Enterprise Internationalisation: Context & Management Imperatives (Dr N P Massa) 13 February 2019

Go Global Programme Programme objectives

SME Internationalisation & Export Management
Session 4: Wednesday 13 February 2019, 4:00-7:30 ► Context: globalisation overview & internationalisation dynamics

► Remind ourselves of key international business fundamentals

Enterprise Internationalisation and reflect on their relevance to your respective circumstances
► Contextual considerations & management imperatives
► Revisit basic motivations & potential barriers to internationalisation

Dr Nathaniel P Massa ► Reflect on & discuss realities, challenges & opportunities faced

Department of Management
► Consider strategic perspectives and their implications
Faculty of Economics, Management and Accountancy on SME resources and operationalisation
University of Malta

► Share lived experiences & apply through interaction & case work
Community for Internationalisation and Enterprise Research
Adam Smith Business School
University of Glasgow

Enterprise Internationalisation – Dr N P Massa

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Programme outline Increasingly dynamic environments

● Context: Globalisation drivers, trends & enterprise dynamics “The world is shrinking” Competition is becoming more intense
● SME internationalisation demographics & rationale
● Motives & barriers for SME internationalisation Globalisation and internationalisation are fast redefining the
● Internationalisation modes: ‘Stage’ models & three pathways rules of the market and contextual parameters
within which enterprises must operate
● Managing Internationalisation
● Internationalisation: Key knowledge types & sources
► Some key drivers:
● Are you ready to export? Some considerations
● Advances in ICT and computer technologies
● Towards strategising: Select tools & fundamentals
● Advances in transportation - mobility and accessibility
● Entry modes: Quo vadis? Where? … and how?
● Deeper regional integration
● Performance & quality
● Managerial implications & factors contributing to SME success Firms seek to develop & exploit core competencies by internationalising
● The family business: Some considerations … yet international markets present both opportunities and threats
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Defining ‘Globalisation’? Globalisation of Markets

National markets merging into a global marketplace

“The process by which the Increasing global connectivity,
● Falling barriers to trade make it easier to sell internationally
experience of everyday life ... is integration and interdependence in
becoming standardised around economic, social, technological, ● Tastes and preferences converge onto a global norm
the world” cultural, political, and ecological ● Firms offering standardised products worldwide creating a world market
Encyclopedia Britannica spheres … increasingly binding people
more tightly into one global system
Yet … Difficulties arise from the globalisation of markets:
Scholars stress:
► Significant differences still exist among national markets
Convergence of patterns of consumption and production
► Country-specific marketing strategies often necessary
and a resulting homogenisation of culture
► Varied product mix required due to local tastes
A shift toward more integrated and interdependent world economy
Most global markets are NOT consumer markets.

Two key components:
❷
● The globalisation of markets
● The globalisation of production Most global markets are for industrial goods and
materials serving a universal need the world over
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Globalisation of Production Globalisation of Production: Considerations

Outsourcing productive activities to different suppliers

Sourcing goods and services from locations around the world
results in creation of products that are global in nature
to take advantage of differences in cost or quality
of factors of production: ► Barriers to globalisation of production include:
● Formal and informal barriers to trade
 Labour;  Land;  Capital ● Barriers to foreign direct investment
● Transportation costs
Historically production outsourcing primarily ● Issues associated with economic risk
confined to manufacturing enterprises ● Issues associated with political risk

► The emergence of global organisations:

Increasingly companies (inc SMEs) taking advantage Globalisation created need for institutions to help
of ICT and Internet advances, to outsource service manage, regulate and police the global marketplace
activities to low-cost providers in other nations E.g.: GATT … WTO IMF World Bank UN
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Drivers of Globalisation: (1) Declining Barriers WTO: World Trade Outlook Indicator

► General international trade tariffs imposed ● World Trade Outlook Indicator signals further loss of momentum in
In 1920s and 30s many nations 2017/18 trade growth into Q4 … and 2019
created significant barriers to 1913 1950 1990 2010 WTO
simple avg
final bound
International trade and FDI
France 21 % 18 % 5.9 % 3.9% 3.9%
Germany 20 % 26 % 5.9 % 3.9% 3.9%
Post-WW II West set about Italy 18 % 25 % 5.9 % 3.9% 3.9%
removing barriers to free flow of Japan 30 % -- 5.3 % 2.3% 2.5 %

Source: WTO 2019

goods, services and capital Holland 5% 11 % 5.9 % 3.9% 3.9%
enshrined in GATT … WTO Sweden 20 % 9% 4.4 % 3.9% 3.9%
UK -- 23 % 5.9 % 3.9% 3.9%

► Implications: USA 44 % 14 % 4.8 % 3.2% 3.2%

30.8%
1) Production processes dispersed in different international locations to
drive down costs and increase product quality 9.1%

34.6%
2) Economies of nations becoming intertwined and dependent
7.1%
3) Rising trade key determinant in world becoming wealthier since 1950
10.4%
4) Domestic markets increasingly ‘under attack’ from foreign competitors!
*Non-Agri. Simp Avg fin bound WTO. 26 November 2018
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Drivers of Globalisation: (2) Technological Change Trade flow maps: Merchandise exports

● Computers and telecommunications

High-power, low-cost computing
Digital convergence, increasingly mobile devices
Global communication and ICT

● Internet and World Wide Web

Internet / WWW becoming info backbone for global economy
Web-based transactions and service delivery
Diminishes location and size / resource constraints

● Transportation technology
Containerisation greatly reduced costs & transportation times
Jet aircraft: fast cargo movement & Low-cost person mobility

Enterprise Internationalisation – Dr N P Massa Source: WTO 2019 (data est 2017 / 2018) Enterprise Internationalisation – Dr N P Massa

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Trade flow maps: Commercial services exports & imports Changing Trends in Global Economy: Exports

World ex ports 2 008 es t.

Current world exports (est 2017)

Germany China Rank Country Exports

9% 9% US$ Million
USA 11%  1 China 2,157,000 
8%
OTHE R
10%  2 EU* 1,929,000 
49% Japan
5% 8% = 3 USA 1,576,000 
7% = 4 Germany 1,401,000 
Franc e
5% 4% = 5 Japan 683,300 
Canada Italy
3%
UK Rus s ia Netherlands 3% 3% = 6 S. Korea 577,400 
3% 3% 3% = 7 France 545,800 
 8 N’Lands 526,400 
● Total world exports: c. 19.3 trillion US$ [WF 2019, data est 2017]  9 Italy 499,100 
2009 Global crisis: Collapse in global demand = biggest contraction -24% since WWII  10 H’Kong* 499,100 
● EU (ext. trade only): 1,929,000 US$m [≈10%] [WF 2019, data est 2017] = 11 UK 436,500 
2009 Global crisis: EU ext trade contracts -21% = 12 Canada 433,400 
● Exports as % of world GDP:  132 Malta 2,627 
Source: WF 2019
1980: 21%; 2000: 25%; 2005: 29%; 2008: 33%; 2016: 29% [World Bank / OECD 2018]
2009 Global crisis: World exports fell faster than world GDP: Exp % GDP 2008: 33%; 2009: 23% (↓ 10%)

● China’s share of exports almost trebled in 5 yrs between 2000-2005, & doubled in 2005-2010
Source: WTO 2019 (data est 2017 / 2018) Enterprise Internationalisation – Dr N P Massa Enterprise Internationalisation – Dr N P Massa

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Malta: Latest export data (FY 2017: € 3,207 m) (NSO Feb 2018) Changing Nature of Multinational Enterprises
Bev & Crude
Exports (€m) Materials, 13.3
5,000.0 Tobacco, 38.6
, 0% Misc Transact Multi-national enterprise (MNE): Any business having
Animal & Veg Oils & Fats , 1% &
4,500.0
4,000.0 Misc Transact & Commodities
Semi-Manuf
Goods, 151.3
Commodities, productive activities in two or more countries.
0.8 , 0%
Crude Materials , 5% Animal & Veg
3,500.0
Bev & Tobacco Food, 245.4 , Oils & Fats, 0.0
3,000.0
Semi-Manuf Goods
8% , 0% Trends since 1960s: 1. Rise of non-US multinationals
2,500.0
Machin &
2,000.0 Food Misc Manuf Transp Equip,
2. Growth of mini-multinationals
1,500.0 Misc Manuf Articles Articles, 379.9 1,009.8 , 31%
, 12%
1,000.0 Chemicals
by Product
500.0 Fuels & Lube etc 1973 share of world’s 260 largest multinationals:
Chemicals,
0.0 Machin & Transp Equip
2011 2012 2013 2014 2015 2016 2017
383.1 , 12% Fuels & Lube US = 48.5%; UK = 18.8%; Japan = 3.5%
etc, 985.2 ,
31%
Germany, Italy, 256.9, 8%
by Region Caribbean Is, by Country France, 231.3,
3.3, 0% EU 39% 398.0, 12%
7%
2002 share of world’s 100 largest multinationals:
S America, 8.4, USA, 128.6, 4% US = 28%; France = 14%; Germany = 13%; UK = 12%
0% Ships & Air
Japan, 106.5,
Store, 532.6,
Aust & Oceania, 17%
3% (… how have things shaped since 2002 ?)
7.8, 0% Europe , Other , 1284.6, UK, 77.8, 3%
40%
Africa, 556.7,
17%
1334.9, 42%
Tunisia, 62.2, ► Also, given facilitation by technology, transportation
2% and regional integration, SMEs are increasingly active
Ships & Air Spain, 47.6, 2%
Asia, 594.4, Stores, 532.6, in international business
N & Cent Am, 19% 17% S Korea, 43.8, € million
169.4, 5% China, 37.7, 1% 1%
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Mapping world’s biggest* public companies Large global enterprises vis-à-vis National economies
Comparative ranking of world’s largest economic entities’ takings in US$ billions
Countries: Gross National Income (GNI); Companies: Revenue
Share of largest Cos
1. US 28.0% 1 United States 17,601 21 Norway 532 41 Samsung (S Korea) 305
2 China 10,097 22 Belgium 531 42 Singapore 302
2. China* 11.6%
3 Japan 5,339 23 Nigeria 526 43 Israel 290
3. Japan 11.4% 4 Germany 3,854 24 Poland 520 44 Egypt, Arab Rep. 273
4. UK 4.4% 5 France 2,844 25 Walmart (US) 485 45 Vitol (Hol / Switz) 270
5. S Korea 3.4% 6 United Kingdom 2,801 26 Sinopec* (China) 455 46 Chile 265
6. H Kong* 2.9% 7 Brazil 2,375 27 China Petrol Corp* 428 47 Finland 265
7. France 2.8% 8 Italy 2,102 28 Austria 424 48 Pakistan 258
8. Germany 2.7% 9 India 2,028 29 Royal D Shell (UK, NL) 421 49 Kuwait Petrol* 252
10 Russian Fed 1,931 30 United Arab Emirates 405 50 Volkswagen (Ger) 245
11 Canada 1,835 31 ExxonMobil (US) 394 51 Apple Inc. (US) 233
Top 10 Cos 12 Australia 1,516 32 Thailand 392 52 Toyota (Jap) 227
1. ICBC (Bank, China) 13 Spain 1,366 33 Colombia 381 53 Iraq 226
2. Construction Bank (Bank, China) 14 Korea, Rep. 1,366 34 Saudi Aramco* (Saud) 378 54 Portugal 222
3. JP Morgan Chase (Bank, US) 15 Mexico 1,238 35 South Africa 367 55 Glencore (Switz) 221
4. Berkshire Hatha (Finance, US) 16 Indonesia 924 36 BP (UK) 359 56 Ireland 215
5. Agri Bank China (Bank, China)
17 Netherlands 875 37 Philippines 347 57 Algeria 214
6. Bank of America (Bank, US)
18 Turkey 822 38 Denmark 346 58 Total (France) 212
7. Wells Fargo (Bank, US)
19 Sweden 597 39 State Grid* (China) 333 59 Kazakhstan 205
8. Apple (Tech, US)
20 Argentina 579 40 Malaysia 333 60 Qatar 200
9. Bank of China (Bank, China)
*’biggest’ measured via a composite of: 10. Ping An (Insure, China) Massa 2016. Compiled from various sources: World Bank 2016 (Country GNI data latest available, mostly FY 2014/15); Company revenue data
Source: Forbes 2019.
● revenues, ● profits, ● assets, ● market value (respective sites inc Statista 2016 and Wikipedia, mostly FY 2014/2015)
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Whence the ‘Davids’? SMEs EU SME internationalisation: Broad snapshot

Internationally-active SMEs (import and / or export) tend to achieve higher

► c 24m SMEs (99.8%) Employ: 66.4% Value added: 56.8% turnover and employment growth (EC reports)

● At c.30%, imports most prevalent form of internationalisation

► c 29k SMEs (99.8%) Employ: 80.9% Value added: 81% (EC 2018)

● Often inward internationalisation leads to exports & new int’l opportunities

● “only 25% of EU-based SMEs export at all … much less outside EU” (c.7%)

“ Many SMEs in EU still struggle to internationalise – even with open, fair

trade frameworks in place” (EU SBA 2016)

− Internationalised SMEs engage more frequently in cooperation

− Small countries / domestic markets have more internationalised SMEs

− Size matters: Larger SMEs tend to be more internationalised (in- & out-)

Source: EC 2019 (SBA factsheet 2018)

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EU SME internationalisation: Demographics EU SME Internationalisation: By sector (direct export / FDI)

− Export & import activities increase in intensity with enterprise age

− SMEs involved in e-commerce more internationally-active
− Awareness of agency support among SMEs is low
− Sectors most internationalised: ● Manufacturing, ● Wholesale trade
● Research (s), ● Comp & ICT (s)
►Modes of internationalisation, % of SMEs ► % of SMEs with direct exports and / or imports

MT: 74%

MT: 30%

● SMEs with Tech. Coop /

Subcontracting / FDI % of SMEs with FDI, tech cooperation and/or
EU Avg: 17%. Malta: 24% % of SMEs with direct export by sector
foreign subcontractor relationships by sector
●
Source: EC 2014 data from EC 2010
Enterprise Internationalisation – Dr N P Massa Source: Latest EC data sourced from 2010 survey Enterprise Internationalisation – Dr N P Massa

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EU SME internationalisation: Policy initiatives - sowing & reaping? Malta SMEs: Single market & Internationalisation

EU SBA Policy measures Internationalisation

for SME internationalisation

Enterprise Internationalisation – Dr N P Massa Source: EC 2019, latest available relevant* data from Malta SBA Factsheet (2018) Enterprise Internationalisation – Dr N P Massa

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Time to Cost to Time to Cost to
Ease of Ease of Trade Trade
Doing Doing across across
Business Business Boarders Boarders
export: export: export: export:
Boarder Border Document Document Ease of Doing Business Globalisation & Internationalisation: Strategic considerations
compliance compliance compliance compliance
DB 2018 DB 2019 Score Rank
(Hrs) (US$) (Hrs) (US$)
Belgium 100 100 100.00 1 0 0 1 0
Denmark 100 100 100.00 1 0 0 1 0
France 100 100 100.00 1 0 0 1 0 Globalisation: In industrial sectors most SMEs face increasing competition
Italy 100 100 100.00 1 0 0 1 0
Netherlands
Romania
100
100
100 100.00
100 100.00
1
1
0
0
0
0
1
1
0
0
Strategic response required (whether SME is domestically focussed or committed to int’l)
Slovenia 100 100 100.00 1 0 0 1 0
Spain 100 100 100.00 1 0 0 1 0
Estonia 99.92 99.92 99.92 17 2 0 1 0 - Danger SMEs will increasingly have only limited competitive power
Lithuania 97.7 97.83 97.83 19 7 58 3 28
Latvia 95.26 95.26 95.26 26 24 150 2 35
Hong Kong* 95.04 95.04 95.04 27 1 0 1 12 - Forced into secondary roles rather than leading value chain positions

Source: World Bank (2018). Doing Business Project

United Kingdom 93.76 93.76 93.76 30 24 280 4 25
Greece 93.72 93.72 93.72 31 24 300 1 30
United States 92.01 92.01 92.01 36 1.5 175 1.5 60 - Trends risk eroding SMEs’ profit potential to minimum levels
Switzerland 91.79 91.79 91.79 39 1 201 2 75
Germany 91.77 91.77 91.77 40 36 345 1 45
Malta 91.01 91.01 91.01 41 24 325 3 25
Turkey
Georgia
86.73
90.03
90.27
90.03
90.27
90.03
42
43
16
6
358
112
4
2
55
0
To face these challenges SMEs must pay attention to:
Singapore 89.57 89.57 89.57 45 10 335 2 37
Cyprus 88.44 88.44 88.44 49 18 300 2 50 ► Global difference in production & cost conditions exploited more effectively
Canada 88.36 88.36 88.36 50 2 167 1 156
Ireland 87.25 87.25 87.25 52 24 305 1 75
Iceland 86.71 86.71 86.71 53 36 365 2 40 ► Innovative capability & ability to develop and absorb new technology
Japan 86.51 86.51 86.51 56 22.6 264.9 2.4 54
China 69.91 82.59 82.59 65 25.9 314 8.6 73.6
India 58.56 77.46 77.46 80 66.2 251.6 14.5 77.7 ► Knowledge of the market + networking & alliance resources
Russian Federation 70.2 71.06 71.06 99 66 580 25.4 92
Tunisia 70.5 70.5 70.50 101 50 469 3 200
Brazil 63 69.85 69.85 106 49 862 12 226.4 ► Access to capital
Barbados 61.88 61.88 61.88 132 41 350 54 109
South Africa 59.73 59.64 59.64 143 92 1257 68 55
Saudi Arabia 49.59 54.31 54.31 158 50 363 60 105
► Awareness of dominating statuses in corporate hierarchies
Afghanistan 30.63 30.63 30.63 177 48 453 228 344
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Some typical SME characteristics (yet to different extents!) Why Export?

SMEs typically characterised by:

● Absence of standardisation, ● Lack of formality in working relationships,
● Flat organisational structure (staff development likely limited)
1 Achieve levels of growth not
possible domestically 6 Increase returns on
investments in R&D,
expansion, management

Organisation: Employees very close to entrepreneur / owner-manager.

Easily influenced. Owner’s aura. Intimacy & immediacy.
2 Increase resilience of
revenues and profits
7 Improve financial performance
Improve your productivity

3 Spread business risk

Risk taking: Can occur where enterprise survival threatened, or where major
competition undermining SME’s activities
4 Achieve economies of scale
not possible domestically
8 Gain knowledge, elevate your
product enhance opportunities

Risk compounded by limited experience or foreign market info in

decision making, also liabilities of ‘smallness’ in resources

5 Increase commercial lifespan

of your products & services
9 Elevate your profile &
international recognition

Flexibility: Direct communication & intimacy with customer / client & org.
helps SMEs react faster & more flexibly to customers’ needs
Leverage a skill or capability
10 Survive …

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Should SMEs go international? Select broad EU indicators Why do SMEs internationalise?

Internationalisation can result in competitive gains for SMEs SME internationalisation (esp initially)
often … ultimately depends on the owner-manager,
From macro perspective this can contribute to
improved national socio-economic performance as well as … idiosyncratic circumstances (int / ext) … and … happenstance!

► Higher turnover growth

>50% SMEs with foreign investment or international SME objectives generally derive from managerial or firm-based perspectives
subcontracting reported increased turnover (other SMEs 33%)

► Higher employment growth ● Primary motivation: often to grow & survive, and improve competitiveness
10% for SMEs importing and exporting (other SMEs 3%)
Mainly based on market dynamics and costs in relation to firm capabilities
► Enhances innovation
26% of int’l-active SMEs launched new products in their country sector
(other SMEs 8%). Also more successful with new process innovations ● Others also argue that a firm’s objectives is to maximise profits

► Enhanced competitiveness
Int’l-active SMEs considered themselves more competitive as a result – increasing with Internationalisation can be a way to realise these objectives
commitment (Inward only: 53%, Export only: 56%, Subsidiary & multimode: 69%)

Source: EC 2004, 2010, 2014 Enterprise Internationalisation – Dr N P Massa Enterprise Internationalisation – Dr N P Massa

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Why do SMEs internationalise? Some key motives SME Internationalisation: Internal & External perspectives

● Growth motives Some key internal stimuli:
Possibilities for increased sales, revenues – profits and profitability
● Decision-maker’s characteristics
See also associated economies of scale (push / pull) & also domestic market size (push)
● Excess capacity
● Knowledge associated motives ● A unique product
Leveraging knowledge assets & expertise (push); Search for knowledge assets,
know-how gaps, technology, keep lead in product / tech development ● Strategic advantage, e.g.. tech adv
● Marketing advantage
● Network / social ties & supply chain links
Importance of soft assets: social / network capital … foreign suppliers, emigres Broadly 5 stimuli:
1. Opportunity
● Domestic market drivers 2. Environmental change
Stagnant domestic sales / market / small size, high production & labour costs, 3. Internal change
economic circumstance, local image & reputation, strict laws & regulations 4. Performance
5. Learning
Some key external stimuli:
● Unsolicited orders
● A saturated domestic market
● Recession
● Better opportunities for rents
All stimuli moderated by
decision-maker’s perception
of risks, potential and costs
Same factors may encourage /
discourage owner-manager
depending on situation & circumstance
Source: Calof & Beamish

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Internationalisation: Drivers & motives (EU perspectives)
Source: EC 2004. Internationalisation of SMEs
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EU “SMEs” perception: External internationalisation barriers
% of SMEs identifying
barrier as ‘Important’
Source: Latest EC data sourced from 2010 survey Enterprise Internationalisation – Dr N P Massa
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EU “SMEs” perception: Internal internationalisation barriers
Imp. of internal barrier
avg. score, by SME size
1 – not important
5 – very important
Source: Latest EC data sourced from 2010 survey Enterprise Internationalisation – Dr N P Massa
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Internal impediments to internationalisation
● Human resources constraints
- HR & managerial capacity
− Lack of managerial skills - Lack of entre’ / int’l orientation [?]
- Lack of strategic plans for internationalisation
− Staff qualifications & numbers - Experience & knowledge: Market / Int’l /
Prod & Tech / Network / Cultural / Entre’
− Time and knowledge
Costs of internationalisation:
- Doing market analysis
● Financial constraints - Buying legal consulting services
- Document translation
− Shortages in capital - Product adaptation
− Access to loans & finance - Compliance costs
- Travel expenses
- Higher business / financial risk
● Limited / asymmetric information
- Market intelligence
− foreign markets - Tax regulations
− foreign rules and regulations - etc. …
Source: Consolidated from EC (2014) Challenges & Opportunities for EU exporting SMEs Enterprise Internationalisation – Dr N P Massa
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External domestic impediments Internationalisation Barriers ranked by Internationalisation Barriers ranked by

SMEs Member economies (policy makers)
1 Working capital shortage to finance exports Inadequate quantity of and / or untrained
● Domestic policies and admin practice & support
personnel for internationalisation
− Access to finance − Export insurance 2 Identifying foreign business opportunities Working capital shortage to finance exports
− Transparency & efficient admin to facilitate internationalisation 3 Limited info to locate / analyse markets Limited info to locate / analyse markets
4 Inability to contact potential overseas Identifying foreign business opportunities
customers
● Trade & investment-specific barriers 5 Obtaining reliable foreign representation Lack of managerial time to deal with
internationalisation
− Non-Tariff measures (NTMs) affect SMEs disproportionately
6 Lack of managerial time to deal with Inability to contact potential overseas
− Complex customs procedures internationalisation customers
7 Inadequate quantity of and / or untrained Developing new products for foreign markets
− Export controls
personnel for internationalisation
− Lack of IPR enforcement 8 Difficulty in matching competitors' prices Unfamiliar foreign business practices
− Lack of transparency re trade rules & other local / domestic regulations 9 Lack of home govt assistance / incentives Unfamiliar exporting procedures / paperwork
10 Excessive transportation costs Meeting export product quality / standards /
− Exchange rate fluctuations
specifications
Source: Consolidated from EC (2014) Challenges & Opportunities for EU exporting SMEs Source: OECD 2007. Top barriers and drivers to SME internationalisation. OECD & APEC survey
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All ‘barriers’? How’s your ‘proverbial glass’ & stance? Globalisation & Internationalisation: SME modes & dynamics

Key stimuli motivating & assisting SMEs to overcome obstacles include:
► Entrepreneurial vision / experience
► Firm / personal networks
Yet … increasingly, emphasis is on softer, hard-to-pin underlying
factors critically influencing SME internationalisation behaviour:
Traditionally, internationalisation = opportunity to increase sales (usually exports)
► International strategy Globalisation intensified competition. SMEs realising internationalisation
► External assistance crucial for competitiveness … and in instances survival.
Hutchinson et al 2006
Export still very important traditional SME route for internationalisation …
… yet increasingly SMEs strategically engaging in other modes, e.g.:
● International partnerships, alliances & JVs

“it is important to note that the attitudes and motivations of decision ● Foreign investments
makers in SMEs determine the path and pace of internationalisation. ● Regional cross-border collaboration / clustering
… they need to be aware of the importance of issues such as their own
attitudes and motivations, timing, coherence, managed growth, ► Beyond financial transactions / physical product exchanges
keep in mind underlying social transactions & relational exchanges
business networks and learning in the internationalisation process.
In fact, managers need to be aware that the mental models they have ► Knowledge & technology transfer … enhance SMEs’
could be their main barriers to internationalisation.” Chetty and Campbell-Hunt 2003 competitiveness & international business strategies
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Internationalisation process: Stage models Managing internationalisation

Based on managerial learning & I-Model (Innovation) Frequently mentioned problems:

accrued experience. Incremental I-Model (Innovation)
1. Domestic marketing
1. Domestic
Exclusive marketing
domestic focus. Not willing / ● Lack of explicit internationalisation strategy (esp initial phases)
Exclusive
capable todomestic focus. orders
Not willing / [0%]
U-Model (Uppsala)  Commitment
handle export
capable to handle export orders [0%]
[EU 2004, 2010, Massa 2011]
U-Model (Uppsala)
 Risk
1. ● Lack of know-how on: ► international activities
1. No
No regular
regular exports
exports  Control
2. Pre-export
2. Pre-export
Interest.Seeks
Seeksinfo
info/ /feasibility
feasibility [0%]
2.
Interest. [0%] ► identification of partners / collaborators / contacts
2. Export
Export via
via independent
independent rep
rep  Learning

 Profit potential 3.
3. Experimental
Experimental involvement
involvement ► assessing market potential
3. Est foreign sales subsidiary Starts
Startslimited
limited exports,
exports,intermittent.
intermittent. Physical
Physical /
cultural distance
/ cultural distancelimited
limited [0-9%]
[0-9%]
4. Overseas
4. Overseas prod
prod // manufacture
manufacture
These are problems or critical limitations
4.
4. Active
Active involvement
involvement
Systematic effort  exports / diff. countries. relating to management … or, specifically the CEO / MD
Systematic
Org structureeffort  exports
to support / diff. countries.
exports [10-39%]
Various entry modes beyond ‘export’: Org structure to support exports [10-39%]
● Strategic alliances ● Joint ventures 5. Committed involvement SME managers’ focus often on: technology, structure, marketing …
5. Committed
High foreign market involvement
dependence. Decisions
● Franchising ● Licensing allocate resources & dependence.
direct invest. Decisions
[ >40%]
… but less on strategy and planning in relation to internationalisation !!
High foreign market
● Networking ● Subcontracting allocate resources & direct invest. [ >40%]

Source: Johansson & Vahlne 1977, 1990; Cavusgil 1980 Enterprise Internationalisation – Dr N P Massa Enterprise Internationalisation – Dr N P Massa

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Managing internationalisation Internationalisation: Importance of internal competencies & barriers

► SME managers considered these planning activities ‘very important’: Various forms of knowledge required, e.g.: ► Foreign market conditions
– Analysis of foreign market potential is very important (73%) ► Laws & regulations,
– Analysis of the competitive environment (68%)
– Analysis of the legal environment (58%) ► Cultural differences etc…

► Yet, what actually happened in reality was markedly different!! Competency development

Learning-by-doing Employ / engage experts

However: CEO / Mgt international experience can be of major importance

Mindset and experience of managers

Small firm owners’ commitment, persistence & internationalisation orientation

crucial for firm’s growth internationally: volition (Jones et 2005, Pauwels et 2009, Massa 2011)
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SME internationalisation: Key knowledge types & focus Dynamic competitive realities: Strategic imperative for SMEs

Knowledge type Key characteristics and focus SMEs attempting to internationalise business operations face a paradox!
Market Experiential tacit: Market - firm & country specific. Capability. Entry-modes
Non-experiential explicit: Gen. knowledge transferrable to other markets  SMEs usually best when:
International- Know-how. Procedural & experiential. Tacit & transferrable to other markets.
► Serving small number of customers who buy quality
isation Firm-specific. Capabilities, resources. Entry-mode processes
Product & Internal processes & modus operandi. Tacit know-how. Can also be explicit. ► Customers demanding frequent changes, customisation
Technology Firm-specific unique / diff advantage. Tech /production / service advantages. to specialised product and willing to pay premium
Enhances ‘internationalisability’
Network Tacit, broad, non-specific, experiential. Informal / formal, social / business
 SMEs typically characterised by:
networks. Ext. knowledge source. Contacts, suppliers, fairs. Opportunity
qualities of entrepreneurship,
Cultural* Predominantly experiential, tacit. Also foreign institutional knowledge.
flexibility and product development …
Country / region specific. Language, habits, norms, laws, behavioural modus
operandi. Also integrated in experiential market knowledge. … motivated by: need to generate
Entrepreneurial* Experiential / tacit. Knowledge on existing opportunities, potential &
growth (and perhaps survive), and
exploiting them. Low intensity at ‘novice’ stage. to challenge existing markets & players
Source: Massa 2011. Palimpsest from theory & empirical observation Enterprise Internationalisation – Dr N P Massa Enterprise Internationalisation – Dr N P Massa

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Are you ready to export? Key considerations Market research: Can you afford it? (Can you afford not to?!)

Is there a market
What’s at stake? … What’s at stake? …
for what we do? ► If you do unnecessary research: ► If you don’t do research
What changes
Where? Scalability
do I need to make?
Research. Is there − Research cost − Target wrong market
demand?
− Target non-existent market
− Wrong offering
Can I service it now? Do we have the Motivation − Wrong route to market
… and in the future? necessary competencies &
How? within the business? Ambition − Sub-optimal execution
− Missed opportunities
− Damage to reputation
Strategic
Does my business Do I − Damage to core business
International
have the have the business − Time and money resources
capacity to cope? capacity to cope? development plan
Outlay and cost estimations: UK Department of Trade and Investment consulting
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Quo Vadis? Where? Overall country attractiveness: Basics

► EU member states (regions)

► Peripheral emerging regions
Benefits Costs
● Market characteristics
► Brazil, Russia, India, China ● Corruption
● Size of economy
● Lack of infrastructure
► Columbia, Indonesia, Vietnam, Egypt, Turkey, South Africa ● Likely economic growth
● Operational costs
● Network / opportunity
► Australia, Canada, USA & Commonwealth ● Legal costs
access

World Bank: ‘Ease of Doing Business’ (2018) ranking: Overall

country
attractiveness

Risks
● Political: Social unrest / Anti-business trends
● Economic: Economic status / mismanagement
● Legal: Failure to safeguard IPR / regulation , …

Source: World Bank 2018 – Doing Business database Enterprise Internationalisation – Dr N P Massa Enterprise Internationalisation – Dr N P Massa

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Country costs: Corruption & bribery Entry modes Advantages / Benefits

Entry Mode
Exporting Relatively fast & easy. Low cost , low
commitment. Flexible. Ability to
Corruption Perceptions Index: EU comparison realise location & experience curve
economies + scale
Disadvantages / Challenges
High transport costs; Tariff / non-tariff trade
barriers; Issues w local marketing agents. Limited
market / network knowledge

Rank RankInternational Bribe Turnkey Ability to earn returns from process Creating efficient competitors; Lack of long-term
Rank Rank Corruption CPI
EU2018
CPI
Country Chg. 2011
EU
Country
CPI Payers Index
CPI Chg.
contracts technology skills in countries where market presence.
Perceptions Index FDI is restricted.
12 36 Slovenia
1 1
Rank Denmark 88
Country  Rank Country59 
2 3 Finland 85  13 38 Cyprus 59  Licencing / Low entry / develop costs & risks. Lack of control over technology / quality.
2
 13
Denmark
Sweden 85
least 13
1 Netherlands
38 Czech Republic 59
 
Franchising Possibility of rapid expansion. Strong (L) Inability to realise location & experience
4 28 New Zealand
Netherlands 82 13 1 Switzerland
38 Lithuania 57 =
 presence in foreign market via brand. economies. Inability to engage in (int’l) strategic
5 39 Fin/S’pore/Swed/Switz
Luxembourg 81 = 14 3 Belgium
41 Latvia 58 = Licensee knows local conditions. coordination. Control costs & limited income.
6 711 Norway
Germany 80  14 4 41 Germany
Spain 58 
 Alliances & Access to local partner’s knowledge & Finding right JV partner critical. Structuring
6 811 Netherlands
United Kingdom 80  15 4 51 Japan
Malta 54 
7 14 Austria 16 53 Italy 52 Joint ventures limited resources / distribution. Share effective partnerships tricky. Lack of control
   76     
development costs & risks. Access to over technology / aspects. Limited ability to
8 170
17 Belgium
Libya / Burundi =
75  23 United Arab Emirates=
17 57 Slovakia 50
market. Client familiarity & politically engage in global strategic coordination. Inability
9 172
18 Estonia 73 18 60 Croatia 48 
Afg/Guinea/Sudan  25 Indonesia acceptable. to realise full location & experience economies.
9 18 Ireland 73  19 61 Romania 47 
 176 N Korea / Yemen  26 Mexico
10 21 France 72  20 64 Hungary 46  Wholly owned Full control . Protect tech IPR. Develop Complex registration & time-consuming.
 178 Syria / South Sudan 21 27 China
67 Greece 45
11 30 Portugal 64   subsidiaries new knowledge / capability. Realise High costs / investments and risks.
12 180
36 Somalia
Poland most
60 = 22 28 Russia
75 Bulgaria 42most
 location & experience curve econ. High commitment & comparatively least flexible.
© 2019 Transparency International © 2012 International
Transparency Transparency International
© 2019
(FDI)
Ability to engage in global strategic
coordination. Minimise transact risk.
© Transparency International 2019, CPI (data for FY 2018)
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Whence the support and access to knowledge? Towards strategy formulation

► Yourself! (your drive, experiential knowledge, contacts and social access)  Internationalisation … also involves complexity & risk
Also seek exposure at first hand! Travel, observe, meet, talk to potential clients

► Your employees & potential new recruits & engaged professionals Risks play important part in formulating your international business strategy
► Your (foreign) suppliers Strategy should be clear, based on realistic options
► Business networks & peers (informal & formal / local & international)
Focus: When, how and which markets to enter, & with what product?
► Internet – vast source of information
► Agencies & public bodies: First: Establish preliminary idea how to proceed:
● Malta Enterprise / TradeMalta
1. Establish your motives for internationalisation (Why?)
● Chambers & Industry associations (inc. foreign)
2. Clearly define your company’s current situation (SWOT analysis)
● Embassies
3. Establish product(s) / service(s) to be internationalised (What?)
► Specialists and consultants
4. Select the right market(s) to penetrate (Where?)
► Universities, training and research centres
5. Decide on your mode of entry (How?)
► Banks, investment agencies & sources of finance
6. Establish right timing and moment to enter (When?)
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Determinants of Enterprise Value Value Creation

The way to increase profitability is to create more value

Reduce Costs ► Amount of value firm creates is measured by difference between its
costs of production and the value consumers perceive in its products.
Profitability
Porter: 2 basic strategies for creating value and
Add Value & attaining a competitive advantage in an industry:
Raise Prices
Enterprise 1. Low-cost strategy suggests a firm has high profits when it
Valuation creates more value for its customers and does so at a lower cost
Sell More in
Existing Markets 2. Differentiation strategy focuses primarily on
increasing attractiveness of a product
Profit Growth

Enter New Superior profitability goes to firms that create superior value.
Markets The way to create superior value is to drive down costs and / or
differentiate the product so that customers are willing to pay a premium

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Strategic Capability General / Macro environment Industry / Competitor Analysis
Internal evaluation Analysis (PEST) (Five Forces, Porter)
Value Creation
● Resources: “what we have” Target country variables for Variables for entry mode & strategy choice
entry mode & int’l strategy choice
Tangible: Threat of
- Financial - Physical New Entrants
Politico-
- Technological - Organisational Economic
Legal forces
Intangible: forces
Bargain. Rivalry Bargain.
- Managerial - Knowledge & IP power of among exist power of
- Innovation - Reputation & trust Suppliers competitors Buyers
- Networks - Quality perception Socio- Techno-
Cultural logical Threat of
● Competencies: “what we do well” forces forces Substitute Prod

Generic Strategies Directional Growth Strategies Four Basic International Strategies

(Porter) (Ansoff) (Global / MNE perspectives)
BROAD HIGH
CURRENT

Pressure: cost reduction

Cost Differenti
Market Product Global

Competitive Scope
leader ation Standardisation Transnational
Penetration Development
Superior value creation relative to rivals does NOT necessarily Strategy Strategy strategy strategy

Markets
require a firm to have lowest costs in the industry, or to
create most valuable product in consumers’ eyes.
Focus Strategy Market Divers- Localisation /
International Multi-domestic
Cost Focussed Development ification strategy
strategy
However, it requires the gap between value (V) and focus differentiation
cost of production (C) be greater than competitors’ gap. NARROW NEW LOW
Competitive Advantage Products / Services Pressure: local responsiveness
LOW COST UNIQUE EXISTING NEW LOW HIGH
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General / Macro Environment: PEST analysis Industry / Competitor Environment: Five Force analysis

Threat of / to new entrants

► Politico-Legal forces ► Economic forces
● Barriers to entry (permissions, patents, rights);
● Political stability; ● Policy stability; ● GDP growth rates; ● Domestic demand; ● Capital requirements, ● Costs, ● Switching
● Rules & regulations for business ops; ● Income / saving patterns; ● Inflation rates; costs; ● Brand equity; ● Customer loyalty
● Antitrust & cartel laws; ● Unemployment rates; ● Exchange rates;
● Competition & consumer protection; ● Tax levels; ● Trade & investment incentives Supplier bargain. power Competitor Rivalry Buyer bargaining power
● Labour laws; ● Environmental laws; ● Customs duties; ● Production costs; ● Number of suppliers; ● Competition intensity; ● No of ● B2B / B2C; ● Consumer
● Indigenous business ‘protection’. ● Labour costs; ● HR pool; ● Various indices ● Diversity of offers; ● Supply competitors; ● Prod capacity profiles; ● Volume / value of
costs; ● Access to raw ● Efficiency / productivity; purchases; ● Consumer habits;
materials; ● Importance of ● Market share; ● Concentration; ● Buyer profits; ● Distribution
industry for suppliers ● Segments; ● Market access & channels; ● Retailer networks;
PEST analysis of international General Environment
distribution; ● Industry life cycle ● Warehousing
Target country factors for entry mode and international strategy choice considerations

► Socio-Cultural forces ► Technological forces Threat of substitute products

● Lifestyle, general fashion / taste trends;
● Business & work ethic; ● Level of educ.;
● Labour productivity; ● Social mobility;
● Consumer disposition; ● Environ. Aware;
● Attitude towards foreign products & Cos;
● Product / service differentiation; ● Emerging
● ICT investment levels & infrastructure; substitute threats; ● Brand strength & lock-in;
● General level of digitalisation & IT society;
● General R&D investment levels;
Trends & broad industry characteristics
● Innovation & competitiveness indices;
● Market size & growth rate; ● Industry profitability; ● Operating costs; ● Scale Economies; ● Production tech;
● Logistics and transportation-related; ● Capital expenditure; ● Innovation & expenditure R&D; ● Quality standards; ● Certification; ● Computerisation

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Generic and Directional growth strategies (Porter & Ansoff) Consolidating: Business level competitive strategies
BROAD

Cost Differenti ► Generic strategies (Porter) COST

Competitive Scope

leader ation
Strategy Strategy ● Cost Leadership Strategy: Competing in industry by providing
products at price as low as or lower that competitors’.
LOW MEDIUM HIGH

● Differentiation Strategy: Competing with all others in industry by STANDARD PREMIUM PRICE
Focus Strategy offering products perceived as different or unique.

LOW
PRICE FOR
NO FRILLS
/ LOW VALUE

DIFFERENTIATION
Cost Focussed
focus differentiation ● Focus Strategy: Competing in a niche serving unique needs of LOW VALUE GOODS
NARROW certain customers
Competitive Advantage
LOW COST UNIQUE
STANDARD

MEDIUM
PREMIUM PRICE
CURRENT PRODUCT
FOR
► Directional growth strategies (Ansoff) LOW PRICE AT
STANDARD
Market Product STANDARD
GOODS
● Market Penetration Strategy: Seek growth in current markets with Penetration Development PRICE

Markets
current products

● Market Development Strategy: Seek new markets for current products DIFFERENTIATED PREMIUM PRICE

HIGH
Market Divers- VALUE FOR PRODUCT FOR
● Product Development Strategy: Develop and improve goods or ification
Development MONEY WITHOUT DIFFERENTIATED
services for current markets
PREMIUM PRICE GOODS
● Diversification Strategy: Completely new products developed or NEW
acquired for new markets Products / Services
EXISTINGInternationalisation – Dr N P NEW
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The strategic management process: A basic take Managing internationalisation: Considerations for success

MOST PEST analysis Leadership Key to successful

analysis Stakeholder analysis Structure
5-Forces analysis HR / Networks
internationalisation project:
KSFs Info & Control Sys
Analyse & ID CEO /
EXTERNAL ► Strategy, planning and
Opportunities
Owner- communication with
Internationalisation:
& Threats Where? When? What? How? Which? Who? MD employees and other
Develop Reassess Evaluate stakeholders
SWOT analysis Formulate Implement
Mission Mission & Control
Strategies Strategies
& Goals & Goals Results
Analyse & ID ► Important: A clear strategy
INTERNAL Other and timely, comprehensive and
International Mgt /
Strengths & Business Stake- honest communication
Weaknesses Employ
Functional holders
► Main goal: Achieve most
Resource analysis widespread acceptance and
MOST
Functional analysis support for internationalisation
analysis
Core competencies project

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Organisational aspects to consider Performance

Structure No consensus on measuring internationalisation performance

● Formal divisions / units
● Decision-making Firm growth important dimension of
responsibility
● Coordination mechanisms
firm performance, especially for SMEs

Important to understand internationalisation’s

Processes
● How are decisions made?
● How is work performed?
Strategy formulation?
Resource allocation?
People
Not only the employees!
Recruitment strategy?
Retention. Compensation
Skills / Values / Orientation
Culture
Norms & value systems
shared among employees
influence of on both growth & profitability
Incentives &
Control
● Performance metrics
● Rewards Growth: ● Annual growth rate of sales ● Annual growth rate of total assets
Profitability: ● Return on sales (ROS) ● Return on assets (ROA)
International.: ● % exports (value / volume) ● Ratio of foreign to total assets (FDI)
► Competitive advantage sustainability dependent on knowledge / capability / resources

► Internationalisation is a process of adaptation – strategic, gradual and incremental

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Entry mode & performance: Export Entry mode & performance: FDI

Firm growth via sales increase 1st order effect on growth: Similarly, broadens SME’s customer base
Broadens consumer base by selling in new markets (directly or via agents) via new markets enabling larger production volumes and growth

2nd order effect on growth: Knowledge & capability development (beyond how to sell /
Higher sales can provide higher production volume & production capacity market in countries), via local operations inc. scientific & technological skills &
expansion. Growth via broadening markets & creating room for expansion Knowledge – enhancing competitiveness and sustainable firm growth

Also: scale economies, asset utilisation, labour & management efficiency (experience ► Location advantages: ● Production costs , ● Talent access, ● Market proximity
curve) as result of increased sales volume ( rate of profit growth +  profitability)
► Especially effective where SME’s competitive advantage based on proprietary assets

Diverse international markets lead to advantages in FDI can mitigate cases where:
market power & revenue diversification
● Product volume / value ratio result in excessive transport costs
● Import tariff & non-tariff regimes in host country are considerable
Indirectly: International market exposure contributes to profitability & growth:
● Greater control & market response mitigating distributor / agent opportunism
Opportunities to develop new knowledge and capabilities for
more international expansion & new opportunities (stepping stones) [Source: E.g. Lu & Beamish etc…] ● Offsets ‘liabilities of foreignness’ [Source: E.g. Lu & Beamish etc…]

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Quality: Fundamental importance Managerial implications

Fundamentals: ► Actively & directly establish international networks. Leverage contacts for
knowledge acquisition, collaboration, opportunity recognition & access
● Poor Q is unacceptable
► Actively & strategically explore ICT / web / social media full potential
Lower costs ● Measure Q throughout production /
► Seek professional employment & experienced consultant involvement – integrate!
& service process (prevention less costly)
Positive
Higher ► Seek public agency support knowledge & support / chamber networks
company ● Rely on few Q suppliers (Right quality /
market
image share limit sampling. JIT) ► Go beyond ad hoc. Research. Articulate client value proposition, formulate
QUALITY exploratory strategy. Establish responsibility, structure & actively pursue
● Train employees for Q and empower
them to decide & report on Q ► Gradually explore / exploit overseas investment opportunities (alliances & JVs)
► Seek strategies helping quickly reach threshold levels for economies of scale
► The 10 dimensions of quality: (reaping benefits from bigger size / investments, higher marketing)
Decreased
product 1. Performance 6. Durability
► No matter size. Ensure quality in interaction & communication, relationships, physical
liability 2. Service / experience 7. Serviceability
8. Responsiveness
evidence, web presence, service … and … product! (core & augmented)
3. Features
4. Conformance 9. Aesthetics ► Relationships: trust, reliability & commitment. Professional yet forthcoming & flexible
5. Reliability 10. Reputation
► Prepared for possible ‘loss leaders’, to win future business and ‘lock-in’,
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Management: Key factors contributing to SMEs’ success Family businesses: Some considerations

Have a truly international outlook
● Seek world-wide opportunities
● Strive to become an international business
● Cultivate enthusiasm for exporting
● Understand global picture for your industry
Show long-term commit to export markets
● Winning int’l orders takes time
● Be prepared for a long haul
● Budget sensible resources for each market
● Respond positively to obstacles
● Expect to make mistakes
● Involve your whole team in exporting
● Encourage visitors to meet employees
Source: Lloyd-Reason et al. See also Department of Trade & Investment
Adopt strategic approach (new market dev)
● Focus on few key markets at a time
● Resist temptation to wander
● Build on success & review progress cont.
● Develop new prod/service w exports in mind
● Provide for local needs
Thoroughly research new markets
● Gather information first hand
● Plan market visits well
● Prepare for cultural & social differences
● Compare yourself with competitors
● Participate in key trade exhibitions
● Draw on other companies’ experiences
● Follow-up your lucky breaks
● Know your best sources of info & advice
Enterprise Internationalisation – Dr N P Massa
● Familiness presents a double edged sword!
● Tacit knowledge and critical contacts reside with owner-manager / ‘boss’
● Ensure generational continuity along nurtured relationships
● Balance boss’ seasoned experience with upcoming generations’
strategising (and trusted employed professionals that share family culture)
● Active involvement of upcoming generations & professional management
(maintain familiness) in good time. Think early and ease in over the years
● As you professionalise – assume strategic stance yet do not sterilise
entrepreneurial drive of incumbent owner-manager (fine balance)
● Ownership structure has important role in determining internationalisation
pathways (fragmented / concentrated)
Source: Massa 2011. Enterprise Internationalisation – Dr N P Massa

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