SMEs and Globalisation - Example

SMEs and Globalisation Table of Contents SMEs and Globalisation 1 Table of Contents 1 Abstract 2 Introduction 2 Major challenges and opportunities that have arisen for SMEs from the process of globalisation 3 In what ways will the capacity of SMEs need to be improved? 5 Role of government 6 Conclusion 7 Bibliography 7 Abstract SMEs have been widely debated in context of globalisation. It is because of the challenges and opportunities globalisation has imposed on SMEs. This paper looks at some of such challenges and opportunities, delves deep into what needs to change at the SME level and what role could government play in making SMEs more effective and productive. Introduction In today's businesses globalisation is a major driver. They way markets have been internationalised has had its impact on every business; big or small. New competitors are making inroads into markets that were formerly considered as protected as protected domestic markets. Adding stiffness to doing business is the fast pace and rapidity with which the markets are changing dynamically. Globalisation is essentially new economic and political scenarios brought about by integration of technology thus resulting in, among many other things, reduction in costs of distances. This has enabled businesses to operate in multiple markets in which they can transact much faster. That means the direct fallout of this is on the SMEs which either need to work smartly or see themselves neck to neck in a global context, even if that might not necessarily mean that they expert their services or launch their products in other destination. Globalisation has resulted into a complex web of activities that either directly or indirectly put pressure on SMEs. On account of this changing business dynamics SMEs have to see themselves in an entirely different light and even if they intend to do operate their businesses locally, the strategies have to be at par with the global players. What is to be read between the lines is that the role of SMEs in the global context becomes all the more interesting. Earlier it was thought that globalisation would render the work of SMEs defunct or they would not be able to compete with the powerful global companies. But this mindset is gradually changing and it has begun to be understood that while SMEs stand chances of being wiped out on account of globalisation, they could even act as reliable agents for big brands or companies which have made entries into the markets in which SMEs ruled the roost earlier. Major challenges and opportunities that have arisen for SMEs from the process of globalisation Challenges SMEs face a number of challenges in a heavily globalised environment. Recently several researchers have pointed towards this, which include Samad (2007); Saleh & Ndubisi (2006); Abu Bakar et al. (2006); Wang (2003); Harvie (2004); Ritchie & Brindley (2000, p. 375-385); Wafa et al. (2005); Decker et al. (2006), and Foon (2006). Some of the challenges SMEs face include lack of financing, inability to face recession, low productivity, barrier from global sourcing, inadequacy of managerial capabilities and problems having access to management and technology. SMEs also face regulatory burden that are heavy in nature. Teoh & Chang (2008, p. 31-38) have remarked that one of the greatest challenges that EMEs face is lack of access to i) social networks, ii) formal business, and iii) access to credit. All along intensified competitiveness from global enterprises remain as a permanent threat. To further understand at what levels SMEs face these challenges, it is important to understand the types of SMEs that are general in function. Broadly they have been classified into three categories; each category determined on the level of capability a SME has or its ability to walk through different levels of challenges. McMohon (2001) has remarked that one group of SMEs is that which is internationally competitive; it is this group that tends to gain from regionalisation, if not globalisation. Another group is less adaptable to pressure exerted by globalisation. These SMEs have the capability to stay afloat in case they avoid taking fast moves and stick to current, if not more, productivity. This helps these SMEs to stick to international standards without compromising on their survival. They do so by creating professional staff by investing in skill management. This helps them face competitions. Samad (2007) has mentioned of a third group of SMEs which are not affected as much by globalisation becomes their interests are protected by the government. SMEs have always been faced with economic downturns. These downturns have been more pronounced since 2007 and included USA's sub-prime credit crunch and rising oil prices; both events have led to the severe financial distress in markets. Several nations today are exhibiting increasing costs of production and diminishing economic growth; thus making recession unavoidable. Recession affects SMEs more than large companies because during recessive phases of economy people's purchasing power reduces which reflects in lower demand in services and products. Since SMEs are small in nature and thrive on smaller demands, further reduction in demand almost cripples them. Recessive periods are indicated by limited financing and lower cash flows which affect SMEs directly. Globalisation has made business resources more transferable and mobile; notwithstanding the borders coming in the way. This dilutes the capability of SMEs to deal with new market entrants as they have to compete not with the products or services but with more innovative and cheaper foreign services and goods. They even have to compete with capital and resources. For SMEs this translates into potential market risks and increasing uncertainty. (Alba et al., 2005) have stated that in order to meet collaborative environment capability, SMEs need to improve drastically. Not all of them, on account of their size, are able to do so and thus such challenges become a burden for them to carry. Opportunities If looked at objectively, neither large enterprises nor can SMEs work in isolation. If they do, they will always see each other in the face of major or minor competition. The fact is both are important drivers of any economy. Sometimes SMEs are capable of delivering in markets in which large enterprises would not prefer to venture. To see an opportunity for them SMEs need to realise that in a globalised world they can act as crucial industrial linkages, which are capable of triggering sustainable development which is broad-based. When globalisation makes entry into any territory, SMEs can act as suppliers and subcontractors. They can be an advantage towards value-addition domestically, productivity, employment and the crucial 'linkage'. They can be an important point where employment can be created domestically and even act as a buffer towards external economic fluctuations. They have a role to play in the functioning of regional and international production networks. The point, however, is to identify the correct linkage between a SME and a large global enterprise. In what ways will the capacity of SMEs need to be improved? SMEs contribute to the development of economy and also to providing stable economic environment. In order to sustain and increase this contribution SMEs need to be supported at all levels. This can be done by providing them consulting and financial services so that they are empowered to overcome difficulties right from their start-up phase to the normal conduct of business activities. Some of this responsibility can be shared by local retail banks who can cat as natural SME partners. On their won SMEs would need to understand the importance of advanced technology integration of which can help them be more efficient and cost effective in their operations. They would also need to structure their distribution channels according to their customers' compatibility. This would also mean providing their customers tailor-made services. To be more effective they would need to resort to multiple channel management, backed by a "selling-culture' marketing backup. Role of government Government can play a major role in making SMEs stronger and self-reliant. It would need to focus on both micro and macro policies with regard to SMEs. At the moment it is generally held that contribution of SMEs to domestic economy is remarkable but even then governments do not have policy frameworks in place so that their competitiveness or contributions can be enhanced. It is intriguing to note that many governments do not even have reliable SME-related statistics available with them. This is probably because in the first place clear definition of SMEs is not in place, conducting an industrial census involves high cost and there are many SMEs that do not register at all. In other words they do not enlist themselves in the formal economy. Governments can take a cue from Organization for Economic Development (OECD) and European Union (EU), both of which have done a remarkable work in listing the contributions that SMEs make to economies. Furthermore governments can initiate drives that can measure SMEs' export worthiness. According to a UNCTAD, WIR (2002) report between ten to sixty percent of exports is contributed by SMEs, which is an indicator of how export competitive they can be. But such figures need to be introspected and effective measures taken by the governments to ascertain how this capability and performance can further be improved. Conclusion All the economic activity happening around the world is globalisation and at a time when it is easy for business to transcend borders cost-effectively and rapidly, SMEs, wherever, globalisation had made its inroads are feeling the heat on account of stiff competition imposed by large global organisations. If an objective analysis is made on how globalisation impacts SMEs, it can be found that there are as many challenges as there are opportunities. If challenges are handled smartly, SMEs can reap good benefits from a globalised world. But by and large it has been seen that government is not doing as much with respect to SMEs which is expected of it. Should it initiate SME-friendly processes and polices SMEs can be expected to be great contributors to the world economy. Bibliography Abu Bakar, J, Mad, C A, & Abdul Latif, R, 2006, Liberalization and globalisation: a case of Naza and a lesson to SME. Proceedings of Persidangan Kebangsaan IKS 2006, Kuala Lumpur: Universiti Utara Malaysia. Decker, M, Schiefer, G, & Bulander, R, 2006, Specific challenges for small and medium-sized enterprises (SME) in M-business: a SME-suitable framework for mobile services. Proceedings of the International Conference on E-Business (ICE-B 2006), Setúbal, Portugal: INSTICC. Foon, LS, & Eu-Gene, S, 2006. The changing of education in the globalized world. Proceedings of Persidangan Kebangsaan IKS 2006, Kuala Lumpur: Universiti Utara Malaysia. Ritchie, B, & Brindley, C, 2000. Disintermediation, disintegration and risk in the SME global supply chain. Management Decision, 38(8), 575-583. Saleh, AS, & Ndubisi, NO, 2006, SME development in Malaysia: domestic and global challenges. [On-line]. Available: http://www.uow.edu.au/commerce/econ/wpapers.html. Samad, NA, 2007, Positioning Malaysian SMEs in the global. Proceedings of Persidangan Kebangsaan IKS 2007, Kota Kinabalu: Universiti Utara Malaysia. Teoh, WMY, & Chong, SC, 2008, Improving women entrepreneurs in small and medium enterprises in Malaysia: policy recommendations. Communication of The IBIMA, 2, 31-38. UNCTAD, 2002, World Investment Report 2002: Transnational Corporations and Export Competitiveness, United Nations publication, sales no. E.02.II.D.4, New York and Geneva. Wafa, SA, Noordin, R, & Kim-Man, M, 2005, Strategy and performance of small and medium-size enterprises in Malaysia. Proceedings of the International Conference in Economics and Finance (ICEF), Labuan: Universiti Malaysia Sabah. Wang, SD, 2003, The implications of e-financing: implications for SMEs. Bulletin on Asia-Pacific Perspective 2003/2004. New York: United Nations. Read More