The four major barriers to internationalization: Lack of capital

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  • Posted in Internationalization barriers
  • March 23, 2015
The four major barriers to internationalization: Lack of capital

When SMEs are trying to enter in a foreign market, one of the major factors which concern the company’s financial power is the ability to have or to raise the needed funds to finance its international activities (Harzing et al., 2011; Adler and Gundersen, 2008).

The lack of finance as a working capital creates barriers for SMEs to start operating their business activities internationally (OECD, 2009; the European Commission-Enterprise and Industry Report, 2010; OSEC, 2012; Karagozoglu and Lindell, 1998; Shaw and Darroch, 2004; Ahmed et al., 2004; Buatsi, 2002). According to Oviatt and McDougall (1994), SMEs face the challenge of obtaining resources for survival, performance and internationalization.

In concordance with academics, one of the barriers facing firms which want to export is how to get the necessary funding to finance export operations.

In foreign business activities most of the necessity requires capital costs for different situations such as: financing customs, insurance, transportation, distribution and promotion, identifying the opportunities in foreign markets, setting-up first contacts, product development or market research.

According to OECD (2009) the financial barrier is divided in line with to the need of funds for internationalization:

  • Lack of funds to finance working capital for internationalization: difficulty in allocating and justifying adequate expenditure towards researching foreign markets, visiting foreign customers, adapting international marketing strategies.
  • Lack of funds to finance investment for internationalization: difficulty in allocating and justifying adequate expenditure towards investment to start or expand international activity.
  • Lack of insurance for internationalization: difficulty in insuring products for foreign markets and/or assets in foreign markets.

The SME may not even have the needed capacity to internationalize and, in order to internationalize, it needs to take more costs to improve its production capacity. And usually that involves a lot of financial effort that the SME is not able to expend. Thus, the company must be aware of its financial resources, its capacity to raise capital and the ability to maintain its foreign operations even if that means to sustain a high working capital.

The barrier to finance international activities is considered to be the third largest barrier among SMEs in the European Union (European Commission, 2012). However, it is considered that one of the solutions at hand for businesses to overcome this barrier is crowdfunding. The main purpose of crowdfunding is to provide entrepreneurs with an alternative solution to raise money, because it is well recognized that for any kind of SME it is difficult to attract external finance through bank loans or equity capital (Belleflammey, Lambert and Schwienbacher, 2010).

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