Challenges for EU SMEs to grow in foreign markets
By: Maria Shopova
Tags: International Relations, European Union, Growth, Export, Small Business

Small and medium-sized enterprises are affected by globalisation and are increasingly forced to think and act internationally. SMEs’ internationalization no longer has a limited focus on exporting / importing, but has become a much more differentiated business activity encompassing subcontracting as well as technical or commercial cooperation. SMEs may be engaged in cross-border partnerships and foreign investments to capitalize on new opportunities. While 80% of SMEs with 50 to 249 employees are operating at an international level, 66% of SMEs with 10 to 49 employees are international. An array of technologies enables SMEs to address markets formerly beyond their reach. In an international marketplace dominated by large corporations, local partners can help SMEs compensate for their lack of size. In the coming years, small and mid sized firms of all types and in every region expect to generate more international revenue and do business in more foreign markets than ever.

SMEs obstacles:

access to finance

access to international markets

ability to comply with business regulations

access to innovation ecosystems and digital economy

access to entrepreneurial skills and managerial talent

The main internationalization barriers are:

administrative procedures are too complicated

identifying business partners abroad is too difficult

inadequate quantity of and/or untrained personnel for internationalisation

limited information to locate/analyse markets

identifying foreign business opportunities

lack of managerial time to deal with internationalisation

developing new products for foreign markets

unfamiliar foreign business practices

unfamiliar exporting procedures/paperwork

meeting export product quality/standards/ specifications

Firms need information about: local supply and demand conditions; local regulations and legal requirements for selling their goods in a particular market; the size of foreign demand; the adequacy of their products to local tastes. The need to acquire market-specific knowledge leads firms to follow a gradual internationalization process, testing a foreign market first via exports before deciding whether to invest there. Firms start their foreign operations by using traditional exports and gradually move to using more intensive and demanding operation modes. Firms start their foreign operations from culturally and/or geographically close countries and move gradually to culturally and geographically more distant countries. Internationalization frequently started in foreign markets that are close to the domestic market in terms of psychic distance. Companies would then gradually enter other markets that were further away in psychic distance. The larger the psychic distance, other things being equal, the more difficult it is to build new relationships. If a firm attempts to enter a foreign market where it has no relevant network position, it will suffer from the liability of outsidership and foreignness. Trust persuades people to share information, promotes the building of joint expectations, but trust-building is a costly and time-consuming process.

Converting a confusing mass of data into pertinent findings and recommendations is another problem for SMEs. They need a concise and easily understandable response to their request for help. SMEs are looking for clarity, innovation and a different answer than they would have come up with themselves. Also too many consultants provide context-free and generic advice, whereas what clients need is advice that is tailored to their specific culture and context.

It is important to focus on growing SMEs and the scaling up challenges these companies face; fragmentation of the EU markets is one of these challenges. 

Issues selling to large companies: there is room to facilitate the purchasing process by large Companies (including public bodies) of SMEs’ innovative products. Financial track record and other requirements often times constitute a barrier. Example of Finland: government supports through guarantees SMEs entering tenders of big companies. 

Internationalization is a commonly shared challenge and the presence of international investors as SME shareholders could facilitate the access of SMEs to international markets. Fostering cross-border investor deals, for instance by the means of the Pan-European investment fund, could play an important role in developing cross-border investment. 

Growing has a cultural /mind-set dimension. There is an implicit trade-off between growth and control of a SME; the faster you grow the more funding you will require to fuel this growth and hence there is a potential risk of losing control of the Company by integrating new investors. 

Along these lines, In the USA there is a mind-set of growth being necessary to ensure survival. 

Awareness of the importance of growth needs to be developed.

The Competitiveness for Small and Medium Enterprises (COSME) Programme and SME support actions funded under the Horizon 2020 programme were instrumental in helping SMEs develop their presence in international markets. The Programme helps SMEs expand outside the EU by promoting clusters and networks for SME internationalisation, rationalising new activities in priority markets and leveraging existing EU external policies.