The Effects of Internal Firm Barriers on the Export Behavior of Small Firms in a Free Trade Environment: Evidence from NAFTA

Since small companies generally do not have the resources to circumvent tariff barriers, there has been an implicit assumption that free trade agreements such as the Canada-U.S. Free Trade Agreement and more recently, NAFTA, will significantly affect the exporting strategies of small firms. The flexibility inherent in small businesses provides them with the ability to adapt to environmental changes more quickly than larger enterprises (Albers and Kumar 1991). The lowering of tariff barriers presents small firms with the opportunity to increase profits, prolong life cycles and open new distribution channels (Szekely and Vera 1991; Wu and Longley 1991). However, compared to most larger firms, small- and medium-sized enterprises have lower levels of productivity and fewer resources to capitalize on the increased exporting opportunities resulting from free trade (Filion 1990). Since firms typically develop international markets on an incremental basis, free trade poses new opportunities only to those firms who are able to mobilize the internal firm resources necessary for greater exporting activity. There is general agreement that internal characteristics such as financial and managerial constraints, personal objectives of the owners/managers, and the lack of formalized planning and control systems (Naidu and Prasad 1994; Roth 1992; Cavusgil 1984; Lyles et al. 1993) act as greater constraints in shaping the exporting strategies of small firms than of larger businesses. However, there has been no examination of whether such internal constraints affect a small firm's decision to be proactive or reactive in exploiting the exporting opportunities arising from free trade. This research investigates the importance of internal constraints on the exporting strategies of small firms operating in a free trade environment. Small Ontario manufacturers who export were selected for the research sample since they are expected to be well informed about the implications of free trade for their businesses. This is due both to Canada's small domestic market and to the economic effects in Ontario resulting from the passage of the 1988 Canada-U.S. Free Trade agreement. Export Constraints in a Free Trade Environment Researchers generally acknowledge that free trade will not affect all small businesses equally. Many small firms are niche players still exploiting their current markets. For such firms, the lowering of trade barriers exerts little influence. For others, however, free trade represents a fundamental change necessitating a proactive strategic response. Exporters tend to be either proactive or reactive. Proactive exporters actively solicit export sales, maintain regular contact with foreign customers, and put a high priority on export sales (Louter, Ouwerkerk, and Bakker 1991). In contrast, reactive exporters are passive order-takers, for whom exporting is often less a priority than domestic sales. Firms that feel affected by free trade are likely to adopt a proactive approach to exporting. Two explanations have been proposed in the literature to understand why small Canadian exporters may feel their firms are affected by free trade. The first is access to new markets (Christensen 1993). Since the U.S. is Canada's largest trading partner, many Canadian firms begin their exporting activity in the U.S. The issue for many Canadian small firms is the importance of the additional opportunities offered by NAFTA over what is currently in place with the Canada-U.S. Free Trade Agreement. The second reason firms feel affected by free trade is the threat of increased competition for export markets (Fraser 1993). Fraser suggests that since North America is a "hub and spoke" economy with most trade flowing to and from the U.S., the major challenge facing Canadian firms under NAFTA will be defending their U.S. exports from increased Mexican competition. Small Canadian firms may need to adopt a proactive exporting strategy to combat the threats posed by free trade in an international arena. …