Globalization of Small & Medium sized

Enterprises (SMES)

Submitted To:

Prof. Muhammad Akram

Submitted By:

Umar Muhammad Javed BC16-204

Ali Hamza BC16-216

Ibtisam Farooq BC16-218

Awais Nazeer BC16-220

Wasam Asad Iqbal BC16-240

1
2
 TABLE OF CONTENTS

Abstract
…………………………………………………………………………………………
4

Acknowledgement ………………………………………………………………….
…...……….5

1 Introduction…………………………………………………………………

……………… 6

1.1 Background

……………………………………………………………………………...….

1.2 What is Globalization

…………………………………………………………………. 7

1.3 Aims and objective of

study………………………………………………………..…. 7

1.4 Importance of the Study

…………………………………………………………..….. 7

2 Literature

Review………………………………………………………………………….

2.1 Approaches to Internationalization

…………………………………………………….. 10

2.1.1

Exporting……………………………………………………………………….

………10

2.1.2 Foreign direct investment

……………………………………………………………...11

2.1.3
Alliance…………………………………………………………………………………11

2.2 Motivation for internationalization

…………………………………………………….11

2.3 Steps to globalization

………………………………………………………………….. 12

2.4

Summary…………………………………………………………………………….
.. 13

3 Modes of Globalization
…………………………………………………………………. 14
4 Effects of Internalization on SME
performance………………………………………….. 15

5 SMEs in Pakistan
…………………………………………………………………….…….. 16

6 Barriers to SMEs Internationalization

…………………………………………………… 18

6.1 Resources Barriers…………………………………….

…………………….……….. 19

6.2 Access to Information and Network

………………………………………...…….. 19

6.3 Cultural Barriers

……………………………………………………………...…………. 19

6.4 Financial Barriers

……………………………………………………………………….. 20

6.5 Organizational Structure and Management Level

……………………………………… 20

6.6 Access to Technology

………………………………………………………………….. 20

7 Discussions
……………………………………………………………………………..…..
20

7.1Easy Access to Information Network ………………………………………...

…………. 20

7.2Culture and Language

Awareness……………………………………………..………… 21

7.3 Technology and Infrastructure Update

……………………………………………… 21

7.4 Policy Performs to support SMEs Globalization

……………………………………. 21

8 Recommendations
………………………………………………………………………… 22

9 Conclusion
………………………………………………………………………………….
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10 Reference……………………………………………………………….
……………………….25
 Abstract

Small and Medium Sized Enterprise (SMEs) significantly contribute to the economy in rapidly
changing business environment domestically and internationally. SMEs play important role in
increasing employment and decreasing poverty by creating employment opportunities. SMEs as
a whole can dominate a developing country's economy by being a part of fast growing and new
industries. In places where monopolies or oligarchies are, price lowering can be introduced by
SMEs.

SMEs engage in internationalization when demand for products in domestic market decreases or
SMEs are looking to increase their profit.

There are three paths a firm can choose from, to engage in internationalization Product Export,
Foreign Direct Investment (FM) and Strategic Alliance. SMEs from developing countries engage
in internationalization using export method for number of reasons such as low capital investment,
less competitive products and lack of resources available. The study aim to explorer the method
adopted by SMEs in Pakistan for internationalization. Research also includes the challenges and
barriers faced by SMEs during their internationalization process.

The study findings and recommendations contribute substantially to the literature for
internationalization from developing countries. In order increase the internationalization of SMEs
and their contribution to economy, developing countries like Pakistan should create feasible
environment with support and access to resources. Research also concluded that financial
resources are not the only challenge faced. Access to resources and contact network can provide
business opportunities and suitable foreign partners.
 Acknowledgement

Praise is upon Allah Almighty the strength of universe, who guides us in darkness and help
in difficulties All respect due to His Holy Prophet Muhammad (P.B.U.H) for enlightening
our consciences with the Essence of faith in Allah Almighty and His Kindness and mercy
upon us.

I have set light an ever-burning flame of gratitude and deep sense of obligations to my
Honorable teachers of HAILEY COLLEGE OF COMMERCE for their valuable guidance
constructive criticism and Inspiring attitude during my studies. We Appreciate and Thanks’
to the Prof .Muhammad Akram.

Last words are lacking to express my feelings and indebtedness to my affectionate family
and friends for their Love , appreciations which always stand by me mentally and
spiritually during all years of my studies.
1 Introduction

1.1 Background

Small and Medium Sized Enterprise (SMEs) with high growth and innovative
capability not only contribute to the economic growth but also crucial for their ability to
respond to rapidly changing environment and challenging international business.
Evidence has shown that SMEs contributions are important, especially in developing
countries. It is more crucial because of the imbalance of wealth distribution and low-
employment rate. Recent evidence has shown that SMEs are important for innovative
and high technology growth; it also highlighted the importance of international
business environment for the growth and development of these SMEs.

The SMEs contribution to the economy is well defined and their importance of being
internationalized. The challenges faced by SMEs are the topic of debate these days.
SMEs faced various challenges in local and international realms and face difficulty in
keeping sustainable competitive advantage over competitors. Traditionally firms used
price, technology and product to keep the competitive edge but, this is no longer valid
as firms need innovate new ways to increase profitability, and firm growth.

But the biggest question is what actually SME is and how do companies qualify to
become a SME?

SME means Small and Medium Enterprise and this term is predominately used by EU
(European Union). In USA people call it SMB. As per EU definition any company
having less than 10 employees and turnover of less than (or equal to) 2million Euro is
Inicro'; having 10-50 employees and turnover of less than (or equal to) 10million Euro
is 'small' and having 51-250 employee and turnover of less than (or equal to) 50million
Euro is categorized as 'medium' enterprise. This entire employee figure should be
working employees in the office (European Commission, 2003).

The process of Internationalization call be identified in different ways. Historically the

author of stage-based theory argues that it is a step-by-step process to gain international
entry. Firms gradually and incrementally increase their business in foreign markets by
acquiring more knowledge and experience in international markets.

One idea that is certain about SMEs is that they are a two-pronged attack to help a
developing economy grow. On a static front, they contribute to decent jobs and output.
On the dynamic front, they are large enterprise nurseries and are the next step up for
expanding micro enterprises. SMEs also contribute to savings and investment, as well
as being a developer for appropriate technology.
1.2 What is Globalization?

It is Process by which
Business or other organization develop international influence or start operating on an
international scale

1.3 Aims and objective of study

The role and contribution of SMEs in emerging economies is important.SMEs and

individual entrepreneurs disproportionately contribute to the economy and increase the
employment growth rate. SMEs further increase their growth and contribution by engaging
into internationalization. Firms adopt different paths of internationalization such as export,
alliance and foreign direct investment but inemerging economies with SMEs that have
limited resources and knowledge, can find difficult to enter into foreign markets. The study
aims to explore the process adopted by SMEs for internationalization in developing
countries particular Pakistan and the importance of their contribution to the economy.

This study covers the following objectives:

1) To study the process adopted by SMEs for internationalization in developing

countries such as Pakistan.

2) To explore the resources required by SMEs for the process of internationalization in

developing countries.

3) To assess the challenges and barriers faced during the process of internationalization.

1.4 Importance of the Study

SMEs play an important part in potential growth of a country's economy. One of the items
that should be noted when things come to SMEs is the question of growth. Challenges
abound, and a main challenge for any country would be to have output taking place outside
capital-intensive activities. A problem can arise if this type of ideal is bound up with settings
or policy that is negative to having this happen. This makes SMEs a difficult challenge when
these items are in place. In countries with developing economies, SMEs will be in the
middle range of size due to its importance strategically. These are also complicated in
structure compared to smaller enterprises such as the self-employed. However, in
comparison to corporations, the structuring is less complicated.

Employment in a developing country can also be helped by the technology that is

intermediate. This allows for job production and creation. There are two lines of though with
this. Without SMEs in an economy, the created jobs will be low skilled and low pay. A firm
that is a part of the SMEs will produce substantially more jobs with higher pay as well as
being more productive. These will also need a less substantial investment than other jobs
being created in the same area.
A key mechanism of dealing with SMEs in developing countries is that this part of the
economy must expand fast enough to absorb those that are unemployed, or are engaged in
low-productivity work. It also plays a vital role in generating growth such as pro-poor
growth for example. This sector is where a lot of successful micro-businesses wind up.
However, if there is policy or governmental issues keeping SMEs out of a developing
country, then this could cause the developing country's economy to stagnate instead of grow.

SMEs as a whole can dominate a developing country's economy by being a part of fast
growing and new industries. In places where monopolies or oligarchies are, price lowering
can be introduced by SMEs. Competition is what drives economies and dealing with
monopolies can seriously hurt GNP. Many countries are now using SMEs in order to grow
their economies such as Taiwan, for example. An additional note to this is that many
successful businesses in developing countries got their start as SMEs. Getting the most from
these will require better support systems than would be required by larger firms.

Questions that should be asked about policy would include: "What should the policy
towards this system be in any given country?". Policies should be designed in developing
countries with the eye towards not obstructing, and facilitation of firm's growth. This is true
for micro enterprise all the way up to the SMEs level.

SMEs face a lot of challenges especially in developing countries like Pakistan. One of the
reasons for this staffs that is not well educated in areas such as external support and strategic
formation. Pakistan also needs more financial resources for investment in capital ventures.
Challenges can also come when there is limited availability for both resources and support.
This is why it is sometimes hard to grow SMEs due to these two factors. Other factors such
as politics and policy do have an effect on the effectiveness of the SMEs to gain a foothold
in the developing country. The market must be able and should be able to support the SMEs,
no matter where in the world that they are.

2 Literature Review

In this section we will review the literature and previous research outcome. Main focus of
this review will be how firm managed their resources, process of internationalization and
strategy adopted by SMEs. There are different ways firm engage and adopt the
internationalization. The review will include the theory and methods of internationalization.

According to Resource-based view (RBV) theory of strategic management; the fundamental

principle of the RBV is that the basis for a competitive advantage of a firm depends
primarily in the application of the collection of valuable resources at the firm's disposal.
Wernerfelt 1984 analyses firm with its recourse instead of products these resources include
human capital, technological, financial and knowledge of the industry. Strategy involves
maintaining a balance between the exploitation of existing resources and the development of
new ones.
Wernerfelt 1984 is of the view that Mergers and acquisitions provide an opportunity to trade
otherwise non-marketable resources and to buy or sell resources in bundles. These tools are
then used to highlight the new strategic options, which naturally emerge from the resource
perspective.
Beamish,1990 defines internationalization, as 'Internationalization is the process by which firms
both increase their awareness of the direct and indirect influence of international transactions on
their future, and establish and conduct transactions with other countries".

The internationalization process model talks about two patterns in the internationalization of the
firm. One is that the firm's engagement in the specific country market, can develop according to
an establish chain, i.e. at the start there is no activity took place or regular export, then export
takes place via independent representatives, later through a sales centres, and finally
manufacturing may follow. The second pattern explained is that firms enter new markets with
successively greater psychic distance, Psychic distance is defined in terms of factors such as
differences in language., culture, political systems, etc., which disturb the flow of information
between the firm and the market.

The process is a theoretical model based on assumptions about the relations between the concepts
of market commitment, market knowledge, current business activities, and commitment
decisions. The patterns can be seen as the process model with the stages and the psychic distance
as possible indicators
 Market knowledge and market commitment are assumed to affect both commitment
decisions and the way current activities are performed. These in turn change knowledge
and commitment

 RI the model, it is assumed that the firm to increase its long-term profit, which is presumed
to be equivalent to growth

In summary Uppsala model describe that firm entry in foreign market will depends on the
knowledge of the foreign market and the resources commitment will be based on that knowledge.
As mentioned earlier market commitments mean the amount of resources committed to the new
market. Once firm start its operations in foreign market it start getting market knowledge and
know how. Then it uses its previous firm knowledge or current business activities knowledge of
the firm to commit decision

Stages of U-Model:

Stage1- Trade and Transaction

Stage2- Capital and investment movement

Stage3- Migration and movement of people

Stage4- Discrimination of knowledge
 The U-Model and traditional models talk about the sequential process of
internationalization but New Venture internationalization theory argues that the importance
of entrepreneurial vision and the initial resource endowment of the firm in allowing early
internationalization decisions.
Where firm commit more resources and accelerate the process by skipping the early stages.
Rapid expansion of internationalization is usually easy for knowledge-intense industry
where less tangible assets or products are required

The basic approach is to determine the set of all possible market entry strategies, to measure
the profitability of each, and to identify the most profitable strategy.. The following issues
define the dimensions of the strategy set:

 (1) where production is located;

 (2) whether production is owned by the entrant;

 (3) whether distribution is owned by the entrant;

 (4) whether ownership is outright, or shared through an UV; and

 (5) whether ownership is obtained through greenfield investment or acquisition.

2.1 Approaches to Internationalization

SMEs adopt different approaches for instance Importing/Exporting, FDI and Strategic
Alliance for internationalization. These have there own challenges and benefits.

• Import/Export
• FDI
• Alliance

Exporting is consider low risk, low investment approaches for internationalization. It is a

fast, easy and flexible way of getting into international market with little knowledge of
foreign market. Strategic alliance is another approach for quick entry to foreign market with
little and expertise of the market. Local strategic partner with equipped with experience can
help to expand rapidly but finding right partners and structuring effective partnership can be
tricky challenge.

FDI is another approach for international market entry, it help to increase the
competiveness and growth, locational advantage and reduces the transaction risk. It requires
large investment and high risk and slow process as well.
2.1.1 Exporting

Exporting is usually first easy step for getting into foreign market with little knowledge.
Many SMEs begin by importing goods from foreign suppliers and only start exporting in
response to intermittent needs and demands. The challenge would be to find the right sales
agent to align with. Tariff & non-tariff trade barriers knowledge and cost of transportation
could be challenge as well.Various authors have suggested that SMEs with little knowledge
and low investment.

2.1.2 Foreign direct investment

Buckley and Casson (1976,1998) argue that large multinational can gain large economic
benefits from exploitation of foreign marketing by entry using export or FDI. Hennart
(1982) argues that exporting bring great benefits for firm willing to enter in foreign market
when there is low capital investment available but if the risk involve when a firm's assets
are proprietary (such as brand equity,trademarks, or patents) exporting can expose a firm to
greater risks in terms of distributor opportunism or asset appropriation and devaluation.
When this kind of risk is involved, FDI becomes an attractive means of internationalization,
because it enables firms to minimize transaction-related risks through internalizing markets
for proprietary asset exchange (Heiman, 1982). With these benefits FDI is less flexible in
terms of capital investment and resources required committing in foreign market then
exporting and it require long-term strategy, as its not easy to roll back. Its also less flexible
then exporting in baring the effects of political risk and market fluctuation (Hymer, 1976).

2.1.3 Alliance

All benefits through FDIs but SIvIEs with these large investment is not As discussed
previously organization gain great possible, as neither they have full range of resources nor
they have the expertise for large investments. AS SMEs and entrepreneur by definition
have limited resources and knowledge.

SMEs face internal shortages of information, capital, management time and experience,
while externally; SMEs face constraints arising from their vulnerability to environmental
changes

Different authors have discussed the benefits and alternate of FDI for SMEs as strategic
alliance. It enables firms to get to foreign market with no or little knowledge. There are no
large resource commitments required. Alliances have been recommended as major mean
overcoming resource and capability deficiencies and enhancing the possibility of success
for internationalizing firms

Alliance partners can help SMEs overcome the problem of limited capital, equipment and
other tangible assets through resource sharing between firms involved in the alliance. It is
also gain more importance, as partner is more equipped knowledge about the foreign
country for SMEs. SMEs can acquire host country knowledge and develop new
organizational capabilities from itself through incremental experience and accumulation in
new geographic regions.

2.2 Motivation for internationalization

Internationalization of firm is prime motive is the profit maximization and growth. Motive
includes the maximization of return, minimization of costs and access to international
technology; labour and capital are factor for internationalization.
 The push forces that are usually internal to the firm and exert there pressure firm from inside
to internationalization.The interactive factors emerge as a result of interaction between the
push and the pull forces and impact the firm's course of action to internationalize.

Firm prime motivation is firm base expansion, profit maximization and attractiveness to
innovative ideas. This can be broadly supported by the firm own perception survey
conducted by OBM in 2006. The survey shows the motivation to export as expanding the
firm base but firm need for learning new ideas and technology is given not equal but high
importance.

Expansion to firm base is cited the most important factor of the expansion where this shows
that exporting is link to business expansion. It also highlights when firm has met the local
product demand or competition is expanding it look for new ways to expand. Firm see the
exporting is the way to expand it.

 -Exposure to new idea is also thought to be important factor among firms. New ideas could
be the new technology, communication or transportation network. It's given more
importance by firms who are more innovative.

 -R&D and innovative firms has found all three motivations important factor

 -Result shows that expansion, profit and exposure to new idea is regarded equally important
or highly important to be precis

2.3 Steps to Globalization

STEP 1- PASSIVE RESPONSE (Exporting to Foreign Countries)

STEP 2- INITIAL OVERT ENTRY (Hiring Foreign representation or contracting with

foreign manufacturers)

STEP 3- ESTABLISHED INTERNATIONAL OPERATIONS

 Licensing/ Franchising

 Joint Venture

 Foreign Subsidiary
2.4 Summary

Many countries are facing low productivity growth, weak trade and investment, and rising or persistently
high inequality. In addition, major trends, including the new industrial revolution, the changing nature of
work and demographic changes, call for innovative policy solutions. SMEs are key to strengthening
productivity, delivering more inclusive growth and adapting to megatrends. SMEs that grow have a
considerable positive impact on employment creation, innovation, productivity growth and competitiveness.
SMEs can scale up and innovate at different stages of their life cycle.

Fostering innovation in established SMEs can enhance aggregate productivity and narrow wage gaps.
The population of SMEs is very diverse in terms of age, size, business model and the profile and
aspirations of entrepreneurs. They vary in their characteristics and performance, including across sectors,
regions and countries.
These differences have implications for how policies are designed and targeted. Digital technologies
enable SMEs to improve market intelligence and access distant markets and knowledge networks at
relatively low cost and stronger participation in international activity can boost SME growth.

A conducive business environment, including institutional and regulatory settings, is essential to

intensive risk-taking
and experimentation by entrepreneurs, and foster business growth potential. Despite wide-ranging
reforms in many countries, the complexity of regulation, high compliance costs and inefficient
insolvency regimes remain a major obstacle to entrepreneurial activity.

Micro firms, young, innovative and high-growth SMEs, and certain categories of entrepreneurs,
including women business owners, face persistent challenges in accessing finance in the appropriate
forms and volumes. The G20/OECD High Level Principles on SME Financing highlight that broadening
the range of financing instruments requires comprehensive approaches to address both demand- and
supply-side barriers.

Access to entrepreneurship competencies, management and workforce skills, technology, innovation,

and networks is also critical to enable SME growth.
A cross-cutting approach to SME policy can enhance SME contributions to inclusive growth, as can
strengthen the monitoring and evaluation of policies. SMEs are key to strengthening productivity,
delivering more inclusive growth and adapting to the major transformations of our time. In many
countries, governments are facing the challenges of low productivity growth, weak trade and investment
and rising or persistently high inequality of income, wealth and well-being.
 These challenges were exacerbated by the 2007-08 global crisis, but they also reflect structural
conditions (OECD, 2016a, 2017a).

In addition, governments are seeking innovative solutions to seize opportunities and mitigate risks that
emerge from major transformations in economy and society, such as increased globalization,
digitalization, the new industrial revolution, the changing nature of work, demographic changes, and the
circular economy the changing nature of work, demographic changes and the circular economy and the
transition to a low- carbon economy. These mega-trends have far-reaching consequences for productivity
and income distribution, and for the role that policy can play to enhance inclusive growth.
Small and medium-sized firms (SMEs) are central to the collective goal of increasing productive
potential, reducing inequality and ensuring that the benefits from increased globalisation and
technological progress are shared, as documented in OECD work on the productivity-inclusiveness
nexus (OECD, 2016a). Furthermore, SMEs can help countries adapt to other major transformations in
the global environment, seizing new opportunities and contributing to mitigate risks.

SMEs are the main source of jobs in the business sector

In the OECD area, SMEs represent almost the totality of the business population, account for
about 70% of total employment and generate between 50% and 60% of value added, on average (OECD,
2017b). SMEs contribute to more than one third of GDP in emerging and developing economies and
account for 34% and 52% of formal employment respectively. In recent decades, employment in SMEs
has steadily increased at the global level. Over 2003-16, across 132 countries, the number of total full-
time employees in SMEs has nearly doubled, from 79 million to 156 million (ILO, 2017).

3 Modes of globalization:

There are three modes of globalization

1. Trade globalization

2. Financial globalization

3. Technological globalization

Design/methodology/approach:

The study uses Hecksher–Ohlin and the Stolper–Samuelson theorem as a theoretical model for the
relationship between globalization and income inequality. The study uses pooled least square (POLS) and
instrumental variable least square (IVLS) estimation technique but prefers the IVLS over POLS due to the
problems of omitted variable biased and indignity.
 Due to unavailability of data for all the Asian emerging economies, the study uses the following 11
countries, i.e. Bangladesh, China, India, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Singapore,
South Korea and Thailand, from 1980 to 2014 for the trade and technological globalization model and from
1990 to 2014 for the financial globalization model.

Findings:

 Trade globalization significantly contributes to reduce income inequality in the Asian emerging
economies.

 The impact of financial globalization on income inequality suggests that financial integration

causes an increase in income inequality. Therefore, the benefits of financial globalization are not evenly

distributed among the rich and the poor.

 The impact of technological globalization significantly contributes in the reduction of income inequality.

Practical implications:

Government has to invest in research and development activities, establish efficient financial system,
reduce trade restrictions and provide subsidies that help to increase the volume of trade

Originality/value:

This study contributes in the existing literature by analyzing the impact of trade globalization, financial
globalization and technological globalization on income inequality in Asian emerging economies. The
study provides useful guidelines to policy makers and governments to make effective policies in relation
to globalization and income inequality that lead toward economic growth and reducing income
inequality.

4 Effects of internationalization on SMEs performance:

In this topic focuses on how network theory contributes to the understanding of the

internationalization process of SMEs and measures the effect of network capability on performance in

international trade and has three research objectives.

The first objective of the study relates to providing new insights into the international market
development activities through the application of a network perspective. The chapter reviews the
international business literature to ascertain the development of thought, the research gaps, and the
shortcomings. This review shows that the network perspective is a useful and popular theoretical domain
that researchers can use to understand international activities, particularly of small, high technology,
resource-constrained firms.

The second research objective is to gain a deeper understanding of network capability. This chapter
presents a model for the impact of network capability on international performance by building on the
emerging literature on the dynamic capabilities view of the firm. The model conceptualizes network
capability in terms of network characteristics, network operation, and network resources.

Network characteristics comprise strong and weak ties (operational zed as foreign-market entry modes),
relational capability, and the level of trust between partners. Network operation focuses on network
initiation, network coordination, and network learning capabilities. Network resources comprise network
human-capital resources, synergy-sensitive resources (resource combinations within the network), and
information sharing within the network.

The third research objective is to determine the impact of networking capability on the international
performance of SMEs. The study analyzes 11 hypotheses through structural equations modeling using
LISREL. The hypotheses relate to strong and weak ties, the relative strength of strong ties over weak
ties, and each of the eight remaining constructs of networking capability in the study. The research
conducts a cross-sectional study by using a sample of SMEs drawn from the telecommunications
industry in Ireland.

The study supports the hypothesis that strong ties are more influential on international performance than
weak ties. Similarly, network coordination and human-capital resources have a positive and significant
association with international performance. Strong ties, weak ties, trust, network initiation, synergy-
sensitive resources, relational capability, network learning, and information sharing do not have a
significant association with international performance. The results of this study are strong (R2=0.63 for
performance as the outcome) and provide a number of interesting insights into the relations between
collaboration or networking capability and performance.

This study provides managers and policy makers with an improved understanding of the contingent
effects of networks to highlight situations where networks might have limited, zero, or even negative
effects on business outcomes. The study cautions against the tendency to interpret networks as
universally beneficial to business development and performance outcomes.

SME international performance of Latin America:

Small- and medium-sized enterprises (SMEs) from emerging markets in Latin America are
increasingly engaging in internationalization. Nevertheless, there is limited research into how these firms
achieve international performance. The purpose of this paper is to examine managerial and technology-
related capabilities and their impact on international performance of SMEs.

Design/methodology/approach:

Drawing on data from 233 Chilean SMEs, a model is developed and tested using structural equation
modeling. Specifically, the model considers the role of international entrepreneurial orientation and
internet technology capabilities on SME international performance, taking into account the mediating
effect of international entrepreneurial opportunity recognition and technology-related international
networks.
Findings:

Results show that international entrepreneurial opportunity recognition and international networks
mediate the relationship between international entrepreneurial orientation and internet technology
capabilities on SME international performance.

Research limitations/implications:

The context for the study is Chile. However, this is an important emerging market in Latin America with
a strong focus on SME internationalization. The research design is cross-sectional and so does not allow
for any causal claims to be made.

Originality/value:

This research contributes to the relatively scant but increasing number of empirical studies which
investigate the link between internationalization strategy and SME performance in emerging market
contexts.

5 SMEs in Pakistan:

According to the definition provided by State Bank of Pakistan all firms come under the
heading of SMEs which number of employees does not exceed 250 and for service industry it’s not more
than 50 employees. There are further criteria defined by State Bank of Pakistan for defining the SME.

A trading and manufacturing concerns comes under the category of SME that has total assets (excluding
land and building) Not more than Rs 50 million.
A manufacturing concern comes under the category of SME if the total assets (excluding land and building)
are not more Rs 100 million.
Any firm whose annual sale is less than Rs 300 million. (Source: SME banking 2010)

Small and Medium Enterprises Development Authority (SMEDA):

In Pakistan, this development authority has been active in raising awareness among
public and private sector for the importance of the growth of SMEs in an economy.
SMEs growth creates low cost employment opportunity and reducing poverty. It
provides dual benefits to the economy one by reducing the poverty and secondly
increasing the export.

There are 3.2 million SMEs business unit in Pakistan with large number of employment
opportunity and it’s consists of 78%of non-agriculture labour force. SMEs in Pakistan
contribute 30% of the whole GD. SMEs largely based on small companies dealing
mainly with sales and retail business, employing 1-5 persons. According to the World
Bank in Pakistan 98% of SMEs employee 1-5 persons and 99% employee ten or less.

SMEs are not professionally managed or organized. One can hardly find personal
qualified person is hired by companies to improve their business efficiently in result
96% SMEs are sole proprietor and only 2% based on partnership. For that reasons
SMEs face slow

growth rate and unable to bear the market changing environment challenges. Failed to
overcome these challenges most of time leads to the failure of the business and
complete disappearance from the market.

According to study conduct by SMEDA only 4%of SMEs in Pakistan manage to

survive more than 25 years.

Pakistan government has focused on the policy and development of large scale
manufacturing industries, which according to economic survey of 2004 recorded
growth of 8.7% during the period of 1950 to 2003. SMEs gain 14.7% growth under the
policy of large-scale industry without any policy intended to their growth.

Example of a company who can globalize day by day:

Atlanta-based Coca Cola Company is often hailed as the model for a global company.
The company has 239 beverage brand sold around the world and coke, its flagship
beverage, has become the symbol of a global product. Although ninety-third on the
fortunes 500 list for the year 2000 (immediately followed by its archrival PepsiCo) with
roughly twenty and half billion dollars in revenue, Coca Cola’s visibility across the
globe is second to none. Studies show that the Coca Cola brand has the highest name
recognition in the world. Only 30 % is said in Latin America while Europe (including
Eurasia),Asia Pacific, and Africa/Middle East account for 21, 16 and 7%, respectively
in 1999, Coca Cola acquired the beverage brands of U.K. based Cadbury Schweppes
that sell 155 countries.
Coca Cola produces Coke in essentially the same way across the globe. It sells
preserving a coherent global theme; it also adapts taste as well as operations to local
markets. Its 2000 annual report states: “we have to maintain our special place in local
cultures, recognizing the difference between countries and regions”. The company’s
famous slogan “think globally and act locally” embodies what may be the central
dilemma in international business: the need to maintain global strategic focus and
control while allowing for adaptation to the local circumstances in everything from
management to distribution .The Company’s most global function advertising avoids
themes that would be controversial in any of its local markets. This is in contrast to its
rival Pepsi.

6 Barriers to Small Business Globalization

As previously reviewed in literature review of the study that firmed faced various
barriers when it tries to go internationalization. Firm faced sunk cost when they first
take entry into overseas market. Sunk cost in economic term which cannot be
recovered. Sunk cost various depending on the firm method of going
internationalization. Firm identifies method with low sunk cost & profit over it
expenses. For that reasons many firm efficient productive of high opt for exporting
method. Which allow them low cost entry to foreign market?

Firm with tangible goods are influenced by various factors such as Language, Culture,
traditions importantly distance. These factors influence firm selection of foreign market,
Evidence shows that firm tends to prefer countries which less the distance where
product can
be delivered. Once successful in near distance market it tries to expand to far distance
market by utilizing the experience learned from it. Trade data evidence proves that large
number of trade between countries with similar language, culture & historical ties.
In particular barriers include Resources barriers Information and Network barriers,
Culture barriers, Legal barriers & Procedural barriers.
6.1 Resources Barriers

Resources barriers include the firm ability to spend capital, availability of human resources,
management skills and capability for the process of globalization. In these resources finance factor is
very important, as firm with no working capital or not enough capital to invest in foreign market.
Financial resources barriers such as Finance to access to foreign market, exchange rate, marketing cost,
etc, all contribute to the cost of doing business. Firm with financial resources still won’t be certain about
their decision of globalization.

Evidence from interview conducted on SMEs showed that access and availabilities to these resources are
one of the major barriers. Also survey conducted by various study paper also prove that firm which potential
to grow find difficult to overcome the resources barriers.

6.2 Access to information & Networks

When firm decide to go international they required information on such as buyers, market
competiveness, rules and regulation, product demand and product pricing. Firm progress to
internationalization can come to halt due to absence of suitable information network. Information
network contacts can provide the business partner opportunities and easy access to resources in foreign
market.

Pakistan has no information network or source available that can provide useful information about the
overseas market. Most of them relied on the internet, friends and family based in overseas countries. It
further causes difficulties and uncertainty for the firms, which are less technology equipped and don’t
have the capability or skills required accessing those information. Access to information is one of the
major barriers as it not only capitalizing on various business opportunities. Many SMEs blindness to the
overseas market or incompletely information discourage their commitment and willingness to adopt the
path of internationalization.

6.3 Culture Barriers

Culture plays an important role in developing business ties. Evidence has shows that countries with
historical similar culture create easy and long lasting relation. Cultural barrier are link to access to
information network that allows the firm to gain knowledge about the local culture and business relation
based on these cultures.OMB research shows that lack of awareness and knowledge about local culture
can make or break the development of business relationship, Japanese business culture and relationship
building is very much influenced by the culture and network ties.
 Ibid market research shows that culture barriers are important factor in overseas market entry. The
probability of a successful entry facing no entry barrier is 0.77, with one barrier is 0.67 and entry facing
four or more barriers success rate is 0.18.

This shows that entry to foreign market can be influenced based on cultural effects.

 Legal, Regulatory, and Procedural Barriers

 Legal, regulatory, and procedural barriers include the legal, financial and tax regulations, trademark,
patent and copyright regulations Procedural can include approval of the product for selling in market,
medicine or food item approved by respective authorities.

 SMEs in Pakistan with low investment Capital and limited access to information find it difficult for
market entry.

6.4 Financial Barriers

For internationalization firm requires funds to spend on analysis of overseas market, acquiring legal
support and to bear travel expenses. SMEs with limited budget and capital find it difficult to spend on
international, which is not completely certain of the successful investment profit.

SMEs in Pakistan rely on self-financing because of limited access to financial credit; historically
financial access was difficult for SMEs but liberalization of banking sector from State Bank of Pakistan
in 90’s allowed SMEs Access to finance and credit. Evidence shows that more SMEs over 50% relay on
self-Financing only about 6% comes from financial institutes and commercial banks.(Asian
Development Bank,2005).

6.5 Access to Technology:

Pakistan SMEs are related on obsolete and out dated technology. For that reasons SMEs produce high
cost and low quality products that are not up to standard for in international market. The Lack of
information and opportunity for technology upgrade has been the main reason behind this stage.
Technology plays crucial role to change the developing economy to knowledge-based modern economy.
It also holds back the SMEs of Pakistan to complete at international arena with competitive products.

SMEs products are relaying on old labour intense method with low quality and low production results.
Pakistan Exports figure shows that its major exports are of agriculture products and sports goods which
are not technology intense. On other hand Pakistan has shown progress on in tangible products as
software and call centre outsourcing.

6.6 Organizational Structure and Management Level

Management level, skills expertise and innovative nature can lead firms profit and high growth. Studies have
shown that organization and management skills are closely related. It’s evident from number of studies the
performance of SMEs in Pakistan is negatively affected by the lack of skills and incapability of
management. SMEs are run by family and friend, firm has to trust their own ability. Having low managerial
skills, lack ability in managing business in terms of finance. Marketing, quality control and product
innovation.

7 Discussion:

In which we will discuss to measures to address the barriers to internationalization faced by SMEs in
emerging economy particularly Pakistan. The growth can help to increase the employment and decrease
poverty. The study aim to identify the key issues faced by the SMEs in Pakistan in the process of
internationalization. Its further aim was to recommended solution to address these by comparing the
method and process adopted by other emerging economics such as India, china and developed country
like UK.

7.1 Easy access to information network:

SMEs access to information resources is crucial for their internationalization process. Information
includes the product demand, market situation, rules and regulation, buyers’ preferences seller network.
This information may be available using different resources SMEs with limited capabilities and skill
may not able to access the information or doesn’t know how to access it. SMEDA provides various
support services starting from evaluating business plan and providing help in formalizing it also
identifies the internationalization and export opportunities. There are not many organizations similar to
this, which can cover the larger number of SMEs in Pakistan. Access to connect network can be
provided using various trade show and report exhibition in overseas market. Pakistani government has
built.
On other side SMEs argue that two days exhibition is not enough for building contact networks and also
traveling expenses are high which are not affordable for many low budget SMEs.

7.2 Cultural and language awareness

Cultural and language create building and constitute stronger business relations. SMEs with limited
resources unable to acquire skills, which can provide help and training to overcome the language and
cultural barriers. Support organization play important role in training and providing translation services
to overcome these barriers. Pakistan SMEs with limited English exposures makes information
accessibility difficult. Availability of information in local language will not only increase the
understanding but also increase the motivation and temptation for going internationalization. Pakistan
people are well aware of UK cultural and tradition. Which makes their entry easy and allow information
availability easy? UK is one of those countries where Pakistani community has established itself
strongly.

7.3 Legal and procedural support

Entry into oversees market require legal and procedural documentation. Usually it takes longer and
requires legal support to peruse the application documentation. Interview evidence shows that for herbal
and medical products legal and procedural work is even longer and difficult as one can think of.
Government first hand support to provide assistance in legal procedural work not only the process but
also enable SMEs to save opportunity cost to be Utilize elsewhere.

organization such as SMEDA provide firs hand information but enable to provide help and support in
documentation and legal matters. There is the need of the establishment or their similar organization to
promote SMEs at international level. China has taken various measures to promote in SMEs in western
market. Chinese government has appointed fulltime staff at embassy in London who provides
information and complete help in procedural and legal matters for SMEs. China has gone a step further
in assisting in SMEs by providing warehouse for Chinese goods at low costs basis for SMES entering
into UK market. Warehousing not only reduce the initial setup cost but also provide the risk free
opportunity to market their products in UK market.

7.4 Technology and infrastructure upgrade

SMEs are in Pakistan by large fall behind in utilizing technology advancement. Technology increase
product productivity, innovation and save manufacturing cost. For that reasons Pakistani exports are
dominated by the agricultural, raw material, sports goods and machine spare parts. Infrastructure is
another constraint in growth, which includes unreliable poor quality services, transportation network,
and high tariffs high cost backup charges. Recently Pakistan has faced sever electricity shortage which
has damaged manufacturing industry badly especially smaller firms which cannot afford to utilize
backup or replacement power generation methods. Introduction and training of new technology, which
can reduce the cost and increase the productivity needs , to be indulge into SMEs production line .

Government needs to take measure by reducing the tax tariffs from the impact of latest machine and
production units SMEDA has been acting influencing government policy to allow more tax relief on
machine import for SMEs. It is also active in hosting training workshop to create for new business
opportunities and use of latest technology.

Policy performs to support SMEs internationalization:

 Policy for SMEs for inter nationalization are generally grouped under two headings.

 Firstly are policies for SMEs to overcome barriers to internationalization:

 There is no much support or policy available is support SMEs provides overcomes barriers of
internationalization. Organization such as SMEDA provides support for growth and establishment
in domestic market.

 Secondly are policies to help build internationalization capability:

  Building internationalization capability includes the knowledge of international business; know
how of doing business in overseas market and skills needed to manage. It also includes the ability
to identify the information needed to evaluate exploit business opportunity in overseas market.

External support or for SMEs:

SMEDA and SME are both major organization, which are actively play roll in promotion and growth of
SMES in Pakistan. SMEDA runs various training and SME provide financial help and consultation, for
various credit lending financial institutes. There are no such authorities who support the
internationalization of Pakistan firma, neither do any help available at embarrass and consulate in
overseas market. Government provides tax incentives and relief to motivate firm establishment in
overseas market. From research it evident. SMEDA is facing financial instability due to lack of
government facilities. Government should continue to internationalization. There is need of further
investment in SMEDA like organization. Country Brazil was spending 7.4 per capital on its SME
agency.

Value addition to product:

It’s clear that majority of Pakistani export is based on raw material, agricultural, sports goods and spare
parts of goods and production, which based competitive in international market. There is need of
exploitation of value addition business opportunities with little addition to raw material, agricultural and
textile products can drive new business opportunities and profit for instance other countries are sending
rice products such as cooked rice to western market instead of trust exporting raw rice. Similarly little
addition for textile material and products can bring more profit to the table. These small additions and
invocation certainly create new market and business opportunities.

8 Recommendations:

 Emphasized on providing more information and Knowledge to business

 SMEs encouraged increasing their competiveness in the global market by assimilating I.T and
Knowledge management in their business efficiently in order to be maintainable in the knowledge base
economy.

 Government agency should implement more policies that encourage SMEs to be innovative in their
production and marketing of goods and services.

 Supply chain activity should be performed more efficiently by firms than their competitors in order to
being more value to their customers and increase a growth of SMEs.

9 Conclusion:
  SMEs attain considerable growth with the help of Government policies and support from other country’s
investors in terms of training and funding.

 SMEs are play important in economic growth and increasing employment rate. SMEs
internationalization contributes to both firm and country economy. This study aim was to explorer the
role of SMEs in developing countries particularly Pakistan. Further it was to identify the
internationalization of SMEs and challenges faced by SMEs in the process.

 In summary we Aim to study was to identify the globalization process of SMEs in Pakistan and
Challenges faced during the process. Most study conducted on SMEs either domestic growth or
globalization its prime focus is usually developed economy. The study provided unique opportunity to
explore the SMEs globalization process in developing country like Pakistan. Provided analysis and
recommendations for their growth and expansion at international arenaThere were few limitations in
study such as it only focuses on one particular method that was internationalization which can also be
explored. But these methods have low significance in developing country because of low financial
capital and under developed technology.

10 References

 https://link.springer.com
 https://www.researchgate.net
 https://www.sciencedirect.com