Examining Limitations Facing Small and Medium-Sized Companies Internationalization Process - Research Proposal Example

DRAFT LITERATURE REVIEW Examining Limitations Facing Small and Medium Sized Companies Internationalization Process NAME INSTITUTION STATE DATE DRAFT LITERATURE REVIEW Examining Limitations Facing Small and Medium Sized Companies Internationalization Process INTRODUCTION Rationale Small and medium sized enterprises (SMEs) play a strategic part in economic development of all nations whether developing or developed providing employment and contributing to the GDP. However, the SMEs are increasingly facing challenges of survival domestically due to intensity of globalisation and break down of physical market borders (Deo 2013). Globalisation presents both a threat and opportunity for SMEs. The threat as stated comes from increased competition, and market openness. The opportunity comes from the probability of obtaining an international market for trading the goods and services as well as an increase in revenue. Much research focus has been on the opportunities attained through globalization; for instance, Syed, Shaikh, Afridi, and Shaikh (2011) examined the impact of globalization on SMEs export business in Pakistan finding that it has created an opportunity for increase in employment. The researchers nonetheless noted some challenges such as increase in surplus goods, and probability of power and resource inequalities exist. One critical opportunity presented through globalisation is the prospect of internationalisation. A firm’s internationalisation may involve exporting of a product made within the home office or starting new operations in a foreign country. The company chooses the approach that will offer the most advantages for its situation and capabilities. Significance The importance of addressing this topic comes from recognising the inevitability of market expansion for many companies. Survivability means looking at ways through which to adapt to a changing market environment, and thus the findings of this dissertation will offer lessons in best practices when expanding to foreign markets for SMEs. The study will contribute to small firms’ research by offering qualitative findings on critical threats and challenges that small and medium size firms face when seeking out internationalisation process as a way to sustain their business. The findings will also show the reasons that push SMEs toward internationalisation process. The study will achieve the mentioned by responding to the following research questions and research model. Research Questions The research question is: what are the issues facing SMEs in their quest for expansion into international market? The question will be supported by the following questions: what is the effect of globalisation on SMEs? What factors push SMEs toward seeking an international market? How do SMEs achieve their internationalisation process? What challenges do SMEs face in their internationalisation process? Research Model The study will use qualitative evidence collected using interviews with managers from SMEs that will be identified during the data collection design. The interviews may be conducted using Skype to make it easier for scheduling. LITERATURE REVIEW Search for Literature The literature review explores ten articles on the internationalisation process of SMEs. These articles were obtained through Internet search, specifically Google Scholar, Elsevier, and Springer databases. The search terms used included impact of globalization on SMEs, role of globalisation in SMEs, internationalisation of SMEs, barriers to SMEs internationalisations, challenges to SMEs internationalisation, and reasons for internationalisation of SMEs. The articles identified were then grouped into categories including subtopics based on the research questions. The following table offers a summary of the literature collected. Research question Article Description What is the effect of globalisation on SMEs? Deo 2013 The author uses qualitative data to explore the impact of globalisation on small business enterprises, finding that although these businesses have an advantage in quick decision-making, they have constraints associated with knowledge, technology, and resources that affect their investment into new innovations. The firms also have as well as limited access to finance and specialised skills affecting their operations in a globalising environment. Syed et al. 2011 The authors use data collected from 300 SMEs in Pakistan using a structural question, and explained using the General Equilibrium Model. The results showed an increase in employment opportunities, increased standard of living on the positive aspect, and increase in power and resource inequalities on the negative side. What factors push SMEs toward seeking an international market? Vásquez and Doloriet 2011 The authors use qualitative content analysis to better understand and assess strategic effectiveness of internationalisation among three Peruvian SMEs and information communication technologies. The results show that SMEs pursue internationalisation due to home market saturation, but face barriers related to technological resources, and limited expertise in foreign markets. Kubíčková, Votoupalová, and Toulová 2014 The researchers collected quantitative data from 341 respondents from SMEs involved in internationalisation from the Czech Republic. The analysis, which included descriptive statistics showed that Czech SMEs enter foreign markets due to increase in demand for company products, customer portfolio enlargement, lack of demand in the domestic market, increase in sales, and competitive pressure domestically. However, the motivations were industry specific. How do SMEs achieve their internationalization process? Lin 2010 The article presents three models, namely the stage approach, the network approach, and the international entrepreneurship approach that may assist in better understating the internationalisation process of SMEs. The author combines the attributes of these models to obtain an integrative approach that better presents the resources and competencies associated with internationalisation of SMEs. The integrative approach appreciates that internationalisation of SMEscombines different resources and competencies. Laghzaoui 2011 The author seeks to show how and why SMEs internationalise using theoretical approaches beginning with the traditional theoretical approaches, namely economic approach, stages approach and networks approach. The author then suggests the use of resources and competencies within an integrated framework that allows researchers to appreciate the complicated nature of internationalisation. What challenges do SMEs face in their internationalisation process? Hsu, Chen, and Cheng 2012 The article addresses the importance of the CEO attributes in facilitating internationalisation and securing performance. The data from 187 Taiwanese SMEs show that the CEO can be both a facilitator or a barrier to internationalisation, based on age, education, international experience, and duality. Kubíčková and Toulová 2013 The article examines risks of internationalisation process for SMEs using a survey of Czech companies. The risks identified include entry activities, decision-making, lack of capital, difficulty in networking, and challenges in finding business opportunities in foreign markets. Organization for Economic Cooperation and Development 2009 The OECD presented results from a survey of several SMEs in Australia, Canada, Finland, Ireland, Korea, Spain, Sweden, Turkey, UK, and USA. It also included China, India, Russia, Indonesia, and South Africa as non-OECD member countries. The results showed the main barriers experienced by SMEs as shortage of working capital to finance exports, inadequate information about the foreign markets, inability to establish customer contacts, and poor managerial skills and knowledge. Al-Hyari, Al-Weshah, &Alnsour 2012 The study reported on a survey of 250 SMEs in Jordan showing that the challenges faced by many in their internationalisation included economic/political-legal and governmental barriers, financial capabilities, and information barriers. Effect of Globalisation onSMEs The articles identified provide useful information for understanding the role played by SMES, the effect of globalisation, and the process of internationalisation. Globalisation refers to an interconnectedness and interdependence found internationally facilitated by a rapid advancement in communication technology, increased foreign direct investment, international trade, and migration (Deo 2013). The process of internationalisation refers to the process of planning, testing, implementing, and evaluation of strategies and tools that would help a company to expand or to cope with a changing situation (Lin 2010). The process involves companies undergoing a period of knowledge acquisition, integration, and utilisation of market knowledge to bring in other operations or promote current operations. Through globalisation and internationalisation process, the international market has become interdependent with goods and services moving from one country to another, people working as expatriates, and the market having more choices. Coming across in literature is that SMEsplay a critical role in every economy, and are an important part of developed and developing economies. These firms provide employment reaching up to 90% of the countries employed persons, and bring in revenue that contribute to their home countries GDP (Robu 2013). SMEs further contribute to innovativeness and entrepreneurial capabilities in producing goods and services that provide alternatives for the people that may not purchase from larger companies. Through SMEs new innovations come into the market that can provide alternative products and services to customers, and additionally, they remain closer to the consumer as many of them act at the local level (Lin 2010). As Robu (2013) indicates, SMEs are the backbone of the economy, both locally and internationally. The role of SMEs in the economy in the 21st century faces both an enhancement and a disruption from competition brought in by globalisation. Noted in the literature is that globalisation has opened ways for intense completion among businesses thus forcing companies to identify new ways to achieve long-term profitability and survival. According to Kubíčková et al. (2014),SMEs are not exempt from the competition for survival, although not all may need to look for new markets. Nonetheless, the SMEs need to realize that due to the ongoing globalization it is inevitable they will lose a share of the domestic market especially as policies within their countries may no longer have the clauses to protect against foreign investment (Deo 2013). Moreover, many countries are looking for foreign investment as ways to promote internal economic growth. This creates an avenue for larger conglomerates to enter the market, bringing in alternative goods and sometimes at a cheaper rate as they have the capital to absorb any overheads. The local SMEs therefore, find themselves in a position of increased competition without domestic protections. The threats associated with globalization reflect limitations experienced by SMEs based on their level of development. For instance, SMEs lack the financing and resources found among the larger companies that enable increased competition within the international market (Kubíčková et al. 2014). The aspect of globalisation nonetheless presents some benefits to SMEs. Deo (2013) offers an argument for how globalisation opens up new opportunities for small and medium sized businesses noting that they have a chance to play a bigger role in job creation and economic growth. Syed et al. (2011) agrees that globalisation presents an opportunity for countries to address their economic challenges through improvement of economic growth. SMEs able to capitalise on the opportunities of globalisation have a chance to bring in greater economic earnings by sending back the money earned overseas. However, the workability of this will depend on whether the host country allows the foreign companies to send back their income. A consideration regarding foreign investment is that it creates a potential for competition as well as knowledge spill over thus presenting a duality. Foreign direct investment has increasingly become an important part for countries to provide jobs for their citizens as well as for companies to grow their capital through high investments (Deo 2013). Additionally, foreign direct investment brings in knowledge spill over from the home country, in which the host country benefits by obtaining access to production processes that may otherwise be unobtainable. The foreign entrants may also partner with new companies thus facilitating knowledge transfer, and capital transfer. However, local companies experience a displacement stemming from increased competition. Votoupalová,Toulová, and Kubíčková (2014) agree that globalization increased pressure on SMEs internationally as market integration adds competition and increases the need to find new markets even beyond geographical borders. This brings in the need for internationalization. Internationalisation of SMEs Various authors acknowledge the role of internationalisation in helping SMEs to build their networks and expand thus achieving survivability and increasing their ability to compete locally and internationally (Kubíčkováet al. 2014; Laghzaoui 2011; Votoupalová et al. 2014). Others look at internationalisation as a benefit with different challenges (Al-Hyari et al. 2012; Kubíčková&Toulová 2014). Irrespective of the view of internationalisation as a positive or negative process, the emerging knowledge shows that the process is critical for the future of all companies, both large companies and SMEs. According to Votoupalová et al. (2014), SMEs have a benefit over large companies in that they are more flexible and are able to react to changes in their economic environment quicker, their organizational hierarchy is simpler, and may easily establish networks with other enterprises. These benefits would make the internationalisation process easier among SMEs, although research shows that these companies are experiencing both positive and negative outcomes. Literature synthesis shows that SMEs internationalisation comes from the recognition of the need to begin building new networks and expanding, which comes from internal and external drives or reactive and proactive responses (Kubíčkováet al. 2014; Laghzaoui 2011; Lin 2010; Vásquez&Doloriet 2011). Internal considerations may include situations where companies set out from the onset to become global companies, or situations where the manager recognises the potential in the international market and sets out to facilitate consciously an interaction. In the first case, the company vision and goal established both a domestic and international plan of growth. In the second case, the management may drive internationalisation through the attitude of the managers and their experience. As Hsu et al. (2011) notes the management such as through the CEO has significant role to play first by their willingness to influence the company towards the foreign market, and secondly through their experience with the international market. Managers that have a previous experience in launching a company into the foreign market may show greater willingness to launch another country. Further, the manager will learn from previous failures to ensure future success. Other factors driving company internationalisation are companies recognition of greater opportunities for their products in the international market. SMEs may seek international markets if they have a surplus within the local market or in situations where the demand for their product is low within the domestic market. In their researchKubíčkováet al. (2014) found that foreign demand for products played an important part in motivation of internationalisation among SMEsfrom the food, wood processing, and agriculture sectors, followed by demand in the domestic market as well as increase in sales. Votoupalová et al. (2014), echoed these findings showing that their results indicated that interest in a firm’s product in the foreign market is the main motivation, following by customer portfolio enlargement, increased in turnover, and expansion of the scope of the business activities. Companies are also willing to expand for new business opportunities and to improve their business image, although increase in competitiveness did not come across as a significant factor. The research by VásquezandDoloriet (2011) described these motivators based on a reactive and proactive strategy, showing that companies may opt for internationalization based on saturation of the home market and due to increased competition. Those that are proactive deliberately pursue internationalisation as a venture to increase their market share irrespective of associated risk. The various authors mentioned in this section show that internationalisation has emerged as a positive attribute contributing to the growth for SMEs from local companies into international firms. Nonetheless, the authors mention that these companies face various challenges in their quest for internationalisation. These challenges arise as barriers to internationalisation and reflect aspects that companies will need to contend with to achieve the benefits sought in internationalisation. The subsequent section looks at literature that specifically focuses on these challenges. Obstacles to SMEs Internationalisation Process Various authors that have looked at the internationalisation process recognise different challenges associated with the process among SMEs. For instance, Vásquez and Doloriet (2011) recognised from their study that SMEs whether proactively or reactively seeking internationalisation faced limited financial, human, and technological resources as key barriers to internationalisation. Deo (2011) echoes similar challenges that affect SBEs performance, namely lack of financial and human resources, and then adds uncertainties arising from on-going globalisation of markets and economies, management of cash flows, short-term planning, and finding reliable business partners locally and internationally. Other challenges noted in the study include limitations in marketing and selling in foreign markets, fluctuations in the exchange rates, regulatory requirements, cultural differences, language barrier, business practices, and inability to manage intellectual and intangible assets. While the challenges facing SMEs pursuing internationalisation rises as part of studies conducted on other subjects, empirical research directly targeting the topic is limited. An Internet search on these challenges provided five articles that directly addressed the challenges, barriers, risks, or obstacles (Al-Hyari et al. 2012; Jahan 2016; Kubíčková&Toulová 2013; OECD 2009; Yener, Doğruoğlu, & Ergun 2014). These articles provide insight into the associated barriers. The findings of the OECD (2009) comes across as the benchmark for the other articles, being often quoted. The article provides four key barriers, the first is shortage of working capital to finance exports as well as other resources needed for international operations. The second barrier is limited information needed by firms to locate and analyse the market, and third is inability to contact customers overseas associated with lack of access to suitable distribution channels. The fourth challenge is poor management, which is connected to managerial time, skill and knowledge. Hsu et al. (2012) recognise the importance of the management as a moderating factor in accessing the market and in driving internationalisation. The management additionally establishes a link between the international market and the firm. Yener et al. (2014) further observed the challenges associated with uncertainties, conflicts in networks, lack of managerial involvement, profitability of the domestic market. The study by Jahan (2016) provides insight into challenges facing internationalisation of SMEs from developing countries. The findings agreed on the issue of management noting the importance of an educated managerial staff in supporting the process. Other challenges were poor incentives for internationalisation due to high bank interest rates, availability of resources, and support from external organizations. The companies thus face obstacles in investing in capital-intensive projects. The research found regarding the challenges associated with internationalisation lacks the same intensity found in literature on the internationalisation process of SMEs or the motivating factors. These two areas show high research saturation, compared to the area of barriers, especially having noted that the research on the other areas identify the need for understanding the barriers associated with internationalisation. This creates an opportunity for more research on the issue, as a way to understand the issues that SMEs need to understand as they seek internationalisation, and that they need to prepare and address to promote better chances of success. Strengths and Weaknesses of Literature Appreciatively, the literature identified in this literature review provides critical insight into the connection between globalisation and internationalisation, and identifies the reasons that companies, irrespective of size need to consider growth into the international market. The literature shows that internationalisation is an on going effort that companies will need to embrace as a way to survive. The reasons are that it provides access to larger markets, ensures companies with a dwindling domestic market have access to an alternative market, and that gives an opportunity for increased revenue. The literature nonetheless seems to focus mainly on the positive aspects associated with internationalisation. A question arising from the literature is therefore, is the elements that companies need to prepare for as they push into internationalisation having realised this phenomenon is inevitable. Moreover, how would SMEs ensure effective internationalisation considering that many start with a local goal, but have to change as they face stiffer competition from larger companies and from foreign investments? Although literature has information on challenges faced by SMEs this study will contribute to the literature by providing structured information generated through an investigation based on an integrative approach to studying internationalisation. The literature focus has been on internationalisation in general that has highlighted challenges including issues of management, resources, uncertainties, and networks. This research will use the integrative approach suggested by Lin (2010) and Laghzaoui (2011) that recognises the complexity of internationalisation, and applies this into studying the challenges associated with the process for small and medium-sized businesses. Although the two authors focus on resources and competencies, the current study will expand into a holistic view that considers the complexity of internationalisation, and thus the different challenges organizations may face at the company level, country level, regionally, and internationally as they seek expansion. The data collected will lay a foundation for making recommendations on ways that SMEs may overcome such challenges to ensure best practices and standards in international expansion. REFERENCES Al-Hyari, K, Al-Weshah, G &Alnsour, M 2012.‘Barriers to internationalization in SMEs: Evidence from Jordan’, Marketing Intelligence & Planning, vol. 30, iss.2, pp. 188-211. Deo, S 2013.‘The impact of globalization on small business enterprises (SBEs)’, Small Enterprises Association of Australia and New Zealand 26th Annual SAANZ Conference Proceedings, 11-12 Sydney. Hsu, WT, Chen, HL & Cheng, CY 2013. ‘Internationalisation and firm performance of SMEs: the moderating effects of CEO attributes’, Journal of World Business, vol. 48, pp. 1-12. Jahan, A 2016. ‘Barriers in the internationalisation process of the emerging SMEs: A desk study from Bangladesh context’, Proceedings of Dhaka International Business and Social Science Research Conference, 20-22 January., pp. 271-292. Kubíčková, L &Toulová, M 2014. ‘Risk factors in the internationalization process of SMEs’, ACTAUniversitatisAgriculturae et SilviculturaeMendelianaeBrunensis, vol. LXI, no. 7, pp. 2385-2392. Kubíčková, L, Votoupalová, M &Toulová, M 2014. ‘Key motives for internationalization process of small and medium-sized enterprises’, Procedia Economics and Finance, vol. 12, pp. 319-328. Laghzaoui, S 2011. ‘SMEs internationalization: An analysis with the concept of resources and competencies’, Journal of Innovation Economics, vol. 1, no. 7, pp. 181-196. Lin, S 2010. ‘Internationalization of the SME: Towards an integrative approach of resources and competences’, Trends in International Business, pp. 117-135. Organization for Economic Cooperation and Development 2009. ‘Top barriers and drivers to SME internationalization’, Report by the OECD Working Party on SMEs and Entrepreneurship, OECD. Robu, M 2013.‘The dynamic and importance of SMEs in economy’, The USV Annals of Economics and Public Administration, vol. 13, no. 1.17, pp. 84-89. Syed, AA, Shaikh, KH, Mehmood, T, Afridi, T &Shaikh, FM 2011.‘Impact of globalization on SMEs export business and economy of Pakistan by using CGE model’, Asian Social Science, vol. 7, no. 9, pp. 52-64. Vasquez, F &Doloriert, C 2011.‘Case study of internationalization in Peruvian SMEs’, Journal of CENTRUM Cathedra, vol.4, no. 1, pp. 77-99. Votoupalová, M,Toulová, M &Kubíčková, L 2014. ‘What factors do drive small and medium-sized enterprises from the Czech Republic to internationalization?’ 5th Central European Conference in Regional Science, pp. 1131-1141. Yener, M, Doğruoğlu, B & Ergun, S 2014.‘Challenges of internationalisation for SMEs and overcoming these challenges: A case study from Turkey’, Procedia – Socail and behavioural Sciences, vol. 150, pp. 2-11.10th Interntional Strategic Management Conference. Read More