done to encourage growth in exports? If no, where will we find the exporters?  By supporting current firms with export potential?  By encouraging external firms to invest here (greenfield or through acquisitions)?