An increasing number of small to midsized enterprises (SMEs) are involved in international activities. However, despite technological advances and the ubiquitous presence of the internet, many SMEs continue to face challenges that limit their ability to engage in international business. In a recent study, we interviewed a number of Montanans who are involved in international business or promote international business to SMEs and the results were insightful.
Small and midsized enterprises have an important role to play in the global economy even though international business has long been considered the domain of large multinational corporations. In every state, small businesses comprise the vast majority of business entities and in 18 states the majority of employees work at small businesses. In fact, Montana has the highest percentage of workers employed at SMEs at 64.8%. Nationally, over 285,000 small businesses are involved in international trade. Although this is a large number, it represents less than 1% of total small businesses. Thus, many SMEs are not participating in international markets despite their huge market potential, and the reductions in transportation and information costs.
SMEs face both structural and psychological obstacles when entering into international markets. Some barriers could be considered environmental or external to the firm. Others are internal having to do with management structure, knowledge and experience, and managerial psychology. Internal barriers include constraints on a managers’ time and a lack of managerial expertise needed to develop foreign markets.
Many SMEs also cannot afford to conduct their own market research and instead rely on personal contacts or experience. This results in internationalization efforts being opportunistic rather than strategic and comprehensive. Typical external barriers include the inability to obtain private or government assistance to overcome knowledge or financial barriers. These include having to deal with complex rules about export destinations, tariffs, customs classifications and shipping requirements. Other barriers include payment collection difficulties, inability to locate a foreign distributor, inability to compete in foreign markets and unfamiliarity with cultural differences.
The Challenges SMEs Face
The major obstacles SMEs face have to do with not understanding regulations involving international sales, shipping methods and a lack of resources to develop international markets. But state assistance can often help reduce these technical barriers and help with the additional documentation required.
International business is not necessarily much riskier than domestic; rather it requires more effort and some additional due diligence on the part of the SME. Business opportunities in Canada and Europe, in particular, are easier to exploit because of similarities with U.S. culture, laws, etc. Business complacency was stated to be a major barrier to pursuing international opportunities. In other words, quite a few businesses are happy with their current situation and do not want to put more time and effort into their business to make it grow.
A lack of international experience continues to be a major obstacle and assistance in this area remains crucial. Many SMEs don’t realize that international customers are often more alike than they are different and want similar products. If your products sell in the U.S. they will probably sell abroad.
The advent of e-commerce has been a boon for SMEs because it reduces direct search costs in locating buyers. When SMEs engage in e-commerce they may be surprised to receive inquiries from abroad and may not be prepared to deal with international customers. There are additional issues that must be considered when shipping abroad, including tariff classifications, taxes, shipping costs and country regulations. World Trade Centers, state trade development agencies, and private-sector freight forwarders all have expertise in helping a SME sort through these complexities.
But the challenges also vary by industry. Knowledge-intensive SMEs may be more familiar with technology that can lower the barriers to internationalization and may psychologically be predisposed to follow a more strategic process in internationalization than other types of SMEs. As a result, SMEs in knowledge-intensive industries tend to be further along in internationalization than others, such as goods manufacturers.
Entrepreneurial managers are more likely to engage in riskier activities and may be more predisposed to pursue international opportunities. Engaging in international operations is often considered a riskier activity than purely domestic operations for a SME without international experience. Thus firms, such as high-tech software providers, tend to be more proactive and respond to new opportunities faster than many goods manufacturers.
States can help SMEs build international business contacts. Programs that provide financial assistance to help pay for attendance to international trade shows are designed to put SME managers in touch with potential overseas clients, distributors and suppliers. It is not clear though how many SMEs are aware of this resource or others available to them.
In discussions with SME managers, the study found that competing domestically was challenging enough and some firms may not have the additional resources, capacity and wherewithal to take on international markets. They consider international trade more complicated because of higher documentation requirements, such as shipper’s letter of intent, commercial invoices, etc. Receiving payment was also a concern for some SMEs, noting instances where receiving payment from their customers was problematic in countries such as India and Russia.
SME respondents did not believe that international operations were much riskier than domestic. They all agreed international efforts require more work and more due diligence by the firm. On the psychological side, they noted that many smaller firms are afraid of the risks involved in international markets. Our interviewees felt that these risks were exaggerated. In their perspective, SMEs generally viewed export compliance to be complicated and initially daunting when beginning international operations, so many do not want to put in the effort needed to get started. Most felt that negotiating shipping and freight deals were the biggest challenges of international operations. Many of the SMEs relied on companies such as DHL, FedEx or UPS to handle shipping details to foreign markets, including several that did business through the United States Postal Service. Some of the respondents indicated that they relied on their foreign distributors to handle the shipping for them. Some of the firms were able to charge higher prices to their international customers to help defray higher shipping costs, while others stated that prices charged to their customers abroad had to be lower because of affordability issues and the presence of other competitors.
There were also concerns with issues that may arise with overseas sales or production, including dealing with late payments or nonpayment from customers or distributors abroad, and demands for advanced payments for purchases before shipping the merchandise. The SMEs in this survey universally avoided foreign exchange risk by insisting on dollar-based transactions, so the exchange risk was born primarily by foreign customers. In some of the cases where SMEs were selling health and beauty products, individual country health and safety rules and specific product ingredient requirements were mentioned as a challenge.
Many of the SMEs surveyed had reached out to international trade specialists at the state level and were very positive about the assistance they had received. A few of the firms reported that they initiated their international entry after receiving assistance and encouragement from the trade specialists at the state level. Many had taken advantage of trade missions, making contacts and received low-cost market reports to assess market potential in specific countries for as little as $300. The trade specialists helped them to identify and elect appropriate trade missions to develop new markets. State-level financial assistance to attend these trade missions and trade shows was also available. This allowed them to find potential customers and distributors in foreign markets.
Trade assistance helped both materially and psychologically. The trade specialists provided technical expertise and offered tools, such as identifying tariff classifications or connecting firms to potential customers and distributors. Importantly, they offered support and encouragement that gave the SMEs enough confidence to take the next step and become involved internationally.
Among the SMEs surveyed there was a strong consensus that to succeed internationally, firms first had to build a solid foundation and successful business operation in the domestic market. None of the firms felt a strategy of entering international markets as a way to save a firm that was failing domestically would succeed. Furthermore, they all emphasized the importance of networking with other firms that were involved in doing business internationally from their region, especially if the firms were in the same industry or similar line of business.
Conclusions
A lack of interest and knowledge about international opportunities remain primary barriers to increased participation by SMEs in international business. Poor return on investment is also often cited as a reason for not participating in trade missions or in seeking out trade-related government assistance. It appears that fears about international operations, lack of knowledge of state and other programs, and a lack of understanding of how private firms, such as freight forwarders who can help SMEs transact international business, lead to excessive concerns about international activities. One conclusion is that state and federal programs should broaden their marketing efforts to SMEs to better show them the assistance they can provide. They should also facilitate more venues to share success stories and challenges in their region among firms in similar lines of business.
The growth of the internet and social media may provide new means to virtually deliver low-cost programs aimed at providing market and legal knowledge, assisting in trade leads, etc. via these media rather than by holding trade promotion events aimed at SMEs that may require travel time and costs.
Trade development agencies should consider targeting resources to firms based on their psychological profile as well as their operations. Some SMEs that can succeed in global markets won’t try unless they are encouraged and trained to break through psychological barriers that cause them to exaggerate the risks and undervalue the opportunities.
Finally, programs that encourage mentoring of SMEs interested in international business by those already successfully engaged in international activities may provide benefits that generic programs offered by federal, state or local agencies do not. States in particular may wish to make available local mentors to SMEs to help overcome perceived barriers due to lack of knowledge, exaggerated belief in the risk of doing business internationally, or perceived poor return on investment from such activities. Appropriate and targeted assistance measures, both public and private, combined with SME agility and entrepreneurial ability, could pave the way for greater international success.
We’d like to thank Brigitta Miranda-Freer, executive director of Montana World Trade Center, and Katie Willcockson, international trade officer at the Montana Office of Tourism and Business Development, for their expertise and for providing contacts with other participants in our study.
To view the full study in the Journal of International Business Disciplines, click here.