Drivers Of Internationalisation

Table of Contents

1. Introduction ..................................................................................................... 4

2. What are small and medium sized enterprises? ............................................. 4

3. Internationalization for SMEs .......................................................................... 4

3.1 Preparations and Requirements ................................................................ 5

3.2 Basic Drivers ............................................................................................. 6

3.3 Strategic Drivers ........................................................................................ 9

3.4 Global Value Chain .................................................................................. 11

4. Conclusion .................................................................................................... 13

Bibliography ...................................................................................................... 14

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Table of Figures

Figure 1: Barriers to Internationalization as perceived by SMEs in OECD and

APEC economies, 2006 (OECD, 2007, p. 40) .................................................... 5

Figure 2: Motives for the decision to internationalize (Mellahi, Frynas & Finlay,

2005, p. 185) ....................................................................................................... 6

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1. Introduction

“Organizations that can realize the full potential of globalization will see dramatic

revenue growth. Those that can’t will lose market share.” (Diana Farrell, 2004)

As the globalization increases its pace, many big companies decided to internationalize

some of their activities or even their full value chain and became multi-national

enterprises (Dicken, 2007). Now the next logical step would be that the small and

medium sized enterprises (SME) follow. But why should they? Wouldn’t it be better if

the SMEs would concentrate their efforts on their home markets and try to gain more

market share, when the big companies are focused on new markets? What is the

benefit for the SMEs to go global?

This paper tries to answer these questions and tries to show which drivers can bring a

SME to think about going international. First of all, the SMEs and the

internationalization are defined and then the drivers for the SMEs to internationalize are

discussed. A special type of driver, the “global value chain” is also defined and

discussed and the last part is summarizing the results.

2. What are small and medium sized enterprises?

According to the OECD, there is no global single definition of small and medium sized

enterprises (SME) (OECD, 2008). Instead there is a variety of definitions in every

single country. But all countries normally use the factors “number of employees” and

“turnover” as criteria for distinguishing. In this paper, the German definition will be

used, which defines the SME as a company with less than 500 employees and a

turnover which is less than EUR 50 million (OECD, 2008). SME are also seen as

independent, non-subsidiary enterprises, which have no big company in the

background. These factors make it harder for the SME to grow internationally, because

normally this is very costly and labor intensive. These two resources SMEs have less

than big companies. Therefore the decision if and then how to go international has to

be very carefully thought through. This is going to be described in the next chapters.

3. Internationalization for SMEs

There are a lot of motives and factors that could drive a company to extend its

business into another country. If the need to grow is developed in an enterprise the

next decision should be, if to go for national or international growth. Especially for

SMEs it becomes more important to grow on an international scale, because they often

have to compete with big companies and need the advantages of, for example, new

markets or cheaper raw materials. But, as a survey of the OECD points out, the SMEs

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see a lot of barriers for internationalization (OECD, 2007). The following figure shows

the results of this survey:

Figure 1: Barriers to Internationalization as perceived by SMEs in OECD and APEC economies,

2006 (OECD, 2007, p. 40)

Astonishingly the second to forth reasons represent problems or concerns related to

communication and information. This is quite surprising, because with the upcoming of

the information and communication technology (ICT), these problems should become

less important (Turban et al, 2008). But there are also many reasons which are related

to the lower size and possibility a SME has in comparison with a big company.

Therefore the reasons or drivers, which lead in the end to an internationalization of a

SME, must be strong enough to overcome the doubts and barriers a SME has to face.

Such motives for growing in new countries could be either organizational factors, like

the decision-maker characteristics or the firm-specific factors, or environmental factors,

like unsolicited proposals, the “bandwagon effect” or the attractiveness of the host

country (Mellahi, Frynas & Finlay, 2005). These motives will be explained in chapter

3.2. Regardless of the reasons why to go international there are a lot of things to

consider. First of all there should be some preparations that are required for the

internationalization, which are described in the following chapter.

3.1 Preparations and Requirements

The decision to extend the business into foreign countries should be based on good

analyses, careful planning and should include all important factors as far as possible.

There are a lot of “How to” books or guidelines for going international on the market,

but they all lack in emphasizing the need for a careful analysis. A good analysis

consists of two parts: the external and the internal analysis (Hill & Jones, 2007). The

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external analysis has its main focus on the factors which could influence the company

from the outside, like the market, the competition or the law. This external analysis has

to be done two times. One for the home market, with the focus on the question, if the

home market allows to grow in new markets or if the home market needs so much

concentration

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