When it comes to business, the internationalization process can mean many things. For instance, an export house may refer to acquiring permits and other necessary documentation to export their products to other countries as internationalization. While for a consultancy, internationalization involves connecting their clients with the right people worldwide. However, one thing that is common in everyone’s definition of internationalization is the presence of cross-border trade or exchange of goods, ideas, or services.
Why is Internationalization Important?
Cross-border trading is not a new concept. It has been around for centuries in the form of barter system or different kinds of alternate currency. However, with time, the ecosystem supporting the cross-border trade has seen a paradigm shift. Several big and small countries are now a part of the international trading scene, and as a result, the complexities involved have increased.
The current economic situation of the world contradicts to the world that we knew a decade ago. Thus, it is safe to say that the nations are now dependent on each other, and co-existing peacefully is the most fruitful way forward. If we subtract the political nuances from the current scenario, it is interesting to see how different nations have emerged as leaders of various economic forays. China, as we know, is leading the way in manufacturing. India is known for its IT solutions. USA is holding onto its innovative ideas while Singapore is emerging as a nation where SMEs and start-ups prosper. Making it evident, companies of no single country can survive alone. Hence the importance of internationalization.
Another reason why SMEs are always on a pursuit of internationalization is the fact that this process opens up new markets leading to new opportunities, which means more money for SMEs. Giant corporates have it comparatively easier. However, for SMEs, every single opportunity matters, and every country that opens up to trade and relaxed business rules is an opportunity that SMEs want to tap.
What Stops SMEs from Internationalization?
SMEs face many challenges when they plan to go international. Not only is the process psychologically frightening, but there are several internal and external factors preventing them from taking the next step. Let’s look at the top 5 challenges faced by SMEs in Singapore during the process of internationalization.
Shortage of Funds: Lack of capital is the biggest and the most common problem faced by SMEs in the process of capitalization. While the emerging markets present a lucrative opportunity, getting into them is a costly affair. Most SMEs aren’t able to justify the cost of export and/or expansion, and as a result, fail in sourcing adequate amount of funds from the banks and investors. Mostly because banks aren’t willing to expose themselves to ever-changing socio-economic factors involved in inter-country trades.
Lack of Expertise: Most SMEs fail to recognize the opportunities presented by overseas markets just because of the short-sightedness of the business developers involved with the business. This inability can be attributed to a few different factors, such as:
- Lack of experience in international trade
- Lack of resources to explore foreign market
- Lack of overseas contacts who can bring in business
Also, finding people with the appropriate expertise is an important thing. Given, the economic, cultural, and political landscape of every country is different; businesses must find local agents who can dedicatedly work and build sophisticated overseas operations for the business. Considering every big and small company is looking for such people, finding the right talent within the minimum budget is challenging.
Legal & Regulatory Issues: Governments of most developing nations focus on the growth of domestic companies and hence create policies geared towards helping the local players grow. As a result, an SME belonging to a foreign country has a hard time trying to carve out its space and customer base. Sometimes, the government can turn hostile towards international players forcing the companies to take an exit and run for safety.
Lack of Knowledge and Network: Most SMEs lack knowledge of the internationalization process. They have the will and the resources to grow big but lack direction. This reason has also been uncovered in major surveys like EFIC 2008, European Commission et al. 2010, and OECD 2009.
The next challenge faced by SMEs is the absence of a clear channel of sales and communication while establishing themselves overseas. SMEs fail to consider several operational aspects; such as poor research, time zone difference, inadequate demographic knowledge of the market, absence of adequate resources, and miscommunication due to language barrier.
Competition: When an SME enters a foreign market, it not only competes with other international companies, it also competes with already established domestic companies. Most SMEs aren’t able to keep up with aggressive pricing policies engaged by the local players, or in some cases, big corporates and succumb to the competition.
Cost of Logistics: A significant factor that contributes to the cost incurred by SMEs is the additional cost of logistics. Long-distance, poor infrastructure, cost of insurance, and delay in delivery make the logistics of the products a costly affair. Since these costs are substantial to be borne by the SMEs alone, they have to pass this cost to the consumer unwillingly. End result, increased product cost, making things worse for the SME.
Of course, not every small scale enterprise faces every problem we have listed. However, if you are a business who is trying to figure out your way into the international waters, it is always good to know about the size and nature of the oncoming troubles.
How to Overcome These Barriers?
While unavailability of funds and inadequate access to the tech has cited as some of the challenges of internationalization, it is, in fact, internal factors like training and capabilities, which seem to be a bigger problem.
SME sector has identified those problem areas, and formulated solutions to fix them:
Network with influential people: Interacting with the right people, and building a strong network provides access to knowledge and information that can be used to leverage the business opportunities overseas. The lack of experience of the SME can be compensated by the expert opinion of someone else who is actively participating in your network. A strong network, also means that the SME will have access to updated resources, better agents, and the best vendors.
Partnerships and alliances: A lot of SME, when they expand, partner with specialists in the new country of expansion. This gives them an advantage over the competition in terms that:
- SME gains access to experts in the country
- SME gains access to the resources used by the partner
- SME can focus on expansion without having to worry about scouting talent and finding agents
- SME can save on transaction costs, logistics and share the risk with a partner
There are several ways to enter an alliance in Singapore. The government’s iMAP allows SMEs to get associated with Trade Associations and Chambers and visit the foreign lands to explore the opportunities. Another Government program called PACT presents an opportunity to all the business owners in Singapore to come together and establish beneficial collaborations among themselves.
SMEs that are looking for quick expansion can also make use of the franchise model. Within the franchise model, the SME grants trademark rights, to use the SME’s business model and system to sell products or services and on-going support to the franchisee. In return, they get paid an initial fee and a regular royalty for using the trademark. One such example is of the Singapore bakery brand founded in 2000 by Mr George Quek, BreadTalk. BreadTalk have successfully formulated an international franchise model, creating a presence in markets across Asia and the Middle East. The business model is based on 60% Franchisee Outlets and 40% owned by the company.
Using technology: Technology is the easiest way to bridge more significant gaps. With technology, an SME can access almost any resource at the click of a button. Moreover, technology can help in automation, fast adoption, better communication, and risk reduction. Furthermore, technology enables the SME to distribute work over virtual teams, without having to rely heavily on expensive local talent.
The success of Lazada, popularly known as the ‘Amazon of SE Asia’ is a story that reckons how digital transformation can help a business overcome the risk of failing at internationalization. Lazada, headquartered at Singapore is an active e-commerce platform in Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. Lazada caters to more than 500 million customers and deals in several categories, including electronics, apparel, electrical appliances, furniture, household goods, and toys.
Strong banking instruments: Banks and the Government of Singapore have devised several platforms and services that enable the SME sector to overcome the hurdles of expansion at a comfortable pace. DBS, Singapore’s largest bank for start-ups is one of the best trade finance banks, provides Internationalisation finance scheme for SMEs.
Internationalization Finance Scheme (IFS) program is to facilitate the SMEs to mark their footprints in the overseas market and the finance required to establish themselves. Companies can borrow up to S$30 million. It includes :
Asset-based Finance: For purchase of estate and construct factories.
Structured Loans: To finance expenses
Bank’s Guarantee: Finance to secure overseas expansion like advance payment guarantee, performance guarantee, and tender bond guarantee.
Market Readiness Assistance Grant or MRA is a grant that supports SMEs in the expansion in other countries. This grant covers the cost to find an opportunity in an overseas market, setup the enablement architecture in the new market, and scouting the talent to run operations. MRA grant covers 70% of the costs (capped at $20,000 per annum) for Singaporean businesses that are exploring overseas markets. It helps in market set-up (Company registration/ tax structure/ licenses/ legal documentation), partnering with local companies, participation in trade shows or PR and promotional activity.
Is Going International Feasible?
Yes, going international is feasible. However, it will require much thinking and a solid strategy. The process of internationalizing is a costly affair, and a long term one. It requires commitment and constant re-evaluation. The progress can be plodding in the beginning, but with continuous efforts, an SME can grow stronger in an overseas market in a few months.