Barriers to international

4.2. Barriers to Internationalization

In order to identify the term ‘internationalization’ with the main objectives of the thesis, Coviello
and McAuley (1999) argue that not only large organizations, but also small and medium sized
organizations, can become global. In addition, they also stated that the international expansion of
an SME is definitely helpful when it comes to contributing to the economic growth and
prosperity of a country. However, one thing to keep in mind is that not all SME is ready to
expand into international markets. Despite the fact that they have small or medium sized
organizations, there must be some factors and limitations in terms of finding the opportunities of
the global market.

There are a number of studies have focused on the barriers to internationalization (Leonidou,
1995; Campbell 1994; Katsikeas and Morgan, 1994, Morgan 1997). The barriers to
internationalization can be classified into five areas: financial, managerial, market based
(including domestic and international markets), industry specific and firm specific. It is widely
recognized that the barriers to internationalization can exist at every stage in the process of
internationalization (Morgan, 1997). Further, the perception of the barriers may vary in intensity
depending on the level of internationalization of the individual firm (Burton and Schlegeliclch,
1987; Cavusgil, 1984; Kedia and Chhokar, 1986; Katsikeas and Morgan, 1994).

4.2.1 Financial Barriers

Limitations of financial and physical resources continuously highlighted as a barrier to

internationalization of SMEs. These include financial difficulties, as a whole (Campbell, 1994;
Burpitt & Rondinelli, 2000), the availability of resources (Karagozoglu & Lindell, 1998), the
cost of overseas operations (Bilkey, 1978), and limited access to capital and credit (Buckley,
1989; Coviello & McAuley, 1999). The relevant evidence including the losses faced by the new
international new ventures or early-stage SME exporters, compared with their more establish
counterparts, in terms of accessing operating and term loans. Lack of capital requirements and
other firm resources and limited access to key infrastructure were also reported by small and
medium-sized enterprises.

Small and medium-sized enterprises are unique and different from large enterprises, particularly
the availability of resources of the organization, to manage the SME is different from the
management of a larger business(Aragon-Sanchex & Snachez Marin, 2005; O’Regan &
Ghobadiah, 2004; Welsh & White, 1981). The second problem is limited access to resources
(Welsh & White, 1981). For SMEs to grow, they should get more resources, yet due to their
original smaller size this is not an easy task. The limited resources owned by SMEs lead to
limited options in conducting business, limited options in acquiring assets and technology, as
well as limited access to financial assistance, such as loans.

4.2.2. Managerial Barriers

Difficulties arising from limited management knowledge base are presented as a top barrier to
small and medium-sized enterprises internationalization in a number of recent surveys.
Managerial barriers are including managerial attitudes (Andersson, 2000; Burpitt & Rondinelli,
2000), lack of international experience and skills (Karagozoglu & Lindell), limited time
management (Coviello & McAuley, 1999; Buckley, 1989), commitment, and partnership
difficulties. Managerial risk perceptions and lack of knowledge about international markets were
the main reasons for not participating in international trade (UPS, 2007). Limitations in
managers’ internationalization knowledge also emerged as a barrier that leads to the initiation of
export. In addition, the average age of the top management team has been negatively associated
with a high-risk decision making (Wroon & Pahl, 1971), and the ability to analyze the new
information (Taylor, 1975). Younger managers’ tend to be more internationally minded and
cosmopolitan than the old one (Jaffe et al., 1998; Moon & Lee, 1990). Better educated decision
makers are expected to be more open-minded and interested in foreign affairs, thus being more
willing to objectively evaluate the benefits of internationalization (Garnier, 1982 cited in
Czinkota & Tesar, 1993), as well as to have more managerial knowledge and capabilities
(Schlegelmilch, 1986), which could develop an international expansions.

4.2.3. Market-based Barriers

The lack of knowledge of foreign markets is also emerging as a major obstacle in a recent study.
This factor stands out as the most cited barrier to the internationalization of companies that
responded, indicating that the gaps of information remain important challenges for small and
medium-sized enterprises, even in the current era of the widespread availability of information.
Market-based barriers are environmental perception (Anderrson, 2001); government regulation,
including tariff and non-tariff barriers (McDougall, 1989; Coviello & McAuley, 1999), the lack
of market knowledge and cultural differences or psychic distance (Karagozoglu & Lindell,
1998), and strong domestic market position (Autio et al, 2000). For example, the social and
cultural influences on international market are enormous. Differences in social conditions,
religion and material culture all effect consumers’ perceptions and patters on buying behavior. In
relation to the international marketing, culture can be defined as “The sum total of learned
beliefs, values and customs that serve to direct consumer behavior in particularly country
market” (Doole & Lowe, 20005 pg. 7). This is the region that determines the degree to which
consumers around the world are either similar or different and so determines the potential for
global branding and standardization. The cultural differences and especially language difference
have a significant impact on how a product used in the market, its brand and advertising product.
The social or cultural environment is an important area for international marketing managers
(Doole & Lowe, 2005).

4.2.4. Industry specific Barriers

Industry-specific factors focus on the business areas that are attributable to the business
environment in which the firm operates. The example of industry-specific barrier is competition.
Trade opening involves changes in the structure of the market, as firms hit by new competitors.
If foreign and domestic firms produce close substitutes, their interaction in the product market
forces prices below the monopolistic level. Demand is shifting from monopolistic to oligopolistic
varieties and incentives to develop new varieties are diminished. The changing market structure
constitutes a market failure as competition becomes asymmetric or uneven. If the scale and the
intensity of competition are large, trade will reduce the welfare even under the autarky level. In
the meantime, the reduction in tariff on all imports and permanent tariffs on oligopolistic
varieties are instruments for welfare improvement (Paul J. G. Tang & Klaus Walde, 2000).
Another example of industry specific barrier is technology. It has been adopted and used in
business organizations over the years. It is obvious that many SMEs adopt IT solutions to
support their businesses and maintain competitive advantage. It is believed that IT promotes
more efficient ways to do business, but it is cost oriented for SMEs and the level of IT
knowledge, level of IT investment, and consistent IT strategy knowledge is limited within the
organizations itself (Bridege & Peel, 1999).

4.2.5 Firm specific Barriers

Firm specific factors include capital, training, and research and development accessibility. Small
and medium-sized enterprises, due to their size limitations, often have limited financial capital
and a lack of required human and managerial resources (Buckley, 1989). Most of the small and
medium-sized enterprises face problem in obtaining the financial capital necessary to become
competitive and achieve economic growth (Gupta et al., 2005). Getting loans is a challenge
because bankers previewed lending to SMEs to be risky due to poor repayment records and low
market credibility (Gupta et al., 2005).

In addition, some study classifies barriers to internationalization as internal and external barriers.
Internal barriers to internationalization are those difficulties relate to organizational resources
and capabilities (Leonidou, 2004). There are three types of internal barriers which are identified
as informational barriers, functional barriers, and marketing barriers.

First, informational barriers related to the problem identification, selection, and contact with the
international markets due to inadequate information. Examples of these obstacles are locating
and analyzing foreign markets, finding international market date, identifying foreign business
opportunities, and contacting foreign customers. These barriers are considered important for both
exporters and non-exporters, because they are important in export management decisions.

Second, functional barriers refer to inefficiencies in functions of the firm, such as human
resources, production, and finance. These barriers usually have a modest impact on export
behavior. Examples are limited management time to handle the export, inadequate export staff
and lack of working capital to finance export.

And lastly for internal barriers, marketing barriers include the firm’s product, pricing,
distribution, logistics, and promotion activities abroad. For many exporting firms, this is the
main problem area. Firms may need to develop new products or customize existing products to
suit customer preferences in foreign markets. However, these innovations would reduce the
possibility to adjust the customer preferences in foreign markets. However, these innovations
would reduce possible economies of scale related to exports. Another important issue is setting
the right price in relation to competition in international markets. Finding the right distribution
channel, and reliable foreign partners and representatives, is a major challenge for many
exporting small and medium-sized enterprises.
Moreover, external barriers originate from the home and host country environment the firm
operates in (Leonidou, 2004). Different types of external barriers are procedural barriers,
governmental barriers, task barriers, and environmental barriers.

Procedural barriers are related to the operational aspects of transactions with foreign customers.
These barriers as a result of unfamiliarity with techniques and procedures, communication
failures, and the slow collection of payments and often has a major impact on the export
behavior. Meanwhile, government barriers are twofold. On the one hand, they include limited
support and incentives for existing and potential exporters. Other forms of governmental barriers
are the barriers that limit policy frameworks and protectionist measures such as tariff and non-
tariff barriers. Another barrier is task barriers reference to the firm’s customers and competitors
in overseas markets. Lastly, environmental barriers focus on economic, political, legal, and
socio-cultural environment of the foreign market.

External Factors posing barriers to Internationalization:

Culture Barriers:
Culture poses a major (Olive, 1975) external barrier for business organization which strategizes
to internationalize. Culture and cultural practices influences the consumption pattern of the
consumers the world over. A business organization planning to market their product in the
international market has to make a detailed analysis in terms of their product and the level of its
acceptability with respect to prevalent cultural tradition without provoking the cultural
sensibilities of the consumers. To make provision for an illustration, an Indian firm which
intends to market food products in the Arab countries such as Dubai would have to make sure
that pork should not form a part of their available product variety. The inclusion of such products
could sensationalize the issue leading to legal and social complications for the organization
marketing such products. (Roberts, M. J. 1975)The food chain giant Macdonald was confronted
with severe outrage in India when it was rumored that beef was utilized in their food product
lines. Cow being holy to the Indians, cultural and religious sensibilities was hurt and eventually
it led to MacDonald’s withdrawing certain product lines. Particularly, Asian and Arab
nations pose cultural barriers to certain products in context to internationalization.

Legal Barriers:
Legal barriers (Satow, 1975) form a major de-motivating factor for firms that plan on
strategizing to internationalize. The government of certain countries impose legal impediment or
incorporate trade restrictive legalities for firms. This is done with intend to protect the national
and local industries or businesses form facing severe competitions from multinationals which are
heavily funded. The American Multinational companies which constantly internationalize create
severe competition for local industries which have limited funding capacity and when faced with
such competition tend to go in a state of dissolution which ultimately leads to economic
imbalances and instability. Laws related to volume of trade, infrastructural legally permissible
provisions etc. constitute legal barriers for business organizations to internationalize in certain
countries.
Economic Barriers:
Tariff and Trade Barriers:
Internationalization accelerates the number of the availability of the product for consumers
domestically to choose from. Since the availability of substitutes is large, there is a considerable
dip in the price of commodities on account of increased competition. Hence tariffs are imposed
on imported goods which add on to the cost. This is done primarily to protect infant industries
within the country from declination. This (Savas, E. E.,1975)strategy of the government is
termed as Import Substitution Industrialization (ISI). It is utilized by many developing
economies where in there is levy of heavy taxes by way of tariffs on imported goods and in the
process a domestic market is created for locally or nationally produced goods and providing
cover for those industries from being wiped out of the commercial scenario. The other positive
aspect of high tariffs for developing nations is the fact that it reduces unemployment and
dependency on agriculture. But the negative aspect is that is poses a barrier for many businesses
to internationalize.

Non-Tariff Barrier:
Non-Tariff barriers (Gaedeke, R.M. (1977), such as quotas, embargoes, sanctions, quotas and
other restrictions pose barriers to internationalization. These barriers are frequently used by
countries which are large and developed. These are barriers to trade which are set up and take a
form other than a tariff. This is way barrier employed with intent to control the trade of one
economy with the other. Nevertheless, any form of barrier to internationalize causes economic
losses which prove to be a de-motivational factor for businesses which plan to venture into that
business arena.

Subsidy:
Subsidy presents itself (Lovelock, Christopher H., ed. (1977), as a barrier to internationalization
as the subsidy provided by a government to domestic businesses enables them to reduce their
cost. This helps them compete with business organization which have internationalized. Subsidy
provided by the governments could be in the form of raw material subsidy, financial subsidy
which could be low interest short term and long term loans, subsidy in setting up the business.
Subsidy leads to low input costs and with a considerable profit margin the product is available at
a cheaper rate than the imported products. This poses a great barrier for business to
internationalize in countries where the governments put forth barriers in the form of subsidies.

Political Barriers:
Political barriers (Henion, Karl E. (1976), are often posed by warring nations. Lack of political
peace creates a sense of hostility between nations and trades between those nations are primarily
affected. Internationalization could be banned out rightly or political influences over
governmental regulations could be imposed to restrict trade. Political unrest between U.S.A. and
the U.S.S.R. during the cold war period resulted in complete disruption of trade between these
countries. Hence political barriers are the worst perceived barriers to internationalization.