Barriers and Drivers of Internationalization of SMEs in China - Case Study Example

Introduction

The small and medium-sized enterprises have essential roles to play in the country’s local economic networks. They also facilitate the process of creating destruction in the instance that they are mishandled. The paper focuses on discussing the primary factors that facilitate the process of internationalizing the small and medium-sized enterprises and the global diffusion of products. It goes on to discuss the process of globalization or internationalization of the enterprises and the barriers that prevent the process of internationalization of the businesses across the globe.

The literature review focuses on the various concepts regarding the internationalization or globalization of the SMEs. It discusses facts from various authors regarding the factors influencing the process and the strategies employed by such businesses in an attempt to expand to international markets. There exists a widespread literature discussing the internationalization process, motives for the global expansion, and the barriers that affect the process. It is obvious that most businesses venture into international markets when they operate as small and medium-sized enterprises, and they eventually develop into large corporations and operate efficiently in the international markets.

Internationalization of SMEs

For many international companies, the process of internationalization is gradual and takes place in radical steps. The corporations start as small and medium-sized businesses before they grow, develop, expand, and venture into other markets across the globe. They follow the steps of internationalization to grow efficiently without experiencing many barriers along the way. It is a common process followed by many international firms across the globe. Individuals cannot start a small venture and expect it to grow into a large multinational corporation the next day. It takes time and hard work to see a small venture grow into other markets in the world. Most SMEs face the similar process of internationalization. They are often faced with different challenges as they try to globalize into other markets. One of the issues faced is the protection of property rights. the current world of technology is advancing, and there are major transformations across the globe. Therefore, the SMEs have to adopt the latest technology to keep up with the market demands. The other challenge is the issue of sources of funding the process of internationalization. The SMEs can use almost all of their investments if they need to internationalize into global markets. It can lead to bankruptcy and collapse of the business. Moreover, getting finance from the government to help finance the process of internationalization is hard in many nations. The challenge of entering the new market also possesses a big challenge among the individuals and groups owning the SMEs (Korsakienė, Diskienė, and Smaliukienė, 2015).

The Internationalization Process

Under this process, the process of globalizing or internationalizing small and medium-sized enterprises relates to the process of transforming the attitudes of the small and medium-sized enterprises to other areas across the globe. For instance, a small business in China can be expanded to other markets in the United States to attract new consumers and increase the sales of the business. As a result of the process of internationalization, the business is likely to grow to become a large corporation in other areas across the globe. The attitudes of such small and medium-sized enterprises relate to the basis for undertaking decisions to venture into international markets. The experiences of the international markets influence the attitudes of such businesses. We focus on the primary aspects of the globalization activities that can be observed in an easy manner. However, we assume that such attitudes are exciting and significant. The process of internationalizing the small and medium-sized enterprises focuses on the interaction existing between the actual behavior and attitudes obtained by such SMEs as they venture into other markets. There are various theories explaining the process of internationalizing the businesses into other global markets. Most theories have been specifically presented to explain the internationalization of manufacturing firms. These theories fail to appreciate that many manufacturing, as well as services firms (and entrepreneurs), do not want to export abroad. Most notably, many owner-managers do not want to commit the resources of the firm (i.e. physical, financial and managerial) to enter export markets. Further, some theories fail to appreciate that some construction and services firms (particularly, knowledge-based firms and those offering business services) have the ability and inclination to internationalize (Schweizer, 2012).

Traditional Internationalization Theory

According to the theory of traditional internationalization, active international firms can develop competitive advantages in their local markets. Through the local brand, they can create new opportunities in the international markets to help them sell their products and achieve maximum returns. The aim of internationalization of such small and medium-sized enterprises into other international markets is to create better opportunities in the international markets to help them grow and develop into large corporations. The other aim for internationalizing the small and medium-sized businesses is to reduce the production and operation costs by transferring the products to other markets with cheaper costs and high returns. They aim to minimize the production and operation costs while maximizing the returns for the businesses. The firm can control the limited resources available and use them to expand into international markets and develop into large corporations across the world (Berning and Holtbrügge, 2012).

It is argued that the small and medium-sized enterprises take the first step of developing in their local markets before expanding into international markets. They have to develop better market links and create a competitive advantage over the competing companies before they attempt to acquire a market share in international markets. The process of internationalization of the businesses is a sequential series that has steps to follow in to reach the global markets. In most cases, the internationalization process is the transformation of the mentality of the small and medium-sized businesses without necessarily locating the business into another country or location. The major obstacles that affect the transformation process are the lack of enough knowledge about the international markets and lack of enough funds to develop new ventures in other regions across the globe. Such obstacles can be conquered through following the steps in the process of internationalization of the businesses and routine learning of the operations of the foreign markets as well as understanding the latest business models.

Entrepreneurs believe that the investment risks associated with moving into global markets decrease as one diversifies into other markets. They also believe that the continued process of moving into other global markets stimulates the need for control larger sales and increasing the demand for the company’s products. In most cases, they use the knowledge regarding the operation of the international markets to help them venture into such markets, with the hope of gaining better deals and achieving maximum returns for their businesses. There are various stages followed in the exporting processes. There should be no regular activities relating to exporting. The second aspect is that there must be an agent to facilitate the export activities. The third aspect is that there should be a sales subsidiary in the global markets and finally there should be the production processes in the other countries (Berning and Holtbrügge, 2012)

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Stage Model Theory

The model is useful while studying the process of internationalization for small firms that belong to the class of industries of conventional manufacturing. However, it is I can also be used to study such processes for the business service and knowledge intensive companies. The theory fails to recognize that there are companies that export from the onset and they are likely to generate high returns from exporting their products than from the domestic sales. Moreover, the development of a new venture can be non-linear. In some instances, companies venturing into global markets fail to follow the chain of internationalization because the markets are not large enough to accommodate all the demands, and not all firms have the desire to venture into a similar market. There are those firms with extensive knowledge about certain markets. Therefore, they are likely to outdo the other companies by venturing into better markets (He, 2010).

Motives for Internationalization

The American Marketing Association explains that the major motive while small and medium-sized enterprises venture into international markets is because e they want the brand of the company to be identified. They want to create the image of the]ir products, develop a better market appeal, grab the opportunities in a particular market niche, and sell their products. They mainly focus on the aspect of ensuring that they achieve the growth and development of the business venture, and expansion is one form of growth and development for the venture. Their desire is to achieve a competitive advantage over the competing companies by ensuring that they obtain a greater market share for their company products. With the expansion of the business into other markets across the globe, the SME owners expect to achieve maximum returns that can create revenue for their business (van Tulder, 2015).

According to van Tudler, seeking the growth of business is a major motive for the small and medium-sized enterprises that want to expand into international markets. Such businesses want to grow to international markets so that they gain a competitive advantage over the competing firms and acquire more revenues to help them grow. The authors also argue that apart from growth and competitive advantage, such SMEs expand into international markets because they want to spread out their geographical risks and follow more customers in the foreign markets. The businesses desire to diversify their risks so that they can balance the chance of losing and gaining from the business. The only way that the businesses can venture into international markets is through exporting their produce. They need to make their products available in the outside markets to help them attract more new consumers and increase their revenue. It is the only way that such investors in the SMEs can achieve investing in abroad markets (van Tulder, 2015).

According to Markovic et al. (2010), there are three primary ways that a company can use to venture into international markets; equity method, export-based method, and non-equity method. Exporting is the oldest method used by SMEs to move to international markets. Most of the enterprises in China use the strategy to move to other markets in other countries. Since they mostly focus on production of products, they have surplus products to export to other countries. Much of the exports from China come from the small and medium-sized enterprises. It is the fastest growing segment, indicating that the size of the business does not matter when a firm is planning to go into international markets. The exporting method is becoming the significant strategy for globalizing the SMEs across the globe. There are so many countries apart from China that employ the strategy to reach the international markets. They focus on ensuring that their products are in the global markets so that they brand themselves in other areas (Markovic et al., 2014).

The other motive why SMEs decide to go into international markets is profit. They focus on acquiring a greater market share to enable them sell their products and gain more profits for the business. Through the innovations in technology, unique products, and competitive advantages, such firms are likely to sell their products in those markets and acquire more profits. As a result, they can achieve and strengthen their competitive advantage over the rival firms. The existence of a strong local competitive advantage benefits the company by developing a foundation for achieving the global competitive advantage. Therefore, a firm has to become competitive in its local markets before venturing into international regions and struggle to achieve the competitive advantage. The SMEs also venture into international markets so to escape from the markets with high costs of operation. For instance, if corporations feel that the local government is imposing heavy taxes on the businesses, they can move to global markets where there is little or no taxes on the businesses. They aim at ensuring that they minimize the operation and production costs while maximizing the outputs for the companies (Markovic et al., 2014).

The Influential Factors on Internationalization of the SMEs in China

In general, the process of internationalizing the small and medium-sized enterprises, especially the small firms, can change depending on the location of the company in the value chain across the globe. In the process of changing the markets to other location, several factors need to be taken into consideration. They influence the operation of such businesses across the globe. In China, the SMEs consider the following major factors before they venture into the global markets (Zhang, Ma and Wang, 2012).

External Factors

For the internationalization process to become successful, the small and medium-sized enterprise should have a strong financial ability. Any issues arising during the process need to be addressed under the global context background. The company should analyze the factors, such as the financial crisis and monetary policies, since they have a direct impact on the operations of the businesses across the globe. They affect the branding and expansion of the firms, and if they are not handled well, they can affect the operation of the businesses. For instance, the 2008 global financial crisis created a great impact on the operation of businesses. For the companies that survived the crisis, they have a lot of opportunities in the global markets (Zhang, Ma and Wang, 2012).

Infrastructure Factors

These factors include the environmental factors under the location of the business. They include the domestic environment of the business, buildings and other infrastructures for export, transport means, and the international environment. For the SMEs to maintain and defend their positions in the global markets, they have to export their products to those markets. One of the strategies such firms use to acquire better deals in the international markets is by establishing relationships with the companies that exist in those markets. For instance, most SMEs in China establish links with the SMEs in the United States enabling them to export their products using the channels of the companies in the United States. They develop the competitive advantages for their businesses by developing mutual agreements with local companies in the international markets. The local companies link them to their consumers, enabling them to acquire new clients easily and settle in the international markets.

The domestic environment, including the competition and customer attitudes towards the business, is the driving factor for the decisions made by the small and medium-sized enterprises to venture into international markets. For such businesses to successfully move into the global markets, there should be external support, especially from the government, to help them succeed in their operations. In China, the government of the nation ensures that it establishes trade links with other countries across the globe, enabling the local companies to export easily their products to those countries. The government maintains a strong relationship tie with the other countries so that the companies that export their products can easily perform the tasks without any form of hatred or rivalry. The government also funds the operation of the SMEs by providing them with the maintenance of the infrastructure and allows the financial institutions to offer SME loans to such companies to facilitate their operation (Zhang, Ma and Wang, 2012).

Congenital Factors

These factors include the spirit of the entrepreneurs to venture into the global markets. There are individuals who start small companies with the motive of developing those companies to international markets. Their decisions to export the products they produce into the international markets are influenced by the external and internal factors that stimulate their operations. However, the skills and competencies of the entrepreneurs differ in the market. Therefore, those with better skills and competencies manage to successful internationalize their businesses. Those with better competencies and skills can make good judgments, make proper strategic decisions, and use the scarce resources wisely to achieve the internationalization motive. Being aware of the imperfections in the global markets, such firms acquire information regarding the opportunities in the market, the needs and preferences of the consumers, and the ability to deliver the desired products in those markets. Such enterprises are ready to take risks of venturing into the markets hoping to acquire better deals and increase their potential for growth and development in the international business sector. They ensure that they focus on the internationalization factors and deal with any barriers that can prevent them from achieving their goals (Zhang, Ma and Wang, 2012).

Barriers of Internationalization

It is accepted that most companies, especially the small and medium-sized enterprises, face various challenges and barriers while they attempt to venture into international markets. The limitations of the finances and lack of enough physical resources are the leading barriers to the internationalization of such firms. The importing tariffs imposed in various global markets also discourage the SMEs owners from internationalizing their businesses. According to Korsakiene (2015), the turbulence market situation where there is limited access to information regarding the risks of operating in certain international markets and lack of technical knowledge also acts as barriers to international trade. The barriers create a great impact on the behavior of the potential and actual exporters during the internationalization process (Korsakiene, 2015).

The price-based barriers also affect the operations of the SMEs. Most companies venture into markets with better prices for their products. They evaluate the mobility and export costs, and consider whether internationalizing their businesses will affect their operations positively or negatively. The prices of the products include the production, operation, and exporting costs and the profit generated from the sale should be higher than the one in local markets. Some markets also limit the amount of exports entering the market. This prevents various SMEs from exporting their products since the market is limited to a certain quantity of products and services. The lack of trained personnel to facilitate the internationalization process also affects the operation of the businesses. Moreover, it can be difficult to obtain a partner in the international markets since the small and medium-sized enterprises lack powerful branding in the international markets. It is rare to find a small business in China being popular in the United States (Ren, Eisingerich, and Tsai, 2015).

Due to the cultural differences, geographic location, and time zones, it can be hard to contact and find the right business partner or potential consumers. The fluctuations in the foreign exchange rates for the currencies also pose a great barrier to international trade. Most SMEs face losses when they carry out the operations and the exchange rates are low. The varying prices of the international currencies discourage most small and medium-sized enterprise owners from carrying out the international businesses of exporting. The currencies that do not belong to the usual euro, dollar, and sterling pound group face the risks of fluctuations. Therefore, most SMEs are discouraged by the potential fluctuation risks (Li, 2011).

Summary and Conclusion

From examining the literature regarding the internationalization of the small and medium-sized enterprises, there are some proactive and reactive motives why the SMEs in China decide to venture into global markets. The internationalization of such businesses has a certain impact on the profitability and growth of such businesses in the future. The companies follow certain guidelines and strategies to internationalize successfully their operations and gain a greater competitive advantage over the rival firms. There are various factors that facilitate the internationalization process for the SMEs and it is the role of the owners of such businesses to consider such factors as they attempt to internationalize the businesses. Apart from the factors, there are different barriers that affect the operations of the businesses in a global setting, and they discourage most SME owners from venturing into international markets.

For the successful operation of the small and medium-sized enterprises in the international markets, the owners of the businesses need to make decisions that promote the business operations and reduce the risks associated with the process of internationalization. They need to be aware of the barriers to the international markets so that they develop strategies to enable them to succeed in carrying out the international operations. The government of China should also play a vital role in ensuring that it supports the owners of the SMEs to internationalize their businesses. For instance, they need to develop strong ties with other countries across the globe and develop trade ties with those countries. The government should also support the SMEs that wish to venture into global markets by providing them with both financial and operational aid. As a result, the businesses grow and improve the economy of the country as a whole.

Reference list

Berning, S., and Holtbrügge, D. (2012). Chinese outward foreign direct investment—a challenge for traditional internationalization theories? Journal für Betriebswirtschaft, 62(3-4), pp.169-224.

He, S. (2010). Transformation of Private Enterprise Internationalization Model in Wenzhou. IJBM, 5(8).

Korsakienė, R., Diskienė, D. and Smaliukienė, R. (2015). Institutional theory perspective and internationalization of firms. How institutional context influences internationalization of SMES? Entrepreneurship and Sustainability Issues, 2(3), pp.142-153.

Korsakiene, R. (2015). Internationalization of Lithuanian SMEs: Investigation of Barriers and Motives. Economics and Business, 26, p.54.

Li, G. (2011). Barriers of Supporting the SMEs Entrepreneurs Financially in China –A Structural Analysis and Policy Implications. Energy Procedia, 13, pp.9803-9809.

Markovic, D., Rakita, B., Arsic, S. and Momcilovic, N. (2014). Prospects and motives of internationalization of China's auto companies: Case studies Geely and Great Wall. Marketing, 45(2), pp.101-112.

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Zhang, X., Ma, X. and Wang, Y. (2012). Entrepreneurial orientation, social capital, and the internationalization of SMES: Evidence from China. Thunderbird International Business Review, 54(2), pp.195-210.