Small and Medium Enterprises (SMEs) have been the backbone of economies in most of the countries. Over the last two decades, interest in the internationalization of small and mid-sized enterprises (SMEs) has grown rapidly as their potential to undertake international business has come to be recognized. SMEs tended to serve domestic markets, while international competition traditionally seemed to be in the hands of large corporations. However, this spatial separation of small and large competitors no longer captures today’s global markets, as SMEs increasingly engage in international activities and undoubtedly play a significant role in international competition.
SMEs are startups that ultimately take the shape of SMEs and typically emerge due to the invention or innovation of products or services.
Many of the SMEs aspire for internationalization as a tool for exponential growth. However, it is imperative to note that internationalization affects every aspect of the business model.
SMEs typically establish their business in the domestic market and then look for internationalization; however, some of them go for internationalization at a very early stage. Various internal and external elements affect the internationalization decision of the entrepreneur. The COVID-19 pandemic has also fuelled digitisation on a large scale, and this has also helped SMEs to go for internationalization.
SME’s internationalization model – Uppsala and Born Global.
The Uppsala model is a stage approach of internationalization, and it can be described as under
The Uppsala model / Traditional model indicates the stage method of internationalization. Johanson & Vahlne (2009) stated that the Uppsala model is further strengthened by incorporating the business network element into the model. Paul et al (2017) also mentioned models like the product life cycle, the Uppsala model, the Network approach, and the born global SME approach to internationalization.
The born global model is driven by an entrepreneur’s mindset, his previous experience of the international market, and these SMEs go for internationalization from the start or at a very early stage. As per the report published by the World Trade Organization (2016), technology-based SMEs go for internationalization at an early stage. In the Born Global approach, psychic distance disappears since these entrepreneurs have much better knowledge of the international market and possess the knowledge Chetty S, (2004).
Drivers of internationalization.
Martineau & Pastoriza (2016) mentioned that internationalization by SMEs is due to one or more drivers mentioned below,
- Environmental level drivers like home market competition, Government benefits, etc.
- Firm-level drivers like product innovations, customization capacity, excess capacity, and network.
- Individual-level drivers include the founder’s perspective and orientation, and his previous personal experience.
According to Ramadani et al (2023), there are various types of innovations like products, services, or processes, and each of these can play a role in accelerating SME internationalization. Process innovation means creating an innovative process for production or delivery, and the company consistently innovates new processes in different industries. Szabo et al (2023) have also pointed out how digitization has created an opportunity for SMEs to achieve internationalization through innovations.
Entry mode of internationalization.
There are two modes of internationalization for SMEs, and they are the equity mode and the non-equity mode. Equity mode consists of forming a JV with a foreign partner or establishing a wholly owned subsidiary. The non-equity mode would consist of starting with export sales and turnkey execution of projects without equity investment of any kind.
SMEs are mostly constrained by resource limitations in finance and skilled manpower; therefore, they tend to go the non-equity route. SMEs are mostly entrepreneur-driven, and founders tend to prefer a non-equity mode, which helps them to restrict their equity dilution risk exposure. Equity mode is preferred when SMEs have previous experience in operating in a foreign country.
Internationalization challenges.
Paul et al (2017) have pointed out external and internal export challenges. SMEs can control internal challenges, but external challenges are beyond their control.
Internal problems constitute the inadequacy of a capable team, poor understanding of the foreign markets, no reliable distributors, and capacity restrictions. Inadequate financial muscle plays a dominant role, especially in the case of innovation-oriented SMEs. Restricted supply chain capabilities also hamper the export growth of the company. Insufficient export marketing capability also became a major challenge.
External problems are beyond the control of the SMEs, and they are in the form of export barriers from the government and importing country, competition in the foreign country, government policies, and WTO restrictions. Political instability and inadequate support from trade organizations are other barriers to internationalization. Legal issues, taxation, and duty structures of different countries affect the ability to price competitively. Demand inadequacy and inconsistency will also pose a problem in creating a robust export structure.
