Internationalization barriers for SMEs

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  • March 23, 2015
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Internationalization barriers for SMEs

Although markets are becoming progressively global, some of them are distinguished by high structural barriers to entry for foreign companies. This chapter examines the barriers engaged by the European SMEs in their process of going in foreign markets based on Shaw and Darroch (2004), the European Commission-Enterprise and Industry Report (2010), OECD (2009) and Hamill and Gregory (1997), as shown in Table 1.

To have a clear view of the international barriers, shown in Table 1, the information contained in of two research articles and two reports were compared. The barriers were divided in five broad areas using the example of Shaw and Darroch (2004): financial, managerial, market-based (domestic and international markets), industry specific and firm specific. It is generally accepted that barriers to internationalization can exist at any stage of the internationalization process (Morgan, 1997). However, the perception of the barriers may change in intensity according to the degree of internationalization of every SME (Katsikeas and Morgan, 1994).

The article of Shaw and Darroch (2004) is used as a reference because it contains a comprehensive list of the barriers to internationalization, focused on the more recent empirical studies involving SMEs. The authors are not using any system of ranking to distinguish between the importance of each barrier, and that is why the barriers are listed in order as all four sources present them.

Table 1: Synthesis on internationalization barriers faced by European SMEs

Darroch (2004) European Commission (2010) OECD (2009) Hamill and Gregory (1997)
Financial barriers Financial barriers in general High costs of internationalization Shortage of working capital to finance exports Limited resources (both financial and managerial)
Resource availability Lack of capital Excessive transportation costs Need for costly products adaptation
Cost of operating overseas Cost or difficult paper work for transport
Limited access to capital and credit
Managerial barriers Partnership difficulties Lack of public support Inability to contact potential overseas customers Problems in identifying and selecting the most appropriate foreign markets (limited resources for country screening and export market research)
Lack of international experience and skills Qualified personnel Identifying foreign business opportunities Problems in finding suitable overseas representation (agents/distributors)
Lack of commitment Obtaining reliable foreign representation Lack of internationally experienced personnel
Managerial attitudes Lack of managerial time to deal with internationalization Lack of commitment to exporting
Inadequate quantity of and/or untrained personnel for internationalization
Market-based barriers Lack of market knowledge Lack of information Limited information to locate/analyse markets Lack of knowledge of foreign markets
Cultural differences Cultural and language differences Lack of home government assistance/incentives Language problems
Economic conditions Trade barriers Tariff and non-tariff barriers to trade
Environmental perception Laws and regulations Profitability of exporting
Government regulations including tariff and non-tariff barriers Export documentation and management of export operations
Access to distribution Foreign markets differences
Strong domestic market position
Industry specific barriers Competition Price of products Difficulty in matching competitors’ prices Sources of competitive advantage abroad
Technology Quality of products
Specifications of products
Firm specific barriers Limited resources Products may not be suitable for foreign markets
Size

Sources: Shaw and Darroch (2004, p. 330); the European Commission-Enterprise and Industry Report (2010, pp. 58-61); OECD (2009, p. 8); Hamill and Gregory (1997, p. 21).

According to the overview of the internationalization barriers presented in Table 6, the most important barriers are considered to be:

  • Lack of capital (Shaw and Darroch, 2004; the European Commission-Enterprise and Industry Report, 2010; OECD, 2009; and Hamill and Gregory, 1997)
  • Limited market information (Shaw and Darroch, 2004; the European Commission-Enterprise and Industry Report, 2010; OECD, 2009; and Hamill and Gregory, 1997)
  • Culture and Language (Shaw and Darroch, 2004; the European Commission-Enterprise and Industry Report, 2010; and Hamill and Gregory, 1997)
  • Inability to contact potential customers in the foreign markets (Shaw and Darroch, 2004; the European Commission-Enterprise and Industry Report, 2010; and Hamill and Gregory, 1997)

Online applications can help classical SMEs to overcome some or all of these barriers and encourage them to enter and to develop sustainable strategies for a successful internationalization.

According to Arenius et al. (2006) the Internet holds particular appeal for SMEs, as it offers the potential to remove some or all of the barriers they face when conducting international business. Anyway, the Internet does not provide a complete solution for such obstacles. However, if used effectively, it can be a very powerful tool and it can provide a low cost entrance to international markets and help overcome many of the barriers or obstacles to internationalization commonly experienced by them (Quelch and Klein, 1996)

But there are also barriers in using the Internet applications and by far the main one is the lack of knowledge concerning the Web’s capabilities and how to use it effectively. Limited or lack of knowledge and experience can be the most important restraining factors (Hamill and Gregory, 1997).

Thanks to trade liberalization the export barriers are in general collapsing. However, the following four barriers presented further on are still active, despite the evolution of the technologies in this area and have been recognized by experts in internationalization to be some of the most important obstacles faced by the SMEs in their process to conducts business activities in foreign markets: culture and language (external barrier), lack of capital (internal barrier), limited market information (internal barrier), and inability to contact potential customers in foreign markets (internal barrier) (OECD, 2009; the European Commission-Enterprise and Industry Report, 2010; Karagozoglu and Lindell, 1998; Shaw and Darroch, 2004; Ahmed, Julian, Baalbaki and Hadidian, 2004; Okpara and Koumbiadis, 2009; Harzing, Köster and Magner, 2011; Adler and Gundersen, 2008; Hamill and Gregory, 1997).


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