The-Accountant-Jul-Aug-2017

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Finance and investment KENYAN SMALL AND MEDIUM ENTERPRISES (SMEs) Barriers to Internationalization By Benjamin Nyaoro, nyaorobenjamin@gmail.com With increased globalization and evolution of information technology, the world has become a global village thereby reducing the distance between the local and international markets. This has therefore made internationalization to be one of the competitive advantages that a firm can develop to achieve growth. Internationalization is the increase in business activities by a firm beyond the borders of one country into foreign countries. Factors such as threats from the local competitors, poor demand and saturation of the domestic market leaves a firm with very little choices but to venture into the international market. Firms that take advantage of opportunities in the international market are able to transfer certain existing expertise from the domestic market into the international market and use its dynamic capabilities to exploit new market opportunities. Globalization necessitates firms to strike a balance between business strategies applied in the domestic market and those applicable to the international markets that encourage and enable the transfer of knowledge and innovation. Constraints such as lack of financial resources, human resources, lack of expertise in international market and market management as being major barriers to internationalization of SMEs. In this piece therefore, I try to examine the various barriers to internationalization and how SMEs can overcome some of them for successful and effective internationalization. Barriers to internationalization There is no doubt that every business owner or manager would want to expand their business activities beyond the borders of one country. What there is the hindrance to this expectation or dream? These factors that can broadly be classified into two: Internal factors and environmental factors. 1. Internal factors Internal factors relate to factors that are perfectly within the control of the firm as below: 12 JULY - AUGUST 2017
Finance and investment a) Information access barrier Owing to the fact that decisions are made based on information, it becomes increasingly difficult for SMEs to make decisions including those related to internationalization since they do not have information to analyze and take a decision. In some cases there are too many sources of information especially on the internet that have cast aspersions on the authenticity and reliability of information provided thus reducing the decision makers’ trust in such sources. A manager sitting somewhere in Kenya may read about an opportunity in another country on the internet or papers but would take time to believe the source and by the time they do the opportunity is no longer available. This makes it difficult for them to identify business opportunities as and when they arise. b) Human Resources Barrier A business entity without people is just a name. Therefore it is important for an organization to get the best people to work in these organizations. However, SMEs owing to their small size lack the capacity to employ some of these best people and therefore settle only for what they can afford which in some cases may not be the best at that time. Training and capacity development is one of the ways to develop capacity in the organization but unfortunately SMEs usually lack the budget to achieve this. This inability to hire the best and the inability to train the existing to become the best have led to overworking the existing employees thereby leaving them with little time to think about internationalization. c) Financing barriers Finance is the life blood of any entity and lack of it can simply bring the organization to a grinding halt. Internationalization is thus considered an investment and as the norm with any investment a feasibility study always ought to be conducted. This includes market research, market visits and possibility of adopting foreign market strategies. Being a new territorial boundary, firms are usually unable to tell how much of investment expenditure would be required to commence and conclude the process, this uncertainty would make SMEs unable to source for funds to finance these internationalization activities. Insurance companies are sometimes reluctant to insure products or assets in a foreign market because of uncertainty. d) Distribution, promotion and Logistical barriers Product placement and promotion is often a challenge in internationalization especially due to lack of effective distribution channels and because they are influenced or occupied by foreign competition. Effective product promotion is that which takes into account the culture of the consumers in a foreign market as well. An advertisement in one country may be considered an insult in another country thereby affecting the chances of penetration of that product or that company in that foreign market. Firms that seek to effectively internationalize should thus be aware of this fact. Transportation costs, insurance, sourcing of raw materials and technical difficulties on offering sufficient after sale service have also posed a challenge to effective internationalization. 2. Environmental factors Environmental factors include factors that are not within the control of the firm starting from factors in the local market to factors in the destination countries as below; a) Procedural barriers Bureaucracy of paperwork and transactions such as understanding exporting procedure, customs, shipping arrangements may cause low internationalization. Due to distance challenges, less communication with the customers in foreign markets may come to play therefore affecting the level of relationship with customers in the foreign markets. This could also lead to low collection of payments and sometimes enforcement of contracts. b) Governmental barriers Governments both in the foreign and home market have a role in promotion of SMEs. Lack of support from both governments can cause low internationalization activities. Lack of incentives, restrictions to foreign ownership, unfavorable import or exportation regulations, protection policy of domestic firms by the foreign governments etc will make SMEs unsuccessful in foreign markets. SMEs decision makers must thus ensure they have a good understanding on these issues before deciding to go to a foreign market. c) Business Environment barriers These factors include political, sociocultural, economic and legal factors of the target overseas market. These factors if not carefully assessed could lead to instant failure in the foreign market. They include poor or declining economic conditions that may increase rates of inflation, high foreign debts and unemployment that may reduce the purchasing power in that market. Other risks include foreign exchange risk, language barrier, different culture, political unrest and poor infrastructural networks in some countries. d) Tariff and non-tariff barriers These barriers are imposed by the governments in the foreign market and some by the governments in the country of origin. They include; high cost of customs administration, impositions of unfavorable quotas and embargos, unattainably high quality standards, arbitrary classification and reclassification of imports and exports and high tariff barriers. Recommended solutions to these barriers In order to overcome the barriers above SMEs could adopt some of the strategies such as use of networks, develop a product with niche characteristics and/ or brand identity. JULY - AUGUST 2017 13
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