Page 1 of 8 ANZMAC 2009 Barriers to internationalisation of SMEs in a developing country Dr. Kodicara Asoka Gunaratne, Unitec New Zealand Abstract A high percentage of small and medium sized enterprises (SMEs) in the developing countries fail to enter foreign markets due to their inability to overcome the entry barriers. This study therefore investigated the barriers to internationalisation of SMEs in Sri Lanka. Results are based on a postal questionnaire survey. Factor analysis was used to examine the underlying constructs in the data gathered. The four factors identified were labelled as – informational, operational, marketing and environmental barriers. Significant differences were observed in the evaluations of impact of a number of barriers between the owner-managers (OMs) of “growth” and “non- growth” businesses. Results demonstrate internationalisation of SMEs is plagued by many obstacles in the home environment. Key words: Internationalisation, SMEs, barriers to exports
ANZMAC 2009 Page 2 of 8 Barriers to Internationalisation of SMEs in a Developing Country IntroductionSMEs are of great importance to the expansion of export earnings in developing countries.However existing research shows that these businesses are under represented in theinternational economy as a result of the impediments to market access (APEC, 2004). Anumber of factors impede the participation of SMEs in the global economy. The conditions inthe input and output markets, the skills and competencies of the employees, and the owner-managers’ entrepreneurial orientation (Kazem and van der Heijden, 2006), influence thesuccess of SMEs in foreign markets. It has been suggested that some of the dramatic changesthat are taking place in the global market place would create new opportunities for businessesand bring prosperity to exporting nations (Cateora and Graham, 2007). Some of these are: theadvances in information and transportation technologies; easing of trading restrictions withthe removal of tariff and non-tariff barriers; formation of multinational market regions, freetrade areas, economic unions, political unions and regional economic blocks to encourageregional trade; and the formation of the WTO to resolve world trade issues. But theopportunities created by these transformations in the emerging global business environmenthave been exploited largely by the market aware exporters in the developed world. Takingadvantage of the advances in technology, telecommunications and infrastructure SMEs inthese countries have established additional links with new customers while strengthening therelationships with existing business partners. The high profits gained through growth inexports have encouraged them to futher invest in foreign markets to extend their lucrativegrowth cycles. However all are not winners. Many have fallen on the way while crossing theinternational boundaries. They fail to overcome the obstacles that make their path tointernationalisation impassable (Julien and Ramangalahy, 2003; Knight, 2000). Majority ofthese victims are the SMEs in developing countries. These businesses are sceptical about theirability to successfully cross national boarders (Carrier, 1999). This study therefore examinesthe barriers hindering the internationalisation of SMEs in a developing country. Literature ReviewThe growth in exports could come from the expansion of sales in the existing markets orthrough the entry into new markets. Past research has identified lack of technical skills (Chauand Pederson, 2000), fear of intense competition (Leonidou, 1995), organisational andoperational problems (Hamill and Gregory, 1997), lack of knowledge of potential markets(Suarez-Ortega, 2003), limited information (Leonidou, 1995), tariff (Czinkota and Ronkainen,2001) and non-tariff barriers (Kume et al. 2001), as some of the numerous impediments toexports. Leonidou (1995) defined the barriers to exports as those that hinder a firm’s ability toinitiate, develop or sustain business operations in a foreign market. The impact of non-tariffbarriers such as home country compliance requirements are more severe on SMEs than ontheir larger counterparts. Due to smaller size SMEs cannot absorb the additional costs of thesefactors that make their transactions unprofitable. The removal of such impedements broadensthe opportunities for SMEs to increase their activity in foreign markets. Past research suggestthat technology advances allow SMEs to improve their performance in the internationalmarkets (Daniel, Wilson and Myers, 2002; Fillis, Johansson and Wagner, 2003; Hornby,Goulding and Poon, 2002; Keogh et al. 1998). Many SMEs have not used these developmentsto trade in foreign markets due to resource constraints (Smyth and Ibbotson, 2001). Barriersof this nature are not experienced by larger businesses (Stokes, 2000; O’Gorman, 2000).
Page 3 of 8 ANZMAC 2009 Recent research emphasises the barriers that impede exports do not on their own prohibit export growth of a business (Leonidou, 2004). In a study of barriers to exports, Barrett and Wilkinson (1985) suggest that it is the idosyncratic characteristics of the OMs, the businesses and the environment that triggers these latent barriers and make them operative. If this is the case, it means that, while some businesses grow in a particular environment, the others may fail to register any growth. Leonidou (2004) also claims that two businesses operating under similar conditions will also not necessarily perceive these barriers to impact their businesses the same way. This implies that different businesses may percieve the same barriers differently. Therefore this study identifies the barriers to internationalisation of SMEs in Sri Lanka and examines the differences in the perceptions of OMs of “growth” and “non-growth” businesses on their impact on exports. It also examines the patterns of relationships in them. Methodological Approach The exploratory studies conducted at the commencement of this study included a literature review, 15 personal interviews and a pilot test. These identified 38 barriers that impede export activities in small businesses. The OMs evaluations of the identified barriers were then examined from a descriptive perspective. To that effect the following three research objectives and four hypotheses were defined. The objectives are: (1) To understand the extent of export growth among SMEs, (2) To identify the differences in OMs’ perceptions of the impact of identified barriers to exports, and, (3) To examine the pattern of relationships between the identified barriers. The proposed hypotheses are: H1: There are significant differences between OMs of “growth” and “non-growth” businesses in their perceptions of barriers related to information; H2: There are significant differences between OMs of “growth” and “non-growth” businesses in their perceptions of barriers related to operations; H3: There are significant differences between OMs of “growth” and “non-growth” businesses in their perceptions of barriers related to marketing; H4: There are significant differences between OMs of “growth” and “non-growth” businesses in their perceptions of barriers related to business environment. Method The businesses were randomly selected using a proportional stratified sampling technique from the sampling frame obtained from the Department of Census and Statistics in Sri Lanka. The survey instrument was a postal questionnaire. It was pilot tested with expert academics and practitioner OMs of small businesses. The questionnaire was mailed to OMs of 1500 SMEs. Respondents were asked to rate the listed barriers on their perceived severity on a five point scale. The end points were marked 1= Not at all severe and 5= Extremely severe. A total of 456 completed questionnaires were returned over a period of three months. The overall response rate was 30.4%. The response rates from the participant SEMs in the 16 industries varied from 28.3% to 34.2%. Two other SME studies conducted in Sri Lanka had response rates of 30.1% (ADB/Sri Lanka, 2003) and 26.2% (Wijewardena, De Zoysa, Fonseka, and Perera, 2004). These figures suggest that non-response bias is not an issue in this study.
ANZMAC 2009 Page 4 of 8 Results of the StudyOf the post start-up businesses that responded to the survey only 16.4% had achieved exportgrowth. A majority (83.6%) were “non-growth” businesses. The measure of growth used wasincreased revenue of external trade. The severity ratings given for barriers investigated hadmean values ranging from 4.476 to 3.012 confirming their high impact. The high mean valuesfor operational and marketing barriers signal deficiencies in financial and non-financialresources and employee competencies in SMEs. These are internal barriers to exports. Factoranalysis was used to reduce the 38 variables to a smaller number of factors that represents theessential characteristics of the set of barriers to exports. Cronbach’s alpha for the 38 itemmeasure was 0.8052. The underlying factors were determined using principal componentanalysis with varimax rotation. Four factors identified are presented in table 1.Table 1 – Factor Analysis of Barriers to Exports Barriers Factor 1 Factor 2 Factor 3 Factor 4Lack of reliable data on market potential 0.8045Difficulty to access market data 0.7036 Lack of information on contact persons 0.4623Lack of information on how to contact 0.5437Limited production capacity 0.7343Lack of staff with experience in exports 0.4584Lack of time for OM to deal with exports 0.5128Shortage of funds to finance and export operation 0.6231Inability to develop high quality new products 0.6652Inability to meet packaging standards 0.5021Unfamiliar distribution channels overseas 0.4254High transport, insurance and warehousing costs 0.5286Difficulty in managing advertising and promotion 0.5383Language barriers 0.5134Poor support from home country government 0.5343Tariff and non-tariff barriers 0.5187Cultural difference in business practices 0.4217Corrupt bureaucratic practices in the home country 0.7231Lack of advanced technology in the home market 0.6415Lack of low interest finance in home market 0.8126Eigenvalues 1.85 1.87 1.94 6.87Percentage variance 8.4 7.2 10.6 43.1To facilitate the interpretation of the results of factor analysis, only the variables withloadings greater than 0.4 are presented in table 1. The four factors selected explain 69.3% ofthe total variance (Table 1). Factor 1 was labelled as informational barriers and is comprisedof four variables. They are: lack of reliable data on market potential, difficulty to accessmarket data, lack of information on contact persons, and lack of information on how tocontact. These are related to ease of access of information on foreign markets and account for8.4% of the total variance (Table 1). The four variables in factor 2 are more aligned to theoperational dimension of exports and therefore this factor is labelled as operational barriers.The four variables - limited production capacity, lack of staff with experience in exports, lackof time for the owner-manager to deal with exports, and shortage of funds to finance exportoperations explain 7.2% of the total variance (Table 1). Factor 3 is marketing related. It is
Page 5 of 8 ANZMAC 2009 labelled marketing barriers and consists of five variables (inability to develop high quality new products, inability to meet packaging standards, unfamiliar distribution channels overseas, high transport, insurance, and warehousing costs and difficulty in managing advertising and promotion) that explains 10.6% of the total variance (Table 1). Factor four labelled the environmental barriers explains 43.1% of the total variance (Table 1). The seven variables representing this factor are: language barriers, poor support from home country government, tariff and non-tariff barriers, cultural differences in business practices, corrupt bureaucratic practices in the home country, lack of advanced technology and lack of low interest finance in the home market (Table 1). Table 2 – Chi-Square Test: Variation in Perceptions of Barriers to Exports Between Owner-Managers of “Growth” and “Non-growth” SMEs Engaged in Exports Barriers to Exports Barrier Chi-Square P-Value Lack of reliable data on market potential I 54.32 p<.05 Difficulty to access market data I 23.26 p<.05 Lack of information on contact persons I 2.84 n.s. Lack of information on how to contact I 3.26 n.s. Limited production capacity O 2.54 n.s. Lack of staff with experience in exports O 16.34 p<.05 Lack of time for OM to deal with exports O 12.49 p<.05 Shortage of funds to finance exports O 54.76 p<.05 Inability to develop high quality new products M 2.54 n.s. Inability to meet packaging standards M 32.61 p<.05 Unfamiliar distribution channels overseas M 38.26 p<.05 High transport, insurance and warehousing costs M 2.04 n.s. Difficulty in managing advertising and promotion M 3.06 n.s. Language barriers E 2.08 n.s. Poor support from home country government E 0.03 n.s. Tariff and non-tariff barriers E 4.63 n.s. Cultural difference in business practices E 3.08 n.s. Corrupt bureaucratic practices in the home country E 0.42 n.s. Lack of advanced technology in the home market E 0.83 n.s. Lack of low interest finance in home market E 3.68 n.s. n.s = not significant, I = Informational, O = Operational, M=Marketing, E= Environmental Table 2 show the results of the Chi-square tests. Hypotheses 1, 2 & 3 were accepted in relation to 2, 3 and 2 of the barriers investigated. Significant differences were observed between “growth” and “non-growth” firms, in relation to the informational barriers “lack of reliable data on market potential” and “difficulty to access market data”. Results of cross- tabulations show these two barriers are rated more highly by the OMs of “non-growth” SMEs than those whose firms were categorised as “growth”. This suggests that while “non-growth” firms struggle due to lack of information “growth” firms have found some success in gaining access to vital information. Significant differences were also found between “growth” and “non-growth” SMEs in relation to three operational barriers and two marketing barriers (Table 2). It appears that ambitious and persevering OMs of SMEs that make inroads into foreign markets find ways to overcome the confronted barriers and employ prudent measures to prevail over them. On the other hand the inward looking OMs of SMEs that fail perceive these as severe barriers that are impossible to breach.
ANZMAC 2009 Page 6 of 8 DiscussionThe perceptions of “non-growth” and “growth” post start-up businesses on the potentialimpact of the investigated barriers to export were diverse. This supports the view expressedby Leonidou (2004, p. 284) that “two firms at the same stage of export development will notperceive necessarily and/or will not experience the same impact from obstacles”. Results ofcross tabulations show that a higher percentage of “non-growth” businesses found lack ofstaff with experience in export (68%) and shortage of funds to finance exports (78%) to besignificant barriers to growth. Fewer “growth” firms perceived the above operational barriersto have a significant impact on their growth. A greater number of “non-growth” firms foundinability to meet packaging standards (59%) and unfamiliar distribution channels overseas(72%), to be barriers to exports than the number of “growth” businesses. This supports pastresearch that found the SMEs’ perception of barriers to operations diminish as they grow inforeign markets (Vozikis and Mescon, 1985). Analysis of results shows that the source ofmajority of environmental barriers is the conditions in the home market. The differencebetween “non-growth” and “growth” businesses in their perception of the severity of thesebarriers are insignificant (p>.05). This is an area of major concern for SMEs in bothcategories as it is beyond their power to instigate any corrective action to mitigate thenegative impact of these barriers. The bureaucratic systems and the institutions in Sri Lankathat have not changed along with the free-market policy reforms cause delays and increasecosts. This requires the policy makers to overhaul the existing administrative systems andremove the costly and stressful barriers resulting from bureaucratic inefficiencies andcorruption. The statutory approval processes require simplification. ConclusionsThe focus of this study was the SMEs in a developing country. It compared the differences inperceptions of export barriers between OMs of “growth” SMEs and their counterparts in“non-growth” SMEs. The study identified four factors that explain the patterns ofrelationships between the variables used in the study. Results shed light on the critical issuesthat discourage entrepreneurial OMs and impede the growth of their sales in overseasmarkets. The results also demonstrate that the growth of SMEs in foreign markets is plaguedby many obstacles. The OMs of “growth” and “non-growth” businesses perceive the severityof these obstacles differently. When exports suffer due to the presence of these barriers theenduring question the governments and the policy makers need to answer in the future is“what could be done to mitigate the effects of these barriers to encourage theinternationalisation of small businesses in developing countries?”References
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