GLOBALIZATION OF SMES : INDEPTH ANALYSIS OF IMPACT OF INTERNATIONALISATION ON FIRMS

Satabdee Mohanty Tanay Kumar Nandi [Abstract] In this paper, we try to present a thorough analysis of firms after an upclose scrutiny of small and medium enterprises and their prominent role in the global marketplace. We studied the various theoretical and practical approaches to the topic of Small Medium Enterprise1and their globalization on a worldwide front. It helped us understand the concept of internationalization of entrepreneurial enterprises and firms in the context of SMEs – to project the worldwide attention drawn towards the growing role of SMEs in the global marketplace and their valuable contribution to international global markets. The paper elucidates upon the consequences that accrue from firms entering foreign markets at inception and their survival in the international market when the transition from domestic to international market takes place. I. Introduction: Globalization has faded the barriers of trade and development and an increase in globalization has in turn led to a significant increase trade and investment. As powerful internationalization of production and marketing continue to thrive all over the globe, businesses have realized that competing globally is no more an option, but an economic necessity. This trend seems to create an extra-ordinary competitive environment for developing countries, as they do not appear to be ready to face the challenges and opportunities that globalization currently presents2. Globalization has significantly affected entrepreneurial enterprises and owing to changes in the international environment in finance, human resources, technology, politics, economics, and social conditions, opportunities have been created for the entrepreneurial enterprises to expand their international businesses on a global basis at a much faster pace3. Entrepreneurs form the economic base of a nation and an increase in the value of the SMEs with respect to a foray made by entrepreneurs on an international arena strengthens the global
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Hereinafter referred as SMEs Lettice Rutashobya, Jan-Erik Jaensson, “Small firms' internationalization for development in Tanzania: Exploring the network phenomenon”, International Journal of Social Economics, 2004, Vol. 31, P. 159 – 172. 3 D. Teece, G. Pisano, A. Shuen (1997), "Firm capabilities, resources and the concept of strategy", Strategic Management Journal, Vol. 18 pp.509 - 533.

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Electronic copy available at: http://ssrn.com/abstract=1593104

competitiveness, thus upgrading the overall economy of the nation 4. As an entrepreneur ventures into an international arena, the establishment of Small and medium sized enterprises play an important role in nation and in turn world economy. Firm’s internationalization, along with the development globalization process, has become a key word for the past few decades and it will continue to be an important issue in managing companies and carrying out policies for years to come.
II. Globalization and Internationalization of SMEs:

A SMEs readiness for involvement in international markets can be interpreted as being function of its state of informedness on targeted foreign market(s) and the means for entering them. SMEs play a pivotal role in the nation’s economy potentially contributing toward arresting the trend of potential trade deficits in order to exacerbate the problems of unemployment and declining wages5. Increase in globalization has brought major changes in the world economy some of which are:
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Significant increase in trade and investment; Rapid technological changes in communications and transport; Increasing trend towards deregulation of foreign exchange, foreign investment and financial markets Creation of greater incentives and opportunities for companies. As well, it has brought new competitors for SMEs in the industrialized world.

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Internationalization is key engine for competitiveness and growth. Traditional way of internationalizing SMEs is export and import. But it is still hold important in developing countries. Internationalization helps in facilitating exchanges of knowledge, technology, strengthen international business strategies of SMEs6. Some primary ways of internationalization are: 1. Export and import; 2. Alliance or subsidiaries; 3. Branches and joint ventures abroad (FDI);

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International Development Research Center, “The Path to Growth: Experiences of Egyptian Entrepreneurs” 2008. Retrieved from http://sme.gov.eg/Jan_publications/Growth_EN.pdf 5 J. Birkinshaw, N. Hood, S. Jonsson (1998), "Building Firm-Specific Advantages In Multinational Corporations: The Role Of Subsidiary Initiatives", Strategic Management Journal, Vol. 19 pp.221 - 241. 6 Justyna Dabrowska, (2008), “White Paper On Internationalization Of Small And Medium-Sized Enterprises” Profit Center Warsaw, University of Szczecin.

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Electronic copy available at: http://ssrn.com/abstract=1593104

Export and Import: Exporting has been traditionally regarded as the first step to entering international market. It is particularly applicable to internationalization of SMEs because SMEs because SMEs frequently lack resources such as financial or otherwise7. Exporting has proved to be of much importance when it comes to growth of SMEs as with small capital investment, it can frequently access foreign market. In addition to it gains valuable international experience. Conceptually many economic benefits can be gained by exporting like gains related to scale and scope economies. These are achieved from larger volumes of sales and productions which in turn made possible by revenue growth in the geographic extension of market. Further advantages like increase in market power and gains from the diversification of revenues are the result of SME’s presence in multiple, diverse international markets8. Alliances or Subsidiaries: Alliances have been suggested as one important means of overcoming resource and capability deficiencies and enhancing the likelihood of success for internationalizing firms. Alliance partners can help SMEs overcome shortages of capital, equipment and other tangible assets through resource sharing between the two or more separate firms engaged in the alliance. More importantly, alliance partners represent an important source of host country knowledge to SMEs. SMEs can acquire host country knowledge and develop new organizational capabilities internally through incremental experience accumulation in new geographic regions9. However alliance is not risk free and faces problems in successful implementation. This is attributed to the factors like goal conflicts, lack of trust and understanding, cultural differences, and disputes over the division of control. These potential problems crop up due to complexities arising from the cooperation and coordination of two or more partners. Mere formation of an alliance does not guarantee success to an SME in the international market. But this does not set back the necessity of an alliance due to the frequently felt need of additional resources. But the impending potential problems can lead can even lead to instability or even failure. So the real issue to be discussed and decided by the SME entering into an alliance is to find the compatible partner who can help not only in sustenance but also in growth of SME10.
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Yiu, Daphne W.; Lau, Chung-Ming, (2008), “Corporate entrepreneurship as resource capital configuration in emerging market firms.” Retrieved from http://www.accessmylibrary.com/article-1G1-180029378/corporateentrepreneurship-resource-capital.html 8 C. Bartlett, S. Ghoshal (1986), "Tap Your Subsidiaries For Global Reach", Harvard Business Review, Vol. 64 pp.87 - 94. 9 M. Forsgren, U. Holm, J. Johanson (1995), "Division Headquarters Go Abroad: A Step In The Internationalization Of The Multinational Corporation", Journal of Management Studies, Vol. 32 pp.475 - 491. 10 C. Bartlett, S. Ghoshal (1989), "Managing Across Borders: The Transnational Solution", Harvard Business School Press, Boston, MA.

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Branches and Joint Ventures Abroad (FDI): Aside from the benefits gained from the internationalization of proprietary asset exchange across international borders, FDI in diversified locations enables a firm to leverage various location based advantages such as competitively priced labor force, to have access to critical resources and develop new knowledge and capabilities that enhance its international competitiveness. But apart from these potential benefits, FDI requires a greater level of resource commitment in foreign countries than exporting and is more difficult to reverse11. It is also less flexible than exporting in copying with investment hazards such as political instability and fluctuating market conditions in host country12. At the initial stage of entering in the foreign market, the global entrepreneur may incur higher costs than local competitors13. While the initial disadvantage might diminish with greater levels of experience in host country markets, the second disadvantage which is related to increasing coordination and transaction costs can be encountered at very high levels of internationalization. As the firm increases its commitment to international markets by establishing more foreign subsidiaries the number of internal transaction increases and governance costs can reach a point that where they outweigh any potential benefits, which in turn translates into lower financial performance. The same logic applies to international expansion into dissimilar markets. The costs of managing location diversity, along political, cultural and idiosyncratic market dimensions can eventually erode profit margins when high levels of internationalization are achieved14.
III. Impediments To The Process Of Internationalization And Globalization:

While entering in the new markets which are dissimilar to the original markets or in case of the new subsidiaries are established, many difficulties are faced by the SMEs. These difficulties come across due to the liability of foreignness and newness. In the former case, liability crops up due to the fact that the knowledge and capabilities with which the company has been operating in its domestic environment are often not suited to operations in the new market15. In order to overcome this gap, new knowledge and capabilities need to be acquired or developed to successfully enter the new markets. In the latter case, the liability lies in the fact that a new subsidiary faces many of the same challenges as a start-up. It needs to build business relationships with stakeholders, the subsidiary needs to establish its legitimacy, and it must
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Murali D.R. Chari, (2006), “Option Value of International Diversification: Evidence from East Asian Firms and the East Asian Crisis.” Retrieved from http://www.baf.cuhk.edu.hk/asia-aom/PDW06/T5_Chari.pdf 12 S. Magee (1977), "Information and the multinational corporation: An appropriability theory of direct foreign investment", in J.N. Bhagwati (Eds), MIT Press, Cambridge, MA, pp.317 - 340. 13 Competitors based in the host country. 14 Ou, Niky and Shyu, Yih-Wen , (2009), “Corporate Internationalization and Systematic Risk”. Retrieved from http://ssrn.com/abstract=1343654 15 R. Burgelman (1983), "A Process Model Of Internal Corporate Venturing", Administrative Science Quarterly, Vol. 28 pp.223 - 244.

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recruit and train employees to staff new operations16. These challenges are compounded when first entering an international market because differences between host and home markets, along political, economic, legal and cultural dimensions, require an internationalizing firm to change many of its ways of doing business that were developed in a domestic context. In addition to these setbacks, an internationalizing firm faces heightened political risks as well as the operational risks stemming from the foreignness of new environment. The higher levels of risk an SME faces when entering a foreign market, relative to domestic expansion, reinforces the internationalization strategy. The literature on internationalization has revealed a number of barriers that small businesses face in their attempt to enter foreign markets. These include both endogenous and exogenous factors. Endogenous factors include lack of command of foreign language, nil cultural experience, poor knowledge of foreign market information, and fear of foreign market risks and so on17. While exogenous inhibitors include; financing problems, technical barriers, and cumbersome export procedures18, main barriers and problems faced by SMEs are:
1. High cost of internationalization process19;

2. Lack of organization; 3. Lack of capability to plan and implement strategies; 4. Lack of know-how regarding international issues/managers;
5. Lack international experience20; 6. Trade barriers: Trade protection, Tech. Standards21.

The framework should be so constructed in order to improve compliance with standards, building global marketing capacities and collective competitiveness with SMEs from the same sector22.
IV. Strategic Options For Smes To Counter The Challenges Faced Internationally:
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C. Bartlett, S. Ghoshal (1989), "Managing Across Borders: The Transnational Solution", Harvard Business School Press, Boston, MA, . 17 Jody Evans, Alan Treadgold, Felix T. Mavondo, (2000), “Psychic Distance And The Performance Of International Retailers – A Suggested Theoretical Framework”, International Marketing Review, Vol. 17, Pg. 373391. 18 J. Birkinshaw (1997), "Entrepreneurship in multinational corporations: The characteristics of subsidiary initiatives", Strategic Management Journal, Vol. 18 pp.207 - 229. 19 Market analysis, consulting services, adaptation products, travel expenses etc. 20 Different working language, limited knowledge on foreign conditions, laws and regulations, cultural differences etc. 21 R. White, T. Poynter (1984), "Strategies For Foreign-Owned Subsidiaries In Canada", Business Quarterly, pp.59 - 69. 22 J. Bower (1986), "When markets quake", Harvard Business School Press, Boston, MA.

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The factors that SMEs are required to bear in mind in order to face tough competition on internationally acknowledged arena can be categorized so as to get access to local knowledge abroad, firms especially those which are facing financial or managerial constraints should initially focus on those forms of internationalization, which do not require a high level of capital investments. Potential strategies, for instance, could be:
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Cooperative agreements with local research institutions and/or firms; Outsourcing of parts of the innovation process; To limit the financial burden of setting up and maintaining own international R&D facilities23.

In case of any kind of collaboration the involved parties must find ways to protect their individual core competences. They should also make an attempt to formulate strategies for sharing the intellectual property generated by such a joint venture, in a justified manner If companies enter foreign markets that require local adaptation of products (and therefore local R&D) they need to be sure that the potential of the target market is sufficient to achieve a favorable cost structure. If companies have reasons to expect problems in achieving needed experience curves24, they should reconsider the market entry25. Firms alongside need to pay attention to cultural aspects and should provide their employees involved in international activities with cross-cultural training. This sensitization to mutual cultural issues may play a key-role in the success of an international venture. The motivation as well as the necessity behind global innovation activities26 must be explained and discussed with existing R&D units so as to secure their benevolent cooperation with overseas operations. In order to sustain their existence SMEs also need to search for competitive advantages across national borders. They are often faced with pressures to reduce production costs, increase productivity and become more knowledge intensive. To achieve this end, they have to internationalize their business activities since consumers today want the cheapest and the best products, with little concern about where they are produced. The entrepreneur’s personality, skills and values affect subsequent behaviors and decisions. Consequently, the entrepreneur’s key decisions, strategies and management practices will shape the performance of the venture. This corresponds to the entrepreneurial firm level in the figure. Thus, the firm has an entrepreneurial influence that serves to combine capabilities, competencies and resources as part
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Firms might consider sharing resources (facilities etc.) with partners. These partners might be other domestic firms with interest in global innovation, firms from other countries with an interest in the target country, or local firms and research institutions in the target country. 24 Economies of Scale and Learning Curve Effects. For more information, refer to Hirschmann, W. (1964), "Profit From The Learning Curve", Harvard Business Review. 25 J.F. Hennart (1982), "The Theory Of The Multinational Enterprise", University of Michigan Press, Ann Arbor, MI. 26 Eg. tapping new markets and reducing time-to-market.

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of the strategic and tactical activity of the organization, including specific decisions, processes and actions that result in or contribute to internationalization27. Policy can also play an important role in assisting SMEs in their internationalization process. The first policy objective should be targeted at increasing the awareness about the benefits of internationalization within this group of entrepreneurs. Policy measures should be aimed at reducing entry barriers and lowering the cost of international expansion, such as protecting of property rights, and transaction costs28. V. Conclusion: Globalization, which was once thought of as the devil incarnate, is now considered as a pervasive and irreversible force that will have both positive and negative effects on a significant portion of SMEs. It is a major driver that has impact on nearly every business. The internationalization of markets for sales and purchasing at least indirectly influences every business. Examples are the entry of new competitors into formerly protected domestic markets of changes in customers’ behaviors or preferences29. During the last decade a paradigm shift occurred: it is now widely recognized that SMEs are a critical driver of employment both in industrialized and developing countries and are uniquely positioned to answer the challenges of an ever-faster globalizing economy. Growing business environment through trade and investment in home market and abroad has been increasing internationalization of production through multinational corporations together with the rise of new form of business organizations such as network and strategic alliances expanding across national boundaries30. Privatization of emerging economies has shown significant efficiency and performance improvements in small and medium enterprises. Underlying this trend is the belief that entrepreneurship is key factor for a number of desirable social outcomes, including economic growth, lower unemployment, and technological modernization. Globalization thus provides a great opportunity for entrepreneurial ventures to expand their business internationally. The progressively disappearing barriers and borders are exposing all companies both to new markets and to international competition. With the help of local governments, large corporations, and international organizations, entrepreneurial enterprises are able to confront the challenges posed by globalization and economic liberalization, to improve their competitiveness in the global market, and better serve the global consumers.

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N. Venkatraman, J. Grant (1986), "Construct Measurement In Organizational Strategy Research: A Critique And Proposal", Academy of Management Review, Vol. 11 pp.71 - 87. 28 P. Rosenzweig, J. Singh (1991), "Organizational Environments And The Multinational Enterprise", Academy of Management Review, Vol. 18 pp.340 - 361. 29 S. Ghoshal, C. Bartlett (1988), "Creation, Adoption, And Diffusion Of Innovations By Subsidiaries Of Multinational Corporations", Journal of International Business Studies, Vol. 19 pp.365 - 388. 30 A Madhok (1997), "Cost, Value, And Foreign Market Entry Mode: The Transaction And The Firm", Strategic Management Journal, Vol. 18 pp.39 - 61.

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