Chapter 1 Internationalization of the Small and Medium Size Enterprise: Why Go International? – Doing Business in the United States

CHAPTER 1

Internationalization of the Small and Medium Size Enterprise

Why Go International?

America is a land of wonders, in which everything is in constant motion and every change seems an improvement.

—Alexis de Tocqueville (1805–1859), a French diplomat, political scientist, and historian

Main points in this chapter

  • Internationalization of the small and medium size enterprise as a competitive strategy
  • Pros and cons of going international
  • Applications on SMEs international expansion

Internationalization of the Small and Medium Size Enterprise as a Competitive Strategy

Arguably, the economic mission of a business enterprise is wealth creation for its owners or shareholders. In a broader context this includes job creation, company employee well-being, community/regional development, and other areas of economic and noneconomic nature. There are differences between the missions of for-profit and non-for-profit organizations. In an increasingly competitive world, companies pursue their economic missions and goals by striving for maximization of profit, cost efficiency, return on investment, and a pursuit of other economic priorities.

Globalization vastly expands geographic, political, and socioeconomic boundaries, creating business opportunities for big corporations, small and medium size enterprises (SMEs), and individual entrepreneurs. By the same token, globalization also removes or mitigates obstacles, layers of protection, and political, ideological, and economic constraints associated with government restrictions, distances, language, cultural, logistical, and other cross-country differences near and far away. The forces of globalization level the playing field across nations and industries and exert competitive pressures on companies whether they position themselves domestically or internationally.1 These forces facilitate internationalization under which business enterprises are in a powerful way lured and/or forced to think and act internationally in search of new opportunities or just to escape competitive pressures at home. Companies and individuals that are absent or slow in embracing this process may miss the crest of the wave of opportunity or suffer strategic defeat in the evolving global competitive field. The advent of the Internet and electronic media enables SMEs to explore the fast-evolving international business landscape and engage in commerce in a cost-efficient manner, often without physically leaving domestic turf.

Unless SMEs’ decision to go international is political, personal, or emotional (while business decisions are supposed to have a rationale, rationality always coexists with irrational aspects of human nature2), it is fundamentally driven by business logic. Under this logic, the scale and forms of SMEs’ international business engagement depend on many conditions determined by the company background, current strategic position and operational situation, strategic mission and vision for the future, and personalities among the top leaders. Altogether these characteristics translate into internal strengths and weaknesses. A decision to go international is also determined by the current state, drivers, and future trends in SMEs’ external business environment and market forces prevalent in the targeted global region, nation, province, or the entire industry where the enterprise operates. From the company’s pragmatic standpoint, these external factors and dynamics in their entirety constitute strategic business opportunities and threats. SMEs’ retrospective background and developments determine their current business performance, profile, and strategic posture. Current dynamics constitute a foundation shaping SMEs’ future dynamics, developments, and growth.

Although it is conceivable for a business enterprise with a global outreach to simultaneously participate in both international manufacturing and international marketing, companies typically limit their foreign involvement as either a manufacturer or marketer. Participating in both of these typically involves high start-up costs, extraordinary capital commitment, ample financial resources or access to financial borrowing, elevated risks, and strong expertise in the host country. Those are challenges formidable even for large corporations, let alone SMEs.

Pros and Cons of Going International

A decision to go international or stay domestic involves a comparative analysis of operational, tactical, and strategic benefits, costs, and risks as well as their trade-offs in the action versus no action context. Assuming the economic mission of a business enterprise as wealth creation, we argue that in contemplating their business steps, SMEs act in the interest of maximizing their strategic benefits, minimizing/optimizing costs, and moderating risks. SMEs aiming to go international can gain immediate business benefits such as market expansion, global brand recognition, or secondary (but still critical!) advantages in the economies of scale over smaller rivals. At the same time a company expanding internationally must endure additional costs caused by product adaptation specific to foreign markets, labeling, promotion, and extra personnel designated for new markets. To act, or not to act internationally? Although inaction may often seem an attractive option, doing nothing may result in missed opportunities and loss of competitiveness in the ever changing business landscape and be fraught with its own costs and risks.

Strategic Benefits

Strategic benefits that for-profit companies aim to achieve in their international expansion differ, depending on whether this expansion pursues marketing or manufacturing in foreign destinations. In general, marketing-related international expansion (typically through exporting) gravitates toward countries with a high GDP/capita and a large population, which translate into higher economic gains from business. In this rationale, a high GDP/capita signifies strong spending power, while a large population signifies a sizeable consumer/customer base. Other conditions prompting SMEs in their export-based international expansion may include geographic proximity of the host (foreign) country to their home country, strong market perception of the product in the host, and cultural closeness between the host and the home country. In contrast, manufacturing-related international expansion often strives for strategic efficiency through utilization of cheap local factors of production—labor, minerals, energy, land, etc.—in a host country (Carraher and Welsh, 2017).

More specifically, overseas expansion can bring potential strategic benefits stemming from the company’s international outreach and scale. These include

  • increasing market share, sales, and profits;
  • advancing corporate competitiveness and brand;
  • gaining access to cheap factors of production and resources (primary extracted mineral resources, labor, capital, energy, etc.);
  • diversifying geographically and reducing dependence on existing markets;
  • taking advantage of geographic proximity to important global markets when product shipping costs from the manufacturing site to the market are prohibitively high;
  • extending sales potential of existing product line by expanding the marketing life cycle overseas;
  • exploiting existing corporate technology characterized by short shelf life, intellectual property, proprietary know-how, or managerial core competencies as competitive advantages and softening seasonal market fluctuations;
  • mitigating temporary excessive production capacity that is hard to realize domestically;
  • gathering intelligence about foreign competition by probing their defenses through overseas offenses;
  • escaping intensity of domestic competition;
  • sharpening competitive edge by engaging in global competition;
  • escaping tight domestic business regulations, high taxes, or bad corporate image (an increasingly challenging task under the fast-evolving global electronic media);
  • taking competitive advantage of the economy on scale, and others.

Along with a wide availability of commercial research databases3 specific to companies, industries, and countries, there are electronic sources available for free public access that can be easily engaged as a starting point in international business research. One of them is the globalEDGE portal (2017), a mega depository containing research information and analytical and decision-making tools for international business. For example, globalEDGE’s annual market potential index4 (MPI) 2017 provides global rankings for 97 countries worldwide categorized under eight criteria: market size, market intensity, market growth rate, market consumption capacity, commercial infrastructure, market receptivity, economic freedom, country risk, and overall score. Table 1.1 provides a fragment from MPI 2017 comparing market potential across the BRICS (Brazil, Russia, India, China and South Africa) countries. Depending on the specific goal of foreign expansion, SMEs can rationalize their selection of the best target markets in first approximation by conducting a comparative analysis of the global rankings under one of the eight selection criteria.

Table 1.1 Market Potential Index (MPI) 2017 of the BRICS countries

In addition to the MPI country index, globalEDGE publishes annual global indexes for 12 industries: advanced manufacturing, aerospace, agriculture, alternative energy, automotive electronics and composites/lightweight materials, biosciences, chemicals, food processing, information technology, land-based products, machinery, and medical devices.5 As its name suggests, MPI index provides only a general picture, not thorough analytical information sufficient for specific decision making on overseas expansion. Industries vary in their profitability, strategic drivers and constraints, trends, cost structure, and other dynamics; therefore, decisions like this involve gathering business intelligence resulting from comprehensive, specialized international market research and industry- and country-specific consulting assistance.

Major international institutions such as the International Energy Agency (2017), International Monetary Fund (2017), Organization for Economic Co-operation and Development (2017), United Nations Conference on Trade and Development (2017), World Bank (2017), World Trade Organization (2017), and others publish a wide variety of respective country and thematic reports rich in factual and analytical information that can be useful in a background analysis preceding SMEs’ international expansion decisions.

The annual Global Competitiveness Report (GCR, 2017)6 by the Switzerland-based World Economic Forum is another useful analytical tool that can be used for country/market selection designated for international expansion. On the one hand, rich and reasonably concise analytical information presented in this report reflects the state of competitiveness across countries worldwide in a comparative perspective, and on the other hand, the better a country’s global competitive rankings and the more robust its competitive metrics are, the more attractive it is likely to be from an international business standpoint. More specifically, the country’s strong rankings in global competitiveness tend to correlate with its attractiveness as a host (recipient) country for exporting and foreign direct investments. SMEs contemplating international expansion can use the GCR by tailoring its comparative analysis of alternative target countries specific to their specific situation and strategic priorities.

Another useful analytical assessment tool in national global competitiveness is the annual World Competitiveness Yearbook (WCY) by the Switzerland-based International Institute for Management Development (IMD).7 The basic version of WCY, offering limited information, can be accessed online free of charge. More comprehensive country reports from WCY can be obtained for a fee.

National government agencies tasked with promoting international commerce and foreign investment for their countries are also an excellent source of analytical information and assistance in support of SMEs’ international expansion. This analysis and support can be obtained complimentarily or very inexpensively. For example, the U.S. Commercial Service, part of the U.S. Department of Commerce’s International Trade Administration, offers companies, particularly SMEs, a full range of expertise in international trade through its export.gov portal (2017). Export.gov offers a vast amount of analytical information that includes annual Country Commercial Guides (2017), Export Information by Industry (2017), and National Trade Data and Analysis (2017). The U.S. Commercial Service (2017) provides its support through 108 domestic offices nationwide as well as more than 75 countries across the globe (Where We Are 2017). The International Trade Administration’s (2017) services for U.S.-based companies rendered through both domestic and international office include the following standard programs:

  • Counseling on Antidumping and Countervailing Duty
  • Export Counseling
  • Gold Key Matching
  • International Buyer Program
  • International Company Profile
  • International Partner Search
  • Market Research
  • Platinum Key
  • Report a Trade Barrier
  • Privacy Shield Certification
  • Steel Import Licensing
  • Trade Compliant Filing
  • Trade Fair Certification
  • Trade Leads.

For example, the U.S. Commercial Service Office in Russia (2017) offers trade counseling services in market intelligence, business matchmaking, and commercial diplomacy (Russia is Open for Your Business 2017). One of its popular services, designed to be the most cost effective means for U.S. exporters to enter the important and complex Russian market, is the Gold Key Matching Service (2017). The program features options such as

  • appointments (typically four per day) with prescreened Russian firms;
  • background and contact information on each potential partner, for example, the size of the company, number of years in business, product or service lines, and capability to provide after-sales service;
  • customized market briefing with U.S. Commercial Service staff;
  • available market research on the relevant industry sector;
  • debriefing with U.S. Commercial staff to discuss results and plan follow-up action and more.

The cost structure for the Gold Key Matching Service is $700 for each SME8 and $350 per SME for new-to-export companies using this service for the first time (Gold Key Matching Service, 2017).

National agencies tasked with promoting international commerce and foreign investment in economically advanced nations like Australia (Australian Trade and Investment Commission, 2017); Canada (International Trade and Investment, 2017); France (Business France, 2017); Germany (Germany: Trade & Invest, 2017); Japan (Japan External Trade Organization, 2017); Korea (Korea Trade–Investment Promotion Agency, 2017); Spain (Invest in Spain, 2017); and the United Kingdom (Department for International Trade, 2017). Other countries offer similar services that SMEs based in these respective countries should consider in their preparation for international expansion.

Major global management consultancies, such as Bain (2017), Boston Consulting Group Ernst & Young (2017), KPMG (2017), and PricewaterhouseCoopers (2017); and many others analytical centers regularly publish analytical reports on specific countries, industries, and international business themes.

In addition to the print and electronic library resources, entrepreneurs contemplating internationalization should consider engaging consulting assistance and support. Resources include the U.S. Department of Commerce (domestically): www.buyusa.gov/home/us.html, the U.S. Commercial Service (internationally): www.buyusa.gov/home/worldwide_us.html, the American Chamber (AmCham) of Commerce offices overseas and bilateral chambers of commerce (e.g., German American Chambers of Commerce www.gaccsouth.com/en/), foreign government consulates and other agencies in the United States (many countries have their trade promotion offices in major U.S. cities), and international trade/marketing consultants. Major industries have their professional associations providing consulting services, maintaining information depositories, organizing networking events, and providing other support on international business.

Costs

Costs associated with international expansion vary widely. For example, industries, due to their own technological conditions and economic dynamics, may be labor, capital, land, or energy intensive. The cost of doing business across countries also fluctuates due to the differences in their economic geography and climate, business environment, mineral resource endowment, infrastructure, and operational efficiency. Additionally, it depends on the company’s entry strategy and mode of operation. For example, in case of exporting, the cargo shipping, tariffs, insurance, and some other items constitute major expenditures on the top of the product manufacturing cost. An overseas manufacturing project under the greenfield investment or the international joint venture format may involve sizeable long-term financing requirements, home and host country personnel commitment, and a large scale capital asset allocation. Entering an international licensing or franchising agreement is less capital intensive, but may involve considerable legal fees and intellectual property protection expenditures. The costs of overseas expansion are also highly dependent on the company’s management and operational efficiency.

The World Bank Group’s annual “Doing Business” report can serve as a useful analytical tool for comparative cross-country cost assessment. “Doing Business” measures aspects of business regulation affecting domestic small and medium size firms defined on the basis of standardized case scenarios and located in the largest business city of each economy. In addition, for 11 economies a second city is covered. The latest 2017 “Doing Business” survey covers 11 areas of business regulation across 190 economies. Ten of these areas—starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency—are included in the distance to frontier score and ease of doing business ranking. “Doing Business” also measures features of labor market regulation, which is not included in the aforementioned two measures (Doing Business, 2017).

Table 1.2, compiled from the “Doing Business 2017” report, contrasts the ease/cost of doing business in five countries. Germany, Japan, and the United States are included as leading economies representing the global triad; China and Russia are the points of contrast as major global emerging markets. For the sake of illustration, Table 1.2 includes only four criteria from “Doing Business”: ease of doing business in general, protecting minority investors, enforcing contracts, and trading across borders. In fact, the “Doing Business” report contains much more analytical information for each of these areas, which is not included in Table 1.2. As shown in the table, based on the overall rankings in the ease of doing business, the United States emerges as the most attractive country, followed by Germany, Japan, Russia, and China, respectively. Broadening this analysis to include the remaining areas of analysis and data from “Doing Business” as well as supplementing it with industry- and company-specific cost information from other sources will add comprehension and rigor to this cost examination, contributing to more informed and justified decisions on the company’s international expansion.

Table 1.2 Comparative costs of doing business in countries

Company-specific cost information is often a secret closely guarded by management and difficult for an outsider to obtain. A partial solution to this problem can be the KPMG biannual “Competitive Alternatives” (2016) report containing comprehensive cost information for international business locations specific to 10 countries, 19 industries, 28 cost components, and more than 100 cities worldwide. SMEs contemplating foreign manufacturing–driven expansion can better rationalize their decision by comparing and contrasting industry costs across countries and cities. For example, a comparative national cost index for the professional services sector/international financial services industry is computed in the KPMG report as follows: the United States, 100 percent; Mexico, 56.9 percent (44.1 percentage point cost advantage over the United States); Canada, 72.4 percent; the Netherlands, 77.3 percent; Australia, 78.3 percent; Italy, 80.3 percent; Germany, 81.4 percent; France, 82.8 percent; Japan, 85.6 percent; and the United Kingdom, 86.7 percent (Competitive Alternatives, 2016). Thus, from the cost minimization perspective for the international financial services industry, Mexico and Canada present the most attractive options.9

Risks

Risks are an integral part of domestic and international business. International business risks tend to be more complex and potent compared with domestic risks due to greater geographic distances, cross-country variations in political–economic and legal systems, divergences in judiciary systems, cultural discrepancies, language and communication barriers, and chance events such as natural disasters, wars, political upheavals, financial–economic crises, and sudden changes in the government. Due to their nature and complexity, many risks in international business are hard to predict and harder yet to avoid.

While business risks cannot be eliminated completely, they can be mitigated through preliminary background research, intelligence gathering, due diligence, country selection grounded in low risks, entry strategy selection characterized by lowest risks, finding the right partners and fostering their trust and commitment, establishing transparent and efficient operating procedures, engaging in foreign currency exchange hedging, and/or building lasting personal relations.

General information on country risk analysis and assessment can be obtained from numerous commercial electronic databases—Business Source Complete, LexisNexis, Business Insights Global, GMID/Euromonitor/Passport, ABI/INFORM, to name a few. More specific risk assessment information and useful financial analysis related to risks can be obtained from such publications as the Almanac of Business and Industrial Financial Ratios, Handbook of Industry Profiles, and Standard & Poor’s Industry Surveys. Complimentary access to these and other databases can be obtained through university and public libraries as well as other channels.

A good first step in international business risk assessment may lie in analyzing risk profiles across countries and industries contained in publications and other reports by large insurance companies serving a global corporate clientele. These insurance service providers offer country risk assessment on the basis of sophisticated statistical models and comprehensive macroeconomic databases.

The globalEDGE (2017) database offers access to country risk information summaries based on the Coface Group10 data. More comprehensive risk assessment information on the country and economic sector level can be obtained directly from the company site (Coface, 2017). Another source of risk assessment information is the Belgium-based Credendo Group,11 a global insurer (Credendo, 2017). The U.S.-based A.M. Best Rating Services12 (2017) provides risk assessment profiles for 107 countries worldwide.

As an example, Figures 1.1 through 1.4 present country risk assessment profiles for the United States by Coface, Credendo, and A.M. Best, respectively. As seen from these charts, economic, political, financial, and trade-related risks in the United States are at their lowest, except for a slightly elevated level of economic risks. Contrasting America’s risks with Germany and Japan reveals similarly low levels of risks: Germany’s risks are slightly lower and Japan’s are slightly higher compared with those of the United States in all the three assessments. However, for China and Russia, the world’s major emerging markets, the situation is different: Their risk level (China’s somewhat lower compared with Russia’s) is notably higher compared with that of Germany, Japan, and the United States. This analysis sends a clear message to a risk averse SME expanding internationally in its selection of the foreign target market.

Figure 1.1 The United States: risk assessment profile by Coface

Source: Coface, 2017.

Figure 1.2 The United States: risk assessment profile by Credendo

Source: Credendo, 2017.

Figure 1.3 The United States: risk assessment profile by A.M. Best

Source: A.M. Best, 2016.

Figure 1.4 The United States Risk Assessment profile by A.M. Best

Source: A.M. Best, 2016.

Contemplating International Expansion: Analytical Tools, Sources of Assistance, and Applications

Which Countries, Markets, or Global Regions should SMEs Target as a Priority?

There are more than 200 sovereign nations around the world, including 193 members of the United Nations (United Nations, 2017). From a business opportunity standpoint, each of these countries is characterized by its own unique geographic and political–economic conditions, laws and regulatory environment, physical and business infrastructure, cultural customs, and business practices thus constituting different business potential and attractiveness for an SME. Under resource constraints, SMEs exploiting this opportunity through international expansion should carefully prioritize country selection in pursuit of the optimal balance in strategic benefits, costs, and risks. Mistakes in country selection may prove costly, and simultaneous expansion to multiple countries may be a bad decision—it stretches SMEs’ limited resources thin and can result in failure due to the costs, risks, and complexity involved in multiple locations (A Basic Guide to Exporting 2016).

Dissimilarities in drivers and dynamics between the marketing-related and manufacturing-related overseas expansion alternatives require different approaches for selecting target countries in these cases. A marketing-driven expansion tends to be simpler, less costly, and less risky than a manufacturing-driven expansion. A typical export transaction involves just logistics of goods and services characterized by shorter time frames, smaller financial commitments, and limited risks. In contrast, manufacturing-driven expansion may involve a sizeable financial commitment for foreign direct investment; higher costs, liabilities, and risks; and complex logistics and management issues associated with expansion and operations in a host country.

There is a wide range of available manuals, tutorials, and other sources of information and assistance on exporting—some of them mentioned earlier in this chapter. In the interest of time and cost efficiency, companies contemplating their export-related international expansion may apply a one stop shop approach and start their exploration by tapping the most comprehensive sources enabling background research. A case in point is the International Trade Compliance Institute (2017) database that offers complimentary access to a wide range of resources on international trade. Among them is the Four Stages in Export Development (2017) framework created by Maurice Kogon (Figure 1.5). The framework outlines and integrates key stages (Build Export Capacity, Develop Export Markets, Make Sales/Get Paid, and Deliver the Goods) in the holistic export development process and outlines the necessary steps for each stage.

Figure 1.5 Four stages in export development

Source: International Trade Compliance Institute, 2017.

Another useful source of information and analytical tool is the Step-by-Step Approach to Market Research (2017). The four-pronged step-by-step procedure by export.gov lists key analytical and decision making steps as well as sources of assistance enabling an exporting SME to identify and strategically explore overseas target markets in the right order of priority.

Step-by-Step Approach to Market Research13

Step 1: Find Potential Markets

  • Obtain trade statistics that indicate which countries import your type(s) of products.
  • Perform a thorough review of the available market research reports in the country (ies) and industries in question to determine market openness, common practices, tariffs and taxes, distribution channels, and other important considerations.
  • Identify 5 to 10 large and fast-growing markets for the firm’s product(s). Analyze them over the past three to five years for market growth in good and bad times.
  • Identify some smaller but fast-emerging markets where there may be fewer competitors.
  • Target three to five of the most statistically promising markets for further assessment. Consult with the U.S. Export Assistance Center near you.

Step 2: Assess Targeted Markets

  • Examine consumption and production of competitive products as well as overall demographic and economic trends in the target country.
  • Ascertain the sources of competition, including the extent of domestic industry production and the major foreign countries the firm would compete against.
  • Analyze factors affecting marketing and use of the product in each market, such as end-user sectors, channels of distribution, cultural idiosyncrasies, and business practices.
  • Identify any foreign barriers (tariff or nontariff) for the product being imported into the country and identify any U.S. export licenses you may need.
  • Identify U.S. or foreign incentives to promote exporting of your product or service.
  • Determine whether your product is price competitive after you’ve figured in packaging, shipping, marketing, sales commissions, taxes and tariffs, and other associated costs. See pricing considerations.

Step 3: Draw Conclusions

If the company is new to exporting, it is probably a good idea to target only two or three markets initially. A local US Export Assistance Center can provide valuable insight into your optimal market opportunities.

Step 4: Test Demand

There are a number of low-cost online and offline services that can help new exporters gauge foreign market interest and collect overseas inquiries:

  • Catalog Exhibitions
  • Foreign Partner Matching and Trade Lead Services

A deployment of the Step-by-Step Market Research framework in an export-driven international market research can be supplemented by multiple analytical and decision-making tools for exporters. For example, the reader can complimentary access the extensive Los Angeles Regional Export Council (2017) database.

Selecting a target country for a manufacturing-driven international expansion, whether it is a greenfield foreign investment or an international acquisition, can be achieved through an exploration of business opportunities involving foreign investment and a comparative cross- country analysis of investment climate. Both of these analyses can be accomplished and rationalized by applying the benefit–cost–risk assessment framework. Due to the high complexity and vast variety of information resources, we limit our discussion by just a few sources.

  • Annual Country Commercial Guides (2017) and information on country portals by the U.S. Commercial Service14 (International Offices 2017) are a must read for an SME contemplating foreign expansion. Chapter 4 of a Country Commercial Guide identifies country-specific leading sectors for U.S. exports and investment and provides a vital background information—a good starting point. Country Commercial Guides and country portals also offer a wide range of useful information and assistance on doing business in specific countries worldwide.
  • Country information resources in the globalEDGE (2017) portal are organized into the following sections: Introduction, History, Government, Economy, Statistics, Trade Statistics, Culture, Risk, Corporations, Indices, Resources, U.S. Trade Resources, and Memo. Depending on the time, scope, and depth of analysis, the approach can vary from engaging short sections such as Memo or Introduction to a wider format including specialized sections and supplementary resources. The Indices section enables the user to generate the country’s global rankings across more than a dozen parameters, thus providing a comparative profile and revealing the level of its attractiveness for business.
  • Investment Climate Statements (2017) published annually by the U.S. Department of State provide country- and economy-specific information and assessments on investment-related laws and other important factors. The statements are designed to provide detailed information on the strengths and weaknesses and recent trends in each economy’s environment for foreign investment. This information, spanning 170 foreign markets, can assist U.S. companies to make informed decisions regarding investment in foreign markets. The Investment Climate Statements include examples of countries and economies expanding openness to foreign investment and investor protections as well as challenges and barriers that may exist. Topics covered for each country and economy include openness to investment, legal and regulatory systems, dispute resolution, intellectual property rights, transparency, performance requirements, the role of state-owned enterprises, responsible business conduct, and corruption, among others.
  • The earlier mentioned “Competitive Alternatives” biannual report by KPMG provides company-level comparative information on cost efficiency across numerous countries, cities, and industries worldwide.

What is the Best Entry Mode/Strategy Overseas?

After the SME has identified a target country for expansion it should consider selecting an entry mode/strategy that ensures the best (optimal) balance of strategic benefits, costs, and risks.15 Besides economic considerations such as profitability, cost efficiency, or market share, the choice of entry mode, as applicable, should ensure a sound management and intellectual property protection. The latter is particularly critical for internationally operating companies whose competitive advantages lie in technologically sensitive products, services, or processes. The most common international entry modes include direct and indirect exporting/importing, international licensing and franchising, international turnkey projects, wholly owned subsidiaries in the form of international greenfield investment and acquisition, joint ventures, and various strategic alliances. Each of these alternative entry modes is characterized by its own pros, cons, situational applicability, and constraints. Figures 1.6 and 1.7 summarize some of these entry modes and their comparative advantages and disadvantages.

Figure 1.6 International entry modes

Source: Global Entrepreneurship, 2017.

Figure 1.7 Advantages and disadvantages of international modes of entry

Source: Global Entrepreneurship, 2017.

Applications on SME’s International Expansion

The remaining part of this chapter contains an integrative exercise in application related to SME internationalization. The application integrates main aspects and key components of a background research involved in an SME internationalization decision: -company analysis (SWOT format); country selection under comparative assessment of strategic benefits, costs, and risks; company-level export-readiness assessment; and export-driven market research. Depending on the purpose of this practical application (an actual international business research or an educational exercise), time allocation, and other organizational and logistical conditions, it may include the exercise in its entirety or just selected steps.

Four-Step Application: Strategic Research for SME’s Internationalization

Step 1: SME SWOT Analysis

  • An SME is contemplating international expansion (entry into foreign market).
  • Conduct SWOT (strengths, weaknesses, opportunities, and threats) analysis for the SME.
  • Based on the SWOT analysis, summarize the SME’s specific pros and cons of going international and rationalize your recommendation on whether the SME should go international or expand its existing international operations.

Step 2: Country Selection: Comparative Assessment of Strategic Benefits, Costs, and Risks

  • Benefits: Go to http://globaledge.msu.edu/knowledge-tools/mpi (globalEDGE 2017). Review the latest available MPI. Based on the SWOT analysis and recommendations from Step 1, select three MPI criteria16 (prioritize as appropriate) reflecting county attractiveness from the SME’s international expansion perspective. Using these criteria as a selection tool, identify two most attractive (target) countries from the BRICS list.17 Go to http://globaledge.msu.edu/global-insights/by/country (globalEDGE 2017). Compare and contrast global indices for the two best target BRICS locations in terms of their attractiveness for the SME’s business.
  • Costs: Go to http://www.doingbusiness.org/ (“Doing Business 2017”). Click on the GEt alL DATA link in the upper right corner. In Select Economy F0E0 SHOW ALL F0E0 check the boxes for your two target locations/countries; in Choose Topics F0E0 check the boxes for Protecting Minority Investors, Enforcing Contracts, and Trading across Borders18; In Which Data Years Do You Wish to Display? F0E0 check a box for the latest available “Doing Business” report or the one for a specific year of your interest. Click on the CREATE REPORT button on the right-hand side.
  • Risks: Go to https://www.credendo.com/country_risk (Credendo. 2017). Identify strategic risks of doing business in two target locations by clicking on these countries’ names in the scroll-down window. Contrast and compare strategic risks of doing business for the two target locations. If necessary, conduct country risk assessment by using alternative Coface (2017) and/or A.M. Best (2016) databases.

Based on your comparative assessment of strategic benefits, costs, and risks, evaluate country attractiveness for the SME’s business?

Step 3: Company-level Export-Readiness Assessment

Step 4: Export-driven Market Research

Background: XYZ is a U.S.-based SME or an external international business consulting firm. Conduct an export-related market research for XYZ on the basis of its product line. Target market/country alternatives are limited to China, Germany, Japan, Russia, and the United States. Your analysis should result in a comparative international marketing research, strategic recommendations, and justification of XYZ’s expansion to one of the aforementioned target markets/countries.

  • Select a product from the SME’s product line; alternatively, as part of skill development, you may select a product from business proposals/ads at http://exusa.thinkglobal.us/ (Export USA, 2017).
  • On the basis of the chosen product, complete a market research resulting in the best market/country for XYZ’s international export-related business expansion. Apply the step-by-step approach to market research (Step by Step Guide to Market Research, 2017) methodology (can be accessed at https://www.export.gov/article?id=Step-by-Step-Guide).19

References

A.M. Best Rating. 2017. Country Risks. http://www3.ambest.com/ratings/cr/crisk.aspx

Australian Trade and Investment Commission. 2017. https://www.austrade.gov.au/

Bain & Company. 2017. http://www.bain.com/publications/index.aspx

A Basic Guide to Exporting. 2016. www.export.gov/article?id=Why-Companies-should-export

Boston Consulting Group. 2017. https://www.bcg.com/

Business France. 2017. http://en.businessfrance.fr/

Carraher, S., and Welsh, D. 2017. Global Entrepreneurship. 3rd ed. Dubuque, IA: Kendall Hunt Publishing Company.

Coface Group. 2017. http://www.coface.com/

Competitive Alternatives. 2016. KPMG. https://www.competitivealternatives.com/

Country Commercial Guides. 2017. https://www.export.gov/ccg

Credendo. 2017. https://www.credendo.com/country_risk

Deloitte. 2017. https://www2.deloitte.com/us/en.html#

Doing Business: Measuring Business Regulations. 2017. The World Bank. http://www.doingbusiness.org/

Ernst & Young. 2017. http://www.ey.com/us/en/industries

Export.gov portal. 2017. https://www.export.gov/services

Export Information by Industry. 2017. https://www.export.gov/industries

Export USA. 2017. http://exusa.thinkglobal.us/

Four Stages in Export Development. 2017. http://www.tradecomplianceinstitute.org/x_plfls/Four%20Stages%20of%20Export%20Development%20by%20Maurice%20Kogon.pdf

Germany: Trade and Invest. 2017. http://www.gtai.de/GTAI/Navigation/EN/welcome.html#invest

globalEDGE. 2017. https://globaledge.msu.edu/

Global Competitiveness Report 2017–2018. 2017. “World Economic Forum.” http://www3.weforum.org/docs/GCR2017-2018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf

Gold Key Matching Service. 2017. https://build.export.gov/russia/servicesforu.s.companies/goldkeyservice/index.asp

Government of UK. Department for International Trade. 2017. https://www.gov.uk/government/organisations/department-for-international-trade.

International Energy Agency. 2017. https://www.iea.org/

International Monetary Fund. 2017. http://www.imf.org/external/index.htm

International Offices. 2017. http://2016.export.gov/worldwide_us/index.asp

International Trade Administration. 2017. http://www.trade.gov/our-services/

International Trade and Investment. 2017. Government of Canada. https://www.canada.ca/en/services/business/trade.html

International Trade Compliance Institute. 2017. http://www.tradecomplianceinstitute.org/

Invest in Spain. 2017. http://www.investinspain.org/invest/en/index.html

Investment Climate Statements. 2017. U.S. Department of State. https://www.state.gov/e/eb/rls/othr/ics/

Japan External Trade Organization. 2017. https://www.jetro.go.jp/en/

Korea Trade-Investment Promotion Agency. 2017. http://english.kotra.or.kr/kh/index.html

KPMG. 2017. https://home.kpmg.com/xx/en/home.html

Los Angeles Regional Export Council. 2017. http://larexc.org/

McKinsey & Company. 2017. http://www.mckinsey.com/mgi/overview

National Trade Data and Analysis. 2017. https://www.export.gov/Trade-Data-and-Analysis

Organization for Economic Cooperation and Development. 2017. http://www.oecd.org/

PricewaterhouseCoopers. 2017. https://www.pwc.com/gx/en.html

Russia is Open for Your Business. 2017. http://2016.export.gov/russia/servicesforu.s.companies/index.asp

Step by Step Guide to Market Research. 2017. https://www.export.gov/article?id=Step-by-Step-Guide

UN Comtrade Database. 2017. https://comtrade.un.org/

UN Conference on Trade and Development. 2017. http://unctad.org/en/Pages/Home.aspx

United Nations. 2017. http://www.un.org/en/index.html

US Commercial Service Office in Russia. 2017. http://2016.export.gov/russia/

Where We Are. 2017. https://www.export.gov/locations

World Bank. 2017. http://www.worldbank.org/?cid=ECR_GA_HPlaunch_searchad_EN_EXTP&gclid=CJau4YP2u9QCFVBrfgodlWsMuw

World Competitiveness Yearbook. 2016. http://www.imd.org/wcc/world-competitiveness-center-rankings/world-competitiveness-yearbook-ranking/#WCY

World Trade Organization. 2017. https://www.wto.org/

1There are plentiful examples illustrating how proliferation of global e-commerce together with advances in transportation and communications have changed the business landscape across industries. The advent of the Internet unleashed tides of creative destruction, wiping out print newspapers, books, and magazines and upending the whole publishing industry. Now bloggers and electronic publishers successfully infringe into these traditional oligopolistic print markets. Amazon and Alibaba have squeezed big name retailers and put out of business numerous shopping malls. For instance, the “baseball hat” or “sneakers” keyword searches on Amazon generate more than 10,000 products each, each visibly displayed and competitively priced: Even the largest department chains like Macy’s or sporting goods stores like Big 5 cannot compete with this variety and prices. UPS, FedEx, DHL, and other global shipping companies with their remarkable cost efficiency, precision, and speedy delivery (drone shipments are on the way) backed by real-time order tracing systems have made thousands of small neighborhood mom and pop stores across the United States unable to stay afloat and thus lose ground in this uphill competitive battle. Landline telephone service providers and cable TV operators are being undermined by global giants such as Google, Skype, Facebook, Netflix, and Amazon (the latter is aggressively expanding from retail to the areas of telecommunications and entertainment).

2Rationality in actual business decision making is limited by the information managers or entrepreneurs have available, their cognitive limitations, and the finite time under which they have to make a decision. Additionally, as human beings, managers or entrepreneurs in their decisions are impacted by their demographics (e.g., age, gender), race and ethnic affiliation, individual psychological traits (e.g., type A versus type B, introvert versus extravert), organizational politics, micro-group dynamics and macro-organizational culture, personal emotions, likes and dislikes, etc. All together that infuses a dose of irrationality in decision making. Besides individual irrationality and personal cultural preferences (travel, history, climate, etc.), international business decisions are often influenced by family relations, religion, social groups, ideology, and other noneconomic impacts.

3To name a few: ABI/INFORM (features thousands of full-text journals, dissertations, working papers, key business and economics periodicals including country-and industry-focused reports; its international coverage provides a picture of companies and business trends around the world); Academic Search Complete (a multidisciplinary full-text database, with more than 8,500 full-text periodicals); AdForum.com (focused on the global advertising industry and provides information on over 20,000 agencies and 70,000 advertisements from around the world); Business Source Complete (incorporates more than 4,300 business periodicals); Economist Intelligence Unit (features country analysis on more than 200 markets, industry trends in six key sectors, and the latest management strategies and best practices); Global Market Information Database (GMID, aka Passport by Euromonitor provides comparative statistics for over 205 countries on economic indicators, health, foreign trade, environment, lifestyle, industrial and agriculture output, communications, and more; also includes marketing data for over 350 consumer products and services); IBISWorld (provides industry-based research reports that analyze the business operating risks and opportunities of over 1,300 U.S. industries); LexisNexis Company Dossier (up-to-date information on 13 million U.S. and international companies, offering comprehensive company reports); Mergent Online (financials details of over 25,000 active and inactive U.S. companies). These and other commercial databases are accessible, with variations, to visitors across university libraries in the United States.

4Global as opposed to a national or local approach to marketing has become increasingly important over the years as trends toward internationalization are gaining momentum. Faced with too many choices, marketers have the challenge of determining which international markets to enter and the appropriate marketing strategies for those countries. The purpose of this study is to rank, with a U.S. focus, the market potential of 97 identified countries and to provide guidance to the U.S. companies that plan to expand their markets internationally. While the United States is not included in the rankings, the insights provided by the index are still applicable to companies located in other international markets. Eight dimensions are chosen to represent the market potential of a country on a scale of 1 to 100. The dimensions are measured using various indicators and are weighted in determining their contribution to the overall MPI (globalEDGE, 2017).

5Additionally, globlEDGE also publishes Insights by Industry for 20 distinct industry sectors containing wealth of information for each industry.

6Global Competitiveness Report framework available complimentary online incorporates 12 pillars of competitiveness: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation. The latest 2017–2018 report covers 137 countries.

7WCY analyzes and ranks the ability of nations to create and maintain an environment that sustains the competitiveness of enterprises (whether private or state owned). In WCY, this field of research is called competitiveness of enterprises. Enterprises operate in a national environment that enhances or hinders their ability to compete domestically or internationally. In WCY, this field of research is called competitiveness of nations. The methodology of the WCY divides the national environment into four main factors: economic performance, government efficiency, business efficiency, and infrastructure. In turn, each of these factors is divided into sub-factors. Altogether, WCY features more than 300 analytical criteria. WCY claims the superiority of its rankings over the GCR by the World Economic Forum by covering 300 indicators compared with only 120 indicators in GCR and a much greater reliance on hard data compared with interviews/questionnaires in GCR.

8US Commercial Service defines a small or medium-sized enterprise (SME) as a firm with 500 or fewer employees or self-certified as a small business under SBA regulations. A large company is defined as a firm with more than 500 employees. Subsidiaries will be classified based on the size of the parent company.

9In addition to the cost of doing business per se, the comparative national cost index values for different countries are affected by the going currency exchange rates.

10The French-based Coface Group is an insurance firm with direct presence in 66 countries and guarantees delivered in nearly 200 countries.

11Credendo is fourth largest European credit insurance group active in all segments of trade credit and political risk insurance, providing a range of products that cover risks in more than 200 countries worldwide.

12A.M. Best (founded in 1899) issues insurance ratings on approximately 3,400 companies and 16,000 insurance companies globally in more than 90 countries worldwide.

13By using this link https://www.export.gov/article?id=Step-by-Step-Guide and clicking on embedded words the user is directed to sources of market research information and assistance along the process.

14Obviously, U.S. Department of Commerce and U.S. Foreign Commercial Service tailor their analysis, reports, and services toward American companies. Mentioned earlier in this chapter are several other countries whose trade promotion agencies provide similar support for citizens and companies of their respective jurisdictions.

15It is not uncommon for SMEs and large corporations to experience conflicts in prioritizing their international and domestic strategic decisions. Depending on the company core competencies, internal strategic strengths and weaknesses, external market opportunities and threats, competitive forces in the SME’s target markets, and other factors, at various stages of growth it may be more important to pursue strategic benefits in the aggressive expansion and brand building while keeping the cost containment as a secondary priority. Amazon is a case in point: Although the company was founded in 1994, almost a quarter of century ago, it became profitable relatively recently, after many years of losing money. However, this approach has enabled Amazon to become the brand and market leader in global electronic commerce with a dominant market share in the United States that has transformed the whole industry and put many traditional retailers out of business or on the defensive. Under the different interplay of market forces and the SME’s priorities, a pursuit of strategic opportunities can be sacrificed with the cost cutting and/or risk avoidance shifting toward the forefront to become paramount priorities.

16The number of criteria and the number of potential target countries can be expanded as appropriate, depending on specific goals and practical needs.

17Germany, Japan, the United States, and other advanced economies are not covered by the MPI, thus limiting analysis to 97 developing and emerging markets only.

18Depending on the situational constraints and practical goals, the cost analysis, as necessary, can be expanded up to 10 criteria included in the World Bank’s “Doing Business” report.

19Instead of Trade Stats Express database by the U.S. International Trade Administration (http://tse.export.gov/tse/tsehome.aspx) that is based on patterns of U.S.-centered merchandise exports and imports, users outside the United States, interested in expanding to the U.S. market should use the UN Comtrade Database (2017) at https://comtrade.un.org/ that is country neutral and integrates worldwide data.