Introduction
Nowadays, global economy encourages limited-sized enterprises through providing new opportunities for further expansion and development. Proving to have an impact on all economic activities is necessary for business survival in the global market. Hence, SMEs are directing their business onto the internationalization concept to achieve competitiveness in the global market in addition to overcome their limitations. Turning the business scope from a closed market to a global market is crucial to compete in the business field taking into account the obstacles that SMEs face as an exporter or direct investor and how to overcome those obstacles. As a consequence, this chapter handles how successful entrepreneurs build internationalization strategies to overcome any constraints as well as deal with foreign market barriers. Moreover, variable economic activities are also identified in this chapter.
Globalization
Globalization refers to the web of interconnections and linkages between organizations, states, and societies that make up the economic system of the present world. Globalization develops new relationships and new structures with the result that business decisions and actions in one part of the world have consequences in other places. Underlying and reinforcing these globalization trends are information processing, telecommunications, and the rapidly changing technological environment, particularly in biotechnology (Acs and Preston 1997).
Globalization is hardly a new phenomenon. After all international trade, management and labor, direct foreign investment, and the associated movement of capital have been going on for centuries. Belchamber of the Australian Council of Trade Unions argues that they found a close linkage between the interests of firms like the East India Company and the interests of nations (Belchamber 1995). However defined, there seems to be general agreement that the pace of such activities has increased. “Total world trade in goods and services has expanded year after year, with few interruptions, for more than four decades” (EPAC 1995a, 13).
There is no specific way to identify a single key factor as the primary motivator for this interest and increase in globalization. Three main factors, however, have been identified (EPAC 1995a, 4). They are:
1. Technological improvements
2. A higher global outlook at firm level
3. Government policy initiatives in developed and developing countries
The global market growth stimulates competition as it forces governments to adopt market-oriented policies, both internationally and domestically. Modern technologies have minimized greatly the cost of information and have enhanced the capabilities to participate in the global economy (Dunning 1993). As globalization is defined by being the broader opening up of national economies to the international marketplace, it has implications for small firms as well as large ones. Increasing the participation of small firms in the international marketplace is an important part of globalization. (Graham 1999).
Acs (1996) argues that in the recent century, all economic activity types are directed into globalization. Since the 19th century, many national markets have been evolved into global markets (Chandler 1990). Dunning (1995) confirms the dramatic increase in both the inbound and outbound FDI stocks in almost every country. As a consequence, FDI is increased at a more rapid rate than international trade. SMEs account for about 80 percent of the global economic growth. Hence, SMEs are considered the cornerstone of the global economy (Jutla, Bodorik, and Dhaliwal 2002). Changing the technological environment due to global competition has a great force to elevate innovation and the quality of the products. This leads many firms that have problems affording technological upgrading systems to make relationships with other corporates to capitalize on their core competencies (Gomes-Casseres 1996). Harrison (1994) discusses the new global environment mentioning the return on the competitive value, which results from using recent technologies, forming critical alliances, and finally, obtaining more active teamwork collaboration. It has been witnessed that larger markets favor larger firms. Thus, partnership alliances are the new trend in most business sectors, especially for those who are seeking internationalization. Hence, this chapter handles the factors promoting globalization in addition to highlighting and promoting resources on strategic projects while endorsing the guiding principles.
SMEs: The Internationalization Process and Performance
SMEs have been recently endorsing the new business trend of internationalization believing that diversification plays a strategic important role (Coviello, McDougall, and Oviatt 1994, 1999). SME internationalization is affected directly by two major forces: government barrier decline and advanced technologies. Customer needs and wants were in a rapid dynamic change during the past decades in response to the aggressive high-tech competitions. Technology and innovation have diversified market demands by introducing the most updated technological and innovative products and services (Rafinejad 2007). High-tech applied sciences are converted into economic profits leading to local economic development (Van Roy and Nepelski 2017). The major key factor leading to the success of high-tech projects in any market is the emergence of local enterprises with international enterprises resulting in “[e]xpansion through [i]nternationalization” that could be done by adopting either of the following strategies: “[i] nternational [s]trategy, [m]ulti domestic [s]trategy, [g]lobal [s]trategy, [t] ransnational [s]trategy.” Professor Daniel Isenberg (2011) outlined several prescriptions for the ecosystem formation in high-tech entrepreneurship. The first prescription was to stop imitating Silicon Valley, the headquarter of innovation and technology, where Apple, Google, Netflix, and so on are located. The second prescription was to build the ecosystem while considering local conditions and reforming the existing industries rather than starting from scratch. The third prescription was engaging the private sector with the governmental sector while stressing the latter’s indirect role as a facilitator only not a directing manager (www.weforum.org). Sodagar (2006) mentions in his book that seeking high-tech industrialization is the turning point of economic development. High-tech projects may drive entrepreneurs to many horizons, leading to further development. For example, as seen nowadays, the Corona (COVID-19) pandemic outbreak has inspired several technological inventions that include a human-sized nursing robot made for dealing with infected patients (www.see-news.net).
Challenges of Technological Change
Human resources associated with technological entrepreneurship must have specialized skills linked to their ability of understanding sciences and implementing technological development that add value to the firm (www.timreview.ca). However, it is a must to invest in developing technical support to ensure the establishment as well as the security of the newly performed high-tech projects. There is a dire need for training a new array of highly talented young leaders with strategic thinking who are capable of managing and operating technological enterprises for the upcoming decades. Moreover, recent sciences have stated that introducing innovation to product development through establishing high-tech ventures cannot be effective without applying the project management approach (Pokharel, Yeo, and Wang 2006).
SMEs Geographic Expansion
Geographic expansion is the most important step toward globalization strategy leading the firm to grow rapidly by broadening customer bases (Barringer and Greening 1998). Despite the value created through geographic expansion, there are many challenges that remain as constraints. Typically those challenges are associated with the liabilities of foreignness and newness (Stinchcombe 1965). However, the previous studies focused on exporting activities behaviors and strategies. More recently, economists have extended the investigation to include SMEs foreign investments and firm performance. Hence, it is concluded that the two major avenues in global economy and firm internationalization are both exporting and FDI activities.
Exporting is the paving path to enter different markets for future SMEs international expansion. Obviously, several scale and scope economies are obtained by exporting. In addition, the presence of variant international markets can increase the capacity of potential markets and also can increase business revenues (DeSarbo et al. 1992).
FDI is the direct capital investment activity in foreign countries. Although exporting is less dangerous than FDI, many investors prefer FDI over exporting because it minimizes the property risk in asset exchange through internalizing markets. FDI promotes location-based advantages such as competitive labor price, resource availability, and knowledge diversification. FDI investors are committed to financing a high level of resources, which makes it difficult to reverse the exporting activity. In addition, political instability is considered an important issue for FDI investors.
Alliances: When SMEs do not have the capability to adopt the full range of resources accompanied by FDI, alliances are suggested to overcome the shortage in resources. Previous literature on alliances points to several interests, including the decrease in transaction costs, high market power, reduced risks, and greater availability of resources such as capital and information. The real limitation in expanding the firm through alliances is to find the right partner. “A firm has three basic partner choices: it can cooperate with firms from the host country, with firms from the home country, or with firms from a third country” (Makino and Delios 1996).
Startups and Small- and Medium-Sized Enterprises (SMEs)
SMEs are defined by the Organization for Economic Cooperation and Development (OECD) (2004) as independent, nonsubsidiary firms that have less than a given number of employees. The most frequent upper limit of employees is 250. In other cases, financial criteria such as balance sheet valuations or turnover are used. Within the OECD, it is estimated that SMEs weigh 95 percent of all businesses and 60 to 70 percent of employment. Albeit crude, these figures show the importance of SMEs to modern economy. A more salient feature and characteristic is the flourishing internationalization of these enterprises as an effect of the integration process and technological change (Johnson and Turner 2010).
The importance of SMEs to global economy is shown through their:
• Contribution to employment: the labor-intensive nature of many SMEs and their comparatively rapid growth shows the importance of SMEs to job generation
• Role in the streamlining and restructuring of large state-owned businesses: SMEs help in the sale of noncore production activities and absorption of redundant employees
• Innovatory capacity: there is a school of thought that believes that SMEs need to be more creative to survive, especially in knowledge-intensive sectors such as biotechnology and IT
• Capability to export: this will be a key issue, though most do not tend to engage in international activities
• Greater flexibility in the provision of services and the manufacture of a variety of consumer goods
• Contribution to the competitiveness of the marketplace and their challenge to the monopolistic positions of large enterprises
• Potential role as seedbeds for the development of entrepreneurial skills and innovation
• Their role in the provision of services in the community and in regional development program
Other contributions include the possession of management structures and the augmentation of consumer choices through the production of a greater diversity of specialized goods and services, which makes them more agile (Johnson and Turner 2010).
Globalization and SMEs
The CIBER organized a conference of experts on “SMEs and the Global Economy,” which was held on October 20, 1995 (Acs and Preston 1997).
The primary focus of the conference was on the role that technology and network organizations play in the global activities of SMEs. Participants in this conference surveyed the act of SMEs in the identification of technological opportunity, technological diversity, geographical localization, technology transference, R&D spillovers, strategic affiliation, and the international diffusion of innovations (Acs and Preston 1997).
An overview of SME participation in the global economy showed at least three lines of activity: investment, trade, and technology. The topic that had the highest discussion in SMEs international literature was their contribution as exporters from their domestic jurisdictions to foreign customers. The opportunities and challenges facing SMEs in this contribution are well known (Acs and Preston 1997).
The second most dramatic issue is SMEs and technology, and particularly SME supplier connections with larger MNEs in local markets. In their simplest form, these connections involve intra-national exports, that is, domestic sales to foreign firms, who happen to be operating within the home country of the supplier. These connections came up for explicit attention at the conference primarily in connection with technological opportunity, technological diversity, technology transfer, and R&D spillovers. The emphasis was mostly on transfer of technology from MNEs to their SME suppliers and customers, although it was also agreed the MNEs might also acquire the appropriate technology from local SMEs, and possibly eventually acquire the SME firms themselves as well (Acs and Preston 1997).
The final issue is the SME role in investment and the connection between SMEs and FDI. SMEs may advance as multinationals either through their own speculations or because of the arrangement of unions. The questions of why SMEs go abroad, how they do it, and what the impacts of this action are examined carefully (Acs and Preston 1997).
We start by inspecting the technological premise of SMEs. In spite of the fact that, in total, SMEs save on R&D more than bigger firms, they produce twice the same number of developments on a per employee premise (Acs and Audretsch 1990). In 1993 United States, SMEs received 3.8 percent of federal R&D dollars and performed 14.5 percent of company funded industrial R&D (Gewehr 1996). In 1991, SMEs received 40 percent of all domestic utility patents granted in the United States (U.S. Patent and Trademark Office 1996). The important role of property rights in capitalist economies is getting progressively apparent. Societies have to protect innovators’ property rights to make profit from their innovations (Acs and Preston 1997).
The new product, process, and so on are mostly owned by the firm, not the inventor from employees. This reduces creative employees’ incentives to innovate for the company. As there is no obvious property rights in bigger corporations, perverse incentives for both managers and employees are being created (Acs and Preston 1997). Contrary to innovative employees in large firms, free innovators can hold clear property rights, can have every incentive to undertake original innovations, and can be hugely free of red tape. Thus, it is argued that SMEs are better at developing original innovations because they protect innovators’ property rights in a better way (Acs and Preston 1997).
The conference concluded that international diffusion of new innovations is crucial for continuing the improvement of global economic welfare. In the dissemination cycle, SMEs face two genuine difficulties: property right insurance and barriers to entry. If the rate of creative destruction is indeed too low, public policies should aim to increase the creation and international diffusion of innovations by SMEs. It was suggested that policies should aim to reduce the costs in international expansion for SME. Policies should aim to reduce the private market costs incurred for the protection of property rights, to reduce entry barriers, and to reduce transaction costs (Acs and Preston 1997).
Conclusion
To sum up, SME internationalization has become recently a highly discussed topic in the literature of business modernization. Although the internationalization argument is not a new topic for western business investors, developing countries nowadays are striving for hunting the chance to position themselves in the global market. This chapter has evaluated the appropriate strategies of economic activities to be adopted for expanding into the global market as well as the future internationalization prospects related to the high-tech industry. FDIs are mostly carried by large firms due to the large capital needed to finance the required resources. Hence, exporting and alliances are the best strategic options for start-up businesses. Governments from all over the world have scrutinized the effect of SMEs in local economies. Therefore, they started launching motivational programs to encourage leading entrepreneurship economic growth. Those motivational programs include capital fund, educational programs, business studies, and so on.