Internationalization of small and medium enterprises effects on operations and performance

Abstract Globalization operations are the current trends in which businesses pursue in a bid to be competitively advantaged. Small and medium enterprises have as a result embarked on opening their branches and operation of their businesses in overseas markets.Advertising We will write a custom essay sample on Internationalization of small and medium enterprises: effects on operations and performance specifically for you for only $16.05 $11/page Learn More This is what has made the researcher to do a research by taking a sample of 20 SMEs in the UK and gather data from the employees and top management. It would be observed in the research that the performance and operational efficiency of SMEs is enhanced by foreign operations. There will thus be a swell on the financial reports presented by these businesses. Introduction A large number of multinational firms are small and medium enterprises. The contribution of the SMEs on the economic development and th eir impacts on the international arena has made it a major area for research. The lion’s part of the economies of underdeveloped and developing economies is controlled by small and medium enterprises (Athavale, 2006). A considerable proportion of the size of the economies of developed nations is also determined by the SMEs. The need to go global has led to the internalization of the operations of small and medium firms. The attention on the operations of the SMEs is epitomized by the quantity of research undertaken on the contributions of SMEs on the economic performance of various economies (Kirby S, 2003). It is now common to find branches and agents of small and medium enterprises in overseas economies. The premises that are used in the classification of operations as either small or big is based on factors like number of customers, capital base, number of employees, technologies adopted and the size of the premises among others (Aitken Harrison, 1999). In UK, a lionâ₠¬â„¢s share of the market is controlled by small and medium enterprises. Justification of the study topic Several researchers have conducted their studies on the various factors that have led to the international operations of SMEs and developed the role of internationalization on the growth of these organizations. More research has also been conducted on the strategies and structures put in place to ensure firms go global.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Little research has been done on the impact of globalization on the performance and operations of SMEs. It is for these reasons that the researcher has picked on this topic to further reduce the information gap. The research area has also been desired by the urge to comprehend the trends that are likely to be observed in the internationalization of small business. The impact of internationalization is also important in the sense that it may have a considerable impact of the economic variables e.g. employment, economic growth and levels of economic interactions. Objectives of the study The researcher has carried out this study with the following objectives in mind: To understand the reason for internationalization of small and medium enterprises To determine the barriers of internationalization of SMEs To elaborately and determine the impacts internationalization of SMEs on their performance and operations. Literature Review Reasons for internationalization SME’s desire to operate in overseas markets has been propelled by many factors. According to Turnbull (1987), some of the critical reasons why small firms have decided to globalize include: The need to increase their financial returns- internationalization will increase the firm’s turnover and result into economies of scale production which reduces the costs of operations. Small and medium firms have thus internationalized their acti vities in order to increase sales, minimize costs and maximize revenues (Burgel, Fier, Litch, Murray, 2001). To exploit new advanced technologies- SMEs that are in search of new and advanced technologies have always internationalized in a bid to utilize and benefit from the technology that better. Technology reduces costs, increase output and increase efficiency and effectiveness in production (Aitken Harrison, 1999) To enter into new markets (widen consumer base) – the availability of a wide market and international consumers, motivates the expansion of the SMEs in the foreign market. Kirby S (2003), asserts that International operations also enhance diversification reducing the financial shocks likely to be experienced in operations.Advertising We will write a custom essay sample on Internationalization of small and medium enterprises: effects on operations and performance specifically for you for only $16.05 $11/page Learn More The entry of SMEs in new markets will result into a modification of the promotional message that is used to market in the global market. This is because of the diverse cultures language and the media coverage. Benefit from a pool of qualified human resource – firms that operate globally can benefit from the availability of a large pool of qualified expertise. Expertise improves the quality of decisions and policies that are made by an organization (Grant, Jammine, Thomas, 1988). It thus motivates small and medium enterprises to globalize and use these production factors. To exploit the idle factors of production the firms- SMEs are endowed with resources that they at times fail to completely utilize in the domestic market. The idle resources can therefore be put into production by internationalizing. This will reduce the level of unused resources and increase the production level. The SMEs will therefore make more gains in their operations. Most of these factors are caused by the need t o remain competitive in the market that is characterized by stiff competition from known and unknown, hostile and friendly, intended and unintended competitors (Athavale, 2006). Irrespective of whom the competitors are small and medium firms have to take necessary precautions in order to ensure their survival. Environmental scanning is mandated by the need to retain market share and improve financial performance in the fast changing environment caused by decline in government regulation and the increase in the size of the informal sector (Grant, Jammine, Thomas, 1988) Obstacles of internationalization of SMEs According to Moen (1999), there are various factors that hinder internationalization of SME. These include: Financial constraint- in undertaking international expansion firms require adequate resources to enable it stabilize in the foreign market. SMEs have majorly been constrained by the resources needed for establishing operations of their activities.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Legal and regulatory framework- the different economies where multinational firms operate is characterized by diverse government regulations and changing legal framework. Some countries deliberately promulgate rules intended to reduce and bar firms from penetrating their markets. This has reduced heavily the operations of firms in international markets. Several SMEs have as well been faced by continuous legal proceedings for failing to act within the legal framework. Trade barriers and huge tariffs account for heavy costs of internationalization. Different cultural practices and beliefs- culture is the beliefs, norms, convictions and practices upheld in a given society (Grant, Jammine, Thomas, 1988). International operations require high level of cultural understanding if a firms product gas to perform above par in the international market. SMEs failure to customize their product and promotional message to suit the international, market adversely influence their performance (Turnbu ll, 1987) Competitive disadvantages- global market experience drastic environmental and market changes that affect the trends and precedents of business performance. SMEs are always characterized by poor capability of analyzing and predicting the market trends. This has further hindered their performance in the global market. Large multinational companies have also engaged in an unfair trade competition which has led to the demise of SMEs activities. Internationalization strategies There are different ways which a firm can use to globalize. According to Aitken Harrison(1999), the internationalization strategies include: Exporting- in exporting, firms engage in production in home country and export their products to the foreign market. It can involve either direct or indirect exporting. In direct exporting firms will use its employees in exportation whereas in indirect exporting, there is the use of external parties (Kirby S, 2003). This strategy is dependent on the transport costs and the import duty imposed by the importing nation. Forming alliances- SMEs can internalize their operation by entering into alliances with foreign firms that will help penetrate the market efficiently and quickly. Moen (1999) opines that strategic alliances are advantageous since it permits quick entry in the foreign market, synergetic effects of alliances and the ability to use the distribution channel of the strategic partners. It also involves the sharing of costs and risks which thereby minimize the risk factor. The kind of strategic alliance entered into dictates the success or failure of entry (Burgel, Fier, Litch, Murray, 2001). Firms must there fore identify objectively and carefully the strategic partner that will enable successful entry. Foreign direct investment- firms that decide to internalize in this manner can do this in two forms: Greenfield investments or merger and acquisition. In green field investment completely new firm is formed or constructed while merger involves the purchase of existing firm or amalgamation with a different firm (Aitken Harrison, 1999). FDI is preferred where exporting involved huge transport cost, high custom duties and where the business intends to retain total control and confide its business know how. Most SMEs have adopted this means of internationalization due to lack of sufficient resources to introduce their operations in the foreign market (Moen, 1999) The type of internationalization strategy that a firm adopts depends on the firm’s resources, size, type of product and the intention of going global. Careful scanning is necessary in making choice of the strategy to be adopted as it involves the utilization of firm’s resources. Conceptual framework Internationalization of SMEs has impacted greatly on their performance and radically changed the way of operations. The SMEs that decide to internationalize has realized a swell on the business turnover and increase in the returns as exhibited by t he increased profits after tax. The increased sales turnover of SMEs due to internationalization is attributed to the expanded market size and increased home sales turnover. When a firm internalize, it positively impacts on the goodwill in the domestic market and increased customer loyalty (Turnbull, 1987). The further increase in returns is pegged on the economies of scale production that results into a reduction on the cost per unit. Proposition formulation The research therefore attempts to formulate proposition that aims at explaining the reasons of the increased performance and efficient operations exhibited by SMEs that internalize. The increased performance is thus explained with the following propositions: Proposition A: SMEs internationalization result in increased sales turnover When SMEs internalize, they increase their areas of coverage. This therefore results into the increase in the production and the sales turnover. The business increases sales and increase in the eco nomies of scale makes the business realize increased profits. The result of the wider coverage makes the business compile annual reports by consolidating its earnings from the foreign market. Proposition B: internationalization of SMEs impacts positively on the improved operation efficiency Efficiency refers to the manner in which the resources are utilized reducing the wastages and losses (Grant, Jammine, Thomas, 1988). With expanded area of operation, the businesses will minimize its losses as a result of the improved and modern technologies adopted in the production process. Capital intensive techniques will be adopted to support the increased demand and ensure standardization of production. Proposition C. Quality of management and better decision making arise with internationalization decisions. Multinational firms have to engage qualified and competent managers who possess conceptual skills that enable managers to make decision and anticipate the effects of their decision (Ath avale, 2006). Small and medium enterprise firms that invest in the foreign markets are therefore compelled to recruit managers who are highly qualified. As a result, the operations of these SMEs are improved and the decision process is assesses to ensure that the draw backs that arise from hurried decision making is avoided. Better structures are formulated with internationalization of a business to allow for sufficient coordination of the foreign branches. Proposition D: financial sources increases with internationalization of SMEs When SMEs globalize, they become eligible to acquire debt from both foreign market and increases there credit ratings (Kirby S, 2003) a business that internationalize therefore enhances their ability to obtain more capital that is needed for expansions. Prosition E: SMEs internationalizations lead to the adoption of better and improved technology. SMEs that decide to internalize their operations will be likely to adopt better technology from countries t hat are more advanced than in the home country. Methodology The research to be conducted using this proposal was to determine the impact of internalization of SME’s on their operations. A sample of 20 SME’s were picked out of the thousand in the UK. Both small and medium were picked for the analysis. The 20 were also picked since they indicated consistency in growth of the various elements which were to be considered as mentioned below. The various elements considered are the number and quality of employees and in the businesses selected, the relative annual turnover, technologies employed in production, the spread of branches both in the home and overseas market. The categorization of data in terms of the elements above was done using the various sampling techniques such as simple random, stratified and clustered sampling techniques as well as judgmental sampling techniques for non-numeric characteristics of the SME’s (Grant, Jammine, Thomas, 1988) Primary dat a was gathered by the use of questionnaires. Questionnaires were developed, mailed to some of these organizations and others administered to these organizations orally using the researchers’ assistants. interview schedules were as well prepared to enable the researchers conduct personal interviews which would help in collecting and finding out about very sensitive information e.g. information on their strategic plans and their competitive advantages given that the performance of the 50 SME’s were not the same in all aspects. Interview is an oral administered of a questionnaire or an interview schedule (Burgel, Fier, Litch, Murray, 2001) The criterion that was found to be the most useful in determining the growth and size as well as the internationalization of an SME was the sales turnover. According to Turnbull (1987), an SME is determined as a firm with a sales turnover of over 24 million dollars and in the less developed countries given their weak financial systems, its even determined using a lesser turnover. The number of outlets were also determined more so the number in foreign countries as this would help determine the impact as per the market share since the larger the number of branches the larger the market controlled. The data collected for the study above was all based on the above assumptions. Secondary, sources consisting of the various annual reports from various firms were majorly got from the websites of the varied firms found in developed countries due to their quick adoption of technology. Secondary data of most SME’s in developing countries were sourced from books and financial journals including the gray literature or material. Variables A variable is a measurable characteristic that assumes different values among the subjects (Athavale, 2006). The measure of internalization has been found in terms of the size of FDI resulting into increased outlets. The outlets further raises the growth of the assets of the SMEâ€⠄¢s hence output also goes up through increased turnovers. Internalization in form of FDI of the SME’s is also largely affected by the ratio of the foreign assets to the total assets of the firms. While profitability has been determined as a measure of general performance, profitability to the ratio of assets giving the Return on capital employed (ROCE) gives the perfect measure of performance. Another variable is the ownership-management relationship as a determinant of internalization which in turn which in the end affects the operations of the SME’s. Management abilities like creativity, adoption of the right management styles and the educational qualifications of the managers can also give the firms competitive advantage over the other. The size of the SME’s also performs a significant role in the internalization of the small firms which alternatively affects the operations of the small firms. The size is determined by the sales turnover. Data analysis The d ata collected above will be analyzed by use of statistical and mathematical tool. The return on capital employed will be taken as the dependent variable. The independent variable will include the ratio of outlets to the sales, advertising expenses and sales level, quality of management as a function of strategic level management. Strategic management is the highest level of management concerned with the formulation of policies and the developing of an organizations strategic plan (Aitken Harrison, 1999). The quantitative data will be coded and then classified by use of mathematical techniques like tables, graphs, pie charts and ratios. For the qualitative information, the researcher intends to develop criteria which will be employed in classifying and coding of the data. The information will then be subjected to a regression analysis and a regression equation will be developed to illustrate the prediction of the dependent variable from the independent variables. Correlation coeffic ient will as well be calculated. Correlation is the degree of relatedness of variables (Burgel, Fier, Litch, Murray, 2001).This will enable the research to identify the degree of how the performance and operations of the variables are related. Coefficient of determination will be developed to determine the degree to which the independent variable explains the dependent variable (Grant, Jammine, Thomas, 1988). The pictorial representation of data will be instrumental in the easy and quick understanding of the trends and data comprehension to those with little understanding on complicated mathematical equations. Limitations in the study While conducting the study the researcher will be constrained by several factors. First, the financial limitation will only allow the research to be conducted using a small number of SMEs and a limited number of respondents. As a result, this may compromise on the findings of the research and lead to wrong generalization. The problem posed in this si tuation can be mitigated by the careful selection of appropriate respondents and use of qualified research assistants. The second limitation of the study arises from the scanty data gathered to show the financial performance of the SMEs. Businesses are reluctant to reveal their financial performance and give information on their strategic plan to non members of the organization to help keep is concealed to the competitors (Kirby S, 2003). This thus affected the level of information details that were acquired. The inadequate records that are kept by the SMEs also posed a problem on understanding the operations and data given. This problem can be minimized by disclosing to the respondents the reason for the research and giving assurance of confidentiality on the findings and data collected from their firms (Burgel, Fier, Litch, Murray, 2001). Moreover, the researchers experienced a limitation arising from the spread of the operations of the SMEs. By internationalizing, the operation s of a business become spread in more than one country and sometimes in different continent (Kirby S, 2003). It will be thus a mirage for the researcher to collect data from a specific data and then use the information derived from the sample to make a generalization on the universe. Careful consideration must be made to ensure that the generalization takes into account the diverse nature of SMEs operation. Finally, the researcher may be limited of sufficient knowledge and time required in data collection and analysis. The researcher should therefore increase the number of researchers he intends to employ to reduce the time for data collection. Deadline and a clear time budget are necessary in research to avoid delays (Moen, 1999). FOR THE skills, the researcher can engage qualified research assistants who posses both statistical and mathematical knowledge necessary for data analysis. Conclusions The research enables us to conclude that there is a positive impact on internationaliz ation of SMEs on their performance and operations. The research findings will be used to generalize the effects of internationalization of SMEs on performance and operations. This therefore assists in the bridging the gap that has existed on how internationalization is crucial in improving efficiency on processes and operations of SMEs particularly in the UK. We can therefore explain and draw the impact of globalizing on the increased turnover and employment creation in SMEs that secede to internalize. I also urge researchers to do more research on this area due to the nature and importance of the subject matter. References Aitken, B. J., Harrison, A. E. (1999). Do domestic firms benefit from firect foreign investment? Venezuela: The American Economic Review. Athavale, D. (2006). SMEs can become big brand. New Delhi: Springer. Burgel, O., Fier, A., Litch, G., Murray, G. (2001). The Rapid Internationalization Of High-Tech Young Firms in Germany and the United Kingdom. London: Anglo - German Foundation. Grant, R. M., Jammine, P. A., Thomas, H. (1988). Diversity, Diversification, and Probability Among British Manufacturing Companies. Academy of Management Journal. Kirby, A. D., S, K. (2003). Joint Ventures as an Internationalization Strategy for SMES. Small Business Economics , 21 (3), 229-242. Moen, O. (1999). The relationship between firsize, competetive advantages and expoer perfomance revisited. International Small Business Journal , 18 (1), 53-72. Turnbull, W. P. (1987). A Challenge to the stages theory of internationalization. London: Praeger. This essay on Internationalization of small and medium enterprises: effects on operations and performance was written and submitted by user Alayna Sanchez to help you with your own studies. 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