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What is the internationalization process for SME’s, and the strategies and techniques for its success?

Theoretical Background

This chapter outlines the literature on the internationalization of business activities by SMEs. The section also includes a review of literature undertaken by other researchers, relevant to the topic under study. These include the theoretical background, Internationalization Process and the SME’s, entry Modes for International Markets, empirical Literature, and

Internationalization theory proposes that it is more profitable for production companies to exist singly in given locations. The first approach to exploring the benefits of internationalization in firms is to highlight the significance of technology transfer (Pedersen and Shaver, 2011). Brennan and Garvey (2009) posit that there is complexity on the buyer when appraising the real value of knowledge. Additionally, it is not possible to quantify knowledge in monetary terms and sell it, and also it is challenging to secure intellectual property rights.  As a result, it is more profitable for businesses to start a new enterprise in the international market than to sell technology to another enterprise (Lee et al., 2012).

The focus of the second method is on vertical integration which implies an apparent dispute between firms. Furthermore, coordination issues may arise due to the imbalances in demand and supply between two enterprises. Unstable prices pose substantial risks for both organizations (Pedersen and Shaver, 2011). Hence, this model posits that the critical issue in internationalization is lack of knowledge concerning markets which are associated with the costs, clients and the alternatives regarded by the decision makers.

Experiential knowledge reduces the risks encountered in expanding to the foreign market and also acts as a mechanism for attaining internal and external knowledge and of the chance of combining both (Brennan and Garvey, 2009). On the other hand, Sandberg (2013) notes that gathering experiential knowledge is expensive due to the costs incurred in gathering, interpretation, and transmission.

The study by Johanson and Vahlne (2009) on the organization’s internationalization process is based on the U-model. Johansson and Wiedersheim-Paul (2017) developed the initial theoretical framework for the theory during research on four companies in Sweden. The authors found that organizations progress stepwise once they begin to internationalize, hence coined the name “step by step.” The model was later developed and established further by Johansson and Vahlne due to its limitations (Zohari, 2008). The theory considers four elements that organizations should factor in when internationalizing: market knowledge and devotion, and decisions on devotion and present operations which are categorized into stage and change components that cyclically interrelate with each other as illustrated in Figure 2.1 below.

The Uppsala Internationalization Process Model (U-model)

Figure 2.1 The process of Uppsala Model

Source: Adapted from: (Johanson and Vahlne, 2009)  

The state components are the resources devoted to the international market: market knowledge and devotion decisions that impact the risks and opportunities of the enterprise (Johanson and Vahlne 2009). Market commitment comprises of resources that are to be devoted in addition to the involvement level. Market knowledge is essential to the management in decision making. The two forms of knowledge are the experiential knowledge, which is acquired through experience, and objective knowledge, which is transferred between markets. Change elements are outcomes of the state elements. After learning about the market, the management can determine the approach it will take to devote itself to it, and thus enable them to strategize and implement the present operations that are required to complete the cycle. Hermannsdottir, (2008) demonstrates that this model fundamentally assumes that decisions on devotion are affected by market knowledge and market devotion.

This model contends that the current advanced technology companies do not follow the step by step process; but instead attain rapid internationalization through experience and network partners’ resources (Johanson and Mattsson, 2015). The entire group of organizations in the market are assumed to be rooted in one or more networks through connections to their providers, subcontractors, clients and other players in the market (Johanson and Mattsson, 2015).  Forsgren (2015) defines a network as a combination of two or more linked firms’ inter-associations, in which each operational exchange association is amongst enterprises that are theorized as collective performers. Thus, networks are a connecting approach that permits quick internationalization. Ojala (2009) found out that network relationships rely on common trust, knowledge, and devotion to each other.

Johanson & Mattsson (2015) observes that businesses occupy and develop a particular market position in reference to other players in the foreign network. Organizations that expand to global markets get involved in a domestic network to establish and grow business relationship abroad objectively. According to Lindblom (2010), market coordination is as a result of the interaction of the organizations engaged in the network, where decision making is influenced by many aspects such as price.

There exists no specific definition of internationalization because the existing ones are subjective and depend on the phenomenon under consideration. Nonetheless, Knight (2015) defined internationalization as a process in which companies expand their activities beyond boundaries. According to Kuivalainen et al. (2012), internationalization is the process by which firms adapt their operations including strategies, hierarchy, etc. to the international market.

Network Theory

Vasilchenko and Morrish (2011) highlight that the current international growth is centered on developing partner networks, and it is achieved through steady expansion abroad. This means that the objective is to get to the other market of different geographical location (Yamakawa, Peng, and Deeds, 2008).  The increased significance and impact of the SMEs in the international market has prompted researchers to investigate the management skills and knowledge transfer of these firms (Freeman et al., 2010; Fletcher and Harris, 2012; Saarenketo et al., 2008). Onetti et al.  (2012) point out how new subsidiaries with exceptional value addition can venture into the international markets even when beset by financial constraints.

Casillas and Acedo (2013) define internationalization process as the result of the interaction between the international and external effectors of change. In other words, it is the process of engagement in global operations. Masum and Fernandez (2008) note that the incentives for internationalization are improving market share, economies of scale, knowledge acquisition that results in enhanced competencies and invention and exploring business openings.

According to Daszkiewicz and Wach (2012), the motivations for going global varies amongst firms, with most of them being motivated by the desire to increase returns and minimize costs for the organization. Such an aim of internationalization can be achieved if the firm can access an extended market and exploit the existing market opportunities to gain from the large-scale production and economies of scale (Javalgi and Todd, 2011).  The economies will enable the enterprise to minimize costs and increase returns (Sauvant, 2009).  Irrespective of constrained resources, small businesses adopt a combination of strategies to attain success in different global markets (Knight, 2015).  There is a similarity in the internationalization process of these companies which in one way or the other adheres to a systematic process of improved performance on the local market and then undertakes the market in the nearest boundary (Daszkiewicz and Wach, 2012). Likewise, the difficulties these enterprises undergo during internationalization process are identical. Al-Hyari (2012) ascertained that most of the entities are unwilling to offer loans to some these companies for fear of uncertainty in the operations that the firm is involved in whether they will be profitable.

According to Golo (2015), the management has to consider three fundamental factors before going international; the market to venture in, the timing of entry, and the scale. Golo reasons that an entity should venture into the market that is more lucrative to it through striking an equilibrium between returns, costs, and uncertainties. Similar conclusions are derived by Canabal and White III (2008) in their research on the past and future market entry modes. Golo (2015) further observes that the time of entry can either be first-movers or future-entrants. The first-movers are the companies that enter the global market before any other business in the same sector does. They become the pioneers in the market but at a high cost. The future entrants are the companies that venture the international market after the first movers have entered. The future entrants have the advantage of low risk and fewer costs since they imitate the first movers. Regarding the scale, an organization can decide to venture on a small or large scale depending on the level of devotion. Entry into a large scale means the firm will incur substantial resources but with faster entry, whereas a small scale entry enables the company to study the selected market but with low exposure to it (Golo, 2015).

Internationalization Process and the SME’s

Phillips and Ahmadi?Esfahani (2008) observe that exporting has for decades been considered as the initial step towards going global, acting as a basis for future global market expansions. Exportation is the most common strategy adopted by SMEs due to limited resources (Love and Roper, 2015), and some level of market knowledge and experience (Meyer et al., 2009). According to Hill (2008), this entry technique is beneficial for it avoids the manufacturing costs in the host country.  It can also be a drawback if the production costs in the host country are cheaper. Filatotchev et al. (2009) found out that exporting technique increased the scale economy of firms in their international sales volume if the production was carried out in the home country and exported to foreign markets. Love & Roper (2015) asserts that exportation is a significant way for SMEs to obtain additional market knowledge and experience from the host market. Nguyen et al. (2008) point out that exporting is a risky venture for SMEs especially if the host country has stringent legislation on consumer protection like tariff barrier.

These are projects in which two companies are tasked with the responsibility of a given plant or machine such as oil plants (Vassileva and Nikolov, 2016). Hill (2008) observes that turnkey projects are common in industries like chemical and pharmaceutical and construction sectors. One of the company may have the resources required for a product but without the technology needed for production, hence involves another qualified firm.  The contractor provides training to the client’s operative employees until the plant can fully be operated by the host. This entry mode is of importance in situations where there is the limitation of foreign direct investment (FDI) by the government of the host market. Masum and Fernandez (2008) show that a turnkey project entry technique offers great economic assets due the know-how gains because they are assets of value for the entities; also, after the end of the project, there are no long-term interests of the contractor in the foreign country. Hill (2008) elucidates that this technique can be risky if the country becomes a significant market for the outcome of the production process that has been exported.

A licensing contract is a short-term arrangement where the licensor gives the right over intangible assets to another firm at the cost of a loyalty fee, for an identified time (Graves, and Thomas, 2008). Licensing is frequent in the pharmaceutical industry which involves patents, innovations, and formulas. Licensing is suitable for entities without production capital in foreign nations(Vassileva and Nikolov, 2016). Graves, and Thomas elucidates that most organizations use this strategy in situations where legislation of the foreign market prevents them entering. Moreover, organizations with intangible assets but with no development plans for this prefer this strategy. On the other hand, research shows that this method inhibits the ability of the firm to coordinate its strategic plans across foreign markets using the returns generated from one country to boost competitive edge in another foreign market (Hill, 2008).

Entry Modes for International Markets

Franchising comprises of commitments that are long-term in nature, in which an enterprise obtains a right from another firm to permit them to conduct business operations on their behalf, under the franchiser’s name (Hill, 2008). Alon (2014) demonstrates that franchising is a type of license in which the franchisee is expected to adhere to guidelines on how to perform the business operations, and is rewarded inform of a royalty payment that is linked to the revenue of the franchisee. The study by Combs et al. (2011) shows that franchising can help an enterprise to rapidly gain global presence within a short time and at considerably low cost and risk. The research by Alon and Wang (2010) found out that franchising is associated with issues of quality control, whereby customers expect the same quality of services in all the branches of the same firm.

Graves, and Thomas (2008) defines a joint venture as an enterprise created by two or more sovereign companies that operate as a single entity. The companies consent to share profits, costs and the regulation of the new entity. Tong, Reuer and Peng (2008) observes that joint ventures are regarded as practical business engagements because the involved firms can complement their skills. Hill (2008) shows that through joint ventures, a company obtains the knowledge of the host country regarding the competitive conditions, business systems etc.  from the local partner, and the costs and uncertainties are shared. According to  Tong, Reuer and Peng (2008) this strategy is reduces risks of a firm through the transfer of the control of its technology to the other experienced firm. However, Hill (2008) shows that joint ventures can lead to disagreements on control especially when either of the firms want to exercise more control of its subsidiaries in the local and global markets.  

This section outlines the stages that are to be adopted to complete the research which includes the gathering of data, measurement, and analysis. The subsections included here include research design, study population, gathering tool, data collection, and analysis.

This research study is to use a cross-sectional survey whose aim is to explore and describe a phenomenon. Neuman (2014) opines that surveys are more effective and less costly. It assists the researcher to become more knowledgeable regarding the opinions and attitudes of the participants. Additionally, the cross-sectional survey provided detailed information about existing phenomenon by querying the respondents regarding their views, attitudes, conducts or ethics with the objective of ascertaining the internationalization process of business activities of SMEs in Wales, UK.

Exporting

The population will consist of the SMEs in Wales, the UK whose business activities go beyond borders. According to the Statistics of the Welsh Government (2017), there are approximately 200,000 active SMEs out of which 20,000 have expanded beyond borders. According to Garg and Kothari (2014), a statistical representation of 10% of the target population is considered a suitable sample. Thus, this study is to select 10% of the SMEs in Wales, meaning only 2,000 SMEs that will meet the criteria out of which purposive sampling will be used to select employees as study respondents. This is to ensure that only the SMEs that have formally gone beyond borders are included in the survey. The businesses will be from various sectors such as manufacturing, pharmaceutical, etc.

This research will adopt a mixed research approach (quantitative and qualitative methods). The research is to gather both primary and secondary data. Secondary data is to be acquired using qualitative method from the published literature by enterprises and government corporations on the internationalization process, strategies, and techniques. On the other hand, primary data is to be gathered using a quantitative method to examine the internationalization process, strategies and market entry techniques in SMEs in Wales, UK.

A combination of a structured and semi-structured questionnaire is to be used as the research instrument to collect responses from the participants. The various reactions are to be based on the five-point Liker scale for easy rating, coding, and analysis. Only the different functional heads in charge of internationalization activities from each of the selected companies will be involved in the research because they presumably possess functional knowledge of the internationalization operations in the company. These can be the line managers, chief supervisors, CEOs, and senior managers.

Before analyzing the feedbacks, the duly filled questionnaires will be counterchecked for completeness and consistency. Then the data is to be coded for easy grouping. Descriptive analysis is to be used in the analysis using the Statistical Package for Social Sciences (SPSS). The findings will be presented in the form of frequencies, percentages, averages, tables, and charts. The mean scores and standard deviation will also be determined using the Likert scale. An inferential analysis will be carried out to measure the strength of the associations between variables. Multiple regression analysis and correlation analysis are to be applied.

The identities of the firms included in the study will be anonymous in the entire research to avoid any potential issue for the specific organizations. Also all the information obtained from the organizations will be treated with utmost confidentiality and used only for the purposes initially indicated in the University’s research letter, that is the information is to be used for academic purposes only. Before the commencement of the survey, informed consent will first be obtained from the prospective respondents. This will include notifying them of the time the process will take, assuring them of privacy, confidentiality and intention of the study.

The primary challenge to the study is the inability to incorporate more firms in the survey. The research is limited to SMEs with global business activities. The research could have included other companies in Wales to provide a broad foundation for generalization.

The participants are likely to be reluctant in providing the required information for fear of intimidation or negativity of the reputation of their firm. This is to be counteracted by attaching an introduction letter from the University as an assurance of confidentiality of the information collected and that it will only be used or academic purposes.

Research Events

Scheduled time

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Choice of study topic

Developing of research objectives

 Approach to Data Collection

Development of Questionnaire

Sample size of survey

Data collection

Draft Report

Final report submission

 

References

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Alon, I. (2014). The internationalization of US franchising systems. Routledge.

Alon, I., Ni, L. and Wang, R.Y., 2010. Internationalization of franchising. In Franchising globally (pp. 54-72). Palgrave Macmillan, London.

Brennan, L. and Garvey, D., 2009. The role of knowledge in internationalization. Research in International Business and Finance, 23(2), pp.120-133.

Canabal, A. and White III, G.O., 2008. Entry mode research: Past and future. International Business Review, 17(3), pp.267-284.

Casillas, J.C. and Acedo, F.J., 2013. Speed in the internationalization process of the firm. International Journal of Management Reviews, 15(1), pp.15-29.

Cavusgil, S.T. and Knight, G., 2015. The born global firm: An entrepreneurial and capabilities perspective on early and rapid internationalization. Journal of International Business Studies, 46(1), pp.3-16.

Combs, J.G., Ketchen Jr, D.J., Shook, C.L. and Short, J.C., 2011. Antecedents and consequences of franchising: Past accomplishments and future challenges. Journal of Management, 37(1), pp.99-126.

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