Dissertation about Internationalisation of SMEs in Pakistan.

1. MBA Dissertation
Page 1 of 46
Internationalisation
Of SMEs in Pakistan
by
Rizwan Chand
rizwanchand@msn.com
MBA – International Business
University of Birmingham

2. MBA Dissertation
Page 2 of 46
Abstract ................................................................................................................................ 4
Acknowledgement ............................................................................................................ 5
1 Introduction ................................................................................................................. 6
1.1 Background ........................................................................................................................... 6
1.2 Aims and objective of study ........................................................................................... 7
1.3 Research Issue and Importance of the Study ......................................................... 8
1.3.1 Research Issue ............................................................................................................. 8
1.4 Importance of the study .................................................................................................. 8
2 Literature Review ..................................................................................................... 10
2.1 Approaches to Internationalization ......................................................................... 14
2.1.1 Exporting ..................................................................................................................... 14
2.1.2 Foreign direct investment .................................................................................... 14
2.1.3 Alliance ......................................................................................................................... 15
2.2 Motivation for internationalization .......................................................................... 15
2.3 Barriers to SMEs ............................................................................................................... 17
2.4 Elements of SMEs Internationalization ................................................................... 18
2.4.1 Timing of internationalization ........................................................................... 18
2.4.2 Intensity and sustainability of internationalization ................................. 19
2.4.3 Mode of internationalization .............................................................................. 19
2.4.4 Influence of the domestic environmental context on
internationalization ............................................................................................................... 19
2.4.5 Leveraging of external resources to internationalize .............................. 20
2.4.6 Unit of analysis (i.e. the firm or the entrepreneur) ................................... 20
2.4.7 Effect of internationalization on SME performance. ................................ 20
3 Research Methodology ........................................................................................... 22
3.1 Introduction ........................................................................................................................ 22
3.2 Research Philosophy ....................................................................................................... 22
3.3 Research Approach .......................................................................................................... 23

3. MBA Dissertation
Page 3 of 46
3.4 The Research Process ..................................................................................................... 23
3.5 Primary Research Interview ........................................................................................ 24
3.6 Secondary Research Data Collection ........................................................................ 24
4 SMEs in Pakistan ....................................................................................................... 25
5 Internationalization of SMEs and Export of Pakistan .................................. 27
6 Barriers to SME internationalization ................................................................ 29
6.1 Resources Barriers ........................................................................................................... 29
6.2 Access to Information and Networks ...................................................................... 30
6.3 Cultural Barriers ............................................................................................................... 30
6.4 Legal, regulatory, and procedural barriers ........................................................... 31
6.5 Financial Barriers ............................................................................................................. 31
6.6 Access to Technology ...................................................................................................... 32
6.7 Organisation Structure and Management Level ................................................. 32
6.8 Government Policy Reforms ........................................................................................ 33
6.9 Evidence from Interview ............................................................................................... 33
7 Discussion ................................................................................................................... 34
7.1 Easy Access to information Network ....................................................................... 34
7.2 Cultural and Language Awareness ............................................................................ 35
7.3 Legal and Procedural Support .................................................................................... 35
7.4 Access to institutional Finance ................................................................................... 36
7.5 Technology and Infrastructure Upgrade ................................................................ 36
7.6 Management and HR Training .................................................................................... 37
7.7 Policy Reforms to Support SME Internationalization ....................................... 37
7.7.1 Policies for SME to overcome barriers to internationalization: .......... 38
7.7.2 Policies to help build internationalization capability .............................. 38
7.8 External Support Organizations for SMEs ............................................................. 38
7.9 Value Addition to Products .......................................................................................... 39
8 Conclusion ................................................................................................................... 40
9 References .................................................................................................................. 42

4. MBA Dissertation
Page 4 of 46
Abstract
Small and Medium Sized Enterprise (SMEs) significantly contribute to the
economy in rapidly changing business environment domestically and
internationally. Developing countries where unemployment level is high,
economy faces low growth rate and poverty is a major issue, SMEs play
important role in increasing employment and decreasing poverty by creating
employment opportunities. SMEs as a whole can dominate a developing
country’s economy by being a part of fast growing and new industries. In places
where monopolies or oligarchies are, price lowering can be introduced by SMEs.
SMEs engage in internationalization when demand for products in domestic
market decreases or SMEs are looking to increase their profit. There are three
paths a firm can choose from, to engage in internationalization Product Export,
Foreign Direct Investment (FDI) and Strategic Alliance. SMEs from developing
countries engage in internationalization using export method for number of
reasons such as low capital investment, less competitive products and lack of
resources available. The study aim to explorer the method adopted by SMEs in
Pakistan for internationalization. Research also includes the challenges and
barriers faced by SMEs during their internationalization process.
SMEs in Pakistan face number of challenges when decide to go international.
These Challenges includes, shortage of investment capital, difficulty in access to
credit, lack of knowledge and experience of international market, low
competitive products and legal barriers. Finding also showed that export was
preferred entry mod chosen by SMEs. Even firms with substantial capital
investment unable to export into international market due to lack of knowledge
of foreign market and no first hand support from Government. Research
evidence has shown that SMEs in Pakistan faces issues of survival and only few
manage to engage into internationalization due to challenges mentioned earlier.
In recommendation we suggested that there is policy shit needed from
Government to provide resources, support and suitable environment for SMEs
for their potential growth in domestic and to encourage their
internationalization engagement.
The study findings and recommendations contribute substantially to the
literature for internationalization from developing countries. In order increase
the internationalization of SMEs and their contribution to economy, developing
countries like Pakistan should create feasible environment with support and
access to resources. Research also concluded that financial resources are not the
only challenge faced. Access to resources and contact network can provide
business opportunities and suitable foreign partners.

5. MBA Dissertation
Page 5 of 46
Acknowledgement
I would like to dedicate this thesis to my Mother whose prayers, encouragements,
inspiration and love helped me achieve this goal.
I would like heartily gratitude towards my supervisor Nick Potter from
Birmingham Business School who accepted my proposal allowed me to work on
the research in his supervision. I am thankful for his support, guidance and help
which led to achieve this goal. I would take this opportunity to thank my family,
friends and especially professors and staff from Birmingham Business School for
their contribution. I would like to thank to firm owners who took time from their
busy schedule and gave the interview for this research.

6. MBA Dissertation
Page 6 of 46
1 Introduction
1.1 Background
Small and Medium Sized Enterprise (SMEs) with high growth and innovative
capability not only contribute to the economic growth (Anyadike-Danes et al,
2009) but also crucial for their ability to respond to rapidly changing
environment and challenging international business. Evidence has shown that
SMEs contributions are important, especially in developing countries. It is more
crucial because of the imbalance of wealth distribution and low-employment
rate. Recent evidence has shown that SMEs are important for innovative and
high technology growth; it also highlighted the importance of international
business environment for the growth and development of these SMEs. Some
firms deal with international market because of the nature of their business. For
those reasons, these firms are called ‘born global’ as they are trading globally
since they started training. (BIS 2010)
BERR Economics Paper (2008) reviewed that growing firms with high-growth
rate are likely to have high productivity from the marketing industry that is
being operated in. Mason et al. (2009) explains that firms with high growth not
only increase the market competitiveness but also contribute employment
growth.
Following the importance of the SMEs, many authors talk about the
internationalization of SMEs, as well as the process and challenges faced.
Emergence of globalisation has occurred due to reduction of trade barriers, low
tariffs, technology advancement and innovative communication channels has
increased the SMEs internationalizing. Even though, the availability of
information and low -trade barriers is more available than ever before, there are
still challenges facing SMEs. Arzeni (2008) identified the challenges for SMEs
such as financial availability, foreign market knowledge, management experience
and capabilities for the process of internationalization. He further explained that
Government could take various measures to promote SMEs growth at the
international level such as easy access to finance, availability of the information
and technical support for internationalization.
Many authors argue that exporting of any firm’s product means
internationalization or the initial step for internationalization. Calof & Beamish
(1995) argues that there are different ways a firm can engage in
internationalization such as import/export, strategic alliance, Foreign direct
investment (FDI) and cross border networking.

7. MBA Dissertation
Page 7 of 46
The SMEs contribution to the economy is well defined and their importance of
being internationalized. The challenges faced by SMEs are the topic of debate
these days. SMEs faced various challenges in local and international realms and
face difficulty in keeping sustainable competitive advantage over competitors.
Traditionally firms used price, technology and product to keep the competitive
edge but, this is no longer valid as firms need innovate new ways to increase
profitability, and firm growth.
But the biggest question is what actually SME is and how do companies qualify to
become a SME?
SME means Small and Medium Enterprise and this term is predominately used
by EU (European Union). In USA people call it SMB. As per EU definition any
company having less than 10 employees and turnover of less than (or equal to)
2million Euro is ‘micro’; having 10-50 employees and turnover of less than (or
equal to) 10million Euro is ‘small’ and having 51-250 employee and turnover of
less than (or equal to) 50million Euro is categorized as ‘medium’ enterprise. This
entire employee figure should be working employees in the office (European
Commission, 2003).
The process of Internationalization can be identified in different ways.
Historically the author of stage-based theory argues that it is a step-by-step
process to gain international entry. Firms gradually and incrementally increase
their business in foreign markets by acquiring more knowledge and experience
in international markets. Alternately the support of New Venture
Internationalization (NVI) theory explains that a firm’s experience and early
resource commitment decisions allow firms to accelerate the
internationalization process (Autio and Sapienza, 2000) without having the need
to follow the sequential steps. Knowledge-intense companies where products
and assets are comprised of intangible items are much likely to be on faster
internationalization track.
One idea that is certain about SMEs is that they are a two-pronged attack to help
a developing economy grow. On a static front, they contribute to decent jobs and
output. On the dynamic front, they are large enterprise nurseries and are the
next step up for expanding micro enterprises. SMEs also contribute to savings
and investment, as well as being a developer for appropriate technology. (Barry,
et. al 2005).
1.2 Aims and objective of study
The role and contribution of SMEs in emerging economies is important. SMEs
and individual entrepreneurs disproportionately contribute to the economy and
increase the employment growth rate. SMEs further increase their growth and
contribution by engaging into internationalization. Firms adopt different paths of
internationalization such as export, alliance and foreign direct investment but in

8. MBA Dissertation
Page 8 of 46
emerging economies with SMEs that have limited resources and knowledge, can
find difficult to enter into foreign markets. The study aims to explore the process
adopted by SMEs for internationalization in developing countries particular
Pakistan and the importance of their contribution to the economy.
This study covers the following objectives:
1) To study the process adopted by SMEs for internationalization in
developing countries such as Pakistan.
2) To explore the resources required by SMEs for the process of
internationalization in developing countries.
3) To assess the challenges and barriers faced during the process of
internationalization.
1.3 Research Issue and Importance of the Study
1.3.1 Research Issue
The following chapter reviews the literature on the process of
Internationalization and the challenges faced by SMEs. Most of the literature
reviews the process and barriers in developed countries, which helps to identify
the research gaps and issues in the research, which provides the structural base
for the study. Internationalizations of SMEs and the challenges faced in
developing countries such as Pakistan have attracted few researchers. Recently
some researched by Viktor Petrovski and Yinjie Shi (2009) to explore the role of
SMEs in emerging economies i.e. India, China. But there is a lot more research
required on SMEs especially in developing countries.
The present study is an endeavour to explore the process of internationalization
in emerging economies particularly Pakistan and its effect on Pakistani economy.
The study also identifies the barriers of internationalization for SMEs in Pakistan.
1.4 Importance of the study
SMEs play an important part in potential growth of a country’s economy. One of
the items that should be noted when things come to SMEs is the question of
growth. Challenges abound, and a main challenge for any country would be to
have output taking place outside capital-intensive activities. A problem can arise
if this type of ideal is bound up with settings or policy that is negative to having
this happen. This makes SMEs a difficult challenge when these items are in place.
In countries with developing economies, SMEs will be in the middle range of size
due to its importance strategically. These are also complicated in structure
compared to smaller enterprises such as the self-employed. However, in
comparison to corporations, the structuring is less complicated. The size of a
SMEs is going to vary according to the country that it is located. Governmental

9. MBA Dissertation
Page 9 of 46
policy is also going to determine how well the SMEs do, in its position in the
current economy.
Employment in a developing country can also be helped by the technology that is
intermediate. This allows for job production and creation. There are two lines of
though with this. Without SMEs in an economy, the created jobs will be low
skilled and low pay. A firm that is a part of the SMEs will produce substantially
more jobs with higher pay as well as being more productive. These will also need
a less substantial investment than other jobs being created in the same area.
A key mechanism of dealing with SMEs in developing countries is that this part
of the economy must expand fast enough to absorb those that are unemployed,
or are engaged in low-productivity work. It also plays a vital role in generating
growth such as pro-poor growth for example. This sector is where a lot of
successful micro-businesses wind up. However, if there is policy or
governmental issues keeping SMEs out of a developing country, then this could
cause the developing country’s economy to stagnate instead of grow.
SMEs as a whole can dominate a developing country’s economy by being a part
of fast growing and new industries. In places where monopolies or oligarchies
are, price lowering can be introduced by SMEs. Competition is what drives
economies and dealing with monopolies can seriously hurt GNP. Many countries
are now using SMEs in order to grow their economies such as Taiwan, for
example.
An additional note to this is that many successful businesses in developing
countries got their start as SMEs. Getting the most from these will require better
support systems than would be required by larger firms.
Questions that should be asked about policy would include: “What should the
policy towards this system be in any given country?”. Policies should be designed
in developing countries with the eye towards not obstructing, and facilitation of
firm’s growth. This is true for micro enterprise all the way up to the SMEs level.
SMEs face a lot of challenges especially in developing countries like Pakistan. One
of the reasons for this staffs that is not well educated in areas such as external
support and strategic formation. Pakistan also needs more financial resources
for investment in capital ventures. Challenges can also come when there is
limited availability for both resources and support. This is why it is sometimes
hard to grow SMEs due to these two factors. Other factors such as politics and
policy do have an effect on the effectiveness of the SMEs to gain a foothold in the
developing country. The market must be able and should be able to support the
SMEs, no matter where in the world that they are.

10. MBA Dissertation
Page 10 of 46
2 Literature Review
In this section we will review the literature and previous research outcome. Main
focus of this review will be how firm managed their resources, process of
internationalization and strategy adopted by SMEs. There are different ways firm
engage and adopt the internationalization. The review will include the theory
and methods of internationalizations.
According to Resource-based view (RBV) theory of strategic management; the
fundamental principle of the RBV is that the basis for a competitive advantage of
a firm depends primarily in the application of the collection of valuable
resources at the firm’s disposal (Rumelt, 1984).
Wernerfelt 1984 analyses firm with its recourse instead of products these
resources include human capital, technological, financial and knowledge of the
industry. Strategy involves maintaining a balance between the exploitation of
existing resources and the development of new ones. Wernerfelt 1984 is of the
view that Mergers and acquisitions provide an opportunity to trade otherwise
non-marketable resources and to buy or sell resources in bundles. These tools
are then used to highlight the new strategic options, which naturally emerge
from the resource perspective.
The Knowledge-based view (KBV) is acknowledged as the extension of resource-
based view of the firm. KBV has inherited much of content for RBV and its talks
about the evolution of the specific resources and capabilities (Kuivalainen 2003).
Evolutionary economics is known to be the origin of resources, capabilities and
knowledge evolution process (Nelson and Winter, 1982; Foss and Eriksen, 1995)
where as knowledge and skills gain from experience leads to better performance.
Beamish, 1990 defines internationalizations, as “Internationalization is the
process by which firms both increase their awareness of the direct and indirect
influence of international transactions on their future, and establish and conduct
transactions with other countries”. According to Luostarinen and Welch “the
process of increasing involvement in international operations”. It is “the change
in the level of international orientation and/or activity over time” (Gibb, 1993).
“The process of internationalization is strategic, gradual, and incremental”
(Lloyd-Reason, 2003).
In the Uppsala model, the internationalization of the firm is seen as a process in
which the enterprise gradually increases its international involvement (Johanson
and Vahlne, 1977, 1990,2003). Johanson & Vahlne developed model based on the
process of internationalization, its main focus is the development of the firm
individually, and particularly on its steady acquisition, integration, and use of

11. MBA Dissertation
Page 11 of 46
knowledge about foreign markets and operations, on its successively increasing
commitment to foreign markets.
The internationalization process model talks about two patterns in the
internationalization of the firm. One is that the firm’s engagement in the specific
country market, can develop according to an establish chain, i.e. at the start there
is no activity took place or regular export, then export takes place via
independent representatives, later through a sales centres, and finally
manufacturing may follow. The second pattern explained is that firms enter new
markets with successively greater psychic distance. Psychic distance is defined in
terms of factors such as differences in language, culture, political systems, etc.,
which disturb the flow of information between the firm and the market
(Johanson and Wiedersheim-Paul, 1975).
The process is a theoretical model based on assumptions about the relations
between the concepts of market commitment, market knowledge, current
business activities, and commitment decisions (Johanson – 1990). The patterns
can be seen as operationalization of the process model with the stages and the
psychic distance as possible indicators (Andersen, 1993).
Market knowledge and market commitment are assumed to affect both
commitment decisions and the way current activities are performed. These in
turn change knowledge and commitment (cf. Aharoni, 1966).
In the model, it is assumed that the firm endeavours to increase its long-term
profit, which is presumed to be equivalent to growth (Williamson, 1966).
The Internationalization Process Model

12. MBA Dissertation
Page 12 of 46
Figure 1.0 (source: Johanson and Vahlne, 1977;1990)
As shown the figure The Uppsala model of internationalisation is based on two
factors, state and change. State consists of Market Commitment and Market
Knowledge. Change state composed of Commitment Decisions and Current
business activities.
State consider the Market knowledge is further consists of two variables; Market
Knowledge which means the knowledge of the foreign market. Carlson, (1974)
defines the knowledge "relates to present and future demand and supply, to
competition and to channels for distribution to payment conditions and the
transferability of money, and those things vary from country to country and from
time to time”. Second the Market commitment is composed of two factors - the
amount of resources committed and the degree of commitment, that
Commitment is, the difficulty of finding an alternative use for the resources and
transferring them to it (Johanson 1977).
In Change Aspect consider current activities which firm used to gain knowledge
about the business activities alternately firm can hire experienced personal.
Commitment decisions are based on experience and exploring the alternate
options for decisions making that could be in response to problem or
opportunity occurs during the business.
In summary Uppsala model describe that firm entry in foreign market will
depends on the knowledge of the foreign market and the resources commitment
will be based on that knowledge. As mentioned earlier market commitments
mean the amount of resources committed to the new market. Once firm start its
operations in foreign market it start getting market knowledge and know how.
Then it uses its previous firm knowledge or current business activities
knowledge of the firm to commit decisions.
The U-Model Stages
Figure 2.0 (Source: Johanson & Wiedersheim-Paul, 1975, in Johanson & Associates, 1994)

13. MBA Dissertation
Page 13 of 46
The U-Model has suggested four stages of firm internationalization. In the first
stage firm does not perform any export or regular activity in foreign market but
it gather information and knowledge from various sources about the foreign
market such supply, demand, competitions and government policy etc. In the
second stage firm start exporting its product to foreign market using
independent representatives. During the process firm start gaining market
knowledge through experiences. Jan Johanson and Jan Erik Vahlne argue that
firm gain knowledge through other firms and by hiring experience personal or
employee who are based in that market, to acquire quicker and faster
information. After gaining sufficient knowledge of the market firm move to next
stage of setting up sales subsidiary. In similar fashion companies’ start moving
the operations to the local market (where possible) such as production and
manufacturing.
The U-Model and traditional models talk about the sequential process of
internationalization but New Venture Internationalization theory argues that the
importance of entrepreneurial vision and the initial resource endowment of the
firm in allowing early internationalization decisions (Autio and Sapienza, 2000).
Where firm commit more resources and accelerate the process by skipping the
early stages. Rapid expansion of internationalization is usually easy for
knowledge-intense industry where less tangible assets or products are required
moments.
Buckley and Casson, (1998) explore and analyse the foreign market entry
strategies. It encompasses its choice between wholly owned foreign investment
and joint venture. The choice between acquisition and Greenfield investment is
examined, and so too are options based on subcontracting and franchising. The
model analyse the home market, foreign market, product demand and then
analyse these factor to conclude the entry strategy. Setup cost and return on the
investment. The basic approach is to determine the set of all possible market
entry strategies, to measure the profitability of each, and to identify the most
profitable strategy (Buckley and Casson, 998). The following issues define the
dimensions of the strategy set:
(1) where production is located;
(2) whether production is owned by the entrant;
(3) whether distribution is owned by the entrant;
(4) whether ownership is outright, or shared through an IJV; and
(5) whether ownership is obtained through greenfield investment or acquisition.
The first four issues determine twelve main strategies of market entry.

14. MBA Dissertation
Page 14 of 46
(Buckley and Casson, 1998)
2.1 Approaches to Internationalization
SMEs adopt different approaches for instance Importing/Exporting, FDI and
Strategic Alliance for internationalizations. These have there own challenges and
benefits.
• Import/Export
• FDI
• Alliance
Exporting is consider low risk, low investment approaches for
internationalization. It is a fast, easy and flexible way of getting into international
market with little knowledge of foreign market. Strategic alliance is another
approach for quick entry to foreign market with little and expertise of the
market. Local strategic partner with equipped with experience can help to
expand rapidly but finding right partners and structuring effective partnership
can be tricky challenge.
FDI is another approach for international market entry, it help to increase the
competiveness and growth, locational advantage and reduces the transaction
risk. It requires large investment and high risk and slow process as well. (Lu and
Beamish, 2001)
2.1.1 Exporting
Exporting is usually first easy step for getting into foreign market with little
knowledge. Many SMEs begin by importing goods from foreign suppliers and
only start exporting in response to intermittent needs and demands (European
Commission, 2004). The challenge would be to find the right sales agent to align
with. Tariff & non-tariff trade barriers knowledge and cost of transportation
could be challenge as well. (Lu and Beamish, 2001) Various authors have
suggested that SMEs with little knowledge and low investment otherwise FDI,
exporting provide fast and easy access to foreign markets, with little capital
investment required, but the opportunity to gain valuable international
experience. (Root, 1994; Zahra et al., 1997; Sullivan and Bauerschmidt, 1990;
Erminio and Rugman, 1996).
2.1.2 Foreign direct investment
Buckley and Casson (1976,1998) argue that large multinational can gain large
economic benefits from exploitation of foreign marketing by entry using export
or FDI. Hennart (1982) argues that exporting bring great benefits for firm willing
to enter in foreign market when there is low capital investment available but if
the risk involve when a firm’s assets are proprietary (such as brand equity,

15. MBA Dissertation
Page 15 of 46
trademarks, or patents) exporting can expose a firm to greater risks in terms of
distributor opportunism or asset appropriation and devaluation. When this kind
of risk is involved, FDI becomes an attractive means of internationalization,
because it enables firms to minimize transaction-related risks through
internalizing markets for proprietary asset exchange (Hennart, 1982).
Apart from the asset proprietary benefits, FDI in diversified locations enables a
firm to leverage various location-based advantages such as access to
competitively priced labour force, critical resources, and great be knowledge and
skills experience gained from international competiveness (Kogut, 1985).
With these benefits FDI is less flexible in terms of capital investment and
recourses required committing in foreign market then exporting and it require
long-term strategy, as it’s not easy to roll back. It’s also less flexible then
exporting in baring the effects of instable political risk and market fluctuation
(Hymer, 1976).
2.1.3 Alliance
As discussed previously organisation gain great benefits through FDIs but SMEs
with these large investment is not possible, as neither they have full range of
resources nor they have the expertise for large investments. AS SMEs and
entrepreneur by definition have limited resources and knowledge.
SMEs face internal shortages of information, capital, management time and
experience, while externally; SMEs face constraints arising from their
vulnerability to environmental changes (Buckley, 1989).
Different authors have discussed the benefits and alternate of FDI for SMEs as
strategic alliance. It enables firms to get to foreign market with no or little
knowledge. There are no large resource commitments required. Alliances have
been recommended as major mean overcoming resource and capability
deficiencies and enhancing the possibility of success for internationalizing firms
(Jarillo, 1989; Zacharakis, 1997; Beamish, 1999).
Alliance partners can help SMEs overcome the problem of limited capital,
equipment and other tangible assets through resource sharing between firms
involved in the alliance. It is also gain more importance, as partner is more
equipped knowledge about the foreign country for SMEs. SMEs can acquire host
country knowledge and develop new organizational capabilities from itself
through incremental experience and accumulation in new geographic regions
(Johanson and Vahlne, 1977).
2.2 Motivation for internationalization
Internationalization of firm is prime motive is the profit maximization and
growth. Motive includes the maximization of return, minimization of costs and

16. MBA Dissertation
Page 16 of 46
access to international technology; labour and capital are factor for
internationalization (ENSR 2003).
Etemad (2004) identified mainly three forces behind the firm choose to go
international. Three forces namely are push; pull and interactive forces,
interplay to impact the internationalization of SMEs (Etemad 2004).
The pull forces, which are mainly factor outside the firm which attractors firm
for internationalization, many author identified these factors such as overseas
market liberalization, advancement in information technology and
communication, transportation and partners. Further more its attractiveness
and serving the international requirements of existing buyers and suppliers.
(Etemad 2004, McNaughton & Bell, 2000)
The push forces that are usually internal to the firm and exert there pressure
firm from inside to internationalizations. The push factors are entrepreneurial in
nature and follow the Schumpeterian quest for "creating" opportunities
especially when the firm has "innovative combinations" (e.g., innovative
products, services, and processes) and it set to realise them. (Etemad 2004)
The interactive factors emerge as a result of interaction between the push and
the pull forces and impact the firm’s course of action to internationalize (Etemad,
2004).
Schematic Depictions of Push, Pull and mediating Forces in Internationalizations Process
Figure 3.0 (Source: Internationalization of Small and Medium-sized Enterprises: A Grounded
Theoretical Framework and an Overview. Hamid Etemad, 2004)

17. MBA Dissertation
Page 17 of 46
Firm prime motivation is firm base expansion, profit maximisation and
attractiveness to innovative ideas. This can be broadly supported by the firm
own perception survey conducted by OBM in 2006. The survey shows the
motivation to export as expanding the firm base but firm need for learning new
ideas and technology is given not equal but high importance. Summery of the
survey table shown below shows that:
-Expansion to firm base is cited the most important factor of the expansion
where this shows that exporting is link to business expansion. It also highlights
when firm has met the local product demand or competition is expanding it look
for new ways to expand. Firm see the exporting is the way to expand it.
-Exposure to new idea is also thought to be important factor among firms. New
ideas could be the new technology, communication or transportation network.
It’s given more importance by firms who are more innovative.
-R&D and innovative firms, according to chart has found all three motivation
important factor. Survey result shows that expansion, profit and exposure to
new idea is regarded equally important or highly important to be precise.
Summary of Motivations for Exporting by SME R&D Activity and Innovation
Table: 1.0 (Source: OBM Research 2006a)
2.3 Barriers to SMEs
There have many barriers being identified by different research and business
surveys. SMEs face barriers of both internal and external factors. External
barriers include the trade barriers by local government and the host or
international level, various formal and informal trade barriers, various rules and
regulations. Internal factor include firm capabilities, skills and knowledge need
to work in international market. Firm also face culture barriers, language
constraints, international network link and availability of funds.

18. MBA Dissertation
Page 18 of 46
The European Commission's European Network for SME Research (ENSR)
conducted a survey in 2003 on SMEs and most of them identified the availability
of the finance to meet the high cost of internationalizations process. According to
OECD (2005) internationalization barriers start at national level, such as
competition policy, legislative and regulatory framework, research and
education policy. There are also other barriers such as political stability of the
country, IPO protection and international capability. In addition to that there are
internal factors, which restrict firm to go internationalization such as
organisation culture and commitments.
ENSR (2003) study explorers other critical barriers for firm that include the
knowledge of international market, competition and assessment of the reliable
foreign partner. ENSR also identified that many firm has unclear strategy of
initial internationalization process or they lack knowledge of business formation.
2.4 Elements of SMEs Internationalization
Wright, M. (2007) suggested the seven key elements from a policy prospective
with regards to the internationalization of the SMEs.
1: Timing of internationalization.
2: Intensity and sustainability of internationalization.
3: Mode of internationalization.
4: Influence of the domestic environmental context on internationalization.
5: Leveraging of external resources to internationalize.
6: Unit of analysis (i.e. the firm or the entrepreneur).
7: Effect of internationalization on SME performance.
2.4.1 Timing of internationalization
The timing of internationalization is an important distinguishing factor between
traditional internationalization studies and international entrepreneurship
studies. According to latter theoretical prospective the International new
venture (INV) theorist challenge the stage model theory, and suggest that many
new private SMEs can internationalize from the inception of business operations.
These theorists are guided by strategic choice theory and learning/knowledge
theory (AUTIO et al., 2000).
INV are the firms who drive profits from superior competitive performance and
sales of their product in different countries. The theorist from INV suggests that
these firms do not regard the international market as new extension to the home

19. MBA Dissertation
Page 19 of 46
market. SMEs with specific competitive advantages linked to their technological
level and product and/or service characteristics may be alert to opportunities in
international markets from the outset (Oviatt and McDougall, 1994).
INV firms do not go and learn new thing for international market but these are
the same thing they have learn because of their domestic market presence
(AUTIO et al., 2000).
2.4.2 Intensity and sustainability of internationalization
Many SMEs gain more growth from their early initiative of the
internationalization and their greater insensitivity to learn and gain more
knowledge. The theorist of the stage model theory argues that learning of the
knowledge and experience is based on entrepreneurial choice. The theorist from
later studies argue that organisation that learn from its success or are
knowledgeable firm will show more commitments and commit extra resources
to internationalization (Wright, M. 2007). Other see problem in that argument
problematic.
First, many firm see problems, barriers and hurdles only after exporting or
engaging into internationalization process (EIM, 2005). Some SMEs stop their
exporting for sometime and resume at later stage but in some case exit all
together and don't start again.
Second, Clark (2004) explains that there could be reasons that domestic product
demand is low and firm seek new market for their stock. Once the domestic
demand is stable they stop exporting and concentrate on local market. Here it
needs to be made clear there is two firms one that is disappointed from the
international market and may not start in future. Other is disinterested who is
not willing to export now but may start exporting in future sometime.
2.4.3 Mode of internationalization
The mod of internationalization is critical strategic choice made by firm, which
enable them to acquire resources and accessibility to the vital information
(Holmlund and Kock, 1998). As discussed earlier firm can choose from variety of
international mod such as exporting without setting up the base, or going in
using FDI investment associated with Greenfield site, or using acquisitions or
joint ventures.
2.4.4 Influence of the domestic environmental context on internationalization
Firm acquire resources from domestic market can utilise these capabilities and
resources in international market (Wiedersheim-Paul et al., 1978). As discussed
earlier the resourced-based view provides the opportunity to utilise and balance
between the product and service resources to gain competitive advantage. Many
firms specialising at various stages of supply chain are cluster together at one
location can accurse advantages to the firm (Taymaz and Kilicaslan, 2005). When

20. MBA Dissertation
Page 20 of 46
these clusters acquire global position, allows firm to use domestic resources such
as marketing knowledge, brand and technology to international market that can
be used to reduce the obstacle during internationalization.
2.4.5 Leveraging of external resources to internationalize
There are benefits associated as part of the network(s), which allows the firm to
utilise the external resources along with the internal resources. Dana (2001)
explains from the resource-based theory prospective that external resources,
tangible or intangible provide aid to internationalization. Inter-firm relationship
influence the selection of internationalization and network can include small and
large firms that can aid the internationalization.
Some evidence has suggested even firm with network support still find it difficult
to operation in international market. But large firm with support of smaller local
firms manage to over come the barriers to internationalization and the small
firms become the supplier to large mover (Le Gale`s et al., 2004).
Acs et al. (1997) suggested large firms provide support to small SMEs in terms of
technology, experience, branding, and quality control and establish mechanism
for international operation.
Another advantage of being in networks is that domestic customer whom
happens to be operating in international market can provide the opportunity to
pull to international arena. In order to maintain the relationship its network can
push to become the exporter if particular business partner has entered in foreign
market. This market entry is often called ‘piggy-back’ mod of entry. It is reactive
exporter to the situation or network partner behaviour (O’FARRELL et al., 1996).
2.4.6 Unit of analysis (i.e. the firm or the entrepreneur)
Traditional theorist and INV specifically focus firm as the unit of analysis. INV
exert as learning and acquiring of knowledge of firm as whole not to the
individual entrepreneur. Alternately Zahra et al. (2000) is of the view that
internationalization process experience is at individual level as oppose to the
firm. Many SMEs owners are the key resources related to experience, knowledge,
creating competitive good and services. They also provide the management,
financial capital and experience to the firm. Therefore it is reasonably acceptable
that individual can learn knowledge and international business experience and
knowledge of foreign market and internationalization (Eriksson et al., 1997).
2.4.7 Effect of internationalization on SME performance.
Internationalization effect on is another element of seven presented by Mike
Wright et al. (2007), it explains that it increases the firm performance at superior
level and increases its wisdom to do business. Mcdougall and Oviatt (1996) is of
the view that internationalization not only increase the firm perform but also it
leads to superior performance on market relativity share and return on

21. MBA Dissertation
Page 21 of 46
investment (ROI). Further Bloodgood et al. (1996) is of the view that
internationalization leads firm to acquire international performance level
technology, expertise and innovation.

22. MBA Dissertation
Page 22 of 46
3 Research Methodology
3.1 Introduction
The proceeding chapter will provide the details about the research design used
to analyse the SMEs in Pakistan. This chapter will provide the details of research
process adopted for research with explanation of the data collection and data
analysis method employed.
It also provide the explanation and justification of the method adopted for the
research purpose. The sampling method adopted with discussion and
justification with the overview of the limitation of the research design.
Figure
Source: Saunders et al. (2006)
3.2 Research Philosophy
Most of literature provides the understanding that choosing the research method
is subjective matter. Fisher (2003) and Easterby-Smith et al (2002) are of the
view that there is no right and wrong way to do research philosophy. Any
research philosophy can be used, as some will be best suite to answer the
research question then other.
Saunders et al. (2000) research onion provides the different choices used for
research philosophy; there are two prominent philosophies at opposite end
interpretivisim and positivism. Jankowicz (2000) explains that positivism is for
truth, which means everything can be proved and known (Fisher, 2007) and
based on scientific method in approach. Silverman (2005) explains that social

23. MBA Dissertation
Page 23 of 46
factors exist independently from the participants and researchers. Positivism is
not considered appropriate where human factors are part of the research (Sobh
and Perry 2006).
The interpretist is usually link to qualitative research. Saunders et al 2003
describes interpretist as phenomenology. This approach is based on experience
and expectation of the people. It’s based on the capturing data from people’s
point of view. Interpretist allows research to get close to the participants and
understand their views (Shaw 1999) with in-depth analysis of data collected.
Saunders et al (2003) explains “a philosophical position which is concerned with
understanding the way we as humans make sense of the world around us”.
Interpretist approach was used for the research of this study.
3.3 Research Approach
There are two main choices for research approach, Inductive and deductive.
Inductive based on data collected and theory is drawn from data collected from
various sources. Whereas deductive is developing a theory and testing it through
research (Saunders et al 2003). Fisher 2004 explains that inductive research is
conclusion drawn from past experiences.
Inductive is also called qualitative approach and deductive as quantitative
approach. For the purpose of study inductive method is used. The initial
research and literature review suggested that inductive approach is best suited
for this kind of study. Qualitative research is important as it represent the view
of the people involved in the job, or working in the organisation who are in
reality are the respondent to the survey, As they will respond what they think
about what they do (Hannabuss 1993).
3.4 The Research Process
The research was conducted based on semi-structured interview. There are
other method of qualitative research that includes survey and observations.
Interview method was selected because it allows getting closer to participant
and the environment they work in. Also it allows participant to contribute more
and gives the opportunities to ask cross-questions. An Interview not only allow
getting closer to participant world they work but also give the opportunity to
observe the interviewee.
There are three different kind of interviews method such as Structured, semi-
structured and informal methods. Structure interviews are used when large
number people are required to interview. Semi structure interview allow
interviewee to me open and contribute freely and it’s allow the observation of
personal or sensitive issues (Hannabuss 1993).

24. MBA Dissertation
Page 24 of 46
The informal interview allows the participant to participate openly and frankly.
Informal interview encourage the follow up questions, which enables data
analysis and collection along with observation. It further allows the interview to
ask follow up questions for accuracy and understand (Gray, 2004).
For the study semi-structured interview method was used with structure set of
questions with follow up questions depending on the answer. Eisenhardt (1989)
explains that inductive research is based on understanding as oppose to just
statistics and data collected using various methods.
3.5 Primary Research Interview
In-depth interview was conducted on SMEs based in Pakistan. In total four
interviews were conducted, participants included Herbal medicine, traditional
garments items, Sports goods and Rice producer. Sports, traditional garments
wear and rice, are popular export products, which dominate the export figures.
These participants have been involved in internationalization, have been trying
and planning to adopt the internationalization in future.
Participants were asked set of questions and follow up questions depending on
their response. Interview included open-ended and close-ended questions
depending on its nature. Interviewee was encouraged to fully participate in
interview session and different methods were used to initiate discussion.
3.6 Secondary Research Data Collection
Data was collected from various sources. Economic Survey report conducted by
independent organisation was available online which comprises the current
political, economic, investment, growth and poverty report. It helped to collect
exact figures and numbers about the economic situation in country. Economic
Census was conducted by Census Pakistan, which provided the distribution of
economy based on agriculture, FDI, manufacturing and other industries. It
further provides the SMEs in various sectors and their contribution to the
country. Working Paper and Reports prepared by Asian Development Bank,
World Bank and Economic & Finance Ministry of Pakistan.
In addition to that few research reports on SMEs based in Pakistan were also
utilised as reference for figures and numbers. Reports prepared by private SMEs
support organisation such as Small and Medium Enterprise Development
Authority (SMEDA) and Gallup Surveys.

25. MBA Dissertation
Page 25 of 46
4 SMEs in Pakistan
According to definition provided by State Bank of Pakistan all firms come under
the heading of SMEs which number of employee doesn’t exceed 250 and for
service industry its not more then 50 employees. There are further criteria
defined by State Bank of Pakistan for defining the SME:
• A trading and manufacturing concerns comes under the category of SME
that has total assets (excluding land and building) not more than Rs. 50
Million.
• A manufacturing concern comes under the category of SME if the total
assets (excluding land and building) are not more Rs. 100 Million.
• Any firm whose annual sale is less than Rs. 300M.
(Source: SME Banking 2010)
Historically Pakistan Government was only focusing large-scale enterprises
without distinguishing the small-scale business. For that reasons the focus of the
policy was never SMEs. The Small and Medium Enterprise Development
Authority, (SMEDA) has been active in raising awareness among public and
private sector for the importance of the growth of SMEs in an economy. SMEs
growth create low cost employment opportunity and reducing poverty. It
provides dual benefits to the economy one by reducing the poverty and secondly
increasing the export. (Economic survey, 2003)
There are 3.2 million SMEs business unit in Pakistan with large number of
employment opportunity and it consists of 78% of non-agricultural labour force.
SMEs in Pakistan contribute 30% of the whole GDP. SMEs largely based on small
companies dealing mainly with sales & retail businesses, employing 1-5 persons.
According to World Bank in Pakistan 98% of SMEs employee 1-5 persons and
99% employee ten or less. (Khawaja, 2006)
The frequently conducted surveys shows that the number of SMEs is much larger
then the figure provided by the government. The reasons for that are those SMEs
are very small in scale and performance that they try to be hidden or left
unrecorded. Due to size of their existence their sole purpose is to survive and
generate some revenue. Many of these small businesses are sole ownership or
have friends and family working for them.
SMEs are not professionally managed or organized. One can hardly find personal
qualified person is hired by companies to improve their business efficiency. In
result 96% SMEs are sole proprietor and only 2% is based on partnership. For
that reasons SMEs face slow growth rate and unable to bear the market changing
environment challenges. Failed to overcome these challenges most of time leads
to the failure of the business and complete disappearance from the market.

26. MBA Dissertation
Page 26 of 46
According to study conduct by SMEDA only 4% of SMEs in Pakistan manage to
survive more then 25 years. (Khawaja, 2006)
Historically Pakistan government has focused on the policy and development of
large scale manufacturing industries, which according to economic survey of
2004 recoded growth of 8.7% during the period of 1950-2003. SMEs gain 14.7%
growth under the policy of large-scale industry without any policy intended to
their growth.
According to Economic Census of Pakistan (2005) there were 3.249 million
households and establishment of which, 64%, 18% and 15%, were in Punjab,
Sindh, Khyber Pakhtunkhwa respectively and 2% in Balochistan and 1% in
Islamabad. 56% of the establishments were in urban areas and 44% of the total
establishments were in rural areas. Wholesale and Retail Trade, Restaurants and
Hotels Sector comprises of 53% of the total establishments, 20% Manufacturing
Sector, 22% in Community, Social and Personal Services Sector. (Economic
Census of Pakistan, 2005)
Contribution of SME in Manufacturing and GDP of Pakistan
Table: 2.0 Source: Economic Survey of Pakistan, Various Issues

27. MBA Dissertation
Page 27 of 46
5 Internationalization of SMEs and Export of Pakistan
Pakistani industry had difficulty adjusting into the global export market. Even
market liberalization and low trade barriers it failed to increase its export.
According to World Bank Pakistan export was equivalent low and middle-income
countries. In 80s export was growing in South East Asian countries by 7% but
Pakistan export was falling every year with the rate of 2%, precisely between
years 95 to 99. World Bank further analyse that these low growth in export is
due to bias policy of government from SMEs and export-intensive industry to
domestic-oriented capital-intensive industry.
As discussed in previous section Government focus was remain large-scale
manufacturing industry and SMEs growth was in the shadow of these polices.
Internally focus polices led to protection of import substitution and capital
investment industry particularly fertilizer, cement, synthetic and motor vehicles.
This was done with selected tax exceptions and high import tariffs which led to
low export and high raw material cost. Pakistan faced political instability in 90s,
this was due to short-lived Governments and both had different priorities, vested
interests and led to high tax barriers and low incentives for SMEs.
According to Doing Business in South Asia (2007) report policy shift in 1997 of
market liberalization led to reduction of maximum tariff barriers from 65 percent to
45 percent. These reforms further included the reduction of average nominal from 67
percent to 10 percent. This resulted in Pakistan ranked above the average trade
barriers in South East Asia in composite index. SMEs and domestic market was badly
affected and internationalization of domestic market was hampered.

28. MBA Dissertation
Page 28 of 46
Pakistan Export Performance
Figure 4.0 (Source: Pakistan Country Assistance Strategy 03-05, annex II, p.5)

29. MBA Dissertation
Page 29 of 46
6 Barriers to SME internationalization
As previously reviewed in literature review of the study that firm faced various
barriers when it tries to go internationalization. Firm faced sunk cost when they
first take entry into overseas market. Sunk cost in economic term, which cannot
be recovered. Sunk cost varies depending on the firm method of going
internationalization. Firm identifies method with low sunk cost and profit over
its expenses. For that reason, many firm efficient productive of high profit opt for
exporting method, which allow them low cost entry to foreign market.
Firm with tangible goods are influenced by various factors such as language,
culture, and tradition importantly distance. These factor influence firm selection
of foreign market. Evidence shows that firm tend to prefer countries with less
distance where product can easily be delivered. Once successful in near distance
market it tries to expand to far distance market by utilising the experience
learned from it. Trade data evidence proves that large number of trade between
countries with similar language, culture and historical ties.
Research has shown that firm face uncertainty of going into foreign market. Firm
even conduct initial research of foreign market, is going to be aware of the risk if
the product is unsuccessful then they have to exit the market. Unless company
overcome the sunk-cost of foreign market uncertainty will surround the firms.
Literature review has shown the various barriers of internationalization for
firms. In this study have identified the barriers of the SMEs for
internationalization concluded from various data and reports collected. In
particular barriers include resource barriers, information and network barriers,
cultural barriers, and legal and procedural barriers.
6.1 Resources Barriers
Resources barriers include the firm ability to spend capital, availability of human
resource, management skills and capability for the process of
internationalization. In these resources finance factor is very important, as firm
with no working capital or not enough capital to invest in foreign market.
Financial resource barriers such as finance to access to foreign market, exchange
rate, marketing cost etc, all contribute to the cost of doing business. Firm with
financial resources still wont be certain about their decision of
internationalization.
Zucchella (2009) explains that support organisation is of the different view that
firm which required going internationalisation not only face the financial
barriers but also the availability of the human resources as barriers. Availability
of qualified human capital who can absorb the knowledge from the international
market and used that knowledge to overcome the entry barriers.

30. MBA Dissertation
Page 30 of 46
Evidence from interview conducted on SMEs showed that access and
availabilities to these resources are one of the major barrier. Also survey
conducted by various study paper also prove that firm with potential to grow
find difficult to over come the resources barriers.
Corviello and McAuley (1999) is of the views that SMEs more likely to face
resource barriers then large firm due to their capacity and availability of human
capital. SMEs with these limited resources face difficulties in
internationalization.
6.2 Access to Information and Networks
Osarenkhoe (2008) explores that firm needs information on various issues such
as foreign market, contacts, product competitiveness and other setting up
information. The process to get this information may increase transaction cost of
entry mode. The availability of information network may allow easy access to the
information and reduce the initial cost. Previously discusses the barriers to
resources are link to the accessibility to the information network.
When firm decide to go international, they required information on such as
buyers, market competiveness, rules and regulation, product demand and
product pricing. Firm progress to internationalization can come to halt due to
the absence of suitable information network. Information network contacts can
provide the business partner opportunities and easy access to resources in
foreign market.
Interview evidence shows that SMEs in Pakistan have no information network or
source available that can provide useful information about the overseas market.
Most of them relied on the Internet, Friends and family based in overseas
countries. It further causes difficulties and uncertainty for the firms, which are
less technology equipped and don’t have the capability or skills required
accessing those information. Access to information is one of the major barriers
as its not only hindrance the SMEs progress international but also reduce the
chance of capitalising on various business opportunities.
Many SMEs blindness to the overseas market or incompletely information
discourage their commitment and willingness to adopt the path of
internationalization.
6.3 Cultural Barriers
Cultural play important role in developing business ties. Evidence has shown
that countries with historical similar culture create easy and long lasting relation.
Cultural barriers are link to access to information network that allows the firm to
gain knowledge about the local culture and business relation based on these
cultures. OMB research (2008a) has shown that lack of awareness and
knowledge about local culture can make or break the development of business

31. MBA Dissertation
Page 31 of 46
relationship. Japanese business culture and relationship building is very much
influenced by the culture and network ties.
Ibid market research shows that culture barriers are important factor in
overseas market entry. The probability of a successful entry facing no entry
barrier is 0.77, with one barrier is .067 and entry facing four or more barriers
success rate is 0.18. This shows that entry to foreign market can be influenced
based on cultural effect.
Pakistan with historically part of British Empire is influenced by its culture and
still has law prior to independence. Many Pakistani are settled in Britain and that
make their access to information and culture preference make their first choice.
But UK is not the only choice for internationalization, as the Middle East, other
European countries and USA are the preferred markets. Market preference for
Pakistani SMEs for their internationalization are open culture, which allows low
barriers to entry.
6.4 Legal, regulatory, and procedural barriers
Legal, regulatory, and procedural barriers include the legal, financial and tax
regulations, trademark, patent and copyright regulations. Procedural can include
approval of the product for selling in market, medicine or food items approved
by respective authorities. Coeurderoy and Murray (2005) explain that to avoid
long and difficult regulatory procedures firm tend to find countries with
minimum legal barriers or country with similar legal and regulatory procedures.
SMEs in Pakistan with low investment capital and limited access to information
find it difficult for market entry. From the interview of SME operating herbal
medicine showed that regulatory procedure was difficult and long. It further
added it required local representative to process the approval of the medicine
and represent the product locally in UK.
6.5 Financial Barriers
For internationalization firm requires funds to spend on analysis of overseas
market, acquiring legal support and to bear travel expenses. SMEs with limited
budget and capital find it difficult to spend on international, which is not
completely certain of the successful investment profit.
SMEs in Pakistan rely on self-financing because of limited access to financial
credit. Historically financial access was difficult for SMEs but liberalization of
banking sector from State Bank of Pakistan in 90s allowed SMEs access to
finance and credit (ILO, 2002). Evidence shows that more SMEs over 50% relay
on self-financing only about 6% comes from financial institutes and commercial
banks.(Asian Development Bank, 2005)

32. MBA Dissertation
Page 32 of 46
The World Bank (2001) argues that access to financial credit is much to do with
procedural and collateral requirements as its do to with banking risk. SMEDA
(2001) suggests that SMEs face difficulty in getting bank loan and procedure
takes from 2-8 months long. SME has to provide collateral guarantee as property
to get the credit access. Credit problem also due to State Bank of Pakistan
lending regulation Prudential Regulations, which limit unsecured lending to
SMEs (Khan, 1997).
With difficulty to access to finance limit the progress of SMEs at domestic level
and many show reluctant for internationalization. Most SMEs in Pakistan are
depending on self-financing and loan from friends & family. SMEs mainly faces
following constrains which apply to SMEs and manufacturing firms:
• Strict Collateral requirements specified by the SBP's Prudential
Regulations
• Procedural and Regulatory delays in obtaining loans
• Poorly enforced creditor rights
• High perceived risk and poor reputation of SMEs
(SME Development in Pakistan Paper, 2005)
6.6 Access to Technology
Pakistan SMEs are relied on obsolete and out dated technology. For that reasons
SMEs produce high cost and low quality products that are not up to standard for
international market. The lack of information and opportunity for technology
upgrade has been the main reason behind this stage. Technology plays crucial
role to change the developing economy to knowledge-based modern economy. It
also holds back the SMEs of Pakistan to compete at international arena with
competitive products.
SMEs production is relaying on old labour intense method with low quality and
low production results. Pakistan Export figure shows that its major exports are
of agriculture products and sports goods which are not technology intense. On
other hand Pakistan has shown progress on intangible products such as software
and call centre outsourcing.
6.7 Organisation Structure and Management Level
As discussed in literature review chapter, Management level expertise, skills and
innovative nature can lead firm’s profit and high growth. Studies have shown
that organisation structure and management skills are closely related. It’s
evident from number of studies the performances of SMEs in Pakistan are
negatively affected by the lack of skills and incapability of management (Aftab
and Rahim, 1986). SMEs are run by family and friend, firm has to trust the their
own ability. Having low managerial skills, lack ability in managing business in
terms of finance, marketing, quality control and product innovation.

33. MBA Dissertation
Page 33 of 46
SMEs find extremely difficult to acquire knowledge and skills to perform in
international market. SMEs suffer from human capital inexperience but their
inability to acquire experience and knowledge gain from internationalization.
Interview evidence has shown that Pakistani SMEs fail to enter in export market
due to lack marketing skills to meet the demand and expectation of the market.
As study has shown the linkage between the product marketing such as
packaging, export quality, finishing quality and then presentation in export
market.
6.8 Government Policy Reforms
As discussed in initial review of the SMEs, Pakistani SMEs were long ignored and
there was no direct policy and willingness to promote SMEs in Pakistan.
Pakistani SMEs being developing under the shadow of policy developed for large
scale manufacturing industry. After 90s Pakistani government realised the
importance of the growth of SMEs and its role in economy. Also the organisation
such as SMEDA and Asian Development Bank influenced Government to promote
SMEs and make favourable policies.
There were no policy reform let alone the government incentives and subsidies.
In that situation SMEs have to depend on their own resources and network
information.
6.9 Evidence from Interview
Number of interviews was conducted on SMEs based in Pakistan who are already
engage in process of internationalization, previously engage in it or willing to try
in near future. Interview covered wide range of questions. Question included
selection of internationalization, selection for market, entry mod, availability of
information and resources.
Interviews result proves that SMEs in Pakistan faces various difficulties in
choosing the internationalization path. Further its shows that most SMEs prefer
to choose the export market because of the limited capital investment and lack of
knowledge about the foreign market.
Interview outcomes highlighted the following dominant factors:
• Lack of knowledge and experience of overseas market
• Overseas market are different
• Legal, regulatory and procedural barriers
• Financial barriers
• Transportation and trade barriers
• Product competiveness
• No first hand support from Government or private support companies
• Export as preferred method for international entry mod

34. MBA Dissertation
Page 34 of 46
7 Discussion
In this chapter we will discuss the measures to address the barriers to
internationalization faced by SMES in emerging economy particularly Pakistan.
As identified in finding chapter those SMEs in Pakistan face number of barriers,
which can be addresses to improve the growth and their economic contribution
to the country. The growth can help to increase the employment and decrease
poverty.
The study aim to identify the key issues faced by SMEs in Pakistan in the process
of internationalization. Its further aim was to recommend solution to address
these issues by comparing the method and process adopted by other emerging
economies such as India, China and developed country like UK.
In order to address the issues, we will first look at how other countries took
initiatives to address these problems and how Pakistan can achieve success by
following the similar path.
7.1 Easy Access to information Network
SMEs access to information resources is crucial for their internationalization
process. Information includes the product demand, market situation, rules and
regulation, buyers’ preferences and seller network. This information may be
available using different resources but SMEs with limited capabilities and skills
may not able to access the information or doesn’t know how to access it. To over
come the barriers SMEs need first hand support from public or private institutes,
which not only provide them information based on secondary data but also
provide legal and procedural guidance.
Historically Pakistan did not have any authority or organisation clearly focusing
on growth of SMEs. As mentioned previously prior to 90s there was no separate
trade policy for SMEs. Small and Medium Enterprises Development Authority
(SMEDA) was established in 1998 to as advisory board to Government of
Pakistan also support the growth of SMEs in Pakistan. It provides various
training, procedural and legal support for establishing local and international
business particularly to SMEs.
SMEDA provide various support services starting from evaluating business plan
and providing help in formalizing. It also identifies the internationalization and
export opportunities. There are not many organisations similar to this, which can
cover the large number of SMEs in Pakistan.
Access to contact network can be provided using various trade shows and export
exhibitions in overseas market. Pakistani Government has build two large export

35. MBA Dissertation
Page 35 of 46
centres in Lahore and Karachi. On other side SMEs argue that two days
exhibition is not enough for building contact networks and also traveling
expenses are high which are not affordable for many low budget SMEs.
7.2 Cultural and Language Awareness
Cultural and language create binding and constitute stronger business relations.
SMEs with limited resources unable to acquire skills, which can provide them
help and training to overcome the language and cultural barriers. Support
organisation play important role in training and providing translation services to
overcome these barriers.
Similarly Chinese Government and European Union signed Memorandum of
Understanding (MoU) in Brussels in January 2010 to standardise the information
sharing. This will allow easy access to information related to Chinese market to
European SMEs and vice versa to Chinese SMEs access to European market. This
will provide the market information available in both Chinese and English, free
of charge. Such measures to allow the access of information in local language can
go long way in helping SMEs for their internationalization interest.
Pakistani SMEs with limited English exposure makes information accessibility
difficult. Availability of information in local language will not only increase the
understanding but also increase the motivation and temptation for going
internationalization.
Pakistani people are well aware of UK culture and traditions, which makes their
entry easy and allow information availability easy. UK is one of those countries
where Pakistani community has established itself strongly.
7.3 Legal and Procedural Support
Entry into overseas market requires legal and procedural documentation.
Usually it takes longer and requires legal support to peruse the application and
documentation. Interview evidence shows that for herbal and medical products
legal and procedural work is even longer and difficult as one can think of.
Government first hand support to provide assistance in legal and procedural
work will not only accelerate the process but also enable SMEs to save
opportunity cost to be utilised elsewhere.
Organisation such as SMEDA provide first hand information but unable to
provide help and support in documentation and legal matters. There is need of
the establishment of the similar organisations to promote SMEs at international
level.
China has taken various measures to promote SMEs in western market. Chinese
government has appoints fulltime staff at Embassy in London who provide
information and complete help in procedural and legal matters for SMEs. China

36. MBA Dissertation
Page 36 of 46
has gone a step further in assisting SMEs, by providing warehouse for Chinese
goods at low cost basis for SMEs entering into UK market. Warehousing not only
reduce the initial setup cost but also provide the risk free opportunity to market
their product in UK market.
7.4 Access to institutional Finance
Along with support services and access to information resources, access to
institutional finance is core and crucial aspect for the promotion and
international growth of SMEs. Historically SMEs were ignored, further longer
due procedures and difficult condition almost made access to credit impossible.
Government needs to take drastic measures to make access to finance easier for
smaller firms. Recently State Bank of Pakistan (SPB) has created separate
division for SMEs. It further needs to take initiatives to allow the lending to
smaller firms and distribution quota is separated from medium firms.
Government should further strengthen the banks such as SME Bank, Asian
Development bank, Agha Khan First Micro Finance Bank and Khuskhali Bank by
providing allowance and tax benefits, so they can further increase the credit
lending to small and medium firms.
Asian Development Bank (2005) suggested the following measures to increase
the access to credit by SMEs in Pakistan:
• Improving Access to Formal Credit Market
o Revisiting collateral requirements
o Simplifying the Lending procedures
o Enforcing Credit Rights
o Credit Registries and Credit Reporting
• Reducing Credit Cost
• Consolidating and Rationalizing Taxes on Financial Institutions
(SME Development in Pakistan, 2005)
7.5 Technology and Infrastructure Upgrade
SMEs in Pakistan are by large fall behind in utilising technology advancement.
Technology increases product productivity, innovation, and save manufacturing
cost. For that reasons Pakistani exports are dominated by the agriculture, raw
material, sports goods and machine spare parts. Infrastructure is another
constraint in growth, which includes unreliable poor quality services,
transportation network, high tariffs and high cost backup charges. Recently
Pakistan has faced sever electricity shortage which has damaged manufacturing
industry badly especially smaller firms which cannot afford to utilise the backup
or replacement power generation methods.

37. MBA Dissertation
Page 37 of 46
As discussed in previous chapter the technology used by SMEs in Pakistan for
product development and manufacture is really old and some of them using as
old as the birth of Pakistan. Introduction and training of new technology, which
can reduce the cost and increase productivity needs, to be indulge into SMEs
production line. Government needs to take measures by reducing tax tariffs from
the import of latest machines and production units. SMEDA has been acting
influencing Government policy to allow more tax relief on machine import for
SMEs. It’s also active in hosting training workshop to create awareness for new
business opportunities and use of latest technology.
7.6 Management and HR Training
Management and low skills discussed in previous sections proves to one of the
major obstacle in SMEs progress. The lack of education, poor middle
management skills and inability of vocational training are the main reasons. The
poor quality of human resources and training exists because family owned
method runs businesses. Managerial trainings are expensive and their inability
to protect the staff makes it difficult to acquire. SMEs management require
generic training and HR skill set to further enhance the skilled labour.
SMEs with shortage of funds and limited access to credit don’t opt for expensive
trainings and skills workshop. To address this issue access to credit can be made
easy for training and workshop purposely. Once organisation have experience
and trained management staff it will automatically contribute to the growth of
the firm.
R. LalKaka (1997) explains that there is way to create ‘incubators’ for specific
skills and it has been experimented in many countries. According to this method
15-20 SMEs get training from government sponsors in sector specific skills over
the period of 2-3 years. Over this duration they are given various trainings and
workshops. Incubators further provide management and extensive consultancy
facility that once completed provides potential help in growth of the SMEs. These
incubators training programmes can be very useful in training and skills
generation in Pakistan.
To make these programs successful, it needs to be designed, planned and
executed carefully to gain maximum outcomes. Many countries have successfully
implemented this idea in various fields with strong industrial requirements but
also in research, educational institutes and health care fields. Country includes
Poland, Turkey, Czech Republic, China and Mexico has successful followed but
difficult to design similar idea (R. LalKaka, 1997).
7.7 Policy Reforms to Support SME Internationalization
Policy for SMEs for internationalization are generally grouped under two
headings:

38. MBA Dissertation
Page 38 of 46
7.7.1 Policies for SME to overcome barriers to internationalization:
There is no such support or policy available to support SMEs overcomes barriers
of internationalization. Organisation such as SMEDA provides support for
growth and establishment in domestic market. In UK and other developed
countries appoint consultant and fulltime officers to provide various services in
embassy and consulates. Services include consultation, information about
market and access to contacts network. These appointed officers also identify the
potential business opportunities to share with SMEs back home. It also provides
the tailored information and advice on overseas market.
7.7.2 Policies to help build internationalization capability
Building internationalization capability includes the knowledge of international
business; know how of doing business in overseas market and skills needed to
manage. It also includes the ability to identify the information needed to evaluate
exploit business opportunity in overseas market. It could further include the
building the understanding of international market requirements and its product
custom requirements (BIS 2010). Most developed countries including UK
provide basic training and information services to SMEs in their country to
promote abroad. Even emerging country like china has adopted the similar
policy for SME promotion.
According to BERR (2008) UK has two strands policy that is delivered or offered
using business products, one “Getting into New Overseas Market” and
“Developing Your Trade Potential”.
7.8 External Support Organizations for SMEs
SMEDA and SME Bank are two major authority or organization, which are
actively play role in promotion and growth of SMEs in Pakistan. SMEDA runs
various training and workshops to help SMEs in various fields such as new
business opportunity, management level, and marketing product programs. SME
provide financial help and consultation for various credit lending financial
institutes. There are no such specialised authorities, which support the
internationalization of Pakistani firm; neither do any help available at embassies
and consulate in overseas market.
Government do provide tax incentives and relief to motivate firm establishment
in overseas market. From research its evident SMEDA is facing financial
instability due to lack of Government funding. Government should continue to
provide financial support to SMEDA but also increase its services for
internationalization.
There is need of further investment in SMEDA like organisation. Country like
Brazil was spending $7.4 per capita on its SME agency. Pakistan’s Government in
comparison spends cent per capita on its agency.

39. MBA Dissertation
Page 39 of 46
7.9 Value Addition to Products
From the research evidence it’s clear that majority of Pakistani export is based
on raw materials, agricultural, sports goods and spare parts for machines . There
is no major export of goods and products, which are competitive in international
market. There is need of exploitation of value addition business opportunities.
With little addition to raw material, agricultural and textile products, can drive
new business opportunities and profit.
For instance other countries are sending rice products such as cooked rice to
western market instead of just exporting raw rice. Similarly little addition to
textile material and products can bring more profit to the table. These small
additions and invocation certainly create new market and business
opportunities.

40. MBA Dissertation
Page 40 of 46
8 Conclusion
SMEs are play important role in economic growth and increasing employment
rate. SMEs internationalization contributes to both firm and country economy.
This study aim was to explorer the role of SMEs in developing countries,
particularly Pakistan. Further it was to identify the internationalization of SMEs
and challenges faced by SMEs in the process.
Literature review shows that SMEs throughout the world face similar challenges
for internationalization. Their motivation is also similar which is growth and
expansion at global level, although there could be multiple reasons for going
internationalization. It further reviews the Challenges and barriers faced by
SMEs during the process of internationalisation.
Focus of the study was developing countries and Pakistan. Historically SMEs
were ignored in Pakistan and the policy was only for large and medium firms.
But since 90s Government has take initiatives to promote SMEs in Pakistan but
only at domestic levels. SMEs established in Pakistan are not opting for
internationalization for various reasons and challenges they faced.
Availability of financial capital investment seems common issue for SMEs but in
Pakistan it seems situation is far more worst then just the shortage of finance.
Government negligence and no clear policy of credit lending for SMEs in
particular made it more difficult. SMEs have to relay on self-financing or borrow
from other means such as friends or family. Strict lending conditions and long
procedures make it almost near to impossible. Another important barrier was
identified during the interview session is the access to information and contact
sources overseas. Information about foreign market includes market
requirements, product demand, tax and regulations.
SMEs and entrepreneur owner’s capability, skills and innovative mind could lead
to high growth of the firm. SMEs with low education and management skills in
Pakistan unable to progress and start the internationalization for their product.
Ability to access, learn and improve from internationalization experience
requires set of skills, which are missing in most of SMEs human resource.
After conducting in-depth interviews with SMEs in Pakistan who were involved
in internationalization at one point or in process of it. Interview revealed that
there are some common barriers all SMEs faced, those are access to information
about foreign market, financial support and first hand support from Government.
It further reveals that finance is not the only issue SMEs faces, as there are other
major challenges such as information access, network contacts and legal barriers
in entering foreign market. SMEs with financial availability were not certain to
export into foreign market.

41. MBA Dissertation
Page 41 of 46
In discussion we discussed the literature review with link to findings collected
from primary and secondary sources. In next step provided the
recommendations and suggestion to promote SMEs internationalization. In
Pakistan SMEDA is major authority, which provide support and help to SMEs
domestically by organising workshops, training programs and seminars. Its
prime focus in domestic growth and there is need to expand its support to
internationalization as well. Financial support by government and other SME
bank to help grow SMEs.
In summary we aim of the study was to identify the internationalization process
of SMEs in Pakistan and challenges faced during that process. Most study
conducted on SMEs either domestic growth or internationalization its prime
focus is usually developed economy. The study provided unique opportunity to
explorer the SMEs internationalization process in developing country like
Pakistan. Provided analysis and recommendation for their growth and expansion
at international arena. There were few limitations in study such as it only focuses
on one particular method that was internationalization using export method. The
FDI and Joint Venture are other two methods of internationalization, which can
also be explored. But these methods have low significance in developing country
because of low financial capital and under developed technology.

42. MBA Dissertation
Page 42 of 46
9 References
1. Acs,Z.J.,Morck,R.,Shaver,M.,&Yeung,B.(1997).The internationalization of
small and medium-sized enterprises: A political perspective, Small
Business Economics,9(1),7-20.
2. Aftab, K and Rahim. E, (1986), “The Emergence of a Small Scale
Engineering Sector: The Case of Tubewell Production in the Pakistan
Punjab”, Journal of Development Studies. (Vol. 23).
3. Aharoni. Y. (1966). The foreign investment decision process. In Buckley
and Ghauri (Ed.), The internationalization of the firm (pp. 1-13):
International Thompson Business Press. The Netherland.
4. Alan M. Rugman (Autumn, 1978), Journal of International Business
Studies, Vol. 9, No. 2, pp. 103-104
5. Andersen, O. (1992). on the internationalization process of firms:a critical
analysis. Journal of International Business Studies , 209-228.
6. Anyadike-Danes, M., Bonnet, K., Hart, M., Mason, C. (2009) Measuring
Business Growth. High – growth firms and their contribution to
employment in the UK. Research report October 2009. NESTA. London.
UK.
7. Arzeni, S. (2008). Removing Barriers to SME Access to International
Market. Singapur: OECD.
8. Autio, E., Sapiienza, H.J. and Almeide, J.G. (2000). Effects of age at entry,
knowledge intensity, and imitability on international growth. Academy of
Management Journal, 43(5), 909-924
9. Beamish, P.W., (1990). “The internationalization process of smaller
Ontario firms: Aresearch agenda”, in Rugman, A. M. (ed.). “Research in
global strategies management- International business research for the
Twenty-First century: Canada’s NewResearch Agenda”, Greenwich: JAI
Press Inc.:77-92
10. Benito, G. and L. Welch (1993), Foreign Market Servicing. Beyond Choice
of Entry Mode, Working Paper Series 4/1993, Helsinki School of
Economics and Business Administration, Centre for International
Business, Helsinki.
11. BERR (2008) High Growth Firms in the UK: Lessons from an Analysis of
Comparative UK Performance. BERR Economics Paper No. 3.
12. Birger Wernerfelt (Apr. - Jun., 1984), Strategic Management Journal, Vol. 5,
No. 2, pp. 171-180
13. Bloodgood, J., Sapienza, H. and Almeida, J., 1996, The internationalization
of new high potential ventures: Antecedents and outcomes.
Entrepreneurship Theory and Practice, 20, 4, 61 – 76

43. MBA Dissertation
Page 43 of 46
14. Buckley, P. J. (1989). Foreign direct investment by small- and medium-
sized enterprises: The theoretical background. Small Business Economics.
1, 89-100.
15. Buckley, P.J., and Casson, M. 1976. The Future of the Multinational
Enterprise. New York: Holmes & Meier.
16. Business Support products, and the economic evidence underpinning the
rationale for each of them are described in BERR (2008) The Economic
Drivers of Government Funded Business Support: Supporting Analysis for
‘Solutions for Business: Supporting Success’ available at:
http://www.berr.gov.uk/files/file48470.pdf
17. Calof, J. L., & Beamish, P. W. (1995). Adapting to foreign markets:
Explaining internationalization. International Business Review , 115-131 .
18. Clarke, T (2004), Is big pharma’s golden era over? Reuters Summit, Nov
17th 2004, New York.
19. Coeurderoy, R. and Murray, G. (2005) Institutional Environments and
First International Market Entries: Evidence on the Learning process of
New Technology-Based Firms. Working Paper 04/2005 CRECIS, Louvain
School of Management
20. Dana, L.P., 2001, Introduction: networks, internationalization and policy,
Small Business Economics 16, 57– 62.
21. Department for Business Innovation & Skills (2005): Internationalisation
of Innovative and High Growth SMEs. BIS Economics Paper No 5
22. EIM (2005) Internationalization in the Netherlands. EIM, Zoetemeer
European Commission (2000), "The European Observatory for SMEs",
Luxembourg: Office for Official Publications of the European Communities,
Report 6
23. Eriksson, K., Johnson, J., Majkard, A. and Sharma, D., 1997, Experimental
knowledge and cost in the internationalization process, Journal of
International Business Studies 28, 337–360.
24. Etemad,H.(2004).Internationalization strategies for small and medium-
sized enterprises facing a typology of different competitive
environments.In L.-P.Dana(Ed.),Handbook of international
entrepreneurship,Cheltenham,UK:Edward Elgar
25. European Commission (2004), Observatory of European SMEs 2003,
No.4: “Intemationalisation of SMEs", EIM, Luxembourg.
26. Faisal Bari, Ali Cheema & Ehsan ul Haq (2002), Barriers to SME Growth in
Pakistan: An Analysis of Constraints
27. Foss, N.J. and Eriksen, B. (1995), “Competitive advantage and industry
capabilities”, in 29 Montgomery, C. (Ed.), Resource-based and
Evolutionary Theories of the Firm: Towards a Synthesis, Kluwer
Academic Publishers, Boston, MA, pp. 43-69.
28. Gibb and Ferguson, ‘Internationalising the Small Business’, 23rd
European Small Business Seminar, 1993