Impact of Globalization on SME’s

Ashish Bhatnagar (Assistant Professor)DCET BUSINESS SCHOOL,

IISE Campus, Kalyanpur, Kanchana Bihari MargLUCKNOW- 226 020 (INDIA)

Phone# 09219262881, email: ashish_mms@yahoo.com

Abstract

Today, globalisation is a major driver that has an impact on

nearly every economy. No country can any longer rely

exclusively on its local resources, capacities and

capabilities to steer its economic growth. Globalization is

leading to the structural transformation of the firms and

nations, and is creating new relationships and new

dependencies.

It is an ongoing process that presents opportunities; as

well as risks and challenges for the Small and Medium-sized

Enterprises SME’s which, although, account for a high

proportion of employment in and exports from all countries

across the world, are already very limited in resources.

A major strength for many SME’s is their close customer

contact and their ability to maintain close customer

relationships. However, in the prevailing business

environment even smaller and locally oriented businesses

have to see themselves in a global context.

All SME’s need to address certain key issues regarding

cooperation with international partners and how it can

benefit them.

The first section of the paper tries to look into what

globalization is. Then we try to analyze the major drivers

and consequences of globalization. what are the major in the

light of major constraints faced by SME’s and how far this

internationalization would help in addressing their

problems.

Globalization

Today, globalisation is a major driver that has an impact on

nearly every economy. No country can any longer rely

exclusively on its local resources, capacities and

capabilities to steer its economic growth. There is a

profound need to integrate its economy with the global

economy. It has been the growth in the world’s capacity to

innovate new goods and services, which has provided the main

engine of economic progress. These developments have been

mainly market driven, but the extent to which they have been

translated into welfare enhancing goods and services has

been influenced by the actions of national governments. As

technological advances continue to push the limits of

growth, firms are forced to look overseas for their inputs

and markets.

The world today is indeed a very different place to the one

into which most of us were born. The hegemony of UK in the

19th century and the US in the 20th century has been replaced

by a triarchy of economic power comprising the US, Japan and

European Union. Issues to do with the quality of life and

the structure of governance are in the process of a radical

rethinking. It is not just competitiveness and development

which has risen to the top of the political agenda, but

sustainable competitiveness and development. Anthony McGrew,

in a jointly edited book, writes

“Globalization refers to the multiplicity of linkages and

interconnections between the states and societies which make

up the present world system. It describes the process by

which events, decisions, and activities in one part of the

world come to have significant consequences for individuals

and communities in quite distant parts of the globe. On the

one hand, it defines a set of processes which embrace most

of the globe or which operate worldwide; the concept

therefore has a spatial connotation. …On the other hand it

also implies intensification on the levels of interaction,

interconnectedness or interdependence between the states and

societies which constitute the world community.” (p 23)1

The term ‘globalization’ became fashionable when it began to

replace words like ‘internationalization’ and

‘transnationalization’ as a suitable term to denote the ever

intensifying networks of cross border interaction in all

domains of human activity: social, political, cultural,

financial and economic.

Globalization is leading to the structural transformation of

the firms and nations, and is creating new relationships and

new dependencies. The main causes of globalization are well-

known. The first is the pressure on firms- by consumers and

competitors alike- to continually innovate new products and

upgrade the quality and/or reduce the price of existing

goods and services. At the same time, the escalating costs

of research and development, coupled with ever shortening

product life cycles are compelling firms both to search for

wider markets. The second cause of globalization- which in

many ways is better described as a removal of an obstacle-

is the renaissance of market supporting policies pursued by

national governments, and the growth of market led regional

integration.2

Since the mid-1970s, the fastest-growing countries have been

those that have managed to industrialize by developing a

competitive advantage in manufactured exports to the point

where industrial exports have become the engine of growth.

The main reasons for the growing importance of international

competitiveness are technological. The rapid pace of

innovation – and the resulting promise of productivity

increase – makes it more costly to insulate economies from

international trade and investment. Since new technologies

benefit all activities, traded and non-traded, rapid access

to such technologies in the form of new products, equipment

and knowledge becomes vital for national welfare. Insulation

from global markets and technologies is no longer a viable

option for any developing country.

Globalization refers also to the increasing mobility of

ideas, information flows and consumer tastes. It is the

corporate business response to the changed and changing

international business environment. The process has its

roots in four key developments, the first two of which are

arguably the most important:

Policy changes in the world economy, specifically the

liberalization of trade and capital flows, the

deregulation of markets, and privatization, which has

opened up new investment opportunities in most countries;

Accelerating technological progress that has changed the

rules of the game for both Trans National Corporations

(TNCs) and for host developing countries and enterprises

in these countries;

New organizational structures within companies, in part

made feasible by technological advances in the

information and communications industries; and

The shift of economic power from the north and west to

the developing countries, especially in Asia - a result,

as much as a cause, of globalization.

Major Drivers of Globalization

Globalization implies an evolving pattern of cross-border

activities of firms involving international investment,

trade and cooperation for purposes of product development,

production and sourcing, and marketing. The main driving

force behind globalization strategies of firms is no

different from that which drives international trade. Firms

seek to maximize profits, given the constraints they face.

Changing or vanishing constraints imply new profit

opportunities and thus require new strategies of firms. In a

way, globalization is nothing more than the entrepreneurial

response to a changing environment, while the prime motive

of firm behaviour - constrained profit maximization -

remains unchanged. One of the most important reasons for

globalization is that large parts of the world have become

industrialized since the Second World War. Many Developing

Countries (DCs), especially in East and South-East Asia,

have attained, or are about to attain, the status of an

industrialized country. This successful catching-up has

increased the number of suppliers on world markets. Global

production capacities and international competition have

increased, and so have the opportunities to exploit market

niches. This process will gain momentum once the large

markets of the People’s Republic of China, India and Central

and Eastern Europe, which represent roughly one half of the

world’s population, are fully integrated into the world

economy. Put differently, the constraint of market size,

which may have hindered globalization strategies in the

past, has become less relevant and probably no longer

applies at all. At the same time, other constraints that

prevented firms from implementing globalization strategies

have disappeared. Thanks to the micro-electronics

revolution, communication technologies have undergone a

dramatic change during the last decade, and new production

and organization technologies such as CAD (computer-aided

design) and CIM (computer-integrated manufacturing) have

evolved. Successive GATT rounds have substantially reduced

tariff barriers to trade, and capital markets have also been

liberalized, especially during the 1980s. Many business

services have become internationally tradable. As

transaction and communication costs fall, the proximity

between sellers and buyers, which has traditionally been

considered to be essential for many services, figures less

prominently. Most important in this regard is that financial

capital has gone global. The deregulation of other business

services such as banking and insurance also offers new

opportunities for the tradability of services. Hence,

standardized business services have become available around

the world, which, in turn, has made the international

fragmentation of production feasible. As a consequence of

all this, not only the constraints on firms, but also on

governments have completely changed.

The Consequences of Globalization

In an increasingly borderless world, where competitiveness

is driven by liberalization and technological progress,

developing countries face serious threats as well as

potential opportunities. The era of globalization is

described as “one of unprecedented opportunity” for

developing countries, while their successful

industrialization is one of the major reasons for

globalization. For developing countries, globalization

comprises both the participation of local enterprises in

international production of goods and services and increased

exports of goods and services by domestic export-oriented

firms to global markets. Unfortunately, however, there are

down-sides to globalization. There is, in John Naisbitt’s

words, “a global paradox”3. The most immediate and visible

consequences of the down-side- which all countries of the

world are currently experiencing is, the increase in

unemployment as new generic technologies substitute capital

for labour, competitive pressures, and the introduction of

more market oriented policies. While, innovation-led

production system offers more purposeful, responsible, and

rewarding job opportunities for those in work; it does not,

in itself, help reduce unemployment-at least not in the

short run. This is because the new system requires a

different mix of labour skills than of the one it is

replacing, and to match these needs, not only do labour

markets need to be more flexible, but quite huge retraining

programmes are needed. Rapidly rising wages, even under

labour surplus conditions, are forcing management to move up

the technology ladder in search of increased productivity to

justify new investment and retain competitiveness.

If global economic interdependence offers the prospects of

higher productivity and living standards, it also more

closely links national economies to exogenous financial and

other disturbances. Economic disturbances originating in any

one of the five or six economies are now electronically and

instantaneously transmitted across the globe, with possibly

devastating effects on nations which may have had nothing to

do with the causes of the shocks.4

If a globalizing economy may lead to greater economic

instability, it may also have unacceptable implications for

national security, social dumping, environmental erosion,

the spread of epidemics, drug abuse, terrorism and ethnic

violence. Bad news travels just as fast as good news; and

crime, disease and war know fewer territorial boundaries

than once they did.

While the forces of globalisation are leading to convergence

of the spending habits of the world’s consumers, they are

also exposing substantial differences in the way people

think and behave. Indeed, not all countries welcome the

effects of globalisation, as they fear it may erode their

traditional life styles. On the one hand the universality of

such goods as the motor car, the television set, the Sony

music system, Coca Cola, jeans and pop-music are leading to

cultural convergence. On the other, most people want to

remain loyal to their distinctive customs and institutions.

The Small and Medium Enterprises (SME) Sector

It has been universally recognized, that SMEs have become an

indispensable segment of every economy and have been playing

an enviable role in generating new employment,

notwithstanding the level of economic development of a

nation. Besides, they have been contributing substantially

to the manufacturing sector’s output and its exports. In

most developing and under-developed countries, SMEs

virtually constitute the entire industrial base. Of late,

SMEs have also emerged as dominant players in the service

sector.

Countries do not use the same definition for classifying

their SME sector. However, the three parameters generally

applied by most countries, singly or in combination are:

Capital investment on plant and machinery.

Number of workers employed.

Volume of production or turnover of business.

Although, there are no universal quantitative norms of

defining an SME, they can be clearly identified in any

developed or developing country and the factors setting them

apart may be qualitative and comparative5.

Most SMEs are one-person shows or are run by two or three

individuals, usually relatives, friends or business

partners, who take most of the decisions. There is usually

no distinction between private and business assets, and

subjective and personal factors play a large role in

decision-making. The personal stakes SME entrepreneurs have

in their businesses are much higher than those of corporate

executives in their companies. This enhances the risk and

commits entrepreneurs even more strongly to the success of

their ventures.

The comparative factors have to do with the way SMEs are

situated vis-à-vis large enterprises in the corporate

sector. They are small and medium-sized in comparison with

the large corporate entities with which they share a given

economic space. SMEs therefore come in varying sizes and

SMEs in one country may well be larger than the “big”

companies in another. The interesting feature is that,

notwithstanding their absolute sizes, the problems

confronting SMEs appear to be similar in most countries

whether developing or developed.

Globalisation and the Role of SMEs in Development (The

Challenge)

Generally, SMEs are considered the engine of economic growth

in most Asian economies by their sheer number and by virtue

of their significant contributions to employment generation,

value added and foreign exchange earnings and savings, as

well as other economic and social contributions. Hence, the

search for national competitiveness and promotion of SMEs

are not a dichotomy, but a necessary complement.

Many Asia-Pacific countries consider SMEs, comprising about

95 per cent of all establishments, as the backbone of their

economies and recognize their important role in socio-

economic development. SMEs are perceived as key players in:

a) ensuring market economy with competition in the market,

b) modernizing industrial structure to penetrate new

markets, c) contributing to the improvement of balance of

payment, d) contributing to socio-economic development of

the regions, and e) creating job opportunities.

SMEs are also promoted as they contribute in the building up

of a middle class group in society, otherwise known as the

missing middle and in helping to distribute income

equitably. They are a source of innovation and a breeding

ground for entrepreneurs and technopreneurs.

Globalization is the extraordinary explosion of both

technology and information, in ways that have considerably

reduced the twin concepts of time and space. It refers to

global economic integration of many formerly national

economies into one global economy, mainly by free trade and

free capital mobility propelled by Information and

Communication Technology6.

SMEs are deeply affected by the globalization of the

markets. Globalization has rapidly gained momentum as a

result of certain factors. They are:

Rapid technological advances in accessing and

disseminating information have resulted in reduction of

costs and complexities of going global. The world markets

are now open to new products and services, and the SMEs

which were earlier limited by cost considerations, are open

to export opportunities.

The protective tariff and non-tariff barriers, which

separated domestic markets from international markets, are

slowly coming down. This has given the SMEs an option to

either operate in the protective domestic environment or

accept the challenge of facing competition in the

international arena.

Efficient international division of labour has now become

a necessity leading to outsourcing, sub-contracting and

other cooperative efforts.

It is becoming increasingly necessary for the SMEs to be

internationally competitive in order to function effectively

even in the domestic markets. In a dynamic environment

marked by fast technological changes, achieving and

retaining a competitive edge are both a necessity and a

challenge. Competitiveness is the key to success and

sustained growth in global operations7.

The SME segment has its strengths and weakness and therefore

created a niche for itself by it’s unique positioning in

terms of offering value added services and being flexible

and yet cost effective. Being a small setup, the decision

making process is quicker and services and products offered

are more customizable. Accessibility is easier and

responsibilities are easily allocated on the hierarchy. The

entrepreneur is ideally the sole decision maker or at the

most a small group of people who reach a consensus

relatively easily. The committee approach is avoided and the

lag time between getting an offer on business opportunities

and grabbing the offer is kept at a minimum. The cost of

operations is lower, overheads are controlled and therefore

the end product / service is highly price competitive.

When it comes to the question of improving the competitive

strength of their SME sector, the developing countries,

despite realizing the need and urgency to do so, are

constrained to extend the required kind of support to them

because of their own limitations, some of which could be

grouped as under:

Financial limitations

Lack of necessary infrastructure

Lack of know-how and expertise

Lack of expertise to forge cooperation among SMEs of

different countries.

Problems related to transition such as rigid mind-set,

resistance to change both at administrative and

enterprise levels, etc.

A study conducted by the International Trade Centre (ITC)

has shown that the major constraints faced by SMEs continue

to be in the critical areas of access to finance, technology

and markets8. On the financial front, affordability,

accessibility and timeliness of short-term and export credit

are the major constraints. SMEs have limited access to

capital markets, due to owner-preferences and minimum

requirements of capital markets. Hence, they rely heavily on

bank loans and the often limited–financial means of their

owners. In addition, Hauser (2000) notices, that, although

smaller companies tend to have a higher turnover yield,

larger corporations are in a better position to cover

temporary losses. They normally have much higher financial

and non-operational incomes and a better equity

capitalization. As a result, SMEs tend to have more

difficulties to finance investments or Research &

Development (R&D) projects9.

The relatively small size of SMEs often leads to

disadvantages in economies of scale. Hauser (2000) points

out that this small size leads to the SMEs greatest

strengths – their ability to offer customized and

specialized goods and services on the one hand and on the

other; it implies that many SMEs cannot make use of cost

advantages in mass production. Furthermore, some types of

costs are not variable in relationship with company size.

Examples are devices for environmental protection (e.g. gas

cleaning equipment), which are often under- utilized in

smaller companies, or R&D costs. R&D as the basis for SMEs’

strength in innovation and flexibility has to be undertaken

on a certain minimum scale in order to lead to results. As a

result of lower sales and costs, which cannot be further

reduced, SMEs often incur a higher proportion of fixed costs

compared to larger corporations.

SMEs require facilitation in making the right choice of

technology, as well as in locating and acquiring technology

suited to their specific needs and open to periodic

upgrading. Underdeveloped testing facilities, poor national

certification and quality counselling infrastructure and

poor quality commitment of SMEs hinder the entrance of these

companies to internationalization. SMEs are often poorly

placed to deal with technical change and upgrading. Not only

do they lack the information and resources to access new

technologies and skills, they often do not know how weak

they are. They may be unaware of competing technologies in

other countries. They may not realize the nature of new

skills and techniques needed to keep up. The problem is much

greater for SMEs in the traditional and rural sectors of

developing countries.

Another major constraint faced by SMEs is lack of

entrepreneurial, management and marketing skills. While most

owner-managers and start-up entrepreneurs are experts in

their products and services, often the lack of managerial

skills, hinder their long-term success.

Small enterprises need a wide range of information from

issues like how to establish own small company, laws and

regulations governing them, taxation, custom regulations,

business advisory services, training opportunities,

financing sources, local and central tenders, and many

others. In many cases only part of this information needed

by entrepreneurs are available in an orderly form, and

access to this information is difficult and expensive.

Compared to larger enterprises SMEs are also at a strong

competitive disadvantage when complying with administrative

regulations and bureaucracy. Special constraints are in

connection with regulation on establishment of a company,

licensing, taxation and control of central and local

governments.

In analyzing national competitiveness with reference to

SMEs, we can refer to the classic work of Michael Porter

(Competitive Advantage of Nations, 1990). He formulated his

“diamond” of four conditions which affect SMEs and

countries, namely: (a) factor conditions, (b) firm strategy

and structure, and (c) related and supporting industries.

The resource-based and labor-intensive nature of majority of

SMEs in many developing Asian countries is consistent with

the structure of their comparative advantage. In principle,

firms in the provinces should have an advantage over firms

in the urban areas because of their access to natural

resources and cheap labor pool. However, Porter suggests

that firms employing natural resources may lack incentives

to improve product quality and to innovate in order to be

competitive. Therefore, they are not well equipped to

function within a dynamic environment. SMEs lack the human

resources, financial resources, knowledge, and

infrastructure available to large enterprises.

In terms of firm strategy and structure, SMEs are at a

disadvantage because of the characteristics of the

entrepreneurs and management. Because of shortcomings caused

by low levels of education, management by experience,

family-type business, domestic market orientation, and lack

of commitment to improve product quality and productivity,

the development of SMEs has rather been retarded in several

Asian countries.

However, since the new generation of entrepreneurs is better

educated, these conditions are changing. The new breed of

entrepreneurs, including second generation entrepreneurs, is

beginning to operate their businesses using modern

management techniques.

Related and supporting industries are typically SMEs. The

effect of the crisis on SMEs depends on the extent of

existing backward and forward linkages with larger companies

and foreign investors. Because linkages are strong with

their mother (contracting) firms in terms of derived demand,

the economic welfare of SME supporting industries is

dependent on the situation of large enterprises.

On the whole, there are advantages and disadvantages for the

supporting industries. On the positive side, consolidation

and upgrading in the supporting industries will occur and

the more viable and competitive ones will emerge.

SMEs face a shortage of professional management capability

to improve their efficiency and the quality of products to

meet internationally accepted standards. Porter advocated

that assistance be provided in terms of long-term capital

supply and low-interest loans, which would help and motivate

SMEs to move and gain a cost advantage by modifying

production processes and relocating factories, where labor

costs are still cheap. As for long-term planning, he

encouraged a larger ratio of SME run by technical

entrepreneurs, or technopreneurs. Along this line, he

commented that at present educational institutes are places

for teaching, not for learning.

Emerging Roles and Policies for SME Development (The Road

Ahead)

Policy measures in the twenty first century should include

the removal of remaining policy biases against SMEs in the

trade and investment programs as well as handicaps imposed

by the smallness of their business operation as against

large enterprises. SME development policy should have a new

dimension as SMEs become integrated into the global economy

and have to be part of the quest for international

competitiveness.

Government’s role in promoting SMEs will require some

paradigm shift as a desirable response to, and in

anticipation of changes in the national and international

environments. Some of these environmental consideration

include demands for increasing industry productivity,

enhancing competitiveness locally and internationally;

shifting comparative advantages, technology development in

hardware and software; technology management, shift from

resource and skilled-incentive industries to knowledge-based

industries, reduced government budget for personnel, and the

implementation of various regional and multi-lateral trade

agreements, etc. Among these paradigm shifts are:

a. Self-Reliant Policy

Government assistance policies to SMEs will be characterized

by the following principles: (a) help SMEs to help

themselves, (b) extend assistance, not protection to SMEs,

(c) integrate SMEs in overall economic development, and (d)

maintain a pro-business environment.

b. Stronger Private Sector Empowerment

The private sector, especially membership organizations like

industry associations, chambers and other interest groups,

is becoming assertive in its advocacy role. They will

require greater role in policy deliberations and decision

making in matters that affect them. This means that there

will be more public-private sector partnerships in

government SME development councils and promotional bodies

as well as joint sponsorship of activities. This includes

empowering membership organizations to self-regulate their

ranks and to perform regulatory functions usually done by

government at present such as registration and certification

schemes. This trend is also consistent with government’s de-

regulation, outsourcing and decentralization efforts.

c. Private and Non-Governmental Business Development

Services (BDS)

While more SMEs demand better, more efficient, and timely

delivery of services, governments’ ability to achieve

greater and wider access of BDS will be hampered due to

plans for leaner but more effective government machinery.

Governments will surrender some of their traditional role of

providing a wide gamut of BDS to the private sector.

In the face of reduced personnel, governments will stop

being a supermarket and one-stop facility for various

services, but rather will become ‘godfathers’ or sponsors in

institution building and strengthening of private and non-

governmental organizations (NGOs) rendering BDS. They will

facilitate and support the rise of private and non-

governmental business development services to provide

assistance in management, marketing, technology, finance,

etc.

Governments will also tend to outsource from the private

sector, subcontract services, and even enter into selective

schemes such as concessions, joint ventures, management

contracts, leasing contracts, and turnkey projects. This

also includes subsidizing services, at least temporarily,

rendered by the private sector to assist SMEs and

implementing grants scheme such as voucher system and funds

subsidy to stimulate market demand for BDS by both SME

clients and service providers.

d. Information-Technology Driven Assistance

Following the wave of information revolution, governments

will give emphasis in investing in information technology

infrastructure to raise the technological and competitive

consciousness of industries and to provide entrepreneurs

with greater access to opportunities in the domestic and

world markets. It will promote greater use of computer

applications, e-commerce, virtual enterprises, etc. This

thrust will also involve educational institutions to prepare

the students for skills demanded by the private industry for

the 21st millennium, to produce more local talents in

information technology, and to develop innovative

technologies.

e. Greater Linkage between SMEs and Large Enterprises

Governments will continue to give greater emphasis in

stimulating greater linkage between SMEs and large

enterprises through various incentives and services. The

direction will go beyond promotion of existing

subcontracting arrangements and foster relationship,

business matching or need-seed information exchange. It will

move in the direction of mentoring and incubation system

wherein BDS providers, whether government, private

consulting firms, or large enterprises, will systematically

coach and guide the start-up, growth, management and

technological upgrading of selected SMEs.

f. Industry Cluster Approach

To achieve positive synergies in quantity and quality of

assistance, governments will move towards promoting market-

driven industry clusters and networks. Important clusters

may be selected based on geographical concentration,

sectoral specialization, ancillary relationships, value

added as well as supplier-vendor value chain contributions.

Collective growth approaches have been proven to help SMEs

in lowering transaction cost, facilitating mutual learning,

sharing best practices and facilities, as well as in

enhancing the beneficiary industry’s domestic and

international competitiveness.

Characterized by high connectivity, industry clusters have

also been known to effect innovations in production and

processes, product designs, packaging, purchasing, and

distribution.

The impact of globalization and liberalization can be

perceived from two viewpoints. It can open new opportunities

for SMEs in developing countries to acquire technology from

abroad and that increased competitiveness in technology

markets has made technologies cheaper and more accessible.

This may indeed in some industries and sectors, while in

others technology remains costly and access is still

difficult for SMEs in the developing world. Acquiring

technologies and the technological capacities needed to

master technologies involve time, effort, cost and risk, and

complex interactions between firms as well as between firms

and institutions.

However, effective technology transfer does not depend

solely on the accessibility and the terms and conditions for

the acquisition of technology, but also on the local demand

conditions and on the prior building up of the technical and

managerial capabilities which determine the ability of firms

to absorb and master the acquired technology.

On the demand side, the inherent smallness of most SMEs and

markets in developing countries, as well as weak

distribution systems and marketing channels and the lack of

support structures are impediments to obtaining technology.

Other impediments include lack of capacity and the skills to

select, acquire, adapt and assimilate technologies,

financial constraints and lack of awareness of, as well as

relevant information on, available technologies. Few SMEs

have the networking and monitoring capabilities that would

enable them to access and evaluate technological

information.

SMEs and Global Competitiveness

The main reasons for the growing importance of international

competitiveness are technological. The rapid pace of

innovation – and the resulting promise of productivity

increase – makes it more costly to insulate economies from

international trade and investment. Since new technologies

benefit all activities, traded and non-traded, rapid access

to such technologies in the form of new products, equipment

and knowledge becomes vital for national welfare. Insulation

from global markets and technologies is no longer a viable

option for any developing country.

In reality the globalization of economic activity has a dual

impact on SMEs. For some it provides new opportunities for

expansion and growth by taking advantage of international

market possibilities. These are able to adapt and become

internationally competitive. For the majority, however,

growing economic globalization is increasing the competition

with foreign enterprises and it is a process that brings

competitive challenges and threats. For these SMEs,

globalization brings risks; as they are unlikely to survive

in their present form without improving quality, cost

competitiveness and management practices. SMEs are deeply

affected by the globalization of the markets, which is

forcing all firms to act and think more globally. The world

economy, the liberalization, the increasing globalization,

e-commerce, and other such changes are gradually shifting

the behavioural pattern of the SMEs.

An important strategy that the SMEs can use to improve their

competitiveness in global markets involves the application

and adoption of new technologies that effectively serve to

reduce costs. A number of significant new technologies,

which include the Internet, help, mitigate economies of

scale and the gains traditionally associated with large-

scale production. New web-based information technologies are

enabling SMEs to attain global marketing capabilities at

very low costs. SMEs are also using electronic commerce and

access to products like financial and accounting management

software systems that enhance organizational and management

capabilities, while at the same time reduce the high costs

associated with managing SMEs.

Technological capabilities vary enormously across the

developing countries, but, within a given country, SMEs are

often at a technological disadvantage. Frequently, they

cannot afford to invest in their own research and R&D or to

hire research staff. Collaboration with SMEs in countries

which are more advanced technologically can be a valuable

means of keeping abreast of technological and market trends,

and also of acquiring advice on implementing new

technologies, such as the Internet, and new managerial

practices in their operations.

For growth-oriented SMEs, export is an important strategic

option to achieve continued business growth. Export does not

only facilitate sales growth, it offers a range of other

advantages:

Expansion of customer base

Reduction of dependence on few major customers

Opportunity to even out regional business cycle-related

demand fluctuations

Additional growth opportunities for niche products, for

which the local market is limited.

Establishment of a network of contacts and partners, gain

of experiences – these can be used to improve offers to

traditional local customers.

Where SMEs cannot individually establish competitive

advantage, they can realize scale advantages by cooperating

with other small enterprises and subcontract from larger

enterprises. Enterprises can jointly undertake functions

where scale economies arise: for instance, training workers,

designing new products, conducting quality control or

research activity. Saxenian (1990) has argued that it is the

culture of interdependence and exchange among individuals in

Silicon Valley that has contributed to its superior

innovative performance10. However, finding appropriate

foreign strategic liaisons/partners, who know the domestic

environment, legislative and non-legislative barrier,

language, and the customer requirement, is also crucial.

Management is science and art. The first can be acquired;

the second one can be developed through commitment and by

“learning by doing”. For many enterprises, then, venturing

into global markets implies a change in management strategy.

There is a lot of evidence that successful

internationalizing SMEs have a particular management style.

Generally they have a well-structured management, which

concentrates on core activities, often buying-in not only

physical inputs, but also business services.

Finally, every SME has to understand that international

activities do mean more than just finding new customers or

suppliers in other countries. In addition to the key-factors

of success, it is believed that national SME authorities

should initiate measures to support the development of the

SME sector and promote internationalization of SMEs. The

internationalization of a business involves a process of

profound change. This change requires taking risks, opening

up the firm’s culture and a great capacity to learn. None of

this happens spontaneously but requires planning and clear

leadership. Hence, the planning of these internal changes

should be part of the planning for international activities.

References

1. Mc Grew and Lewis, 1992, Globalization and the Nation States, (p

23)

2. Dunning, J.H, 1994, Globalization: The Challenge for National

Economic Regimes, Dublin: The Economic and Social Research

Council.

3. Naisbitt, J. 1994, Global Paradox, New York: William Morrow.

4. Dunning, J.H, 1994, Globalization, Economic Restructuring and

Development, Geneva: UNCTAD.

5. Hibbert Edgar, The Globalization Of Markets –How Can SMEs

Compete?

6. Bhardwaj Anil, Secretary General of Federation of Indian

Micro and Small & Medium Enterprises (FISME), New Delhi:

Globalization, World Trading System and Indian SMEs.

7. Dr Antal Szabo: SMEs in the Third Millennium,

International Conference on “Legal Aspects of SME

Development & Best Practice in Simplification of SME

Legal Environment” 6-7 April 2000, Maribor.

8. “An analysis of Competition Constraints - SMEs and the

Global Market Place”. International Trade Centre

UNCTAD/WTO, Geneva 1996.

9. Hauser, H.-E. 2000. SMEs in Germany. Facts and Figures

2000. IfM Institut für Mittelstandsforschung Bonn,

available under www.ifm-bonn.de/ergebnis/sme.zip. Kets de

Vries, M.F.R. 1993. The dynamics of family controlled

firms: The good and the bad news. Organizational

Dynamics. 21(3) S. 59 ff.

10. Saxenian, A., 1990, “Regional Networks and the

Resurgence of Silicon Valley,” California Management Review,

33, 89-111.