Modern Business Transactions - Coursework Example

 A Review of Trust and Contract and Its Implications on the Network Relations of Small and Medium Enterprises (SMEs) in International Business Table of Contents I. Introduction ……………………………………………………………… 3 II. Factors that Make the Local SMEs Avoid Building Network Relations with International Businesses ……………………. 5 III. Importance of Trust in Building Networks for SME Internationalization ………………………………………………. 6 IV. Impact of Cross-Cultural Differences in Building International SME Network ……………………………………………. 7 V. Processes that Link SMEs to a Network Relevant to Internationalization ……………………………………………………… 9 VI. Conclusion ………………………………………………………………. 10 References ………………………………………………………………………. 11 - 14 Introduction The modern business transactions are very competitive and complex in nature. Due to globalization, continuous trading of services and finish products throughout the world market as well as the purchasing of low-cost raw materials, high-technology machineries, and competitive human resources have become a common business concept in order to enable a small and medium sized businesses (SMEs) to maintain a competitive edge over its competitors. In line with developing a strong business relationship with businesses in other countries, it is a challenge for the local SMEs to build an inter-organizational trust with its potential international business partners.1 Trust factor is an important ingredient that could contribute to the success of a business organization. Its ‘invisibility’ factor makes it even more challenging for SMEs businesses to manage since developing trust does not require a face-to-face contact with the individuals involved each of the business transaction.2 Specifically the absence of a direct physical contact in conducting an international business transaction is considered the main problem among the local SMEs.3 Despite the difficulty in establishing a strong trust relationship among the business partners and its stakeholders as well as the lack of effective mechanisms that could enhance the trust system4, trust is considered as a fundamental requirement in each economic activity since it allows people to continuously interact with one another.5 As a result, the economy could function smoothly without so much business conflicts. There is a very little study conducted on how key SME personnel build and maintain relationships across national boundaries. In line with the gap in the study of SME and its relationship with other countries, this study will discuss the factors that makes SMEs avoid building network relations with international businesses; the importance of trust in building networks for SME internationalization as well as the impact of cross-cultural differences in building international SME network. Prior to the conclusion, the researcher will discuss the processes that could link SME to a network relevant to its internationalization. Factors that Make the Local SMEs Avoid Building Network Relations with International Businesses SMEs are often at a disadvantage when dealing with big foreign markets because of its inadequate resources to compete with bigger firms.6 In some cases, it is possible for a firm to have sufficient financial resources but lack the technological resources, knowledge and skills to maximize its monetary assets. Considering the limited resources that hinder the economic growth of SME firms7, establishing a strong network with international businesses will enable the local SMEs to easily find a strategic way of acting on its economic deficiencies. Aside from the lack of monetary and technological resources, the lack of the international management expertise and knowledge on the foreign markets8 among the local SMEs also contributes to the hesitancy of many SMEs to enter the international markets. Based on the study of Lee, Lim & Tan (2000), the ability of the local SMEs to overcome its resources limitations is the key factor that could enable small firms to develop its competitive advantages.9 Importance of Trust in Building Networks for SME Internationalization The concept of trust is referring to the interpersonal as well as commercial relationship between two business entities wherein the reliability of a person in terms of having a positive character, strength, integrity and honesty is being considered.10 According to Williamson (1993), trust should not be based on self-interest but benevolence or goodwill.11 Building trust is difficult to achieve because of the possibility of high risks and uncertainty attached with conducting an international business transaction.12 The fact that there are many people who possess an opportunistic behaviour makes it difficult to develop international business relations. Despite the difficulty aligned with building trust, ‘trust’ is considered as an important factor since it could serve as ‘the glue’ that binds and strengthens the relationship between a buyer and the seller.13 Collaboration among the local and international distributors, customers as well as business partners could enable SMEs to operate its business successfully in the global markets.14 The study of Karagozoglu & Lindell (1998) on the internalization of smaller technology-based companies shows that implementing an organizational learning on ‘international orientation’ could increase the long-term success rate of SMEs in building a network relationship with international businesses.15 The benefits of building a strong business relationship between a local SME and those from another country is to enable the local SMEs to implement a fast pace changing technology to strengthen its production capabilities. Collaboration between two companies could increase the firms benefit in relation to economies of scale, access to financial resources, expanding its market distribution as well as the development of its core competencies by having a better access to technological changes.16 Impact of Cross-Cultural Differences in Building International SME Network The cultural differences in each country significantly affect the building of international SME network. In line with the issue on cultural differences, a lot of researchers have studies the impact of culture towards building a collaborative relationship between two different business entities.17 Cultural differences can create negotiation problems that could lead to an unsuccessful business transaction.18 In the absence of trust and strong business relationship, parties involved in an international business negotiation could easily be affected by simple misunderstanding. Aside from the cultural differences, different decision-making approach could also lead to negotiation problems in international agreements.19 To avoid early exit from the negotiation process, SMEs should practice smooth collaboration and consider the cultural differences in both parties.20 An effective way of preventing miscommunication problems, managers in SMEs should have a good communication skill to enable them to interact with other firms effectively.21 Aside from the existence of trust, SMEs could also prevent cultural conflicts by learning more about its prospective business partner prior to establishing a business relationship.22 In line with this matter, Buckley, Glaister & Husan (2002) strongly suggest that managers should invest their time in developing their cultural awareness as a way of strengthening their relationship with their prospective international allies.23 For instance, Japanese businessmen build trust based on sincerity, personal relationship as well as decision-making aspects of their business partners. Contrary to Japanese businessmen’s perception of trust, Western businessmen build trust based on a legal agreement.24 Processes that Link SMEs to a Network Relevant to Internationalization Partnership agreements in the form of a formal contact or a genuine trust are some of the ways that could link SMEs to a network in internationalization. Although many have considered trust to go beyond a formal control25, the use of a legal contract is still considered an important strategy by the western business people in terms of enabling the local SMEs to expand its businesses in the global markets26. Business agreements between two or more parties can be in a form of verbal or in writing. Based on the classical contract theory, a formal contract is referring to a written agreement that reflects all the possible uncertainty, issues on intellectual property rights, project management approach, specific responsibilities, terms on relationship termination, specific investments, project plan, and/or frequency of the business transaction as well as the specific asset involved.27 This contract is considered as a legal binding among the parties involved in a given transaction.28 According to Chen (2000), each formal contract is different in terms of its completeness in details. Some formal contract may contain more information as compared to others. Basically, a complete contract has a more legal binding than contracts that are incomplete.29 Conclusion The local SMEs need to develop a better network with international businesses in order to gain a competitive edge in the global markets. In line with building relationship with foreign firms, SME owners and managers should conduct a cultural knowledge on its prospective partners since this strategy could enable them to successfully develop a stronger business relationship based on trust. A legal or formal contract could strengthen the business relationship among two different firms based in the Western countries. However, not all countries have the culture of using formal contracts as a means of building trust relationship such as in the case of Japan. For this reason, SME managers should be able to balance the importance of trust and formal contracts with the cultural differences in each of its target foreign business partner. *** End *** References: Akoorie, M., & Enderwick, P. (1992). The International Operations of New Zealand Companies. Asia Pacific Journal of Management , 9(1):99 - 117. Beamish, P. (1999). The Role of Alliances in International Entrepreneurship. 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