Ottawa, ON – Canadian manufacturing firms that adapted to economic pressures during the past two decades by finding new markets – either international or domestic – became more productive than those that maintained the status quo, according to a new study from Statistics Canada.
During the 1990s, reductions in tariffs resulting from free trade agreements led to an expansion of trade between Canada and the United States and to an increase in the export intensity of manufacturing plants. In contrast, the worldwide resource boom post-2000 led to higher prices for Canadian commodity exports, an appreciation of the Canada-US exchange rate, and a decline in the competitiveness of Canada’s manufacturing sector in US markets. However, it also led to new domestic opportunities in the domestic resource sector.
Canadian manufacturing firms adapted to these pressures in different ways. Those that adapted by finding new markets became more productive. The more successful firms were more likely to have organizational structures that enabled them to better adapt.
Previous studies have shown that productivity tended to increase for firms that developed new international markets. This study showed that entry into new domestic markets had a similar effect.
In both cases, productivity growth of Canadian manufacturing plants that entered new markets was superior to the productivity of those that maintained the status quo. Entering new domestic markets was just as beneficial as entering international markets. The beneficial effects of entry accrued not just to entrants that crossed international borders but also to other forms of expansion, in particular to entrants that expanded across provincial borders.
Impact of exiting from export markets
Exiting the export market was not likely to be detrimental to productivity growth for a firm when it was followed by entering new domestic markets. Firms that exited export markets, but then explored new domestic markets, performed as well as firms that continued exporting. They also performed better than those that simply retrenched to their existing home markets.
In other words, experimenting with new markets produced tangible benefits to the overall economy.
The study found significant differences in the strategic capabilities of firms that move to new markets and those that do not find themselves able to adapt. Firms that entered new markets started with a greater strategic emphasis on market innovation and perceived higher levels of competition.
In addition, they typically had a flexible and decentralized organizational structure (flexible job design, information sharing with employees, problem-solving teams, joint labor-management committees and self-directed work groups).
The research paper, Market Expansion and Productivity Growth: Do New Domestic Markets Matter as Much as New International Markets?, part of the Economic Analysis Research Paper Series (11F0027M2012078, free), is now available from the Key resource module of the Statistics Canada website under Publications at www.statcan.gc.ca.