Internationalisation of the SMEs - Case Study Example

International Entrepreneurship

The growth of the cross-border venturing and globalisation warrant the need to understand factors that influence small and medium-sized enterprises (SME). SMEs are vital to the economy of the countries or regions through their influence in the production network. They improve the employment rate and productivity. In most countries, these businesses contribute to over 65% of the employment and contribute to more than half of the GDP growth. The developing countries find the SMEs necessary in their economy due to low employment rates that hinder development. Some countries may still be having small numbers of people venturing in these types of business and limit their economic growth. Thus, there is a need to understand the barriers and drivers of internationalisation of these firms by the policymakers and owners of SMEs. The need to understand these issues force various organisations and researchers to conduct comprehensive studies.

Internationalisation of the SMEs ensures there is growth the economy of countries they cover. They further play a significant role in the restructuring the economy to enable growth after the crisis (Vasilescu 2014, p. 35). They improve the employment percentages in the regions and enhance the productivity. In the European region, the SMEs account for more than 60% of the employment and provide more than half of the GDPs of the countries. The globalisation also forces the small and medium firm to venture into international market that can take place in many forms. The small firms may collaborate with others in different regions, import or export goods and direct investment in the foreign market.

In most regions, the SMEs fail to grow due to various reasons. Some of the failures in growth result from external problems where the owner set their business. Poor personnel skill and lack of experience also contribute significantly to the failure of these SMEs.

Poor planning and management are one of the factors that significantly contribute to the inability of SMEs. Planning often allows the owners to know when to use their resources. Most of the people who operate these businesses use their limited resources in areas that do not lead to economic growth. Poor management of these enterprises also contributes to their failure. The people running these businesses lack the skill necessary to ensure the firm is successful. One of the problems that result from poor management is the inability to keep and control the finances of the business in the required manner. The problem will result to use of business resources inappropriately. Increasing the competence of the people who run the SMEs through experience and training programmes can assist in solving these failures resulting from personnel practices.

The external factors also often cause the failures of SMEs. These may include the completion they face from the market. In most cases, these SMEs often provide similar goods or services to other large companies. Due to their small nature, these businesses lack the ability to provide goods or services at low prices like the large organisation. Thus, they lose the ability to attract the customers that need products or services provided by other firms. Besides, these small enterprises lack the funds needed in marketing their products that limit their customer bases and growth. The locations of these businesses also contribute to their failures. In most cases, the owners are unable to afford rent in prime locations that can allow access to many customers. The poor situations of their premises cause the businesses to have a limited number of customers and limit growth. Thus, the external factors also limit the growth of the SMEs in most regions.

Internationalisation of SMEs assists in solving some of the problems that deter growth. It provides an opportunity for venturing into new markets that have limited competition for the SMEs. The owners who have business in competitive regions will have a chance to spread their reach to countries they perceive to have minimal competitors. This move will also assist in reaching more customers for the SMEs. Thus, the SMEs will improve their revenue that facilitates growth. Through internalisation, the owner can also gain experiences that are useful to enhance the performance of the enterprise. Thus, the internationalisation provides unlimited opportunities SMEs in enhancing their growth and expanding the customer base.

The advent of new technology, new reforms in the financial systems, deregulation of market policies and opportunities internationally encourages more entrepreneurs to go beyond the borders of countries and regions. They often provide a suitable environment for the small and medium-sized enterprises to increase their revenue and enable growth. Other programmes provided by the governments in some regions may also facilitate the internationalisation of the SMEs.

However, there is less likelihood that SMEs will venture in international markets compared to the large companies. The idea shows that there are some barriers specific to SMEs that hinder them from internationalisation. Some of the barriers to the international markets include a shortage of capital, limited information on the foreign market, lack of ability to contact customers out of the native regions, lack of managerial competence and regulation policies in some regions. Other barriers are affecting the large organisation also affect these small enterprises. The entrepreneurs evaluate all factors that may negatively contribute to the performance of their businesses before venturing in international markets that may not be similar to their native regions. Due to these elements, most of the entrepreneurs owning these SMEs will not consider the internationalisation of their business.

SMEs Internationalisation theories

There are theories suggested on the internalisation process of the SMEs. These theories differ greatly in their application about the time taken by business in internationalisation. The stage theory explains the progressive development of the business until they achieve the international status (Etemad, 2013, p. 39). The emerging international entrepreneurship theory explains the fast internationalisation of SMEs.

Drivers of SMEs internationalisation

Some factors are pushing the most of the SMEs to internationalisation. These factors may be due to the practices of the firm, industry or country. The interactions of these factors together with opportunities in the foreign market determine the probability of entrepreneurs in Europe participation in the international markets.

Firm-specific

Aspiration of the manager

Some of the managers it the firms assist in leading the SMEs towards the internationalisation. The managers with a great national diversity of the manager also serve as an advantage in the internalisation of the firms (Kaczmarek & Ruigrok 2013, p. 513). The owners of these enterprises take the managerial duties in most cases. If their motive involves expanding the firm to international levels, then they will deploy strategies to attain their goals. Most of the managers of the SMEs with limited capital will implement stage theory of internationalisation. This theory allows for the progressive growth of the business to a level it can expand across the international borders (Onkelinx & Sleuwaegen 2008, p. 34). It is the best way to move to international markets that limit the uncertainty and risks to the firm. Thus, if the managers of the SMEs have a goal of expanding their enterprises across the borders, they will develop clear strategies and objectives on how to achieve internationalisation.

Differential firm’s advantages

The firm may also have the technology needed in enabling operation in the international market. An example is the firms with internet platforms that allow the customers to order their goods virtually. It allows the business to reach the clients who cannot physically buy their goods from the business premises. The enterprises that have these structures in place can participate in the SMEs internationalisation as they give them an advantage in the importation or exportation process. They also motivate the managers to think of ways to expand the business to international levels with the aim of generating more revenue at minimal expansion cost.

Commitment of organisation

Some of the SMEs can expand to the international markets due to the commitment of the organisation. The management of the firm will show commitment to internationalisation through devoting the limited resources in expanding the business to international market. Some of these firms show this kind of commitment with international new venture theories. It allows the businesses to become internationalised at a rapid rate that is not possible through the stage theory. Most of these firms that show fast growth in the international market often have the idea during the time of their formation. The owners always know that their businesses need to cover a large region and forces them to invest any resource they have to achieve this goal. These enterprises also embrace the idea of internationalisation of some of their transactions. The business often deals with exportation or importation even at the start of its operations.

Expectation of the managers

In most cases, the managers have some information about the foreign market that makes them have some expectation of the performance. In such cases, managers understand the risks and profits possible from expanding the business to other regions. The expectation to have a performing business can push most of the managers in the European region to venture into the international market. Their primary aim in these moves is to improve the revenue of their firms. Besides, most of these managers in the European regions who are seeking international market want their firms to have the additional production capacity to help generate more revenue.

Industry-specific

Some factors deal with the industry that facilitates the internationalisation of the SMEs. These factors give all the firms equal opportunity of expanding their territories and customer bases. The firms that take advantage of these opportunities have the upper hand in succeeding in the international market.

High cost of production in local countries

One of the factors that push most of the small and medium-sized enterprises to venture in the international market is the high cost of production in Europe. The cost of producing goods depends on many factors that can significantly influence the price of the products and revenue of the firm. Firms in the European region often experience high cost of production. One of the factors that increase the cost of production in this region is high wages paid to the employees and price of raw materials. The business owners have to regain the money they are paying their workers through the increase of the prices that may not serve a good decision to SMEs. Instead of raising the price of the products, the small entrepreneurs opt to venture into the international market where they can source their raw material at low costs or pay fewer wages to their employees. They move to internationalise their enterprises with the aim of reducing the production cost and increasing the revenues.

Human capital

The people working in the SMEs are increasingly having high levels of knowledge and skills in business. The high levels of competence in the field are encouraging many investors to venture into new regions. Most of the people venturing in business understand the advantages of internationalising their enterprises. Besides, they have managerial competence in handling people from different cultures to enable smooth operation of the business. Besides, the increasing population of people in Europe also offers a challenge in finding formal employment and forces most of the graduates to start their businesses. They use the knowledge and skills they learnt to ensure the businesses are successful and expand to international markets.

Country specific

Insurances to exporters

The practices of the governments also facilitate the internationalisation of the SMEs. Countries like the UK have insurance coverage for the exporters who have a problem receiving payment from their customers (OECD 2009, p.1). The move aims at improving the ability of the SMEs to participate in the international market through reducing the risks involved in the overseas transactions. The insurance of this nature of business ensures the small and medium sized businesses do not lose their money while engaging in the international trading.

Trade policies

The governments are also passing policies that allow free movement of citizens and goods in different countries. Most countries recognize SME contributions to their economy and subsequently provide growth opportunities. The countries understand the economic impact of the foreign direct investment (Iacovoiu 2015, p. 74). Removing the border barriers allow the business owners in the European region to import and export goods to areas that favour their business. It also allows people from one country to move frequently in different regions that allow the entrepreneurs to gain the information necessary in setting up businesses away from their native land. The governments also facilitate the internalisation of SMEs through the passing of the laws that reduces the amounts of taxes paid when exporting to other countries.

Barriers of SMEs internationalisation

In the past decades, there are developments to reduce the barriers in internalisation of enterprises of all sizes. However, many obstacles exist that limit small and medium-sized businesses from engaging in the foreign markets. Some of these factors affect businesses of all sizes, but some elements affect only the small and medium-sized firms that hinder their ability venture in the foreign market. Some of these factors are internal while there are those that originate from the surrounding. Overcoming these barriers may be too hard for the SMEs leading to inability to venture into the foreign market.

Most of the obstacles for the SMEs in internationalisation originate from internal factors. These barriers are often hard to solve without intervention and external help. Besides, they require the owner of the business to be interested and active in looking for solutions to enable internationalisation. Some of these problems include incompetence, limited resources, lack of knowledge in the mark and attitude towards investing in new regions.

Financial constraints

Small and medium-sized enterprises have limited resources at their disposal. In some cases, even the perception of the managers that they do not have enough resources is sufficient to limit their ability to try new markets (Xie & Suh 2014, p. 222). The process of internationalisation requires many resources to have an effective system. Most of these firms face the challenge of cash flow in their regional business. Thus, the owners of these firms cannot be able to fund the requirement in the expansion process in internationalisation. The challenge is not common to large firms that have vast resources and can finance their initiatives in the new region. The entrepreneurs in Europe face this financial problem. It hinders their ability to venture into new markets even after some initiatives that aim at facilitating internationalisation.

Lack of international contacts

The owners of these small businesses also lack contacts to people in the foreign market. The problem is not common for large firms that already have people that recognise some of their workers. Most of the entrepreneur will want to know an individual in the foreign market they are trying to venture. Lack of contacts causes the firms to be uncertain venturing the new region. The gains from participation in the international business may be lucrative, but the entrepreneurs may become reluctant to pursue these markets due to lack of contacts.

Lack of knowledge about the foreign market

Information is crucial to the owner of businesses in making a decision. It is necessary for the entrepreneur to analyse and make a decision if the market is viable. The analysis by the owner of the SMEs also assists in developing strategies to overcome the challenges they may face. The business owners need to understand the environment of operation and know their competitors. Most of the small business entrepreneurs lack needed information about the new market making them lose the ability to take a risk in venturing into the international market. The use of technology and globalisation is making advances in enhancing the access of some types of information. However, there are still data needed by the investors that are not easy to obtain by the SMEs owners.

Inability to identify foreign opportunities

Most of the owners of SMEs often fail to identify the opportunities in the international market. This problem often results from insufficient information that the entrepreneurs obtain. Due to the lack of the needed information, the entrepreneurs are unable to know the viability of the new markets. An example is the lack of proper knowledge to investors in London about the opportunities available in Italy. As a result, most of the investors miss the opportunities available in the internationalisation of the SMEs.

Negative attitude of the SME owners

The small and medium-sized entrepreneurs have their preferences in regions of operations. The attitude of the owner plays a significant role in the decision of the managers to venture into the international market (Sommer 2010, p. 288). In some cases, the owner of the businesses may develop the perception that they can only operate successfully within their countries. Others are often unwilling to invest across the borders due to personal reasons even though they understand it may improve the revenue of their firm. The owner of the business may be seeing the idea of venturing in another region as an unnecessary risk. All these personal factors affect the ability of the SMEs to expand across national borders.

Lack of international managerial competence

The managers that run the business in the United Kingdom only understand how to deal with people from the same region and culture. Expanding the small-sized businesses beyond borders comes with a challenge of interacting with people from various backgrounds. The managers of these small businesses lack skills of leadership at the international levels but are unable to higher professional managers. Thus, the owners of the small business usually opt to operate within the regions where they understand the cultures of people.

Operation obstacle

The SMEs also face barrier from internationalisation due to problems in the operations that will involve many countries. Internationalising small business in the European region will require means of communicating with the more suppliers and serving the customers. It will require the creation of a comprehensive network to carry out all these logistics. It creates the problem of small business being unable to reach their customers and serve them efficiently. Reaching some of the customers will require the installation of the computer communication systems that are not affordable to SMEs. However, the small and medium-sized businesses lack the resources to construct these structures that enable smooth operation. Thus, lack of structures in the international operation also hinders the internationalisation of SMEs.

Marketing barrier

The SMEs also experience a challenge in marketing in the process of internationalisation. In most cases, production in the small businesses often results in the high operation cost. The development, in turn, affects the prices of the products by making them high. While venturing into a new market, the small firms also have to consider the cost of transportation that will raise the price of the goods. At the same time, these small enterprises have to compete with other large organisations that supply the products at lower prices. In some cases, the small organisations have to develop new products that meet the customers demand after investing in a new region. Besides, some of the owners of the small businesses lack funds to advertise their products to attract more customers. Thus, the SMEs face a barrier in marketing in the process of internationalisation.

Political and legal

Policies passed by politicians in some countries may limit the ability of the entrepreneurs from some states to venture into their country. The policies within the European countries currently allow the movement of people easily across the borders. However, the entrepreneurs may find it hard to travel to other countries when the European Union pass the policies that aim at protecting domestic firms (Castellacci & Fevolden 2015, p. 1). Thus, the legal restriction serve may serve as a barrier to the SMEs internationalisation.

Social and cultural

The social and cultural difference in difference may serve as a hindrance to the internationalisation of SMEs. The people from various regions often have their ways of lives and may not find the products supplied by the entrepreneurs from Europe useful. Due to these cultural differences, the businesses providing services or goods not usable by certain communities may not be able to become successful in the new regions.

In conclusion, the SMEs in the European region experience factors that facilitate and deter SMEs internationalisation. The primary factors that contribute to SMEs internationalisation include human capital. The increasing number of graduates having skills and knowledge in the field enhances the internationalisation of SMEs. The aspiration of the managers also contributes significantly to the internationalisation. Most of the managers will want to improve the capacity production and revenues of their firm making them aspire to venture into the international market. Besides, these managers will also act by devoting the required resources in the internationalisation process. However, the process of internalisation also has some challenges. The financial limitations of these small and medium-sized firms act as the primary barrier to the internationalisation of SMEs in the European region. Most of these businesses lack the required resources to trade internationally. The insufficient information to the managers also serves as a barrier to foreign investment. In most cases, it will cause the entrepreneurs to lack knowledge about the investment opportunities.

Reference List

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Castellacci, F., & Fevolden, A 2015, Innovation and liberalization in the EU defence sector: a small country perspective, viewed 18 April 2016, http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1136503.

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Kaczmarek, S, & Ruigrok, W 2013, 'In at the Deep End of Firm Internationalization', Management International Review (MIR), 53, 4, pp. 513-534, Business Source Complete, EBSCOhost, viewed 14 April 2016.

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Xie, Y, & Suh, T 2014, 'Perceived resource deficiency and internationalization of small- and medium-sized firms', Journal Of International Entrepreneurship, 12, 3, pp. 207-229, Business Source Complete, EBSCOhost, viewed 14 April 2016.