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April 29, 2015

An evolving set of challenges for Canadian entrepreneurs

In many ways, we’re living in a golden age for entrepreneurship.  Technology has made innovation easier than ever before, while disrupting traditional industries across such diverse sectors hotels and accommodations, transportation, and finance. Barriers have never been lower for company founders seeking to leverage creative ideas and new technologies to challenge large and established industry players and grow their operations globally. And we’re increasingly seeing the rise of born global and micro-multinational firms.

At the same time, the shifting landscape has created new threats both at home and abroad. And while we know that internationalization is tightly linked to firm growth, young companies face a host of new challenges that go beyond traditional barriers to market entry.  Back in 2013, Dan and Anthony wrote a paper that identified five major challenges holding back Canadian SMEs. While those challenges continue, in this post I’ll survey some additional issues that firms – and particularly rapidly internationalizing high-growth firms – face today.

Intellectual Property

Firms venturing abroad for the first time need to carefully consider how best protect their valuable intellectual property assets.  Too often, young firms lack both the internal expertise to manage their intellectual property and the financial resources to obtain counsel from outside. While initiatives such as the University of Windsor’s Law, Technology and Entrepreneurship Clinic have sought to bridge the gap, such resources remain rare in Canada when compared to those in the US.

These issues can become magnified as small, young firms seek to expand their operations internationally.  Despite some recent changes, intellectual property concerns remain particularly prominent for firms seeking to enter the large and potentially lucrative Chinese market. And while changes in China’s domestic intellectual property system may eventually help mitigate risks of IP theft, experts have warned that they may also enhance litigation risks for market entrants. With added questions surrounding the changing role of government-backed entities in the intellectual property marketplace and the need for firms and government to remain vigilant about protecting Canada intellectual property assets is clear.

Cyber-Security

Recent allegations centring on Chinese cyber-espionage activity, directed at both governments and firms, coupled with high-profile data breaches at large firms such as Target and E-Bay, have moved cyber-security issues to the front pages. But while much of this attention has focused on malicious attacks against governments and large multinationals, small businesses also face significant risk.  According to a 2013 survey conducted by the US National Small Business Association found that 44% of companies had fallen victim to some type of cyber-attack.  An earlier study found that the majority of data breaches occur in small firms with less than 100 employees. And while large firms may be able to weather the aftermath of a security breach, they can represent an existential threat to smaller businesses.

While the threat of cyber crime and industrial espionage impacts all firms, rapidly internationalizing high-profile and high-growth companies – so called ‘global gazelles’ – may be particularly vulnerable. At the same time, small companies often fail to consider the risks they face from an online attack. Increased awareness of risks, and the need to adopt proactive measures to address them, may help smaller firms avoid the type of online breach that would threaten to derail their future growth.  Still, even with increased knowledge, challenges remain. As an article in the Financial Times notes, “protections against hackers remain conspicuously weak, what with security software that turns out to be hugely flawed and a skills shortage that makes cyber security specialists too expensive for many companies and state and local governments to hire.”

An Uncertain Business Environment

Firms seeking to expand internationally also face broader challenges stemming from a lack of knowledge of the local business environment. For Canadian firms, this difficulty can grow as they seek to branch beyond the American or European contexts to take advantage of opportunities in emerging markets. Canadian businesses looking abroad may be handicapped by a lack of knowledge of foreign regulatory environments, particularly where shifting domestic practices impose unanticipated costs on firms. Lack of knowledge about market composition – particularly the competitive environment – and cultural barriers can also be significant.  And while opportunities in major emerging markets remain, dampened economic growth and geo-political concerns have heightened market uncertainty.

Mitigating Risks and Costs

Given the important role of rapidly internationalizing high-growth firms in driving economic growth and employment, both government and the private sector have an important role to play in mitigating risks encouraging Canadian firms – where appropriate – to expand their operations abroad. Currently, Canada under-performs with respect to the international exposure and competitiveness of its companies, both large and small. Particularly for young firms, the small-pool of internationally experienced managers available within the local labour market may enhance the risks identified above. In a previous post here at the DEEP Cente Blog, my colleague Dan highlighted that far too few Canadian youth are seeking to gain experience internationally.

Closing this gap will require better education –and more diverse internationally exposure – for Canadian entrepreneurs. Government programs can help encourage this type of experience through of ‘soft-landing’ type programs that help ease the costs of market entry for firms. And on intellectual property and cyber-security issues, initiatives such as the University of Windsor’s law clinic can help small companies in accessing high-cost expertise.  But while programs can provide assistance, Canada ultimately needs to work to nurture firms with the ambition and expertise to succeed globally, despite the barriers and risks they face.

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