Download pdf - Barriers

Barriers to internationalisation of SMEs in a developing country

Dr. Kodicara Asoka Gunaratne, Unitec New Zealand

Abstract

A high percentage of small and medium sized enterprises (SMEs) in the developing

countries fail to enter foreign markets due to their inability to overcome the entry

barriers. This study therefore investigated the barriers to internationalisation of SMEs

in Sri Lanka. Results are based on a postal questionnaire survey. Factor analysis was

used to examine the underlying constructs in the data gathered. The four factors

identified were labelled as – informational, operational, marketing and environmental

barriers. Significant differences were observed in the evaluations of impact of a

number of barriers between the owner-managers (OMs) of “growth” and “non-

growth” businesses. Results demonstrate internationalisation of SMEs is plagued by

many obstacles in the home environment.

Key words: Internationalisation, SMEs, barriers to exports

Page 1 of 8 ANZMAC 2009

Barriers to Internationalisation of SMEs in a Developing Country

Introduction

SMEs are of great importance to the expansion of export earnings in developing countries.

However existing research shows that these businesses are under represented in the

international economy as a result of the impediments to market access (APEC, 2004). A

number of factors impede the participation of SMEs in the global economy. The conditions in

the input and output markets, the skills and competencies of the employees, and the owner-

managers’ entrepreneurial orientation (Kazem and van der Heijden, 2006), influence the

success of SMEs in foreign markets. It has been suggested that some of the dramatic changes

that are taking place in the global market place would create new opportunities for businesses

and bring prosperity to exporting nations (Cateora and Graham, 2007). Some of these are: the

advances in information and transportation technologies; easing of trading restrictions with

the removal of tariff and non-tariff barriers; formation of multinational market regions, free

trade areas, economic unions, political unions and regional economic blocks to encourage

regional trade; and the formation of the WTO to resolve world trade issues. But the

opportunities created by these transformations in the emerging global business environment

have been exploited largely by the market aware exporters in the developed world. Taking

advantage of the advances in technology, telecommunications and infrastructure SMEs in

these countries have established additional links with new customers while strengthening the

relationships with existing business partners. The high profits gained through growth in

exports have encouraged them to futher invest in foreign markets to extend their lucrative

growth cycles. However all are not winners. Many have fallen on the way while crossing the

international boundaries. They fail to overcome the obstacles that make their path to

internationalisation impassable (Julien and Ramangalahy, 2003; Knight, 2000). Majority of

these victims are the SMEs in developing countries. These businesses are sceptical about their

ability to successfully cross national boarders (Carrier, 1999). This study therefore examines

the barriers hindering the internationalisation of SMEs in a developing country.

Literature Review

The growth in exports could come from the expansion of sales in the existing markets or

through the entry into new markets. Past research has identified lack of technical skills (Chau

and Pederson, 2000), fear of intense competition (Leonidou, 1995), organisational and

operational problems (Hamill and Gregory, 1997), lack of knowledge of potential markets

(Suarez-Ortega, 2003), limited information (Leonidou, 1995), tariff (Czinkota and Ronkainen,

2001) and non-tariff barriers (Kume et al. 2001), as some of the numerous impediments to

exports. Leonidou (1995) defined the barriers to exports as those that hinder a firm’s ability to

initiate, develop or sustain business operations in a foreign market. The impact of non-tariff

barriers such as home country compliance requirements are more severe on SMEs than on

their larger counterparts. Due to smaller size SMEs cannot absorb the additional costs of these

factors that make their transactions unprofitable. The removal of such impedements broadens

the opportunities for SMEs to increase their activity in foreign markets. Past research suggest

that technology advances allow SMEs to improve their performance in the international

markets (Daniel, Wilson and Myers, 2002; Fillis, Johansson and Wagner, 2003; Hornby,

Goulding and Poon, 2002; Keogh et al. 1998). Many SMEs have not used these developments

to trade in foreign markets due to resource constraints (Smyth and Ibbotson, 2001). Barriers

of this nature are not experienced by larger businesses (Stokes, 2000; O’Gorman, 2000).

Page 2 of 8ANZMAC 2009

Recent research emphasises the barriers that impede exports do not on their own prohibit

export growth of a business (Leonidou, 2004). In a study of barriers to exports, Barrett and

Wilkinson (1985) suggest that it is the idosyncratic characteristics of the OMs, the businesses

and the environment that triggers these latent barriers and make them operative. If this is the

case, it means that, while some businesses grow in a particular environment, the others may

fail to register any growth. Leonidou (2004) also claims that two businesses operating under

similar conditions will also not necessarily perceive these barriers to impact their businesses

the same way. This implies that different businesses may percieve the same barriers

differently. Therefore this study identifies the barriers to internationalisation of SMEs in Sri

Lanka and examines the differences in the perceptions of OMs of “growth” and “non-growth”

businesses on their impact on exports. It also examines the patterns of relationships in them.

Methodological Approach

The exploratory studies conducted at the commencement of this study included a literature

review, 15 personal interviews and a pilot test. These identified 38 barriers that impede export

activities in small businesses. The OMs evaluations of the identified barriers were then

examined from a descriptive perspective. To that effect the following three research

objectives and four hypotheses were defined. The objectives are: (1) To understand the extent

of export growth among SMEs, (2) To identify the differences in OMs’ perceptions of the

impact of identified barriers to exports, and, (3) To examine the pattern of relationships

between the identified barriers. The proposed hypotheses are: H1: There are significant

differences between OMs of “growth” and “non-growth” businesses in their perceptions of

barriers related to information; H2: There are significant differences between OMs of

“growth” and “non-growth” businesses in their perceptions of barriers related to operations;

H3: There are significant differences between OMs of “growth” and “non-growth” businesses

in their perceptions of barriers related to marketing; H4: There are significant differences

between OMs of “growth” and “non-growth” businesses in their perceptions of barriers

related to business environment.

Method

The businesses were randomly selected using a proportional stratified sampling technique

from the sampling frame obtained from the Department of Census and Statistics in Sri Lanka.

The survey instrument was a postal questionnaire. It was pilot tested with expert academics

and practitioner OMs of small businesses. The questionnaire was mailed to OMs of 1500

SMEs. Respondents were asked to rate the listed barriers on their perceived severity on a five

point scale. The end points were marked 1= Not at all severe and 5= Extremely severe. A total

of 456 completed questionnaires were returned over a period of three months. The overall

response rate was 30.4%. The response rates from the participant SEMs in the 16 industries

varied from 28.3% to 34.2%. Two other SME studies conducted in Sri Lanka had response

rates of 30.1% (ADB/Sri Lanka, 2003) and 26.2% (Wijewardena, De Zoysa, Fonseka, and

Perera, 2004). These figures suggest that non-response bias is not an issue in this study.


Results of the Study

Of the post start-up businesses that responded to the survey only 16.4% had achieved export

growth. A majority (83.6%) were “non-growth” businesses. The measure of growth used was

increased revenue of external trade. The severity ratings given for barriers investigated had

mean values ranging from 4.476 to 3.012 confirming their high impact. The high mean values

for operational and marketing barriers signal deficiencies in financial and non-financial

resources and employee competencies in SMEs. These are internal barriers to exports. Factor

analysis was used to reduce the 38 variables to a smaller number of factors that represents the

essential characteristics of the set of barriers to exports. Cronbach’s alpha for the 38 item

measure was 0.8052. The underlying factors were determined using principal component

analysis with varimax rotation. Four factors identified are presented in table 1.

Table 1 – Factor Analysis of Barriers to Exports

Barriers Factor 1 Factor 2 Factor 3 Factor 4

Lack of reliable data on market potential

Difficulty to access market data

Lack of information on contact persons

Lack of information on how to contact

Limited production capacity

Lack of staff with experience in exports

Lack of time for OM to deal with exports

Shortage of funds to finance and export operation

Inability to develop high quality new products

Inability to meet packaging standards

Unfamiliar distribution channels overseas

High transport, insurance and warehousing costs

Difficulty in managing advertising and promotion

Language barriers

Poor support from home country government

Tariff and non-tariff barriers

Cultural difference in business practices

Corrupt bureaucratic practices in the home country

Lack of advanced technology in the home market

Lack of low interest finance in home market

Eigenvalues

Percentage variance

0.8045

0.7036

0.4623

0.5437

1.85

8.4

0.7343

0.4584

0.5128

0.6231

1.87

7.2

0.6652

0.5021

0.4254

0.5286

0.5383

1.94

10.6

0.5134

0.5343

0.5187

0.4217

0.7231

0.6415

0.8126

6.87

43.1

To facilitate the interpretation of the results of factor analysis, only the variables with

loadings greater than 0.4 are presented in table 1. The four factors selected explain 69.3% of

the total variance (Table 1). Factor 1 was labelled as informational barriers and is comprised

of four variables. They are: lack of reliable data on market potential, difficulty to access

market data, lack of information on contact persons, and lack of information on how to

contact. These are related to ease of access of information on foreign markets and account for

8.4% of the total variance (Table 1). The four variables in factor 2 are more aligned to the

operational dimension of exports and therefore this factor is labelled as operational barriers.

The four variables - limited production capacity, lack of staff with experience in exports, lack

of time for the owner-manager to deal with exports, and shortage of funds to finance export

operations explain 7.2% of the total variance (Table 1). Factor 3 is marketing related. It is


labelled marketing barriers and consists of five variables (inability to develop high quality

new products, inability to meet packaging standards, unfamiliar distribution channels

overseas, high transport, insurance, and warehousing costs and difficulty in managing

advertising and promotion) that explains 10.6% of the total variance (Table 1). Factor four

labelled the environmental barriers explains 43.1% of the total variance (Table 1). The seven

variables representing this factor are: language barriers, poor support from home country

government, tariff and non-tariff barriers, cultural differences in business practices, corrupt

bureaucratic practices in the home country, lack of advanced technology and lack of low

interest finance in the home market (Table 1).

Table 2 – Chi-Square Test: Variation in Perceptions of Barriers to Exports Between

Owner-Managers of “Growth” and “Non-growth” SMEs Engaged in Exports

Barriers to Exports Barrier Chi-Square P-Value

Lack of reliable data on market potential

Difficulty to access market data

Lack of information on contact persons

Lack of information on how to contact

Limited production capacity

Lack of staff with experience in exports

Lack of time for OM to deal with exports

Shortage of funds to finance exports

Inability to develop high quality new products

Inability to meet packaging standards

Unfamiliar distribution channels overseas

High transport, insurance and warehousing costs

Difficulty in managing advertising and promotion

Language barriers

Poor support from home country government

Tariff and non-tariff barriers

Cultural difference in business practices

Corrupt bureaucratic practices in the home country

Lack of advanced technology in the home market

Lack of low interest finance in home market

I

I

I

I

O

O

O

O

M

M

M

M

M

E

E

E

E

E

E

E

54.32

23.26

2.84

3.26

2.54

16.34

12.49

54.76

2.54

32.61

38.26

2.04

3.06

2.08

0.03

4.63

3.08

0.42

0.83

3.68

p<.05

p<.05

n.s.

n.s.

n.s.

p<.05

p<.05

p<.05

n.s.

p<.05

p<.05

n.s.

n.s.

n.s.

n.s.

n.s.

n.s.

n.s.

n.s.

n.s.

n.s = not significant, I = Informational, O = Operational, M=Marketing, E= Environmental

Table 2 show the results of the Chi-square tests. Hypotheses 1, 2 & 3 were accepted in

relation to 2, 3 and 2 of the barriers investigated. Significant differences were observed

between “growth” and “non-growth” firms, in relation to the informational barriers “lack of

reliable data on market potential” and “difficulty to access market data”. Results of cross-

tabulations show these two barriers are rated more highly by the OMs of “non-growth” SMEs

than those whose firms were categorised as “growth”. This suggests that while “non-growth”

firms struggle due to lack of information “growth” firms have found some success in gaining

access to vital information. Significant differences were also found between “growth” and

“non-growth” SMEs in relation to three operational barriers and two marketing barriers

(Table 2). It appears that ambitious and persevering OMs of SMEs that make inroads into

foreign markets find ways to overcome the confronted barriers and employ prudent measures

to prevail over them. On the other hand the inward looking OMs of SMEs that fail perceive

these as severe barriers that are impossible to breach.


Discussion

The perceptions of “non-growth” and “growth” post start-up businesses on the potential

impact of the investigated barriers to export were diverse. This supports the view expressed

by Leonidou (2004, p. 284) that “two firms at the same stage of export development will not

perceive necessarily and/or will not experience the same impact from obstacles”. Results of

cross tabulations show that a higher percentage of “non-growth” businesses found lack of

staff with experience in export (68%) and shortage of funds to finance exports (78%) to be

significant barriers to growth. Fewer “growth” firms perceived the above operational barriers

to have a significant impact on their growth. A greater number of “non-growth” firms found

inability to meet packaging standards (59%) and unfamiliar distribution channels overseas

(72%), to be barriers to exports than the number of “growth” businesses. This supports past

research that found the SMEs’ perception of barriers to operations diminish as they grow in

foreign markets (Vozikis and Mescon, 1985). Analysis of results shows that the source of

majority of environmental barriers is the conditions in the home market. The difference

between “non-growth” and “growth” businesses in their perception of the severity of these

barriers are insignificant (p>.05). This is an area of major concern for SMEs in both

categories as it is beyond their power to instigate any corrective action to mitigate the

negative impact of these barriers. The bureaucratic systems and the institutions in Sri Lanka

that have not changed along with the free-market policy reforms cause delays and increase

costs. This requires the policy makers to overhaul the existing administrative systems and

remove the costly and stressful barriers resulting from bureaucratic inefficiencies and

corruption. The statutory approval processes require simplification.

Conclusions

The focus of this study was the SMEs in a developing country. It compared the differences in

perceptions of export barriers between OMs of “growth” SMEs and their counterparts in

“non-growth” SMEs. The study identified four factors that explain the patterns of

relationships between the variables used in the study. Results shed light on the critical issues

that discourage entrepreneurial OMs and impede the growth of their sales in overseas

markets. The results also demonstrate that the growth of SMEs in foreign markets is plagued

by many obstacles. The OMs of “growth” and “non-growth” businesses perceive the severity

of these obstacles differently. When exports suffer due to the presence of these barriers the

enduring question the governments and the policy makers need to answer in the future is

“what could be done to mitigate the effects of these barriers to encourage the

internationalisation of small businesses in developing countries?”

References


ADB/Sri Lanka., (2003). Enabling SME Growth – SME Baseline Survey: Results and Key

Findings Report. Reading UK: Enterplan Limited.

APEC., 2004. Breaking down the barriers for SME exporters. Available from

http://www.apec.org/apec/enewsletter/march_vol2/onlinenewsf.html. accessed 3 July 2009.

Barrett, N. I., Wilkinson, I. F., (1985). Export Stimulation: A segmentation study of the

exporting problems of Australian Manufacturing firms, European Journal of Marketing 19(2),

53-72.

Carrier, C., (1999). The training and development needs of owner-managers of small

businesses with export potential, Journal of Small Business Management 37(4), 30-41.

Cateora, P. R., Graham, J. L., 2007. International Marketing, McGraw-Hill Irwin, New York.

Chau, S., Pedersen, S. G., (2000). Small is Beautiful: The emergence of New Micro Business

Utilising Electronic Commerce. Proceedings of the Australian Conference of Information

System. Brisbane, Australia, 1-8.

Czinkota, M. R., Ronkainen, I. A., 2001. International Marketing, Harcourt College

Publishers, U.S.A.

Daniel, E., Wilson, H., Myers, A., (2002). Adoption of e-commerce by SMEs in the UK.

International Small Business Journal 20(3), 253-270.

Hamill, J., Gregory, K., (1997). Internet marketing in the internationalisation of UK SMEs.

Journal of Marketing Management 13(1), 9-28.

Hornby, G., Goulding, P., Poon, S., (2002). Perceptions of export barriers and cultural issues:

The SME e-commerce experience. Journal of Electronic Commerce Research 3(4), 213-226.

Julien, P. A., Ramangalahy, C., (2003). Competitive strategy and performance of exporting

SMEs: An empirical investigation of the impact of their export information search and

competencies. Entrepreneurship Theory & Practice 27(3), 227-245.

Kazem, A., van der Heijden, B., (2006). Exporting firms strategic choices: The case of

Egyptian SMEs in the food industry. SAM Advanced Management Journal 71(3), 21-33.

Keogh, W., Jack, S. L., Bower, J., Crabtree, E., (1998). Small technology-based firms in the

UK oil and gas industry: Innovation and internationalisation strategies. International Small

Business Journal 17(1), 57-68.

Knight, G., (2000). Entrepreneurship and marketing strategy: The SME under globalisation.

Journal of International Marketing 8(2), 12-32.

Kume, H., Anderson, P., De Oliveira Junior, M., 2001. Non Tariff Barriers to Trade in

Mercosur: How do Brazilian Exporting Firms Perceive them? Available from

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=292945, accessed 4h July 2009.

Leonidou, L. C., (1995). Empirical research on export barriers: Review, Assessment, and

Synthesis. Journal of International Marketing 3(1), 29-43.


http://www.apec.org/apec/enewsletter/march_vol2/onlinenewsf.html

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=292945

Leonidou, L. C., (2004). An analysis of the barriers hindering small business export

development. Journal of Small Business Management 42(3), 279-302

Suarez-Ortega, S., (2003). Export Barriers: Insights from small and medium-sized firms.

International Small Business Journal 21(4), 403-41

Vozikis, G. S., Mescon, T.S., (1985). Small Exporters and Stages of Development: An

Empirical Study. American Journal of Small Business (Summer) 49-64.

Wijewardena, H., De Zoysa, A., Fonseka, T., Perera. B., (2004). The Impact of Planning and

Control Sophistication on Performance of Small and Medium-Sized Enterprise: Evidence

from Sri Lanka. Journal of Small Business Management 42(2), 49-64.
