Small and medium sized enterprises and the risks they face in an international environment - Essay Example

? Small and Medium-Sized Enterprises and the Risks They Face in an International Environment by 27 April Small and Medium-Sized Enterprises and the Risks They Face in an International Environment Executive summary The goal of this research is to see what contemporary authors have to say about the major risks faced by small and medium enterprises as they entering international trade. Theoretical frameworks related to the question are considered. The research highlights the seriousness of the barriers to entry and property rights risks encountered by SMEs in their striving to become international. Policy implications for the internationalization of small and medium-sized business forms are provided. Introduction The study of international businesses and internationalization has been traditionally focused on the analysis of large corporations. Despite the growing importance of small and medium businesses, they often remain beyond the scope of scholarly studies. Apart from the fact that small and medium enterprises play a crucial role in the rapid advancement of economies, the prevailing majority of today’s international and multinational corporations have once been small and medium domestic enterprises. These are just some of the many reasons why the place of small and medium businesses in international trade should not be disregarded. More important is the question of risks faced by SMEs as they enter international trade. Recent advancements in technologies and transportation facilitate the subsequent integration of small and medium business forms into international trade communities. Therefore, SMEs should be aware of and be prepared to face international trade risks. Small and medium enterprises: Why so neglected? Small and medium enterprises are generally considered to create a strong foundation for the rapid advancement of economies. It is not surprising that so many developing countries provide SMEs with greater flexibility and freedom from taxation and administration burdens, to speed up their development and contribution to nations’ economic development. However, the current state of research often leaves small and medium-sized enterprises beyond the scope of analysis. According to Oviatt & McDougall (1994), more often than not, large multinational corporations and not small and medium enterprises become the central objects of research. Yet, it should be remembered that “many MNEs developed from large, mature, domestic firms, and they commanded attention because they wielded significant economic power, especially after World War II” (Chandler 1986; Dunning 1981; Oviatt & McDougall 1994, p.45). Moreover, recent changes in the technological environment and transportation make it easier for domestic small and medium firms to expand to an international level. The growing number of consumers in international business makes international trade extremely attractive for domestic businesses, especially small and medium ones. Today, any small or medium businessman with a sufficient amount of capital can successfully conduct business anywhere in the world or travel to any part of the world, looking for international business opportunities (Oviatt & McDougall 1994). That small and medium enterprises find it easier to capture international business opportunities means the topic of their internationalization is becoming more urgent. Scholars in organization science are becoming more attentive to the issues of internationalization and international trade challenges affecting domestic SMEs. However, again, the most common issues considered in today’s research include the effects of public policies on SMEs, the nature and characteristics of entrepreneurial activities across countries, and comparing international and domestic enterprises (Oviatt, & McDougall 1994; Ohe et al. 1991). In light of these issues, a close look at the risks faced by domestic SMEs going into international trade is required. This report will help small and medium businesses going into the international trade arena to develop resources and strategies needed to deal with the most common risks of internationalization. Risks of internationalization and theoretical frameworks Internationalization creates new business opportunities for SMEs. However, it is also associated with considerable risks. Manolova et al. (2002) suggest that internationalization may spread small and medium firms’ resources too thinly. Also, internal coordination may become a serious problem for any small business going international. In highly contested industries, such as personal services or agriculture, internationalization risks are even higher (Manolova et al. 2002). These assumptions were also supported by Kirchhoff (1994), who called highly contested industries “an economic core”. In other words, these industries are essential for the growth and evolution of economies but do not always bring huge profits to small and medium firms. These firms also experience lower growth and innovation opportunities, compared to their “competitors” in other industries. These sectors are believed to be less glamorous than, for example, IT or automobile manufacturing, and the best way they can achieve their business goals is by implementing more sophisticated human resources strategies or unique resources can give SMEs a chance to outperform their international competitors, especially in state-supported industries. The importance of human capital factors in the internationalization of businesses has been recognized by many researchers, including Becker (1964). However, it is at least incorrect to say that the lack of human resources can impede internationalization of businesses or that human resources alone can suffice to bring businesses to the desired internationalization goal. Objectively, businesses that choose to go international face complex risks, and the strategies and resources they develop to tackle with this issue should also be complex. At present, several theoretical frameworks help to explain what exactly happens to businesses when they go international or even global. These theoretical frameworks can lay the foundation for the development of practical internationalization strategies. Despite the growing number of theoretical explanations to internationalization, only Clercq, Sapienza and Crijns (2005) were able to systematize and explain the main risks faced by SMEs in international trade. Because uncertainty is a common companion of small and medium businesses in the international environment, behavioral theories can explain what stages SMEs usually go through in international trade. This knowledge is important in the sense that it can prepare businesses for unexpected difficulties at each and every stage of businesses’ integration with international business. These theories were developed and later discussed by Aharoni (1966), Johanson and Vahlne (1977). Besides going through a series or stages in their internationalization, SMEs are also believed to undergo changes in their transition to international trade (Clercq et al. 2005). For example, firms that enter international trade for the first time may prefer operating in less risky markets and learning from them (Calof & Viviers 1995). These ‘less risky’ markets are usually geographically located not far from firms’ domestic markets (Calof & Viviers 1995). These markets potentially expose small and medium-sized businesses to lower risks, compared with other international trade environments. Another theoretical explanation to the risks faced by small and medium-sized business in international trade is related to the question of learning (Clerq et al. 2005). The fact is that learning and knowledge are directly related to the activities in which firms engage to internationalize their strategies (Clerq et al. 2005). Theoretically, small and medium-sized businesses possess many different characteristics of an effective learning organization, and only businesses that pursue learning have a chance to succeed in international business environments (Gibb 1997). Learning presupposes “a process of adaptive learning in order to cope with change and survive, but also what has been deemed ‘generative’ learning which embodies the capacity to create and ‘bring forward’ experience” (Gibb 1997, p.17). Unfortunately, theoretical explanations to the risks faced by businesses in international trade are but scarce, although it is possible to delineate the most important ones. Risks faced by small and medium-sized businesses in international trade That small and medium firms are so important for economic growth does not mean that they cannot face risks while going international. Acs et al. (1997) provides an explicit classification and description of the main risks affecting SMEs in international business environments. According to Acs et al. (1997), these risks can be roughly divided into three main categories: creative destruction, property rights problems, and serious barriers to entry. First, the problem of creative destruction dates back to the 1930s, when Joseph Schumpeter described the process of creative destruction as a continuous emergence of creative ideas underlying the growth and expansion of capitalist economies (Schumpeter 1934). Creative destruction is actually the destruction of firms that fail to implement innovative approaches to business. Small businesses entering international trade are not secured from these risks: they may use their innovative ideas to enter the international market but will also have to maintain their “innovative” image in long-term periods (Acs et al. 1997). Because there is competition in all fields of business, small and medium-sized enterprises cannot be confident that other firms do not similar or better ideas and do not make their own ideas obsolete. Simultaneously, innovative ideas, even if they are temporary, can generate considerable revenues and attract funds that can be used by businesses to expand and promote their innovations (Acs et al. 1997). Compared to large organizations, small and medium-sized enterprises are more flexible and capable of generating innovative ideas. Therefore, they usually have greater chances to succeed in the international business arena. Simultaneously, even innovative businesses can face considerable strategic risks, if they operate in an industry that is inherently insensitive to innovations. Property rights remain one of the most contentious issues faced by small and medium-sized businesses entering international trade. Acs et al. (1997) write that property rights play a crucial role in the development of capitalist economies. Looking back to the innovation arguments and risks, it is clear that property rights and innovation risks go hand in hand. When small firms go international, they need to be innovative. Simultaneously, they should also be confident that their innovations are protected by solid property rights (Acs et al. 1997). The stronger the property rights protection, the more motivated businesses are to enter and pursue internationalization. However, with the lack of strong property rights protections and the growing attractiveness of certain industries, especially new ones, small and medium-sized businesses may find it extremely problematic to foster internationalization and growth. Certainly, small and medium enterprises are more likely to monitor their own property rights and ensure solid protection of their innovations, but they cannot be secured from various legal and contextual risks. Since small firms are usually more flexible and innovative, their ideas may be extremely attractive for other businesses. Consequentially, if small and medium companies feel insecure about the fate of their innovations and creations, they may decide to keep away from international trade. Others may choose to be extremely cautious in their internationalization decisions. These are the risks that should be considered before SMEs go international, especially in the industries that have low barriers to entry and are open to manipulations with intellectual and physical property. Barriers to entry represent the third and biggest category of risks faced by SMEs in international trade. Barriers to entry faced by SMEs are numerous and diverse. To begin with, small and medium firms can experience the lack of sufficient financial resources and, as a result, fail to implement their innovative ideas (Acs et al. 1997). This is particularly the case of smaller, family businesses: Fernandez and Nieto (2005) suggest that the lack of resources is one of the major factors limiting international growth among small and medium businesses. The lack of resources, coupled with uncertainty and unexpected difficulties, is likely to work against foreign expansion decisions (Fernandez & Nieto 2005). Back to the theoretical view of internationalization among small and medium firms, it is clear that businesses need to have various types of resources, depending on the market they choose to enter. For example, the resource-based view of firms stresses the importance of strategic resources and capabilities (Dunning 1988; Peng 2001). Here, intangible resource play one of the crucial roles in how small and medium businesses develop: it is common knowledge that small and medium-sized businesses are extremely susceptible to the loss of intangible property rights (Fernandez & Nieto 2005). Beyond these, SMEs going to international trade may simply lack access to the important information about the industry, market, and nature of competitors (Fernandez & Nieto 2005). The absence of this information will reduce their chances to meet business goals. Again, and back to theories, small and medium businesses sometimes choose to enter less risky and more familiar markets, which gives them time and space to learn more about the target market. However, even when the knowledge of the target market is full, SMEs remain increasingly vulnerable to various barriers and risks. The barrier risks experienced by SMEs in international trade can be different. First, the lack of financial resources may prevent SMEs from entering the desired market. Moreover, SMEs founded in developing economies may not have access to credit opportunities (Diamond 1989). As a result, they are less likely to successfully implement their internationalization strategies. Wealth constraints reduce the scope of business operations performed by SMEs in international trade. Added to this is imperfect information, which may distort the overall picture of business in the international environment. Many barriers and risks faced by SMEs in their internationalization efforts are mostly due to the lack of adequate information, especially information about competition, output conditions, labor and raw materials (Acs et al. 1997). These can also be the barriers and risks erected by foreign governments, with the goal of restricting access of non-domestic firms to their markets (Acs et al. 1997). SMEs may also face barriers erected by the firms, which dominate one or several markets (Acs et al. 1997). In most cases, these are large or multinational enterprises that resort to aggressive pricing strategies to reduce the chances or market entry for potential competitors. Needless to say, small and medium-sized businesses have fewer chances to compete with large multinational enterprises, and this is why they often choose to stay away from international trade. Based on everything said above, only by eliminating barriers to entry and ensuring strong property rights protections can businesses enter the target market and pursue their internationalization goals. Policy implications and recommendations Acs et al. (1997) suggest that the best way for businesses to succeed in the international environment is to have all barriers to entry eliminated. The main question is what countries and governments can do to meet this goal. Acs et al. (1997) have a good answer to this question. First of all, small and medium enterprises going international and global need special policy protection and assistance (Acs et al. 1997). Apart from the fact that the barriers erected by firms and governments should be eliminated, any policy protections provided can certainly expand overseas (Acs et al. 1997). In the conditions of recession, governments should become particularly attentive to the needs of small and medium businesses and their competitiveness in international business. Only governments can foster the development of broader policy frameworks aimed at the protection of firms’ property rights and innovations. Simultaneously, firms should become more proactive in the defense of their business interests. However, as internationalization and globalization of businesses continue, many of the risks discussed here will continue to persist. Therefore, the best businesses can do is to raise their awareness of these risks and develop strategies to prevent market discrimination in international trade. Conclusion Globalization opens new markets and expands business frontiers. Small and medium businesses face better internationalization opportunities. Unfortunately, the risks faced by SMEs in international trade can be extremely serious. Barriers to entry, property rights complexities, the lack of resources, and other problems can impede internationalization developments among SMEs. Only through collaboration between governments and enterprises can internationalization become more affordable and beneficial for SMEs. As of today, the best businesses can do is to develop better awareness of the main internationalization risks and develop strategies to reduce the risks of discrimination in international trade. References Acs, ZJ, Morck, R, Shaver, JM & Yeung, B 1997, ‘The internationalization of small and medium-sized enterprises: A policy perspective’, Small Business Economics, vol.9, pp7-20. Aharoni, Y 1966, The foreign investment decision process, Boston: Harvard Business School. 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