International Entrepreneurship, SMEs in India - Case Study Example

Introduction

In the past one decade, the level of competition in the local and international market has increased tremendously. This has mainly resulted from the entry of multinational companies. These are firms that have a huge financial base that is used to create a barrier of entry for other interested investors. However, majority of these businesses outsource employees from their headquarters. These are employees that understand the goals and objectives that have been set by the organization. In addition, these subordinates are conversant with the internal culture within the organization. As a result, they send their salaries to support their families back home and spend very little in the host country. Therefore, although those supporting investment of multinational companies in the local market have been stating that they play a significant role in paying heavy taxes thereby enabling the government to support various projects that are meant to alleviate poverty, Majority of these businesses send their profits back to the headquarters, thereby, draining cash from the economy. Small and medium enterprises are the main drivers of the economy. These businesses spend their profits in the country and employ the local people. Furthermore, they create a balance of trade between the country and its trade partners. This paper will therefore discuss in details the barriers and drivers of internationalization in the SME sector in India.

Background

Role of SMEs

Currently, the Indian government has spent a lot of money in order to improve the quality of education in the country. Therefore, each year, thousands of graduates are released from the institutions of higher learning. However, not all of them can secure a job in the government. Furthermore, majority of the global businesses that are eyeing the Indian market due to the high population in the country prefer to employ subordinates that have a high experience. Therefore, young people are left to languish in poverty despite spending much of their years in school. However, the existence of small and medium enterprises has played a significant role in closing this gap in the employment sector. This is through providing the young people with a platform to gain the required experience. Through the SMEs, this group is able to put their skills on test, an aspect that enables them to identify their strengths and weaknesses. This makes it possible for them to work on their weaknesses and use the strengths as their base for improvement. Through the skills gained from SMEs the employees are able to secure jobs in multinational companies. For instance, statistics indicate that each year, thousands of employees are living India to work overseas. This is mainly being driven by the need to look for better working terms. Through foreign direct investment, these people have participated significantly in supporting the Indian economy (Jones, 2009). In an example, the country has been suffering from house shortage. However, through foreign direct investment, Indians living abroad have played an important role in reducing this pressure. This is through indulging themselves in the real estate sector, an aspect that has reduced the demand for houses in the country.

SMEs play a significant role in economic development. With the rising levels of globalization which has resulted from the integration of economies, developed countries have been taking advantage of the liberalization of markets to expand their markets in developing countries. The reason is that these countries have invested heavily in the modern technologies. As a result, they are able to produce products at cheaper rates and export them to developing countries. Although the products pay the excise duty, the amount cannot support government operations. Instead, India has seen an increase in the number of SMEs due to increased influx of cheap products especially from China and United States. Therefore, thousands of people have lost their jobs while the government has lost its tax base. Therefore, in any economy, SMEs play an important role of ensuring that the economy does not rely entirely on foreign products. The global financial crisis which affected many economies across the world is an ideal example of the reason why the government should rely on local businesses and industries in order to avoid the economic shocks. This explains the reason why the Indian government has been investing heavily on small and medium enterprises in the country (Harvie, & Lee, 2008). The reason is that with the integration of economies, one problem in a certain economy has a direct impact on the other. Therefore, the economy should be anchored on local investment rather than being on the mercies of external investors who are profit-oriented.

SMEs balance trade between a country and its trade partners. India has a large population, an aspect that attracts investors in other parts of the world. Therefore, the amount of imports in the country is so huge and they continue to increase especially with the increasing consumerism culture. All major brands have invested or opened a subsidiary in the Indian market. Increased imports are draining the country its foreign currencies which are in its reserves. If the situation is not rectified, the economy can be exposed to external forces. Therefore, SMEs has an important role of producing locally thereby, serving the tastes and preferences of the local market. This reduces the interests of the local people on the imports. In addition, exports from small and medium enterprises bring foreign currencies in the country (Prashantham, 2010). This balances the trade between India and other trade partners across the world.

Barriers of SMEs

One of the main barriers of SMEs in India is lack of adequate capital. In many cases, small and medium enterprises are started by individuals or a group of people that are not financially strong. Therefore, the enterprises lack the necessary resources to stage a strong competition especially putting into perspective that multinational companies can now enter the market and produce high-quality products at cheaper costs. The reason is that the global firms have invested heavily on the modern technologies with the aim of increasing efficiency and reducing the costs of operations. This has made them to lower the breakeven price, thereby passing the benefits to the consumers. However, SMEs have limited resources to even afford these technologies. This explains the reason why some countries have set up measures to protect their local businesses from exploitation by multinational companies whose interests is to make profits. On the other hand, SMEs cannot afford to hire the best employees in the job market. Instead, they depend on fresh graduates who are willing to work in the businesses and once they gain the necessary skills and experiences, they are fished out by larger businesses. In some cases, multinational companies have even gone ahead and partnered with institutions of higher learning in order to identify the raw talents. They therefore, sponsor their education and later train them regarding the organizational culture and other critical aspects before they are integrated into the workforce (Rahman & Ramos, 2011). This has enabled the businesses to innovate products and services that make it possible for the company to segment the market and attract the loyalty of the target market towards the products and services. In many cases, the SMEs try to improve the ideas that have already been developed. However, lack of resources has hampered their efforts

Lack of highly qualified subordinates affects the competitive strengths of the SMEs. Currently, the market has become very dynamic with new challenges arising each day. In addition, the entry of new products and services in the Indian market has offered the customers with a variety of options to select from. This has increased the bargaining power of the customers. Furthermore, lack of enough subordinates has been hampering the growth of these businesses in the market. With the changing consumption behavior of the customers, it has become critical for businesses to keep on conducting frequent market research. This is to identify the main factors that affect the purchasing behaviors of the target market. However, SMEs depend on the information collected from the employees when interacting with the customers in order to make decisions regarding the future of the business. On the other hand, the Indian market has become diversified. With the opening up of boundaries and markets, people are moving from one part of the world to the other to search for better working conditions. Thousands of employees have been sponsored by international companies to set camps in the country in order to improve the positions of the businesses in the market. Therefore, for a business to excel in the Indian market, it must employ a diversified workforce. This is significant in enabling it to understand the interests of people emanating from different cultural, religious, and racial backgrounds. However, due to financial constraints, SMEs cannot be able to achieve this objective especially due to the fact that many of high-qualified employees demand for high wages (Ndubisi, & Nwankwo, 2013). They are therefore, forced to use less skilled and skilled employees. However, the high turnover rates being experienced by these businesses affect their progress. This is because every time they lose their experienced employees to their competitors, they are forced to recruit new employees and train them. This takes time and resources thereby, derailing their growth and development.

Overcoming the Challenges

The Indian government has set aside a fund to help small and medium enterprises. The businesses are expected to repay the loan with a small interest on it. Capital is the main driver of growth in any business. Therefore, the businesses should take this advantage and utilize the funds in order to expand their operations in the local and external markets. This will play a significant role in increasing the profit margins for the businesses. Furthermore, expanding the operations to different markets will play a significant role in reducing the risks and uncertainties that are associated with focusing on few markets (Ndubisi, & Nwankwo, 2013). This will offer the businesses with stability, thereby, enabling them to make sound decisions regarding their future.

Currently, the global businesses have led to an increase in the fees being charged by media houses for advertising on their platforms. The reason is that they are trying to maximize their returns by taking advantage of the demand for their services. Many of the small and medium enterprises in India cannot be able to afford these fees. However, social media and the internet provide an ideal platform to reach the target market. The young people form the largest market segment. This is a generation that uses the social media to look for products and services being offered in the market. Furthermore, they use the social media to look for reviews by other customers regarding the product or service being offered in the market. Therefore, the SMEs can use these channels to advertise their products and services in the global market. Currently, customer relationship management has become a critical concept for any business to succeed in the market. Many of the international companies are spending a lot of money to conduct research. This has been critical in enabling them to understand the needs of the target market. They therefore, incorporate these views in the production process. This plays an important role in ensuring that the products and services meet the specific needs of the customers. This explains the reason why these companies have been able to retain their market segments despite the increasing levels of competition. SMEs can use the social media to collect feedbacks and grievances from the customers. This will save time and resources because only few employees will be required to collect and monitor customer reviews and feedbacks over the social media. Once collected they should be forwarded to the decision makers in order to be incorporated when critical decisions regarding the future of the business are being made (Lloyd-Reason & Sear, 2007). This would make it possible for the enterprises to customize the products and services according to the needs of the customers. As a result, the businesses will be able to increase their customer numbers through retention and referrals. Furthermore, they will expand their profit margin, an aspect that will enable them to create a barrier of entry for other interested investors.

One of the drivers of internalization is the fact that the small and medium enterprises will have a larger market, an aspect that will be replicated on their overall sales. Although India has a large population, international businesses have even a large market. Furthermore, the businesses will gain enough experience that will enable them to deal with the challenges that affect the business on a daily basis. One of the main advantages of internalization among the small and medium enterprises is that fact that the businesses are able to ride on the improved communication and transportation infrastructure. Due to the increasing levels of globalization, SMEs that have internationalized their operations are able to take advantage of inexpensive communication and logistical services as a result of eroded boundaries and reduced distance (Lloyd-Reason & Sear, 2007). This plays an important role in expanding their markets, thereby increasing their financial base.

Internalization of SMES improves their competitiveness through improved cost-efficiency as a result of subcontracting abroad and development of know-how and technology through cooperation. Furthermore, they are able to extent their product ranges through commercial partnership. This is significant in reducing the risks and uncertainties associated with focusing on few product lines. Diversification enables the SMEs to attract more customers who have varying interests. This expands their revenue base.

Other major drivers of internalization by SMEs are access to cheap labor force, raw materials and capital. Other countries such as China have invested heavily in the modern technologies. As a result, once an Indian SMEs open a subsidiary in the China, it is able to enjoy cheap technologies, labor, and raw materials. This would enable them to produce cheap products and export them to the Indian market. Furthermore, the expansion of the operations in the global market would attract the interests of large investors. Through selling of shares, the business can be able to raise money that would be used to expand the operations of the business in different markets across the world (Rahman & Ramos, 2011). Furthermore, employees in the Chinese market are highly qualified because the government has emphasized a lot on technical education. This would boost the production and the overall running of the business.

India has various regulations that affect the growth of small and medium enterprises. For instance, the level of taxation on these businesses is very high, an aspect that affect their profitability. Furthermore, there are strict labor laws that affect the hiring process. However, other countries across the world have changed their laws to attract new investors. Some of them even provide the new businesses with a grace period whereby the business will not pay taxes in order to stabilize in the new market. Therefore, SMEs are attracted to these flexible regulations that enable the business to grow and develop. Therefore, they are able to save some money which is used to intensify the level of marketing (Prashantham, 2010). This increases the level of brand awareness in different markets across the world. At the end, the businesses are able to expand in size and increase the product lines, thereby staging a strong competition against other multinational companies.

One of the main barriers of internalization is lack of information regarding the external markets. Unlike in local markets where the consumer behavior is similar, external markets are driven by different factors that should be taken into consideration when expanding the operations of the business. For instance, cultural values and beliefs of the people has a major impact on the purchasing behavior of the customers, As a result, the employees must be trained on different ways of handling these customers in order for the business to penetrate the market. The reason is that getting employees that are conversant with the different interests of various customers is hard and they ask for high wages (Lloyd-Reason & Sear, 2007). This might create a sense of discontentment within an organization especially when employees are almost performing similar tasks but being paid differently.

Lack of management capabilities is another major barrier that affects the internalization of the SMEs. Managing an international business requires more skills to spearhead the growth and development of the business. International market has businesses that have been in existence in decades. Therefore, their employees understand the trends in the market. Furthermore, they are conversant with the main factors that change the consumption behavior of the target market. They are also able to handle the interests of a diversified market. As a result, they maintain the competitive advantage of the business and identify potential markets for the business to expand to. This explains the reason why companies such as Google, Apple Inc, Microsoft, Toyota, etc have been able to retain their position in the global market despite the increasing threat of new entrants. Majority of these companies keep on hiring young employees who pump new ideas into the company, thereby, freshening things up (Etemad, 2013).

Technological and legal barriers affect the internalization process. In order to operate on the global platform, the enterprises are required to have modern technologies that will enable them to interact with the customers irrespective of their geographical location. Furthermore, the management will be requires to understand the legal hurdles that might face the business when operating in a foreign country. Therefore, they are supposed to be taken through the training program in order to equip them with the latest skills on how to deal with legal challenges that might affect the operations of the business in the market (Rahman & Ramos, 2011).

The social and economic issues might affect the expansion program of a small and medium enterprise. Different countries have varying social elements that affect their perceptions regarding certain products and services. In addition, it’s critical for the enterprises to understand the demographics of the new markets. Some of the aspects to consider include the age of the target market, family composition, income of the customers, and any other elements that might affect their purchasing behavior (Jones, 2009). Therefore, the businesses are expected to conduct an in-depth research in order to understand these aspects. This is to ensure that they are incorporated in the main decisions.

SMEs are expanding into other countries through acquisition of an existing firm in the target market. Establishing a new firm in a different country is expensive and time consuming. In addition, it involves a lot of legal hurdles. However, when an enterprise acquires an existing business, it is able to reduce the expenses. Furthermore, it acquires the local employees who understand the market effectively. Therefore, they are able to train the rest of the employees on the important aspects to look for in order for the business to position itself strategically in the market. Moreover, through acquisition, the businesses are able to acquire the assets and the technologies to produce in the new country (Karlsson, Johansson, & Stough, 2006). Many of them opt to improve on the current technologies rather than purchasing new technologies during this uncertain period. Once they are well established in the market, they improve the production process in order to cater for the demand.

SMEs are expanding to new countries through franchising. This involves locating a business that is producing almost similar products and allowing it to use the business model in order to product a replica of the products or services. This reduces the risks and uncertainties associated with penetrating the new markets. The reason is that the franchisee is responsible for marketing the products in the new markets. Different SMEs in Europe and Asia has used this strategy to penetrate the Indian market. The reason is that the market is not predictable especially due to the fact that Indians want to associate themselves with products that are produced by local companies (Analoui, & Karami, 2003). Therefore, using this strategy enables the business to have a local outlook.

Another common expansion strategy that is used by different SMEs is licensing. This entails entering into a contract with an independent company to produce the products in a new market (Ndubisi, & Nwankwo, 2013). This provides the licensed company with the rights to use the brand name. Just like franchising, the strategy has been important in enabling the enterprises to avoid the risks associated with entering an unpredictable market such as India.

Conclusion

Indian market is characterized by high levels of uncertainties. The threat of new entrants is very high. Furthermore, the bargaining power of both the suppliers and customers is high. Moreover, the level of competition has increased tremendously over the years due to the entry of multinational companies. Therefore, small and medium enterprises have found it very hard to expand and grow in this market. The reason is that the liberalization of markets across the world has led to an influx of cheap products from developed countries. However, this has not reduced the importance of SMEs in the economy through creation of employment and stabilizing the economies. However, many of the SMEs are expanding into other countries in order to take advantage of cheap labor, raw materials, and modern technologies. However, they are facing various barriers such s lack of adequate capital, information, and regulations. However, they have been able to avoid these barriers through acquiring existing business in the target market, franchising, and licensing.