business strategies of smes and large firms ......position to be product quality, customer service,...

WORKING PAPER SERIES

BUSINESS STRATEGIES OF

SMEs AND LARGE FIRMS IN

CANADA

Working Paper Number 16October 1997

WORKING PAPER SERIES

BUSINESS STRATEGIES OF

SMEs AND LARGE FIRMS IN

CANADA

by Gilles McDougall and David Swimmer,Industry Canada

Working Paper Number 16October 1997

Aussi disponible en français

Canadian Cataloguing in Publication Data

McDougall, Gilles

Business strategies of SMEs and large firms in Canada

(Working paper)Text in English and French on inverted pages.Title on added t.p.: Stratégies commerciales des PME etdes grandes entreprises au Canada.Includes bibliographical references.ISBN 0-662-63190-0Cat. no. C21-24/18-1997

1. Industries management -- Canada.2. Business planning -- Canada.3. Small business -- Canada.4. Big business -- Canada.I. Swimmer, David. 1942-.II. Canada. Industry Canada.III. Series: Working paper (Canada. Industry Canada)

HC5351.M32 1997 658'.02�0971 C97-980392-6EACKNOWLEDGEMENTS

This paper was presented at the Canadian Economic Association Meetings in St. John’s, Newfoundland, June 6–8,1997. We would like to thank Tereasa Chudy for collaboration on an earlier draft of this paper. We would also like tothank Someshwar Rao, and two anonymous referees, for very helpful comments.

The views expressed in this working paper do not necessarily reflect those of Industry Canada or of the federalgovernment.

The list of titles available in the Research Publications Program and details on how to obtain copies can be found atthe end of this document. Abstracts of Industry Canada research volumes, working papers, occasional papers,discussion papers and the full text of our quarterly newsletter, MICRO, can be accessed via STRATEGIS, theDepartment's online business information site, at http://strategis.ic.gc.ca.Comments should be addressed to:Someshwar RaoDirector, Strategic Investment AnalysisMicro-Economic Policy AnalysisIndustry Canada 235 Queen Street, 5th Floor, West TowerOttawa (Ontario) K1A 0H5Tel: (613) 941-8187 Fax: (613) 991-1261 E-Mail: [email protected]

TABLE OF CONTENTS

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1. BUSINESS STRATEGIES AND ACTIVITIES: SELECTED LITERATURE. . . . . . . . . . . . 3

2. RESEARCH METHODOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.1 Objective of the survey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.2 Survey instrument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.3 Conduct of the survey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3. RESEARCH FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93.1 General characteristics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93.2 Intellectual property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.3 Perceived competitive position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123.4 Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143.5 Business strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Markets and products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Markets and products by size of firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Importance of technology to overall business strategy. . . . . . . . . . . . . . . . . . . . 20Use of production inputs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Use of production inputs by size of firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Management practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Management practices by size of firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Human resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

3.6 Innovation capability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Sources of product innovation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Sources of product innovation by size of firm. . . . . . . . . . . . . . . . . . . . . . . . . . . 29Sources of process innovation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Sources of process innovation by size of firm. . . . . . . . . . . . . . . . . . . . . . . . . . . 31

3.7 Government programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Use of government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Importance of government programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Importance of government programs by size of firm . . . . . . . . . . . . . . . . . . . . . . 34

4. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

APPENDIX A: TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

APPENDIX B: SURVEY QUESTIONNAIRE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

INDUSTRY CANADA RESEARCH PUBLICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

EXECUTIVE SUMMARY

This research investigates the strategies for growth and competitiveness pursued by large firmsand small and medium-sized enterprises (SMEs), to find out whether they differ and, if so,whether these differences can help identify problems specific to SMEs.

In this study, “business strategy” is defined as “all aspects of a firm’s behaviour,” includingapproaches to management, human resources, technology, investment, staff training, use ofgovernment programs, and sources of innovation.

The present study is based on a recent survey of SMEs and large firms conducted by AbtAssociates of Canada for Industry Canada. The study increases understanding of large firms byusing a larger sample than case studies do, thereby permitting generalization about the conduct oflarge firms. It also increases understanding of SMEs by permitting comparisons with large firmsto find out whether the strategies SMEs follow are distinguishable from large firms’ strategies andwhether they might be a cause for concern.

This study finds the following important similarities between SMEs and large firms:

� Both large firms and SMEs perceive the four most important influences on their competitiveposition to be product quality, customer service, flexibility, and range of products.

� For both SMEs and large firms, growth is most influenced by management, marketing, andemployee morale. Other important influences on growth are: access to capital and markets,ability to adopt technology, and organizational culture. Government assistance is consideredthe least important influence on growth.

� SMEs and large firms differ little in business strategy. Market share and new products areconsidered important to the business strategy of both large firms and SMEs, as aretechnological change, efficient use of inputs, management practices, and human resourcesstrategy.

� For both large firms and SMEs, customers and managers are the most important sources ofproduct innovation. The R&D unit, the production unit, and suppliers are the next mostimportant. Managers and the production unit, followed by customers and the R&D unit, arethe most important sources of process innovation.

This study has identified the following important differences between large firms and SMEs:

� Large firms are much more likely than SMEs to pursue linkages with other firms throughstrategic partnerships, joint ventures, and strategic alliances.

ii Executive Summary

� Proportionately more small firms than large firms use government programs, although the useof government programs is widespread among firms of all sizes. SMEs are more likely thanlarge firms to consider R&D tax credits and government training programs to be veryimportant. SMEs attach less significance to market information and export incentives suppliedby government, although these services are important to them.

� Large firms are more likely than SMEs to perceive organizational culture and skilled labour asimportant growth factors. Large firms also consider innovative organizational structure to bemore important to overall management practices.

� More employees in large firms than in SMEs receive formal training, except for professionals,who receive approximately equal training. Employees spend equal time in informal training inSMEs and large firms, approximately 10 percent of work time.

� Large firms perceive licensing of intellectual property as a more important source of bothproduct and process innovation than SMEs do.

In conclusion, SMEs and large firms generally follow similar business strategies. Both SMEsand large firms perceive management, marketing, access to capital and markets, and ability toadopt technology as the most important growth factors, and government assistance as the leastimportant growth factor.

The results highlighted in this paper indicate that government policies should focus onimproving the business climate. Sound macro-economic policies and fair, efficient market-framework policies do much to help both large firms and SMEs to become more competitive andprosperous, and to create more jobs.

However, some important differences between SMEs and large firms’ business strategiesindicate that some specific government interventions might be warranted. First, the overallbusiness strategies of large firms focus more on the importance of employees than those of SMEsdo. Large firms perceive skilled labour to be more important than SMEs do, and more large firmsthan SMEs offer their employees formal training. Government training programs could, therefore,be an important source of help to SMEs.

Second, large firms are more likely than SMEs to engage in strategic partnerships, jointventures, and strategic alliances with other firms. SMEs could, therefore, benefit from exploringthe potential for linkages with other firms. In this area, government can help by facilitating suchlinkages at both the national and international level.

Finally, the use of licensed intellectual property is more important as a source of innovationfor large firms. SMEs could, therefore, benefit from further consideration of these potentialsources of innovation, and government could facilitate that consideration.

Executive Summary iii

The evidence presented in this paper indicates that government policy focus on SMEs iswarranted. Although SMEs rank government assistance as their least important growth factor,they use government programs more than large firms do, and generally rate them as moreimportant to their overall business strategy.

1Baldwin, Chandler, Le and Papailiadas (1994), p. 32–33.

2SMEs are firms with fewer than 500 employees. We have grouped small and medium-sized firms together so a useful comparison can be made with other research results in theliterature. The objective is also to compare the behaviour of SMEs with that of large firms. Indoing so, differences between small and medium-sized firms will be lost. This could beimportant if medium-sized firms behave differently from small-sized firms in a significant way.

INTRODUCTION

From a policy perspective, knowledge of the behaviour of small and medium-sized enterprises(SMEs) is important. The small-firm sector creates most new jobs in Canada, although most joblosses also occur in this sector. Also, small firms that are growing employ about the sameproportion of personnel in R&D as the overall population of firms, and their R&D-to-sales ratio ishigher than the national average.1 Therefore, in terms of total employment and innovativeactivities, SMEs are important to the Canadian economy.

However, if jobs created by start-up ventures are excluded, employment growth is almostthe same in SMEs and large firms. In addition, large firms seem to be less vulnerable than SMEsto financing problems, marketing difficulties, inflexibilities in adopting technology, and difficultyin hiring qualified employees.

Recognizing the important contribution of both types of firms to the Canadian economy,this study investigates the strategies for growth and competitiveness pursued by large firms and bySMEs to find out whether they differ.2 Much recent research in this area has focused on thestrategies of SMEs. The objective was to analyse their behaviour and isolate specific deficienciesthat might explain some of their problems. Other research has focused on successful SMEs toidentify the strategies that make them successful; the present research compares the strategies ofSMEs and large firms to identify the problems that are specific to SMEs.

We recognize that the behaviour of firms cannot be represented by a unique dimension orvariable. Rather, we have defined business strategies to cover all aspects of a firm’s behaviour,including approaches to management, human resources, technology, investment, staff training, useof government programs, and sources of innovation.

The present study is based on a recent survey of SMEs and large firms conducted by AbtAssociates of Canada for Industry Canada. The study increases understanding of large firms byusing a larger sample than case studies do, thereby permitting generalization about the conduct oflarge firms. It also increases understanding of SMEs by permitting comparisons with large firmsto find out whether the strategies SMEs follow are distinguishable from large firms’ strategies,and whether they might be a cause for concern.

2 Introduction

Section 1 summarizes a selection of the literature on SMEs and large firms in Canada thatis relevant for comparison purposes, Section 2 outlines the research methodology of this study,Section 3 presents its findings, and Section 4 presents our conclusions.

1. BUSINESS STRATEGIES AND ACTIVITIES: SELECTED LITERATURE

Little is known about the differences between large firms and SMEs in what they perceive to besuccess factors and the public policy implications of those differences. The research is fragmentedand thin. Comparisons of the behaviour of large and small firms first appeared indirectly, in thecontext of explaining the market structures amenable to innovative activity and economic growth.Schumpeter (1942) was the first study to examine the dynamics of market structures mostfavourable to success, measured in terms of innovation. The theme running through Capitalism,Socialism, and Democracy is now familiar to economists: economic growth results mainly frominnovative activity, which depends on entrepreneurial activity. Schumpeter argued that innovationis more likely to occur under monopolistic conditions, where rents can be captured frominnovative activity and where firms are in a better position to absorb the risks of creative activity.

Since Schumpeter, however, understanding of the role of market structures has advancedin theory as well as in terms of the statistical evidence brought to bear on the problem. Thisresearch challenges Schumpeter’s theory. The theoretical work suggests complex relationshipsbetween market structure and economic growth. Technological change depends on a host offactors, and can occur in various market structures, from competition to oligopoly and monopoly.The empirical research, based mainly on U.S. firm-level and industry-level data, points to several important conclusions, such as: that large corporations are not the sole sources of innovativeactivity, and that a high degree of seller concentration does not necessarily favour innovation.Specifically, the empirical research finds that large firms are more likely to engage in formal R&Dand receive more patents than very small firms. However, innovation also occurs in firms ofmodest size in the manufacturing sector. Acs and Audretsch (1990) find that small firms seemmore efficient in R&D: they generate more innovations per thousand employees and per milliondollars of R&D spending. Yet, the majority of small firms are not innovative to any significantdegree. From these findings, it is possible to conclude that the weight of evidence does notsuggest any concrete relationship between particular market structures and the extent to whichinnovative activity occurs at firm level.

In Canada, Baldwin and colleagues (1994) investigates both the strategies and theactivities of successful SMEs, focusing on the tactics small firms use to become successful and onthe activities they use to implement these strategies. Baldwin explores the broad areas ofmanagement, marketing, financing, human-resource development and innovation. The study isbased on survey data supplemented with administrative data on sales and profitability. The surveyfocuses on three interrelated areas: the firm’s strategies, which encompass the overallorganizational plan adopted to meet the firm’s goal; the firm’s activities, such as financing,personnel, technology, and capital equipment investment; and characteristics of the firm, such asits governance structure, geographical diversification of sales, and the ethnic and educationalbackground of the manager.

The sample for that survey was designed to produce a picture of growing Canadian SMEsin 1992. Firms eligible for the study had fewer than 500 employees and less than $100 million in

4 Business Strategies and Activities: Selected Literature

assets in 1984. Eligible firms also had grown in employment, sales and assets between 1984 and1998.

Baldwin finds that the three factors most significant to the success of growing SMEs aremanagement, the skills of employees, and marketing. Financing strategy is also regarded asimportant.

Skillful management is perceived to contribute the most to the competitiveness ofindividual firms; total quality management and innovative organizational structures receive thegreatest emphasis. Skilled labour ranks just after management in explaining growth. The humanresources strategy focuses on continuous staff training. Growing SMEs place considerableemphasis on the quality of their workforce; it is found that 53 percent of them spend, on average,10 percent of their investment budget on staff training.

Marketing strategy ranks third in influence on success. This factor includes productquality, flexibility in responding to customer needs, and customer service. In the area of finance,growing SMEs report that gaining access to capital and solving the problem of capital cost aremost important.

Baldwin finds that growing SMEs appear to be significantly innovative, with 16 percent ofall investment allocated for R&D and R&D-to-sales ratios better that the average for Canadianbusinesses overall. Growing SMEs report that innovative activity can occur in the absence offormal R&D structures.

2. RESEARCH METHODOLOGY

2.1 Objective of the survey

The purpose of the survey done for this paper was to examine the business strategies of firms inCanada and to compare strategies used by SMEs with the strategies used by large firms.Specifically, we wanted to determine whether the combination of important elements in a businessstrategy is the same for all the firms in our sample and, more important, whether the combinationfavoured by SMEs differs from that of large firms in Canada. In this study, we used a broaddefinition of business strategies that covered approaches to management, human resources,technology, investment, staff training, use of government programs, and sources of innovation.

2.2 Survey instrument

The questionnaire had three main sections. The first section examined the general characteristicsof firms, including ownership structure, country of control, involvement in strategic alliances andjoint ventures, and sales.

The second section assessed the competitive position of firms, relative to competitors, incategories such as price, quality, and customer service, focusing on the factors contributing togrowth over the previous five years and predicted for the next five years. These factors includedmanagement skills, R&D capability, and employee skills.

The third section queried firms’ overall business strategy, including how each firm dealtwith its markets and products, technology, inputs, employees, and its management practices. Thissection also included questions on sources of product and process innovation, such asmanagement and the R&D and production units, and the importance of various governmentprograms to growth. Human resources strategy was also examined in firms where theemployment, earnings, and training of occupational groups was sampled. Finally, the proportionof total investment in market development, R&D, materials for production, buildings, machineryand equipment, and staff training was examined.

2.3 Conduct of the survey

The survey questionnaire was designed to examine how the characteristics, strategies, andactivities of SMEs and large firms affect their competitiveness and growth. It included questionsfrom the Statistics Canada Survey of Growing SMEs because of the objective to compare thissurvey’s results with Statistics Canada’s results on growing SMEs. The questionnaire was alsoadapted to the survey sample, which included large firms, and to obtain answers to questionsspecific to this research.

6 Research Methodology

We tested a preliminary version of the questionnaire. The test consisted of 13 interviewswith senior representatives (e.g., VP Human Resources, VP Finance, Comptroller, Director ofCommunications or Government Relations) of medium-sized and large Canadian companies. Therespondents’ views indicated what we should do to finalize the survey instrument (seeAppendix B).

To select our survey sample of firms, we more than 1,200 of the largest firms from theCanCorp Canadian Corporations database maintained by Micromedia Ltd. This database coversmajor public corporations incorporated in Canada and trading on a Canadian exchange; majorsubsidiaries; privately held, federally registered corporations; and all companies listed on theToronto Stock Exchange.

The survey was conducted between July 11, 1995 and September 30, 1995, by means of aninitial general mailing, a telephone follow-up and a second mailing. It produced 254 validresponses, a response rate of about 21 percent.

Approximately 60 percent of the final sample is SMEs — that is, firms with fewer than500 employees. The remaining 40 percent is large firms — that is, firms with 500 or moreemployees. This size distribution is very close to the distribution in our initial full sample of firmssurveyed (see Table 1).

Table 1Size distribution of sample (by size of firms, number, and percentage of sample)

SMEs Large firms Total

Initial sample 703 (57%) 532 (43%) 1235

Final sample 146 (58%) 108 (42%) 254

The industrial distribution of our final sample (see Table 2) looks different from thedistribution of the initial sample. The response rates in the manufacturing sector and trade sector(both wholesale and retail) were lower than average and, consequently, these sectors are under-represented. However, we chose not to correct for these differences because the initial samplecontained an over-representation of these sectors in total GDP. The industrial composition of thefinal sample is, in fact, closer to reality.

Research Methodology 7

Table 2Industry distribution of sample (percentage of sample)

Initial sample Final sample

Resources 7 (0.5%) 20 (7.9%)

Manufacturing 590 (47.8%) 95 (37.4%)

Construction 30 (2.4%) 4 (1.6%)

Transportation andcommunications

106 (8.6%) 33 (13.0%)

Wholesale trade 205 (16.6%) 22 (8.7%)

Retail trade 228 (18.5%) 14 (5.5%)

Finance, insurance andreal estate

61 (4.9%) 40 (15.7%)

Services 8 (0.6%) 26 (10.2%)

Total 1235 254

3 Baldwin and colleagues (1994) found that most SMEs are independently owned (that is,owned and operated by executives or managers), and a few are owned by passive investors.

3. RESEARCH FINDINGS

3. 1 General characteristics

SMEs are more likely than large firms to be proprietorships, and smaller firms are probably morelikely than large firms to be taken over. In the sample, more SMEs than large firms are controlledby a parent company (see Table 3).3 On average, 49 percent of firms are controlled by a parentcompany. Among large firms, control by a parent company is less likely than the average for thewhole sample. This is a reasonable finding — large firms are more likely to control than to becontrolled.

Table 3Control by a parent company (percentage by size of firm)


Controlled by a parent company 51.4 45.4 48.8

Table 4 shows the origin of the parent company by size of firm, for the firms controlled bya parent company. Of the total sample, 36 percent of parent companies originate in Canada and 36percent in the United States. Of large firms, 41 percent are controlled by a parent companyoriginating in the United States. Consequently, the likelihood of ownership by a U.S. firmgenerally increases with firm size. This is consistent with the branch-plant nature of the Canadianeconomy.

Table 4Origin of parent company (by size of firms)


Canada 34.7 38.8 36.3

United States 32.0 40.8 35.5

Rest of world 22.7 20.4 21.6

Firms in the sample can grow because of external forces such as mergers or acquisitions.In the 1992–1995 period, 10 percent of firms in the sample had been acquired by other firms, and30 percent had acquired other firms. Generally, SMEs are acquired more often than large firms,and large firms are more likely than SMEs to acquire other firms (see Table 5).

10 Research Findings

4 To answer the qualitative questions, respondents were asked to rank their opinion on afive-point scale: 1 (not important); 2 (slightly important); 3 (important); 4 (very important);5 (crucial). Results for qualitative questions are reported as an average of all responses.

Table 5Acquisition of firms (by size of firm)


Percentage of firms acquired 11.0 9.3 10.2

Percentage of firms that have acquired others 26.7 35.2 30.3

A firm’s interests may be linked to those of other firms by joint ventures, strategicalliances, or strategic partnerships. Over the 1992–1995 period, 34 percent of all firms in thesample had been involved in a joint venture, 33 percent in a strategic alliance, and 29 percent in astrategic partnership. Forty-five percent of the firms in the sample had been involved in at leastone of these linkages.

Large firms were much more likely than SMEs to enter into strategic partnerships, jointventures, and strategic alliances (see Table 6). Thirty-nine percent of large firms were involved ina strategic partnership, 45 percent in a joint venture, and 44 percent in a strategic alliance but, atmost, only 25 percent of the SMEs were involved in any kind of linkage with another firm.

Table 6Type of alliance (by size of firm)


Strategic partnership 21.9 38.9 29.1

Joint venture 25.3 45.4 33.9

Strategic alliance 24.0 44.4 32.7

3.2 Intellectual property4

Firms have many reasons for entering into a strategic alliance, partnership, or joint venture. Thesurvey asked firms whether the sale to or acquisition from other firms of intellectual property wasimportant in the decision to enter into any linkage with another firm. The acquisition, sale, orlicensing of intellectual property was a factor in the decision to form such an arrangement for 35percent of firms in the sample, and more large firms (37 percent) than SMEs (33 percent) said itwas a factor.

Research Findings 11

Trade Secrets/Know-how

Trademarks

Patents

Copyrights

0 1 2 3 4 5

Figure 1

Intellectual property can be acquired or licensed through patents, trademarks, copyrights,and trade secrets or know-how. In the sample, 29 percent of firms ranked the sale or licensing ofpatents as very important or crucial to the decision to form a joint or strategic arrangement;45 percent ranked trademarks as very important or crucial; 24 percent ranked copyrights as veryimportant or crucial; and 87 percent ranked trade secrets or know-how as very important orcrucial. The significance of the sale or licensing of such intellectual property to other firms wasranked about the same.

Figure 1 shows the average score of each type of intellectual property acquired or licensedfrom other firms, and Figure 2 shows the average score of each type of intellectual property soldor licensed to other firms. Acquisition or sale of trade secrets or know-how is ranked as veryimportant, although all types of intellectual property are considered important.

Table A1 and Table A2 show the average score given to the importance of each type ofintellectual property in the decision to form a strategic or joint arrangement, by size of firm. BothSMEs and large firms rate trade secrets and know-how as the most important form of intellectualproperty, followed by other forms.


Trade Secrets/Know-how

Patents

Copyrights

Trademarks

0 1 2 3 4 5

Figure 2

Figure 3

3.3 Perceived competitive position

“Perceived competitive position” refers to how a firm views its success relative to that of its maincompetitors. A firm will want to know whether its product, overall, is better or worse than thoseof its competitors, and will be concerned with the conditions under which it must produce thegoods and services it supplies to its customers (see Figure 3).


QualityCustomer Services

FlexibilityRange of Products

Skill Level of EmployeesNew Products

Research and DevelopmentLabour Climate

Costs of ProductionPrice of Goods

0 1 2 3 4 5

Figure 4

Firms were asked to rank their competitive position relative to their main competitors onthe following 10 attributes:

� product price;� customer service;� product quality;� range of products;� frequency of introduction of new products;� flexibility in responding to customers’ needs;� production costs;� R&D spending;� labour climate; and� employee skills.

Firms were asked to assess their relative position on a five-point scale: 1 (much worse thanthe competition); 2 (somewhat worse); 3 (about the same); 4 (somewhat better); 5 (much better).The average scores for each category (excluding not applicable responses) are shown in Figure 4and Figure 5.


QualityCustomer Services

FlexibilityRange of Products

Skill Level of EmployeesNew Products

Research and DevelopmentLabour Climate

Costs of ProductionPrice of Goods

0 1 2 3 4 5SMEs Large Firms

Figure 5

Although the firms in the sample clearly perceive that all the listed factors influence theirrelative competitive position, it is also clear that they believe that the most important are productquality, customer service, and flexibility in responding to customer needs, each with averagescores of 3.9. Next in importance are range of products (3.8), employee skills (3.6), new products(3.5), labour climate (3.4), R&D (3.4), price of goods (3.2), and production costs (3.2).

Figure 5 and Table A3 show the average scores (standard error) for both large firms andSMEs. The four factors in which they perceive themselves most superior to their competitors are:product quality, customer service, flexibility, and range of products, with scores of 3.7 or more.SMEs perceive these factors to be more important than large firms do, however. The leastimportant factors, for firms of all sizes, are product prices and production costs.

The ranking of the results is similar to that for growing SMEs found in Baldwin andcolleagues (1994). In both the present study and in Baldwin, the top three factors are productquality, customer service, and flexibility.

3.4 Growth

The factors perceived as contributing to the growth of firms include the various facets ofproduction, including managerial, marketing, and employee capabilities, technological andinnovational adaptability, and the overall business climate within the firm. Growth also dependson availability of inputs, especially the supply of capital, the price of capital, markets, technology,and government assistance. Figure 6 illustrates the factors influencing growth.


Figure 6

Firms were asked to rate on a five-point scale 12 factors for importance to the growth oftheir company over the 1990–1995 period: 1 (not important); 2 (slightly important); 3 (important);4 (very important); 5 (crucial). The factors are:

� management skills;� R&D capability;� ability to adopt technology;� skilled labour;� access to capital;� cost of capital;� intellectual property rights;� government assistance;� marketing capability;� access to markets;� organizational culture; and� employee morale.

Figure 7 shows that firms ranked management skills as the most important determinant ofgrowth, with a mean score of 4 (very important). Marketing capability and employee morale (3.8)were next in importance, followed by access to markets and access to capital (both at 3.7), abilityto adopt technology and organizational culture (both at 3.6), skilled labour (3.5), cost of capital(3.3), R&D (3.2), intellectual property rights (2.5) and, finally, government assistance (2.1).


Management SkillsMarketing Capabilities

Employee MoralAccess to MarketsAccess to Capital

Adopt TechnologyOrganizational Culture

Skilled LabourCost of Capital

R&DIntellectual Property Rights

Government Assistance

0 1 2 3 4 5

Figure 7

Like the study of growing SMEs (Baldwin et al. 1994), the present study found thatmanagement skills, marketing capability, access to markets, and access to capital are among thetop five factors. The results differ in that, although employee morale is among the top five factorsfor large and small firms, skilled labour is not, although it is for growing SMEs. Like growingSMEs in Baldwin’s study, the firms surveyed for this study reported government assistance as thelast important contributor to growth.

Figure 8 and Table A4 show the responses of SMEs and large firms. For both, the topthree factors perceived to affect growth in the previous five years are management skills,marketing capability, and employee morale. For both SMEs and large firms, management skillsare crucial, with mean scores of 4.0, and marketing capability and employee morale are ratedequally by both firms, with mean scores of 3.8. These scores are followed closely by access tomarkets and access to capital, ability to adopt technology, and organizational culture. Large firmsperceive access to markets, organizational culture, and skilled labour to be more important, andaccess to capital to be less important, than SMEs do. For both SMEs and large firms, R&Dcapability was ranked important, but less so than most other contributors to growth. The leastimportant factors for both groups are intellectual property rights and government assistance,which received mean scores of around 2.0.


Management SkillsMarketing Capabilities

Employee MoraleAccess to MarketsAccess to Capital

Adopt TechnologyOrganizational Culture

Skilled LabourCost of Capital

R&DIntellectual Property Rights

Government Assistance

0 1 2 3 4 5

SMEs Large Firms

Figure 8

3.5 Business strategy

Firms have strategies that permit them to work toward their goals. Firms need a strategy fordealing with market changes, and coordinated plans for the types of products and markets theysupply. On the production side, firms must be able to innovate and to be flexible in adoptingappropriate production technologies, training employees, using new materials, reducing costs, andmanaging their operations.

Firms were asked to rate the following five categories for importance to their overallbusiness strategy:

� markets and products;� technology;� use of production inputs;� management practices; and� human resources strategy.

A five-point scale was used to assess the importance of various factors in each category: 1(not important); 2 (slightly important); 3 (important); 4 (very important); 5 (crucial). Allcategories of strategies were reported as important or crucial. Human resources and the marketsand products were first and second in the overall ranking, followed by management practices,technology, and use of production inputs, in a tight group. The patterns for SMEs and large firms


Market Share

New Products in Present Markets

Current Products in New Markets

New Products in New Markets

0 1 2 3 4 5

Figure 9

were the same, except that human resources strategy came first in importance for large firms, andmarkets and products came first for SMEs.

Markets and products

Firms were asked about the importance of maintaining market share, introducing new products tocurrent markets and new markets, and introducing current products to new markets.

Figure 9 shows that maintaining market share is the most important factor, with a score of4, followed by introducing new products to current markets (3.8), current products to new markets(3.5), and new products to new markets (3.3). All factors are considered important.

Therefore, the sampled firms value the least aggressive marketing strategy, maintainingmarket share, the most, and the most aggressive strategy, that of entering new markets with newproducts, the least. Still, all marketing strategies rank above 3 (important), which shows that firmsof all sizes emphasize their original markets, but also value aggressive entry into new marketswith new products.

Markets and products by size of firm

Figure 10 and Table A5 show that SMEs and large firms differ little in their perception of theimportance of maintaining market share (crucial) and of introducing new products in currentmarkets (important). Market share is considered crucial, with a mean score of 4.0 for SMEs and


Market Share

New Products in Present Markets

Current Products in New Markets

New Products in New Markets

0 1 2 3 4 5

SMEs Large Firms

Figure 10

4.1 for large firms. Introducing new products in current markets receives a mean score of 3.8 forboth SMEs and large firms. Smaller firms, however, place more importance on introducingcurrent products in new markets, with a score of 3.6, compared with large firms, which scoremarket strategy at 3.4. The most aggressive strategy, introducing new products in new markets, isranked the lowest by both SMEs and large firms, although the SMEs rate it higher than largerfirms do.

In conclusion, firms of all sizes primarily base their marketing strategy on maintainingmarket share, the least aggressive approach of the possibilities offered in the survey.

Technology

In the knowledge-based economy, technology plays a leading role in fostering growth in theeconomy as a whole and at firm level. Therefore, it is important to inquire about the technologystrategy of firms. At firm level, technological change occurs through the development of newtechnology, refinement of technology developed by others, use of technology developed by others,or improvement on current technology. The importance of each kind of technological change tofirms of all sizes is shown in Figure 11.


Improve Own Technology

Use Other's Technology

Refining Other's Technology

Develop New Technology

0 1 2 3 4

Figure 11

The most important of the categories of technological change is improving a firm’s owntechnology with a score of 3.7 followed by almost equal weight being given to the other forms oftechnological change with scores of 3.3 for using others’ technology, and 3.2 for each of refiningothers’ technology and developing new technology. By following a less aggressive, and thereforeless risky strategy, firms find it easier and less costly to innovate. Still, all strategies are given ascore greater than 3 (important) so that both aggressive strategies and building on existingstrengths are important.

Importance of technology to overall business strategy

Figure 12 and Table A6 show how SMEs and large firms perceive the importance of each type oftechnological change to overall business strategy. Both large firms and SMEs rate improvingcurrent technology as the type of technological change most important to their business strategy,with scores of 3.8 and 3.6 respectively. Large firms rate using others’ technology as next inimportance (3.5). Both these factors are rated higher by large firms than by SMEs. Developingnew technology and refining others’ technology are viewed as important by both large firms andSMEs, but less so than improving current technology.

It is possible to compare these results with the results of Baldwin and colleagues (1994)for growing SMEs from a similar question. Growing SMEs also favour improving currenttechnology above other strategies. In order of importance, firms prefer using technologydeveloped by others, developing new technology, and refining the technology of others.


Figure 12

The literature portrays SMEs as having difficulty adapting to technological change. Thisstudy shows that their technology strategies are substantially similar to those of large firms —they all favour the least aggressive approach of improving their current technology, and largefirms probably prefer this strategy even more than SMEs do.

Use of production inputs

In Canada, the productivity slowdown that began during the 1980s is not well understood at thefirm level. Efficiency of production, including how the firm uses production inputs, is part of theexplanation, but full understanding of efficiency at firm level is impossible without a detailedexamination of the use of inputs.

A firm’s business strategy usually stresses the following categories of change in the use ofinputs:

� adopting new materials;� using existing materials more efficiently;� cutting labour costs; and� reducing energy costs.

Figure 13 shows an average score for each category for all sizes of firms. It shows thatcutting labour costs is the type of change in use of inputs most important to a firm’s businessstrategy, with a score of 3.7. This is followed by using materials more efficiently (3.5), reducingenergy costs (3.0), and adopting new materials (2.9).


Cutting Labour Costs

Using Materials More Efficiently

Reducing Energy Costs

Using New Materials

0 1 2 3 4

Figure 13

It is possible to compare these scores with the scores Baldwin and colleagues (1994)reports for growing SMEs. Growing SMEs reported reducing labour costs as the most importantway to improve efficiency, followed by using existing materials more efficiently, reducing energycosts, and adopting new materials.

Use of production inputs by size of firm

Figure 14 and Table A7 show use of inputs for large firms and SMEs. In general, large firmsconsider use of production inputs more important to their overall strategies than SMEs do. Bothlarge firms and SMEs view cutting labour costs as the most important of this group of factorscontributing to overall business strategy, with scores of 3.8 and 3.6 respectively, followed byusing materials more efficiently, with scores of 3.6 and 3.4 respectively. For large firms, reducingenergy costs is next in importance (3.2), followed by adopting new materials (2.9). SMEs reversethis ranking, with respective scores of 2.9 and 3.0.

In conclusion, large firms and SMEs both rank cutting labour costs as the most importantstrategy for using production inputs efficiently.


Cutting Labour Costs

Using Materials More Efficiently

Reducing Energy Costs

Using New Materials

0 1 2 3 4

SMEs Large Firms

Figure 14

Figure 15

Management practices

Firms view management practices as core activities. One approach to fostering good managementpractices is to set up incentives for managers to encourage desired behaviour. The organizationalstructure managers adopt are part of a firm’s business strategy, as are managers’ approaches toinventory control, production processes, and intellectual property. Figure 15 shows the importanceof these factors to firms of all sizes.

Firms view total quality management as most important, with a score of 3.7, followed byprocess control (3.6), management incentives (3.5), organizational structure (3.5), just-in-timeinventory control (3.3), and intellectual property management (2.7).

Again, a comparison can be made with the findings of Baldwin and colleagues (1994) forgrowing SMEs. Growing SMEs emphasized total quality management above all other


Total Quality Management

Process Control

Management Incentives

Organizational Structure

Just-in-time Inventory Control

Intellectual Property Management

0 1 2 3 4

SMEs Large Firms

Figure 16

management strategies, organizational structure and management incentives came second andthird, and just-in-time inventory and process control came last.

Management practices by size of firm

The ranking of management practices in order of importance is almost the same for the wholesample of firms, for large firms, and for SMEs (see Figure 16 and Table A8). However, largefirms rank innovative organization structure higher than management incentives.

Both large firms and SMEs value total quality management over all other managementpractices, with scores of 3.8 and 3.7, respectively. Large firms rank process control and innovativeorganizational structure equally (3.7), followed by management incentives (3.5), just-in-timeinventory control (3.2), and intellectual property management (2.8). In contrast, SMEs scoreprocess control at 3.6, both innovative organizational structure and management incentives at 3.4,just-in-time inventory control at 3.3, and intellectual property management at 2.7. In conclusion,both large firms and SMEs rank total quality management the highest of management practices,but consider other management practices almost as important. Large firms consider innovativeorganizational structure more important than SMEs do.


r

s

0 5 10 15 20 25 30 35 40

Figure 17

Human resources

The knowledge, skills, and adaptability of a firm’s employees are the key to its growth andcompetitiveness. The study finds only minor differences between large firms and SMEs inoccupational composition of the workforce and amount of informal training, but that SMEs offertheir employees less formal training than large firms. Large firms and SMEs use similar humanresources strategies, emphasizing continuous staff training, staff motivation, and innovativecompensation packages.

Production

Other

Professional/Technical

Sales

Executive/Management

Part-to-Full Time

Workforce composition by occupational groups: Figure 17 shows a workforce breakdownof executives and management, professional and technical, production, sales, and otheremployees. For all firms in the sample, almost 35 percent of all employees are productionworkers, and the next largest category is “other employees,” comprising almost 31 percent of allemployees. Professional and technical employees come third, then sales employees, and executiveand management employees are last. The survey also found that, for every five full-timeemployees, there is one part-time employee.

Figure 18 shows that the pattern of occupational groups for the whole sample isapproximately the same for large firms and SMEs. The differences are that there areproportionately more professional employees and fewer sales people in large firms. SMEs have amarginally larger proportion of part-time to full-time workers.

Training: All firms in the sample, on average, formally trained 46.2 percent ofprofessional and technical employees, 44.1 percent of executives, 43.6 percent of sales employees,and 33.9 percent of production employees. Of full-time employees, 39.6 percent received formaltraining, and both full- and part-time employees spend 10 percent of work time in informaltraining.


Production

Other


Sales


Part-to-Full Time

0 10 20 30 40

SMEs Large Firms

Figure 18



Sales

Other

Production

Informal *

0 10 20 30 40 50 60

SMEs Large Firms

Figure 19

Figure 19 shows the percentage of employees receiving training in SMEs and large firms.In large firms, all categories of employees except professionals received more training than theywould in SMEs. The differences are substantial: 29.5 percent and 42.1 percent of productionemployees, in SMEs and large firms respectively, received training. The remaining statistics, forSMEs and large firms, are: professional and technical employees, 46.4 percent and 45.9 percent;sales employees, 39 percent and 52.2 percent; executives and management employees, 42.1percent and 47.6 percent; and other employees, 36.3 percent and 44 percent. The amount of time


Continuous Staff Training

Staff Motivation in Other Ways

Innovative Compensation Package

0 1 2 3 4 5

Figure 20

spent in informal training is approximately the same in SMEs and large firms, at 10.3 percent and9.7 percent respectively.

In conclusion, SMEs generally offer their employees less formal training than large firmsdo, but approximately the same amount of informal training.

Human resources strategy: Firms were asked to rate the importance of continuous stafftraining, innovative compensation packages, and other forms of staff motivation. Figure 20 showsthat, for firms of all sizes, continuous staff training is the most important human resourcesstrategy, with a score of 3.9, followed closely by other forms of staff motivation (3.7), andinnovative compensation packages (3.4).

In Baldwin’s 1994 study of growing SMEs, other forms of staff motivation received thehighest score, followed by staff training and innovative compensation packages.

Human resources strategy by size of firm: Large firms and SMEs are about the same in thepriority they give to staff training, innovative compensation packages, and other forms of staff motivation. Large firms consider continuous staff training crucial (score of 4.0); SMEs scored thiscategory at 3.7. Large firms and SMEs give staff motivation almost the same score (3.6 and 3.7respectively). Innovative compensation packages are scored at 3.5 by large firms and 3.3 by SMEs(see Figure 21).


Continuous Staff Training

Staff Motivation in Other Ways

Innovative Compensation Package

0 1 2 3 4 5

SMEs Large Firms

Figure 21

Figure 22

In conclusion, large firms and SMEs both emphasize continuous staff training, but largefirms rate it higher than staff motivation and SMEs rate it equal to staff motivation.

3.6 Innovation capability

Innovation is a key element in the growth and competitiveness of a firm. Yet the capacity toinnovate — that is, create new products and production processes — comes from sources bothinside and outside the firm. Internal sources include the R&D unit, the production unit andmanagement. The external sources include affiliated firms, competitors, suppliers, and customers(see Figure 22).


Figure 23

Sources of product innovation

For the entire sample, firms reported that the most important sources of product innovation arecustomers and management, with mean scores 3.7 and 3.6 respectively (see Figure 23), followedby the R&D unit (3.4), the production unit (3.3), suppliers (3.3), affiliated firms (3), competitors(2.9), contracting out (2.7), licensing Canadian intellectual property (2.4), licensing foreignintellectual property (2.3) and government contracts (2.1).

Sources of product innovation by size of firm

Figure 24 and Table A10 display the sources of product innovation for firms of different sizes.The general pattern is the same as that for the overall characteristics of the sample. Customers andmanagers remain the top sources of product innovation for large firms, with mean scores of 3.6and 3.5 respectively, and for SMEs, with mean scores of 3.7 each. For both large firms and SMEs,the next most important sources of product innovation are the R&D unit, the production unit, andsuppliers. Intellectual property and government contracts are viewed as slightly important sourcesof product innovation; however, large firms rate intellectual property, whether Canadian orforeign, higher than SMEs do.


t

s

t

P

s

0 1 2 3 4

SMEs Large Firms

Figure 24

Customers

Management

R&D Unit

Suppliers

Production Unit

Parent or Affiliated Firms

Competitors

Contracting Out

Licensing Canadian IP

Licensing Foreign IP

Government Contracts

The study by Baldwin and colleagues (1994) of growing SMEs found a similar pattern forthe sources of product innovation: customers and management come first, followed by suppliers.However, growing SMEs rated the R&D unit toward the bottom of the scale, along with parent oraffiliated firms and licensed intellectual property. More successful growing SMEs placed moreemphasis on the production and R&D units, parent or affiliated firms, and licensed Canadian andforeign intellectual property as sources of product innovation.

Sources of process innovation

The relative importance of various sources of process innovation differs slightly from that ofproduct innovation. Management is the most important source, with a score of 3.7, followed bythe production unit (3.5), customers (3.4), suppliers (3.2), the R&D unit (3.1), parent or affiliatedfirms (2.9), competitors (2.7), and contracting out (2.6). The least important sources of processinnovation are licensed Canadian and foreign intellectual property, and government contracts (seeFigure 25).


Figure 25

0 1 2 3 4SMEs Large Firms

Figure 26

Sources of process innovation by size of firm

Approximately the same relative importance is attached to each source of process innovation bysize of firm as for the sample as a whole (see Figure 26 and Table A11). Large firms scoremanagers and the production unit each at 3.6, followed by customers (3.4), suppliers (3.2), and theR&D unit (3.1). For SMEs, the mean scores are: managers (3.7), the production unit (3.5),customers (3.4), the R&D unit (3.2), and suppliers (3.1). Large firms, however, rate licensedCanadian and foreign intellectual property and contracting out higher than SMEs do.

Management

Production Unit

Customers

Suppliers

R&D Unit

Parent or Affiliated Firms

Competitors

Contracting Out

Licensing Canadian IP

Licensing Foreign IP

Government Contracts


Procurement

Export Incentives and Services

Industrial Support

Market Information Services

Training Program

R&D Tax Incentives

0 20 40 60 80

Figure 27

In conclusion, SMEs and large firms both look to managers, customers, the productionunit, the R&D unit, and suppliers for process information, although large firms put more emphasison licensed Canadian and foreign intellectual property.

The study by Baldwin and colleagues (1994) of growing SMEs showed a similar rankingfor sources of process innovation, with customers, management, and suppliers on top. As withproduct innovation, more successful growing SMEs put more emphasis on the production andR&D units, and licensed Canadian and foreign intellectual property.

3.7 Government programs

From a policy perspective, it is important how much firms use government programs and howimportant government programs are to them.

Use of government programs

Figure 27 shows the percentage of all firms in the sample that use different types of governmentprograms. Seventy-four percent are involved in government procurement, 73 percent usegovernment export incentives and services, 73 percent use government industrial support (whichincludes regional, technology, and development programs), 61 percent use government marketinformation services, 51 percent use government training programs, and 50 percent usegovernment R&D tax incentives.


0 20 40 60 80 100

SMEs Large Firms

Figure 28

As Figure 28 shows, SMEs differ substantially from large firms in use of governmentprograms. In all categories, SMEs are more likely to use government programs. Procurement isthe program SMEs use most — 82 percent report using procurement, whereas 63.4 percent oflarge firms report using it. Seventy-eight percent of SMEs report using export incentives, butsubstantially fewer large firms (66.7%) use them. Next in importance are industrial programs,which are used by 77.7% of SMEs and 65.3% of large firms. Market information is used by69.7% of SMEs and 49.5% of large firms. Almost 60% of SMEs make use of R&D tax creditsand training programs. Fewer large firms (37.1%) in the sample use R&D tax credits and 40.2%use government training programs compared with 59.2% of SMEs.

Procurement


Industrial Support


Training Program

R&D Tax Incentives

Importance of government programs

Firms score R&D tax incentives the highest (3.4), although many were less likely to use taxcredits than other programs. This is followed by government procurement (3.0), industrialsupport (3.0), export incentives (2.9), training (2.8) and, lastly, market information services (2.6)(see Figure 29).


R&D Tax Incentives

Procurement

Industrial Support


Training Program


0 0.5 1 1.5 2 2.5 3 3.5 4

Figure 29

R&D Tax Incentives

Procurement

Industrial Support

Training Program



0 1 2 3 4

SMEs Large Firms

Figure 30

Importance of government programs by size of firm

Figure 30 and Table A12 show the importance of government programs to the growth of largefirms and SMEs. The ratings of each category are similar for the two groups of firms, despitesome differences. Both SMEs and large firms view R&D tax credits as the most important sourceof growth among government programs, although SMEs value them more highly: SMEs scoreR&D tax credits at 3.6 and large firms at 3.3. Next in importance for SMEs are governmentprocurement and industrial programs (both 3.2), followed by government training programs (3.1).


Large firms rate procurement, industrial programs, and export incentives equally, withscores of 2.9 each, followed by training and market information each with scores of 2.6.

In conclusion, SMEs consider most government programs to be important for their growthand score government programs more highly than large firms. Large firms consider governmentprograms in the slightly important to important range. For both SMEs and large firms, R&D taxincentives are the government programs most important to business growth, although R&D taxcredits are used by fewer firms than other programs.

These results contrast with the findings of Baldwin’s 1994 study of growing SMEs, inwhich training received the highest rating, government procurement, market information, andindustrial support programs followed, and R&D tax and export incentives came last. However, thedifference in perception between the less successful and the more successful growing SMEs withrespect to government programs is interesting. The more successful growing SMEs rated R&D taxincentives and export incentives as much more important, and government training andprocurement programs were negatively related to success.

4. CONCLUSION

This study finds important similarities in the behaviour of SMEs and large firms:

� Both large firms and SMEs perceive the four most important influences on theircompetitive position to be: product quality, customer service, flexibility, and range ofproducts. Both large firms and SMEs consider their relative performance in these areas tobe somewhat better or better than that of their competitors.

� For both SMEs and large firms, growth is influenced most by management, marketing, andemployee morale. However, other important influences on growth are: access to capitaland markets, ability to adopt technology, and organizational culture. Governmentassistance is considered the least important influence on growth.

� SMEs and large firms differ little in their business strategy. Market share and newproducts are important to the business strategy of both large firms and SMEs, as aretechnological change, efficient use of inputs, management practices, and human resourcesstrategy.

� For both large firms and SMEs, customers and managers are the most important sources ofproduct innovation, followed by the R&D unit, the production unit, and suppliers. Forprocess innovation, managers and the production unit are the most important sources,followed by customers and the R&D unit.

This study has also identified the following important differences between large firms andSMEs:

� Large firms are much more likely than SMEs to pursue linkages with other firms throughstrategic partnerships, joint ventures, and strategic alliances. Therefore, SMEs may expandtheir scope to explore linkages with other firms, depending on the advantages thesearrangements would have.

� The proportion of small firms using government programs is greater than the proportion oflarge firms, although use of government programs is widespread among firms of all sizes.Sixty percent or more of SMEs use some type of government program, and SMEs attachslightly more importance to all types of government programs. SMEs consider R&D taxcredits and government training programs very important, more than large firms do. Theyalso consider industrial programs and procurement important. SMEs attach lesssignificance to market information services and export incentives supplied by government,although these services are influential.

38 Conclusion

� Large firms perceive organizational culture and skilled labour as more important growthfactors than SMEs do. Large firms also consider innovative organizational structure to bemore important to overall management practices than SMEs do.

� In general, large firms consider the use of production inputs to be more important in theiroverall strategies than SMEs do.

� More employees in large firms than in SMEs receive formal training, except professionals,who receive approximately equal training. Employees spend equal time in informaltraining in SMEs and large firms, approximately 10 percent of work time.

� Large firms consider licensing of intellectual property as a more important source of bothproduct and process innovation than SMEs do.

In conclusion, SMEs and large firms follow generally similar business strategies.Management and marketing, access to capital, access to markets, and ability to adopt technologyare perceived as the most important growth factors, and government assistance the leastimportant, for both SMEs and large firms.

The results presented in this paper imply, therefore, that government policies should focuson making the business climate right. Sound macro-economic policies and fair, efficient marketframework policies do much to help both large firms and SMEs to become more competitive andprosperous, and to create more jobs.

However, some important differences between SMEs and large firms’ business strategiesindicate that some specific government interventions might be warranted. First, large firms focusmore on their employees within their overall business strategy. More large firms perceive skilledlabour as an important factor, and more large firms offer their employees formal training, thanSMEs do. In this context, government training programs could be an important help to SMEs.

Second, large firms are also more likely to enter into strategic partnerships, joint ventures,and strategic alliances with other firms. SMEs could, therefore, benefit from further exploration ofpossible linkages with other firms. In this area, government can be useful by facilitating suchlinkages at both the national or international levels.

Finally, licensing of intellectual property is more important as a source of innovation forlarge firms. SMEs could, therefore, benefit from further study of these sources of innovation.Government could act as a facilitator here also.

The evidence presented in this paper indicates that a government policy focus on SMEs iswarranted. Although SMEs rank government assistance as the least important growth factor, theyuse government programs more intensively than large firms do, and generally rate them as moreimportant to their overall business strategy.

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40 Bibliography

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APPENDIX A: TABLES

Table A1Importance to alliances of acquiring intellectual property (by size of firm)

Type of intellectual property

Total < 500employees

> 500 employees Significance of difference

Patents 2.8 3.2 2.5 —

Trademarks 2.9 3.2 2.8 —

Copyrights 2.4 2.7 2.2 —

Trade secrets or know-how

4.2 4.2 4.1 —

Table A2Importance to alliances of selling intellectual property (by size of firm)

Type of intellectual property

Total < 500 employees > 500employees

Significance of difference

Patents 3.0 3.1 2.8 —

Trademarks 2.6 2.3 2.9 —

Copyrights 2.7 1.8 3.2 ***

Trade secrets or know-how

4.0 4.3 3.8 —

*** indicates significance at the 95% confidence interval; ** at 90%; * at 80%; and — indicates not significant.

42 Appendix A: Tables

Table A3Perceived competitive position (by size of firm)

< 500 employees > 500 employees Significance ofdifference

Product quality 4.0 3.9 *

Customer service 4.0 3.8 ***

Flexibility 3.9 3.8 —

Range of products 3.9 3.7 *

Employee skills 3.6 3.6 —

New products 3.5 3.5 —

R&D 3.4 3.4 —

Labour climate 3.4 3.5 —

Product price 3.2 3.3 —

Production costs 3.2 3.3 —

*** indicates significance at the 95% confidence interval; ** at 90%; * at 80%; and

— indicates not significant.

Appendix A: Tables 43

Table A4 Factors perceived to aid growth (by size of firm)


Management skills 4.0 4.0 —

Marketing capability 3.8 3.8 —

Employee morale 3.8 3.8 —

Access to markets 3.6 3.8 **

Access to capital 3.7 3.5 *

Ability to adopt technology 3.6 3.7 —

Organizational culture 3.5 3.7 **

Skilled labour 3.4 3.7 ***

Cost of capital 3.4 3.2 —

R&D 3.2 3.1 —

Intellectual property rights 2.4 2.6 —

Government assistance 2.1 2.0 —



Table A5Importance of markets and products (by size of firm)


Market share 4.0 4.1 —

New products, current markets 3.8 3.8 —

Current products, new markets 3.6 3.4 *

New products, new markets 3.4 3.2 *

Table A6Importance of technology (by size of firm)


Improving current technology 3.6 3.8 **

Using others’ technology 3.2 3.5 ***

Developing new technology 3.2 3.2 —

Refining others’ technology 3.2 3.3 —



Table A7Importance of use of production inputs (by size of firm)

< 500 employees > 500 employees Significance of difference

Cutting labour costs 3.6 3.8 **

Using materials efficiently 3.4 3.6 **

Using new materials 3.0 2.9 —

Reducing energy costs 2.9 3.2 ***

Table A8Importance of management practices (by size of firm)


Total quality management 3.7 3.8 —

Process control 3.6 3.7 —

Innovative organizational structure 3.4 3.7 **

Management incentives 3.4 3.5 —

Just-in-time inventory control 3.3 3.2 —

Intellectual property management 2.7 2.8 —

*** indicates significance at the 95% confidence interval;** at 90%;

* at 80%; and— indicates not significant.


Table A9 Human resources strategy (by size of firm)


Continuous staff training 3.7 4.0 ***

Other forms of staff motivation 3.7 3.6 —

Innovative compensation package 3.3 3.5 **

Table A10Sources of product innovation (by size of firm)


Customers 3.7 3.6 —

Managers 3.7 3.5 **

R&D unit 3.5 3.2 —

Suppliers 3.3 3.3 —

Production unit 3.2 3.3 —

Parent or affiliated firms 3.0 2.9 —

Competing firms 2.9 2.8 —

Contracting out 2.7 2.7 —

Canadian intellectual property 2.2 2.6 ***

Foreign intellectual property 2.1 2.6 ***

Government contracts 2.1 2.0 —

*** indicates significance at the 95% confidence interval; ** at 90%; * at 80%; and



Table A11Sources of process innovation (by size of firm)


Managers 3.7 3.6 —

Production unit 3.5 3.6 —

Customers 3.4 3.4 —

R&D unit 3.2 3.1 —

Suppliers 3.1 3.2 —

Parent or affiliated firms 2.9 2.8 —

Competitors 2.7 2.7 —

Contracting out 2.5 2.8 ***

Canadian intellectual property 1.9 2.4 ***

Foreign intellectual property 1.9 2.3 ***

Government contracts 2.0 1.7 *

Table A12Importance of government programs (by size of firm)

< 500 employees > 500 employees Significance of difference

R&D tax incentives 3.6 3.3 **

Procurement 3.2 2.9 —

Industrial support 3.2 2.9 —

Export incentives and services 2.9 2.9 —

Training programs 3.1 2.6 ***

Market information services 2.7 2.6 —

*** indicates significance at the 95% confidence interval;** at 90%; * at 80%; and


APPENDIX B: SURVEY QUESTIONNAIRE

INDUSTRY CANADA RESEARCH PUBLICATIONS

INDUSTRY CANADA WORKING PAPER SERIES

No. 1 Economic Integration in North America: Trends in Foreign Direct Investment andthe Top 1,000 Firms, Industry Canada, Micro-Economic Policy Analysis Staffincluding John Knubley, Marc Legault and P. Someshwar Rao, 1994.

No. 2 Canadian-Based Multinationals: An Analysis of Activities and Performance,Industry Canada, Micro-Economic Policy Analysis Staff including P. Someshwar Rao,Marc Legault and Ashfaq Ahmad, 1994.

No. 3 International R&D Spillovers Between Industries in Canada and the United States,Jeffrey I. Bernstein, Carleton University and the National Bureau of Economic Research,under contract with Industry Canada, 1994.

No. 4 The Economic Impact of Mergers and Acquisitions on Corporations, GillesMcdougall, Micro-Economic Policy Analysis, Industry Canada, 1995.

No. 5 Steppin' Out: An Analysis of Recent Graduates Into the Labour Market, RossFinnie, School of Public Administration, Carleton University and Statistics Canada,1995.

No. 6 Measuring the Compliance Cost of Tax Expenditures: The Case of Research andDevelopment Incentives, Sally Gunz, University of Waterloo, Alan Macnaughton,University of Waterloo, and Karen Wensley, Ernst & Young, Toronto, under contractwith Industry Canada, 1996.

No. 7 Governance Structure, Corporate Decision-Making and Firm Performance inNorth America, P. Someshwar Rao and Clifton R. Lee-Sing, Micro-Economic PolicyAnalysis, Industry Canada, 1996.

No. 8 Foreign Direct Investment and APEC Economic Integration, Ashfaq Ahmad,P. Someshwar Rao and Colleen Barnes, Micro-Economic Policy Analysis, IndustryCanada, 1996.

No. 9 World Mandate Strategies for Canadian Subsidiaries, Julian Birkinshaw, Institute ofInternational Business, Stockholm School of Economics, under contract with IndustryCanada, 1996.

No. 10 R&D Productivity Growth in Canadian Communications Equipment andManufacturing , Jeffrey I. Bernstein, Carleton University and The National Bureau ofEconomic Research, under contract with Industry Canada, 1996.

66 Industry Canada Publications Program

No. 11 Long-run Perspective on Canadian Regional Convergence, Serge Coulombe,Department of Economics, University of Ottawa, and Frank C. Lee, Industry Canada,1996.

No. 12 Implications of Technology and Imports on Employment and Wages in Canada,Frank C. Lee, Industry Canada, 1996.

No. 13 The Development of Strategic Alliances in Canadian Industries: A Micro Analysis,Sunder Magun, Applied International Economics, 1996.

No. 14 Employment Performance in the Knowledge-Based Economy, Surendra Gera,Industry Canada, and Philippe Massé, Human Resources Development Canada, 1996.

No. 15 The Knowledge-Based Economy: Shifts in Industrial Output, Surendra Gera,Industry Canada, and Kurt Mang, Department of Finance, 1997.

No. 16 Business Strategies of SMEs and Large Firms in Canada, Gilles Mcdougall andDavid Swimmer, Micro-Economic Policy Analysis, Industry Canada, 1997.

INDUSTRY CANADA DISCUSSION PAPER SERIES

No. 1 Multinationals as Agents of Change: Setting a New Canadian Policy on ForeignDirect Investment, Lorraine Eden, Carleton University, 1994.

No. 2 Technological Change and International Economic Institutions, Sylvia Ostry, Centrefor International Studies, University of Toronto, under contract with Industry Canada,1995.

No. 3 Canadian Corporate Governance: Policy Options, Ronald. J. Daniels, Faculty ofLaw, University of Toronto, and Randall Morck, Faculty of Business, University ofAlberta, 1996.

No. 4 Foreign Direct Investment and Market Framework Policies: Reducing Frictions inAPEC Policies on Competition and Intellectual Property, Ronald Hirshhorn, 1996.

No. 5 Industry Canada’s Foreign Investment Research: Messages and PolicyImplications, Ronald Hirshhorn, 1997.

Industry Canada Publications Program 67

INDUSTRY CANADA OCCASIONAL PAPER SERIES

No. 1 Formal and Informal Investment Barriers in the G-7 Countries: The CountryChapters, Industry Canada, Micro-Economic Policy Analysis Staff including AshfaqAhmad, Colleen Barnes, John Knubley, Rosemary D. MacDonald and ChristopherWilkie, 1994.

Formal and Informal Investment Barriers in the G-7 Countries: Summary andConclusions, Industry Canada, Micro-Economic Policy Analysis Staff including AshfaqAhmad, Colleen Barnes and John Knubley, 1994.

No. 2 Business Development Initiatives of Multinational Subsidiaries in Canada, JulianBirkinshaw, University of Western Ontario, under contract with Industry Canada, 1995.

No. 3 The Role of R&D Consortia in Technology Development, Vinod Kumar, ResearchCentre for Technology Management, Carleton University, and Sunder Magun, Centre forTrade Policy and Law, University of Ottawa and Carleton University, under contractwith Industry Canada, 1995.

No. 4 Gender Tracking in University Programs, Sid Gilbert, University of Guelph, andAlan Pomfret, King's College, University of Western Ontario, 1995.

No. 5 Competitiveness: Concepts and Measures, Donald G. McFetridge, Department ofEconomics, Carleton University, 1995.

No. 6 Institutional Aspects of R&D Tax Incentives: The SR&ED Tax Credit, G. BruceDoern, School of Public Administration, Carleton University, 1995.

No. 7 Competition Policy as a Dimension of Economic Policy: A ComparativePerspective, Robert D. Anderson and S. Dev Khosla, Economics and InternationalAffairs Branch, Bureau of Competition Policy, Industry Canada, 1995.

No. 8 Mechanisms and Practices for the Assessment of The Social and CulturalImplications of Science and Technology, Liora Salter, Osgoode Hall Law School,University of Toronto, under contract with Industry Canada, 1995.

No. 9 Science and Technology: Perspectives for Public Policy, Donald G. McFetridge,Department of Economics, Carleton University, under contract with Industry Canada,1995.

No. 10 Endogenous Innovation and Growth: Implications for Canada, Pierre Fortin,Université du Québec à Montréal and the Canadian Institute for Advanced Research, andElhanan Helpman, Tel Aviv University and the Canadian Institute for AdvancedResearch, under contract with Industry Canada, 1995.

68 Industry Canada Publications Program

No. 11 The University-Industry Relationship in Science and Technology, Jérôme Doutriaux,University of Ottawa, and Margaret Barker, Meg Barker Consulting, under contract withIndustry Canada, 1995.

No. 12 Technology and the Economy: A Review of Some Critical Relationships, MichaelGibbons, University of Sussex, under contract with Industry Canada, 1995.

No. 13 Management Skills Development in Canada, Keith Newton, Industry Canada, 1995.

No. 14 The Human Factor in Firm’s Performance: Management Strategies forProductivity and Competitiveness in the Knowledge-Based Economy, KeithNewton, Industry Canada, 1996.

No. 15 Payroll Taxation and Employment: A Literature Survey, Joni Baran, IndustryCanada, 1996.

No. 16 Sustainable Development: Concepts, Measures, Market and Policy Failures at theOpen Economy, Industry and Firm Levels, Philippe Crabbé, Institute for Research onEnvironment and Economy, University of Ottawa, 1997.

JOINT PUBLICATIONS

Capital Budgeting in the Public Sector, in collaboration with the John DeutschInstitute, Jack Mintz and Ross S. Preston eds., 1994.

Infrastructure and Competitiveness, in collaboration with the John Deutsch Institute,Jack Mintz and Ross S. Preston eds., 1994.

Getting the Green Light: Environmental Regulation and Investment in Canada, incollaboration with the C.D. Howe Institute, Jamie Benidickson, G. Bruce Doern andNancy Olewiler, 1994.

To obtain copies of documents published under the RESEARCH PUBLICATIONSPROGRAM, please contact:

Publications OfficerMicro-Economic Policy AnalysisIndustry Canada235 Queen Street, 5th Floor, West TowerOttawa, Ontario, K1A 0H5Telephone: (613) 952-5704 Fax: (613) 991-1261

business strategies of smes and large firms ......position to be product quality, customer service,...

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