The purpose of this paper is to critically examine and discuss the motives and barriers of SMEs going international and its Uppsala model and principles. In today’s fast-changing business environment, internationalisation has become an essential aspect to competitive advantage of enterprises and, meanwhile, the most challenging in realisation and adaptation to changes. In order to understand the key driving factors and major challenges, the term ‘internationalisation’ can be interpreted and defined through many viewpoints. The rest of this paper debates about the Uppsala model’s suitability to internationalisation process of small-to-medium enterprises.
2.0 Internationalisation and SMEs
A number of theorists has described internationalisation “as the process of transforming a domestic marketing management system into an international marketing management system over time.” (Clarke and Wilson, 2009, p.8) It is further assumed that internationalisation takes the form of the internal management strategy that creates the firm’s structures and operational processes in order to adapt to the international environment and to expand beyond the local market. Lots of traditional companies that have been operating for a long period of time went international. Before stepping into foreign countries, they step by step reduce the potential risk of entering new markets, try neighbouring or physically near markets. In fact, global competition has forced SMEs to seek new markets and to speed up the product cycle development. This, in turn, creates new and difficult challenges for international managers as the choice of direction is infinite. McDonald’s, the global food service retailer, successfully went international in 1960 in order to take competitive advantage over its main rival Domino’s. McDonald’s restaurant has a different menu in each country as they try to adapt their menus to different tastes and preferences as well as local cultural traditions all across 190 countries.
According to Rugman and Collinson (2009), SMEs definitions varies in different countries as, for instance, in the United States, SMEs have up to 500 employees, while European SMEs have around 11 to 200 employees and sales of $40 billion. Most of these companies have less than $5 million annual sales but they are able to compete with rivals of all sizes and perform operations effectively that some multinational companies cannot do. It is noticed, that the governments often provide financial support for SMEs in order to support export performances and connect to international markets. The German government representative has signed an agreement to sponsor small and medium enterprises with $2.5million in Sub-Saharan Africa what will improve competitiveness and raise demand. (Jackson, 2014)
3.0 Motives for Internationalisation
According to American Marketing Association (2007), the research shows that the key motive of internationalisation is brand identity and the associations of luxury product image, market appeal, lifestyle perception, niche market opportunities and global relevance. Similarly, Clarke and Wilson (2009) agree that seeking business growth opportunities is an obvious motive for SMEs to go international. They also state that the most important drivers of internationalisation are the opportunity to control a competitive advantage, the desire to spread geographical risk and the need to follow consumers into foreign markets. Besides, the term internationalisation can be associated with the export and import, thus, Albaum and Duerr (2008) believe that exporting is still the most common tactic for manufacturers to run business abroad what help to achieve profit-oriented goals like return on sales, stability, investment or profit maximisation and non-profit objectives such as maintaining employment, customer service excellence and management expansion. In turn, Wall et al. (2010), suggest three categories of ways for a firm to go international: export-based method, non-equity methods, and equity methods. “Exporting is the business activity of meeting the demand for goods or services in foreign markets.” (Clarke and Wilson, 2009, p.5) It is the most common and the oldest way in which SMEs begin to go international. In 2010, Hannahen identified that small enterprises account for 30 percent of all the U.S. exports what is $300 billion per year. Also, the fastest growing segment of the United States exporting firms, comprising 65 percent of all U.S. exporters, are firms with 20 or fewer employees, what demonstrates that size is not an essential requirement for success in global markets. According to Koksal (2006), exporting has become a significant internationalisation strategy for both companies and national economies in the world markets. It is possible to state that another key reason for small and medium-sized enterprises (SMEs) to go international is profit, especially if a firm has innovative technology, unique products and other advantages to expand internationally. This lead to another essential motive – to strengthen competitive position and weaken the rivals. Kotler defined competitive advantage as ‘the company’s ability to perform in one or more ways that competitors cannot or will not match’ (2012,p.311) and Porter emphasized that strong local competition frequently benefits a national industry in the global market and companies in a competitive environment produce qualitative products more efficiently. In 2012, the European Commission has agreed to support small and medium sized enterprises in the EU and US in order to access markets in Atlantic. They also believe that internationalisation for SMEs mean faster growth, more workplaces, higher wages and cross-border partnership development in the global market. It is interesting to note, that 41% of SMEs admitted that the main reason for entering the international market is the access to new markets, while other 31% of SMEs named the access to know-how technology and diversification of product or service portfolio as the main reason to increase international business activity. (Source: HIS Survey, 2012) In addition, Albaum and Duerr (2008) added that new markets help a company to use better its production volume, to extend the product life cycle, to increase competitiveness and even gain tax benefits.
4.0 Barriers of Internationalisation
It is generally accepted that most organisations, particularly SMEs, face with a number of barriers and challenges when accessing international markets. Finance limitations and a lack of physical resources has been noticed as a leading barrier to the internationalisation of SMEs. Additionally, tariffs on imported goods will discourage trade and reduce economic welfare. (Wall, et al., 2010) In a situation of market turbulence, it is believed that limited information of potential markets and a lack of technical knowledge can be barriers to export and ability to stay in a foreign market. Based on the literature, ‘barriers are important because of the impact they have on the behaviour of potential and actual exporters at various stages of internationalisation’ (Albaum and Duerr,2008, p.27) Rugman and Collinson (2009) suggested a number of international barriers to trade: price-based barriers, international price fixing, quantity limits, non-tariff barriers, financial limitations and foreign investment controls, meanwhile, Wall, Minocha and Rees (2010) agreed and added that inadequate quantity of and/or untrained staff for internationalisation to SMEs to be the key barriers to access the foreign markets. Crick (2007), in turn, states that SMEs face difficulties with locating adequate representation in target export markets, while Kneller and Pisu (2007) concluded that finding an appropriate foreign market partner is a main barrier to the internationalisation of the small and medium enterprises. Due to the geographic location, time zones and cultural differences, there is a high probability of risk in finding and contacting the right business partner or potential customer. Another barrier that may arise is foreign exchange risk what is a very real concern for financial managers. Because of currency exchange, SMEs may face with financial losses when carrying out international trade operations and, also, may affect the prices of export and import. Research of 500 UK small-medium enterprises showed that firms were more aware that ever of the need to be prepared for an increasingly expansive range of risks, such as high energy and operating costs, growth in UK economy and the Eurozone crisis. With this knowledge at hand, it is reasonable to state that finance officers in SMEs do not usually understand the importance and possibility of foreign exchange risk. In a later study, Gelis (FT, 2013) added that ‘currencies outside the usual dollar, euro, sterling markets – raises even more potential risk’ as fluctuation in these currency standards can either increase or decrease the returns linked with foreign investments. Although Rugman and Collinson (2009) argue that tariffs (import, export and transit) continue to be one of the most commonly used barriers to trade. Authors also include non-tariff barriers which include quotas, voluntary export restraints (VERs), subsidies, exchange controls and other standards and formalities. Such barriers, like taxes or tariffs, reduce the demand for the product while increasing the price to the customers.
5.0 The Uppsala model
The majority of internationalisation theorists provide a number of various internationalisation models, for example, Hymer’s model (1970) mostly focused on the early stages of firms’ growth and domestic-market approach, while Vernon (1966) developed the internationalisation model based on monopolistic theory of international production. Both of these classic models are still used in practice, however, according to Hegge (2002), the Uppsala or stage-theory model differs from other models and the reason for going global is that firms internationalise because other competitors in their national network internationalise as well what makes it dependent on each other. Uppsala model considers internationalisation as an incremental process of acquisition, integration and the use of knowledge about foreign markets. A basic theory of the Uppsala model is that lack of knowledge about foreign markets is a key issue to go international, however, this issue can be overcome via information about foreign market environments. The more data and awareness the firm has about a foreign market situation, the lower the perceived market risk will be and, thus, the higher the actual investment by the firm in that market supposes to be. The main concepts of the model are market commitment and knowledge, commitment decisions and recent business activities. All tangible and intangible assets that a firm accumulates in a particular geographic market structure its market commitment. (Forsgren and Hagstrom, 2007) The original model was introduced by Johanson and Wiedersheim-Paul (1975) who distinguished the Uppsala Internationalisation model into four steps of entering a foreign market: no regular export; export activities; independent representatives and subsidiaries; establishment of production/ manufacturing facilities. The authors suggest, that internationalisation process often starts in foreign markets that are physically close to the home market, for example, England and Ireland or Belgium and the Netherlands. Similarly, companies are more likely to internationalise with countries of similar language, culture, political similarities and educational systems. It has been found out by Aerts (1994), who examined the internationalisation process of Belgian SMEs, that 62 per cent of the companies exported straight to neighbouring countries what made it easier for them to control the resources and gain knowledge of the market situation. It is generally believed, that most of the firms start its internationalisation through exporting to the target country via different agents or representatives. For instance, Boxman, Swedish CDs website, decided to internationalise quickly through local country manager, who in turn hired a number of people for customer service and other operations in order to ‘build a brand name and to exploit first-mover advantages’ (Forsgren and Hagstrom, 2007, p.295) However, there are some theorists who argue that the Uppsala model is too deterministic and does not take into account interdependencies among various country markets. Johanson and Wiedersheim-Paul (1975) pointed out that a major criticism of the stage theory model is that it is based on the mentioned research of the export behaviour of four Swedish companies and research on Australian firms. It is interesting to note, that the model was initially introduced as understanding actual behaviour of companies, rather than suggesting suitable standards for how to invest abroad. Further, authors criticised that the Uppsala model deals with only the early stages of internationalisation, particularly for SMEs starting their international process abroad. Most of small-medium sized enterprises (SMEs) have no international experience and knowledge, as they are usually local businesses with limited international skills. Consequently, the decision to go internationally is quite risky because of the essential investment required to internationalise, insufficient management skills and lack of brand recognition. For such firms, the Uppsala model provides this essential experience and increases a level of knowledge about the international markets as well as evaluates the potential opportunities and threats. Thus, the Uppsala model decreases most of the disadvantages that SMEs meet when going internationally.
From examination of the existing literature, it has been argued that a number of different reactive and proactive motives for internationalisation of SMEs has a particular impact on future business growth and profitability. Small to medium-sized enterprises have to follow certain strategies in order to stay internationally successful (Hegge, p. 170) and gain competitive advantage. The reasons to internationalise are mostly market driven and less resource and efficiency driven, which signifies that market access, growth and access to new technologies are very important. (Hegge, p.173) It has been discussed that geographical and psychical distance plays a significant role for a firm when selecting a number of countries to go international. On the other hand, a limited company resources, lack of managerial skills and market knowledge are the top barriers to SME internationalisation. Authors concluded that there is a high level of risk in financial operations across different countries due to the unstable economic situation and fast changing business environments. Earlier studies of Uppsala model have shown four stages referring to the process of internationalisation and identified exporting as a starting point. However, the stage-theory model was criticised by a number of theorists that the series of internationalisation strategies are based on effects of learning and experience of Swedish and Australian firms what makes it irrelevant to nowadays situation. According to the discussion above, it is possible to conclude that internationalisation gives a better and faster business growth for a firm and the ability to double its revenues, however, SMEs internationalisation is a tough process and has a number of barriers which can be strategically overcome and well managed.