Small and Medium-sized Enterprises (SMEs) in global competition: internationalization as an entrepreneurial challenge.

Introduction
Business schools, consultants and business-specialized media are biased agents because they do not pay tribute to an important actor of the global economy: the millions of Small and Medium-Sized Enterprises (SMEs) around the world. For instance, in the European Union alone all but 0.2 % of enterprises which operated in the EU-28 non-financial business sector in 2017 were small and medium-sized firms and these SMEs employed more than 93 million people, accounting for 67 % of total employment and 57 % of value added in the EU-28 non-financial business sector [1]. Consequently, SMEs are the engine of the global economy, because they are an essential source of jobs and value creation, not only in Europe but also in other economic blocs.

How to characterize an SME?
According to the Organisation for Economic Co-operation and Development (OECD), small and medium-sized companies are non-subsidiary, independent firms which employ fewer than 250 employees and/or have total revenues up to EUR 50 million [2].

Internationalization of SMEs
The importance of SMEs goes well beyond the limits of national boundaries, as such organizations embrace internationalization as much as their multinational counterparts do. Therefore, SME´s international expansion can be explained by the classic theories of international business. For instance, the Nordic theory or the Uppsala model advocates that international expansion is the result of acquisition of competences and shortage of opportunities in native markets [3]. This model explains the gradual acquisition of knowledge and commitment of resources to international operations, to reduce the so-called “Liability of Foreignness”. This idea is strongly related to the Psychic distance (see link here) and the CAGE analysis. Because the Uppsala model focus on the incremental acquisition of competences, this framework also explains several entry modes strategies. Figure 1 compares the many approaches to international expansion according to two variables: the extent of investment and risk vs. the degree of ownership and control [4].

Entry Mode Strategy

Figure 1: Foreign entry modes. Source: Root (1994)

A modernized version of the previous model is called the Network Model [5]. In this version, it is not the CAGE distance that matters, but the participation in an internationalized network that supports or blocks the foreign expansion of SMEs. The activities in the network allow the firm to form relationships, which helps small firm to gain access to resources and markets. As the firm’s internationalization efforts increase, the number and sthe trength of relationships between different business actors increase as well, creating access to resources and markets. Therefore, the network reduces the “Liability of Outsidership”, mitigating the internationalization risk. It is importance to notice that while in Operations the network is called Global Value Chains (GVC), in the literature of Innovation the same network is called Ecosystem.

John Dunning [6] offers one of the most important models of internationalization of firms, the Eclectic paradigm or OLI, which explain foreign investment activities by ownership of specific advantages (O), location-specific advantages (L), and internalization advantages (I). Figure 2 helps the understanding of the entry mode of foreign ventures according to the possession or not of the OLI advantages.

OLI

Figure 2: Foreign entry modes. Source: business-to-you.com

According to this model of internationalization, firms, regardless their sizes, search for new markets, new resources or new sources of already known resources, improvements of efficiency (such as logistics), and strategic resources (such as intellectual property, knowledge, brands, and patents).

Another framework, the International New Venture (INV), recognizes that many SMEs do not go along with the gradual models in their internationalization process because some of them are Born Global or Global Start-Up. In these cases, highly entrepreneurial SMEs challenge the conventional wisdom by directly entering global markets with innovative products. This model does not focus on the size of the firms and suggests that the INVs retain unique assets and capabilities that enable them to venture faster into foreign markets with their scarce resources [7] [8].

Given the relative lack of tangible and intangible resources, the internationalization SMEs is a sound entrepreneurial challenge. Several facts support this claim, as can be seen bellow.

  1. SMEs are not simply smaller versions of large companies and exhibit differences in ownership, resources, organizational structures, and management systems. They also deal with unique size-related issues and behave differently from their larger counterparts [9] [10];
  2. Any foreign market initiative will take a larger proportion of resources from a SME than from a large firm [10];
  3. The impact of a failure in international expansion on a SME may be greater, which increases the risk levels of SMEs [10];
  4. Typically, SMEs do not perform global scanning and hence might lack the information necessary for exploiting the international opportunities [11];
  5. Many SMEs suffer scale and resource disadvantages compared to their global rivals, adversely impacting the likelihood of success of their internationalization initiatives [12];
  6. Strong link between entrepreneurial orientation of the founders (or managers) and the degree of internationalization [14];
  7. Given their age, size and resources constraint, SMEs are more dependent on human capital (and other intangible assets) than large companies are;
  8. The more internationally experienced the top management is, the earlier the small company entered the foreign market [15];
  9. The challenges faced by SME leaders are many. They need to attract and retain the right talent. And they need to adapt their strategy for different stages of business They need to be able to scale up and expand globally, working around the many macro-economic challenges and fluctuations in FX markets [16]

Given the many risks associated with the internationalization, a rational question may arise from the curious minds: why SME internationalize anyway? First, higher degree of internationalization leads to better financial performance. Consequently, SMEs should indeed internationalize since the benefits due to internationalization seem to outweigh the costs [17]. Second, SMEs search for foreign markets because those firms may be able to exploit a similar market niche in different countries, thus enhancing their revenues as well as profit potential. Third, additional volume gained from the foreign markets might be particularly valuable for attaining economies of scale, especially if volume gains were constrained in the domestic market due to saturation or other issues such as well-entrenched competitors. Finally, by becoming international firms SMEs may also be able to provide better service to their multinational clients and, in the case of foreign direct investment, avoid export tariffs [17].

Here come three stories of SMEs that provide real-life examples of the how theory and practice go together to explain the internationalization path of small and medium-sized enterprises.

wihaThe first example is provided by Wiha, a German toolmaker. Because the firm is owned and ran by teh founding family, the firm´s internationalization process is highly dependent of the controlling group. Additionally, after emphasizing product innovation, the company targets niche markets in the developed world. Although the firm follows the Uppsala model of incremental internationalization, manufacturing still is heavily concentrated in Germany (with an exception of a Vietnamese plan). Additionally, because the firm relies in sales representatives in the US, China, Central Europe and France, therefore, the foreign entry-mode the firm still is in the Exporting Mode.

makron.pngThe Finnish toolmaker Makron recognizes that the company´s main customers are from many parts of Europe given the small size of the Finnish market. Additionally, the lack of qualified employees in the home market made the company to consider internationalization as well. The OLI framework is applicable here.

acquiris

Finally, the Brazilian game studio Acquiris provides an example of a Born Global firm because their distribution channel are the digital stores set up by Apple and Google. In the case of this developer of digital games, the Network Model apples, together with the use of CAGE distances from the Uppsala Model.

Conclusion
Small and Medium-sized firms are important players in the global economy, despite the focus of the specialized media and the academy towards large multinationals. In spite of the many risks associated with the search of foreign markets, SMEs pursue internationalization because of the higher profitability allowed by foreign markets and the need of new resources and technology. The international experience of the founders seems to be another important driving force towards international expansion of SMEs.

References
[1] OECD, OECD SME and Entrepreneurship Outlook: 2005, page 17
[2] European Commission. Annual report on European SMEs 2017. https://ec.europa.eu/growth/smes/business-friendly-environment/performance-review_en , Extracted March 25, 2018
[3] Johanson J, Vahlne JE. The mechanism of internationalization. Int Mark Rev 1990;7(40): 11–24.
[4] Root, F.R., 1994. Entry strategies for international markets (pp. 22-44). Lexington, MA: Lexington books.
[5] Johanson J, Mattsson LG. Internationalization in industrial systems — a network approach. In: Hood N, Vahlne JE, editors. Strategies in Global Competition. NY: Croom Helm; 1988. New York.
[6] Dunning, J.H., 1988. The eclectic paradigm of international production: A restatement and some possible extensions. Journal of international business studies19(1), pp.1-31.
[7] Etemad, H. (2004a). International Entrepreneurship as a Dynamic Adaptive System: Towards a Grounded Theory, Journal of International Entrepreneurship 2, 2(1), 5-59.
[8] Etemad, H. (2004b) Internationalization of Small and Medium-sized Enterprises: A Grounded Theoretical Framework and an Overview, Canadian Journal of Administrative Sciences, 21(1), 1-4.
[9] Lu, J. W., & Beamish, P. W. (2001). The internationalization and performance of SMEs. Strategic Management Journal, 22(6/7): 565–584.
[10] Shuman, J.C. and Seeger, J.A. (1986), “The theory and practice of strategic management in smaller rapid growth companies”, American Journal of Small Business, Vol. 11 No. 1, pp. 7-18
[11] Buckley, P. J. (1999). Foreign direct investment by small and medium sized enterprises: The theoretical background. In P. J. Buckley & P. N. Ghauri (Eds.), The internationalization of the firm (pp. 1999–). NY: International Thomson Business Press.[12] Yip, G. S., Biscarri, J. G., & Monti, J. A. (2000). The role of the internationalization process in the performance of newly internationalized firms. Journal of International Marketing, 8(3): 10–35.
[13] Pangarkar, N., Internationalization and performance of small- and medium-sized enterprises. Journal of World Business 43 (2008) 475–485
[14] Javalgi, R.G. & Todd, P.R. (2011). Entrepreneurial orientation, management commitment, and human capital: The internationalization of SMEs in India. Journal of Business Research, 64(9), 1004-1010. doi:10.1016/j.jbusres.2010.11.024
[15] Manolova T.S., Brush, C G, Edelman L F, Greene, P G. Internationalization of Small Firms: Personal Factors Revisited. International Small Business Journal 2002 20: 9
[16] London Business School Review. Importance Of SMEs Is Grossly Underestimated. https://www.forbes.com/sites/lbsbusinessstrategyreview/2014/12/12/importance-of-smes-is-grossly-underestimated/#46801db83679 Extracted Mar 25, 2018
[17] Pangarkar, N., Internationalization and performance of small- and medium-sized enterprises. Journal of World Business 43 (2008) 475–485

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