Impact of Globalisation and Regional Integration on SMEs - Example

Impact of Globalisation and Regional Integration on SMEs Abstract This paper evaluates the impact of globalisation and regional integration on the ability of small and medium enterprises (SME) to expand their activities in the international market. In particular, the paper highlights opportunities and challenges for SMEs in recent years amidst globalisation and increased economic integration. Some of the opportunities that have emerged for SMEs are: improved access to advanced technology; improved ways of communication; enhanced ability to minimise business risks; better chance for sharing certain costs; and improved access to finance. Among the various challenges highlighted in the paper are increased exposure to international competition, political risks and limiting rules and regulations and theft of intellectual property. As it will be noted, most SMEs have not enjoyed the benefits of globalisation and regional integration, mostly due to their low capacity. In this regard, this paper has suggested ways through which the capacity of SMEs can be enhanced. The paper proposes that the capacity for SMEs can be enhanced through improved access to finances, enhanced skills for managers, modification of products and services to fit in the international market and facilitation of collaboration among SMEs. It has also proposed that governments can provide further support through increased regional integration, promotion of foreign direct investment, support for research and development, protection of intellectual property rights and establishment of laws and regulations that are less restrictive to the growth and expansion of SMEs in the international market. Introduction Globalisation simply refers to the process of formation of an international network of social, political and economic systems. Among other aspects, the phenomenon of globalisation is characterised by integration of national and regional economies, leading to the formation of a global economy (Haq & Sen 2010, p. 136). The process of globalisation and regional economic integration has opened opportunities and increased pressure for SMEs to expand their activities in the international market. However, the low capacity of most SMEs has greatly reduced their ability to globalise their activities and to exploit emerging opportunities in the international market. At the same time, the process of globalisation has posed various challenges to SMEs, which have also contributed to reduction of the potential for these firms to access and enjoy the fruits of globalisation (Haq & Sen, 2010, p. 136). In this view, this paper examines the opportunities and challenges posed by globalisation and regional economic integration to SMEs. As well, the paper proposes ways through which the capacity of SMEs can be enhanced in order to increase their growth potential. Opportunities The process of globalisation and economic integration has opened several opportunities for the growth of SMEs. Over the last two decades, there have been concerted efforts in many parts of the world to liberalise trade through reduction in tariff and non-tariff barriers to trade (Gaston & Khalid 2010, p. 57). This has been achieved through formation of unilateral and multilateral agreements and unions. Examples of famous agreements that facilitate trade liberalisation among members are the General Agreement on Tariffs and Trade, the World Trade Organization, the American Free Trade Agreement and the Asia-Pacific Economic group (Krishna 2005, p. 12). Generally, trade liberalisation has made it easier for SMEs to penetrate into new, more lucrative international markets. Despite this, most SMEs have focused on serving local niches, especially due to lack of adequate resources and required expertise to expand activities into the international market (Singh, Garg & Deshmukh 2010, p. 56). Secondly, globalisation and economic integration has facilitated advancement and diffusion of technology across countries. Increased emphasis in innovation has led to rapid change in technology in various parts of the world. SMEs can access newer and better technology and technological products which can enhance productivity (Cavusgil 2009, p. 57). However, most SMEs have not been able to exploit this opportunity due to lack of adequate financial resources (Singh et al. 2010, p. 56). Further, advancement in information technology has facilitated communication and interaction among human beings across the world. Communication over the Internet, for instance, has increased at a high rate. This has opened an opportunity for SMEs to market and sell their products and services in the international market. As well, SMEs are able to access useful information through the Internet, which can help to support innovation and development (Ervin & Smith 2008, p. 34). Just as other profit-oriented organizations dealing with products and services, SMEs face various risks when expanding to new markets, such as commodity risk and currency risk. However, SMEs are able to minimise the risks through integration. Precisely, the process of globalisation has opened opportunities for SMEs to form partnerships or strategic alliances with foreign and multinational organisations which facilitate production, sale and distribution of products in the global market (Vakharia & Yenipazarli, 2009, p. 18). This can be achieved through joint ventures, mergers, equity strategic alliances, non-equity strategic alliances and global strategic alliances (O'Dwyer, Gilmore & Carson 2011, p. 93). As O'Dwyer et al. (2011, p. 94) explain, partnerships enable enterprises to access essential information regarding the target market such as culture and resources needed for penetration into the market. Thus, risks associated with lack of sufficient information and resources are eliminated. As well, globalisation has provided an opportunity for SMEs from different regions and countries to share costs (As O'Dwyer et al. 2011, p. 94). For instance, organisations can set up a joint research and development facility and share the costs incurred in the process. Lastly, globalisation has increased opportunities for SMEs to access finance from local and foreign commercial banks, equity markets and government agencies (Caprio 2012, p. 222). Challenges Globalisation and regional integration has posed various challenges to SMEs. To start with, globalisation and economic integration have led to increased exposure of SMEs to international competition. As Singh et al. (2010, p. 55) explain, increased trade liberalisation has facilitated penetration of well-established firms into underdeveloped foreign markets. This has facilitated the loss of local markets to foreign firms offering lower-priced products and services. In some countries, increased competition from foreign firms has made it difficult for local SMEs to survive in their respective markets (Singh et al. 2010, p. 55). Further, globalisation has increased vulnerability of globalising SMEs to political risks. Political instability in any of the nations where an SME operates may affect its performance. Political relationships between countries in which an SME operates may also have a significant impact on its performance. Despite establishment of agreements that aim to facilitate trade, some governments have established protectionist policies and formulated laws and regulations that aim at limiting entry and minimising competitiveness of foreign enterprises in their local markets. Among other reasons, they do so to protect domestic firms and industries from competition (OECD, 2004, p. 17). Some countries have established strict laws, which make it difficult for some SMEs to operate. For instance, Australia has established strict rules and regulations on environmental protection that applies to both local and foreign firms operating within the country (OECD 2004, p. 17). Globalisation has also enhanced the potential for SMEs to develop new and innovative products and services (OECD 2004, p. 17). At the same time, the importance of patterning activity, industrial designs and trademarks has increased. A globalising SME can be highly limited by an inefficient, unsuitable, ineffective or inaccessible intellectual property system. As well, globalisation has increased chances for intellectual property theft. This has posed a challenge for SMEs to that do not have effective intellectual property systems or those operating in countries where there are not effective laws for protecting intellectual property rights (OECD 2004, p. 17). Enhancing capacity for SMEs To benefit from globalisation and regional integration and cope with or overcome challenges associated with the process, the capacity for SMEs to maintain continually improving businesses is critical to ensure sustainability in the long-term. One way of enhancing the capacity of SMEs to expand into the global market is to equip managers with the relevant skills. Singh et al. (2010, p. 55) explain that most managers of SMEs lack appropriate skills needed to reflect strategically on their businesses and establish successful ways of expansion into the international market. Secondly, the products and services offered by the SMEs should be oriented towards serving all customers in both local and in foreign markets (United Nations 2004, p. 23). Importantly, the ability of SMEs to access financial resources should be enhanced. Their capacity can also be enhanced through improved access to technical expertise. Further, several SMEs can collaborate and mobilise their joint resources in order to be able to penetrate and establish a competitive edge in the global market (United Nations 2004, p. 23). Governments can contribute in support growth of SMEs in the global market in various ways. First, they can do so by establishing ways of reducing barriers that are encountered by SMEs while trying to globalise their activities. This can be achieved, for instance, through increased economic integration. According to OECD (2008, p. 25), many of the impediments to the growth of SMEs in recent years are brought about by non-tariff barriers (rules and regulations) placed by governments. Increased economic integration and engagement in useful negotiations by governments can help in minimising such barriers. Secondly, governments can support SMEs through promoting inward foreign direct investment. According to OECD (2008, p. 26), promoting inward foreign direct investment can provide an opportunity for SMEs to penetrate into markets in foreign countries by joining well established supply chains of multinational organisations. In addition, promoting foreign direct investments supports efficient diffusion of technology and enhances the ability of SMEs to compete in the international market. The Chinese SMEs Promotion Law established in 2003, for instance, has been successful in supporting the growth of local SMEs through promoting foreign direct investments (Itō & Han 2010, p. 47). Further, governments can support SMEs through establishment of facilities for research and development and protection of intellectual property rights. Subsidies and financial incentives from the governments can also help to increase the growth potential of SMEs. Lastly, governments can support SMEs through establishment of laws and regulations that are less restrictive to entry in the global market. Conclusion In conclusion, globalisation has facilitated the establishment of an international network of economic actors, leading to the formation of a global economy. This has opened various opportunities for SMEs to expand their activities from local to the international markets. However, as mentioned earlier, the low capacity of SMEs has hindered their ability to exploit the opportunities that have arisen. The situation has been worsened by the presence of challenges that are posed by the process of globalisation and regional economic integration to SMEs. Considering the importance and contribution of SMEs to national economies, there is need for governments to provide the necessary support to these firms and hence, enhance their capacity to penetrate and establish niches in the competitive international market. Managers of SMEs should also play their role in order for the internationalisation process to be successful. References Caprio, G 2012, The Evidence and Impact of Financial Globalization, Academic Press, London Cavusgil, S T 2009, Michigan State University Contributions to International Business and Innovation, Emerald Group Publishing, Bingley. Ervin, J & Smith, Z A 2008, Globalization: A Reference Handbook, ABC-CLIO, California. Gaston, N & Khalid, A M 2010, Globalization and Economic Integration: Winners and Losers in the Asia-Pacific, Edward Elgar Publishing, Cheltenham. Haq, K & Sen, A K 2010, “Internationalization of SMEs: Opportunities and limitations in the age of globalization”, International business and Economics Research Journal, Vol. 9, Iss. 5, pp. 135 – 142. Itō, T & Han, C 2010, The Rise of China and Structural Changes in Korea and Asia, Edward Elgar Publishing, Cheltenham. Krishna , P 2005, Trade Blocs: Economics and Politics, Cambridge University Press, Cambridge. O'Dwyer, M, Gilmore, A & Carson, D 2011, “Strategic alliances as an element of innovative marketing in SMEs”, Journal of Strategic Marketing, Vol. 19, Iss. 1, pp. 91-104 OECD 2004, “Facilitating SMEs access to international markets”, Accessed 7 October, 2013 OECD 2008, Promoting Entrepreneurship and Innovative SMEs in a Global Economy, OECD Publishing, Paris. Singh, R K, Garg, S K & Deshmukh, S G 2010, "The competitiveness of SMEs in a globalized economy: Observations from China and India", Management Research Review, Vol. 33 Iss. 1, pp.54 – 65. United Nations 2004, Investment Promotion and Enterprise Development Bulletin for Asia and the Pacific, Issue 2. United Nations Publications, Geneva Vakharia, A J & Yenipazarli, A 2009, Managing Supply Chain Disruptions, Now Publishers Inc, MA. Read More