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There must be some motivations behind the decision to internationalize. Leonidou, Katsikeas and Percy (1998) found that organizations are often willing to market themselves for four reasons. First, it may be due to slow growth in the domestic economy as evidenced by a decrease in the number of the home market opportunities. Consequently, an organization will look for other opportunities by entering new international markets (Chandra, Styles and Wilkinson, 2009). Second, there may be a trade deficit followed by currency devaluation and a number of export restrictions. Third, the world trading system may become more liberalized leading to a minimization of international market entry barriers. Forth, it might be more intensive global competition in the global business environment.
All these trends have developed the dynamic of exports. The creation of exports is not only due to the self-initiative of a company, but also by the government. This is also confirmed by Gripsrud (1990) who states that the government of a country may believe their firms to think globally by expanding their service areas to foreign markets, in the expectation of increasing exports from the country. Thus, it will help the economy of that country.
Additionally, OECD (2009) also analyzed motivations for small and medium-sized internationalization including growth motives, knowledge-related motives, network or stoical ties and domestic or regional market factors.
4.1.1 Growth Motives
The growth opportunities associated with international markets were identified as a key driver of firm internationalization in several recent studies (Orser et al., 2008), (Rundh, 2007), (Barnes et al., 2006), (Reynolds, 2007). Growth opportunities in other markets and increase profits from international opportunities have been identified as key driver for exports. The company decision in venturing abroad also seems to be motivated by a need for business growth, profits, an increased market size, a stronger market position, and to reduce dependence on a single or small number of markets. The reason for the growth is very closely linked to maximizing revenues and minimizing costs in purchasing, production and sales.
4.1.2 Knowledge-related Motives
Garvey and Brennan (2006) suggest that knowledge assets both push and pull small and medium-sized enterprises into international markets. The ‘push’ dimension relates to the importance of managers’ previous international experience and related management capacity factors. There are also related findings on the internationalization triggering effects of knowledge aspects, including R&D investment, innovation capabilities, unique product or technology, and language skills; and firm resource base, which reflected in the proxies as size, age, and experience.
4.1.3 Network or Social Ties and Supply Chain Links
Camara and Simoes (2008) have pointed out the importance of network or social ties and supply chain links in triggering SME’s first internationalization step and broaden the processes internationalization processes. The research studies particularly reported the stimulating effect on export activity of firms’ soft assets, including social and network capital, some of which may have pbtained through managers’ immigrant background and related links.
4.1.4 Domestic or Regional Market Drivers
There is also support from recent relevant research (Lopez, 2007), (Staoian, 2006) on the push effects of firms’ limited or stagnating domestic market on internationalization behavior. The enterprise vary significantly in their propensity export, with a tendency to increase exports in areas with less favorable domestic conditions , local incentives to export and good export infrastructure. Recent evidence from Chile and Indonesia further suggest a greater tendency to export among firms from sectors characterized by high levels of export intensity and presence of foreign buyers. The Indonesian finding on the importance of foreign buyers’ presence is substantial as it reinforces the earlier observed need to strengthen SME’s role in global value chains by facilitating their integration into production or supply systems of foreign affiliates of larger firms (OECD, 2008).
Cavusgil and Nevin (1981) also classifies the internal determinants of export behavior in four categories, which are differential firm advantages, strength of managerial aspirations for various business goals, management expectations about the effects of exporting on business goals, and level of organizational commitment to export marketing. First, differential firm advantages are derived from the nature of the firm’s products, markets, technological orientation, and resources. These factors play an important role in preparation the firm and in management motivation, but not enough to start export. Second, the strength of managerial aspirations for various business purposes, such as growth profits, and market development are a second set of drivers. The importance that managers attach to internationalization is believed to be a direct determinant of a firm’s export behavior. Third, the impact of export management expectations for business purposes represents knowledge manager and the possible risks and profitability of exports. These expectations are also influenced by external factors, such as unsolicited orders from foreign buyers and currency fluctuations. Lastly, the level of organizational commitment to export marketing indicates the willingness to devote adequate resources to export-related activities. As reporting includes many new challenges and requires substantial financial and managerial resources, this is a crucial factor for an effective internationalization strategy.
4.2. Barriers to Internationalization
In order to identify the term ‘internationalization’ with the main objectives of the thesis, Coviello and McAuley (1999) argue that not only large organizations, but also small and medium sized organizations, can become global. In addition, they also stated that the international expansion of an SME is definitely helpful when it comes to contributing to the economic growth and prosperity of a country. However, one thing to keep in mind is that not all SME is ready to expand into international markets. Despite the fact that they have small or medium sized organizations, there must be some factors and limitations in terms of finding the opportunities of the global market.
There are a number of studies have focused on the barriers to internationalization (Leonidou, 1995; Campbell 1994; Katsikeas and Morgan, 1994, Morgan 1997). The barriers to internationalization can be classified into five areas: financial, managerial, market based (including domestic and international markets), industry specific and firm specific. It is widely recognized that the barriers to internationalization can exist at every stage in the process of internationalization (Morgan, 1997). Further, the perception of the barriers may vary in intensity depending on the level of internationalization of the individual firm (Burton and Schlegeliclch, 1987; Cavusgil, 1984; Kedia and Chhokar, 1986; Katsikeas and Morgan, 1994).
4.2.1 Financial Barriers
Limitations of financial and physical resources continuously highlighted as a barrier to internationalization of SMEs. These include financial difficulties, as a whole (Campbell, 1994; Burpitt & Rondinelli, 2000), the availability of resources (Karagozoglu & Lindell, 1998), the cost of overseas operations (Bilkey, 1978), and limited access to capital and credit (Buckley, 1989; Coviello & McAuley, 1999). The relevant evidence including the losses faced by the new international new ventures or early-stage SME exporters, compared with their more establish counterparts, in terms of accessing operating and term loans. Lack of capital requirements and other firm resources and limited access to key infrastructure were also reported by small and medium-sized enterprises.
Small and medium-sized enterprises are unique and different from large enterprises, particularly the availability of resources of the organization, to manage the SME is different from the management of a larger business(Aragon-Sanchex & Snachez Marin, 2005; O’Regan & Ghobadiah, 2004; Welsh & White, 1981). The second problem is limited access to resources (Welsh & White, 1981). For SMEs to grow, they should get more resources, yet due to their original smaller size this is not an easy task. The limited resources owned by SMEs lead to limited options in conducting business, limited options in acquiring assets and technology, as well as limited access to financial assistance, such as loans.
4.2.2. Managerial Barriers
Difficulties arising from limited management knowledge base are presented as a top barrier to small and medium-sized enterprises internationalization in a number of recent surveys. Managerial barriers are including managerial attitudes (Andersson, 2000; Burpitt & Rondinelli, 2000), lack of international experience and skills (Karagozoglu & Lindell), limited time management (Coviello & McAuley, 1999; Buckley, 1989), commitment, and partnership difficulties. Managerial risk perceptions and lack of knowledge about international markets were the main reasons for not participating in international trade (UPS, 2007). Limitations in managers’ internationalization knowledge also emerged as a barrier that leads to the initiation of export. In addition, the average age of the top management team has been negatively associated with a high-risk decision making (Wroon & Pahl, 1971), and the ability to analyze the new information (Taylor, 1975). Younger managers’ tend to be more internationally minded and cosmopolitan than the old one (Jaffe et al., 1998; Moon & Lee, 1990). Better educated decision makers are expected to be more open-minded and interested in foreign affairs, thus being more willing to objectively evaluate the benefits of internationalization (Garnier, 1982 cited in Czinkota & Tesar, 1993), as well as to have more managerial knowledge and capabilities (Schlegelmilch, 1986), which could develop an international expansions.
4.2.3. Market-based Barriers
The lack of knowledge of foreign markets is also emerging as a major obstacle in a recent study. This factor stands out as the most cited barrier to the internationalization of companies that responded, indicating that the gaps of information remain important challenges for small and medium-sized enterprises, even in the current era of the widespread availability of information. Market-based barriers are environmental perception (Anderrson, 2001); government regulation, including tariff and non-tariff barriers (McDougall, 1989; Coviello & McAuley, 1999), the lack of market knowledge and cultural differences or psychic distance (Karagozoglu & Lindell, 1998), and strong domestic market position (Autio et al, 2000). For example, the social and cultural influences on international market are enormous. Differences in social conditions, religion and material culture all effect consumers’ perceptions and patters on buying behavior. In relation to the international marketing, culture can be defined as “The sum total of learned beliefs, values and customs that serve to direct consumer behavior in particularly country market” (Doole & Lowe, 20005 pg. 7). This is the region that determines the degree to which consumers around the world are either similar or different and so determines the potential for global branding and standardization. The cultural differences and especially language difference have a significant impact on how a product used in the market, its brand and advertising product. The social or cultural environment is an important area for international marketing managers (Doole & Lowe, 2005).
4.2.4. Industry specific Barriers
Industry-specific factors focus on the business areas that are attributable to the business environment in which the firm operates. The example of industry-specific barrier is competition. Trade opening involves changes in the structure of the market, as firms hit by new competitors. If foreign and domestic firms produce close substitutes, their interaction in the product market forces prices below the monopolistic level. Demand is shifting from monopolistic to oligopolistic varieties and incentives to develop new varieties are diminished. The changing market structure constitutes a market failure as competition becomes asymmetric or uneven. If the scale and the intensity of competition are large, trade will reduce the welfare even under the autarky level. In the meantime, the reduction in tariff on all imports and permanent tariffs on oligopolistic varieties are instruments for welfare improvement (Paul J. G. Tang & Klaus Walde, 2000). Another example of industry specific barrier is technology. It has been adopted and used in business organizations over the years. It is obvious that many SMEs adopt IT solutions to support their businesses and maintain competitive advantage. It is believed that IT promotes more efficient ways to do business, but it is cost oriented for SMEs and the level of IT knowledge, level of IT investment, and consistent IT strategy knowledge is limited within the organizations itself (Bridege & Peel, 1999).
4.2.5 Firm specific Barriers
Firm specific factors include capital, training, and research and development accessibility. Small and medium-sized enterprises, due to their size limitations, often have limited financial capital and a lack of required human and managerial resources (Buckley, 1989). Most of the small and medium-sized enterprises face problem in obtaining the financial capital necessary to become competitive and achieve economic growth (Gupta et al., 2005). Getting loans is a challenge because bankers previewed lending to SMEs to be risky due to poor repayment records and low market credibility (Gupta et al., 2005).
In addition, some study classifies barriers to internationalization as internal and external barriers. Internal barriers to internationalization are those difficulties relate to organizational resources and capabilities (Leonidou, 2004). There are three types of internal barriers which are identified as informational barriers, functional barriers, and marketing barriers.
First, informational barriers related to the problem identification, selection, and contact with the international markets due to inadequate information. Examples of these obstacles are locating and analyzing foreign markets, finding international market date, identifying foreign business opportunities, and contacting foreign customers. These barriers are considered important for both exporters and non-exporters, because they are important in export management decisions.
Second, functional barriers refer to inefficiencies in functions of the firm, such as human resources, production, and finance. These barriers usually have a modest impact on export behavior. Examples are limited management time to handle the export, inadequate export staff and lack of working capital to finance export.
And lastly for internal barriers, marketing barriers include the firm’s product, pricing, distribution, logistics, and promotion activities abroad. For many exporting firms, this is the main problem area. Firms may need to develop new products or customize existing products to suit customer preferences in foreign markets. However, these innovations would reduce the possibility to adjust the customer preferences in foreign markets. However, these innovations would reduce possible economies of scale related to exports. Another important issue is setting the right price in relation to competition in international markets. Finding the right distribution channel, and reliable foreign partners and representatives, is a major challenge for many exporting small and medium-sized enterprises.
Moreover, external barriers originate from the home and host country environment the firm operates in (Leonidou, 2004). Different types of external barriers are procedural barriers, governmental barriers, task barriers, and environmental barriers.
Procedural barriers are related to the operational aspects of transactions with foreign customers. These barriers as a result of unfamiliarity with techniques and procedures, communication failures, and the slow collection of payments and often has a major impact on the export behavior. Meanwhile, government barriers are twofold. On the one hand, they include limited support and incentives for existing and potential exporters. Other forms of governmental barriers are the barriers that limit policy frameworks and protectionist measures such as tariff and non-tariff barriers. Another barrier is task barriers reference to the firm’s customers and competitors in overseas markets. Lastly, environmental barriers focus on economic, political, legal, and socio-cultural environment of the foreign market.
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