Internationalization of SMEs through MNCs Social Capital in African Countries
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Diverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
Internationalization of SMEs through MNCs
Social Capital in African Countries
Levious Chiukira
Gleam Consultant, Zimbabwe
Email: lchiukira@gmail.com
[Cite as: Chiukira, L. (2021). Internationalization of SMEs through MNCs social capital in African countries.
Diverse Journal of Multidisciplinary Research, Vol. 3, Issue 1, Pages 1-11.]
Abstract – The paper examines the importance of internationalization of SMEs in the current global set up
of international trade. The study identifies the existing MNCs social capital as critical to the growth of
SMEs in Africa and promotion of both forward and backward linkages between SMEs and
MNCs. Approximations in the studies done accentuates that approximately 95% of the running businesses
in the world are Small to Medium Enterprises and they employ about 60% of the total working population
and significantly add up to 40% of Gross Domestic Product. It highlights the role which can be played by
the state to ensure sustainable economic growth is achieved by inclusion of SMEs in developmental policy.
With the proliferation of regional trade agreements in Africa and continued opening of domestic markets
to foreign suppliers through trade liberalization, policies have to be matched with external growth of SMEs
and domestic industries. As businesses venture into the international markets there are prospects of internal
growth and this result in the development of competencies, thus firming competitiveness of the firm in the
long run. The paper is concerned with small enterprise development in African countries, concentrating on
the interrogation of the prospective for making use of connections and relationships with large business
organizations as part of a strategy for the development of the SMEs sector.
Keywords: internationalization, social capital, SMEs, MNCs, networking, linkages, globalization
1. INTRODUCTION
The digital era has brought hope to nations as they seek to integrate into one global village through
globalization. This has been witnessed with the proliferation of regional trade agreements promoting the
opening of markets to foreign businesses. The continued negotiations on the elimination of trade barriers and
current skills developments in the industrial and communications industries have validated global access of
SMEs and International Entrepreneurs (Dabic, et al 2019; Lee, et al 2012).Approximations in the studies done
accentuates that approximately 95% of the running businesses in the world are Small to Medium Enterprises
and they employ about 60% of the total working population and significantly add up to 40% of Gross
Domestic Product (Bell, 2015). As the world interconnects, it is imperative that the SMEs benefit from such
changes as they have proven to be key players in international trade. There has been failure by academics and
professional to agree on whether globalization has positive or negative net effects on developing countries’
economies. The advancement in technology has also allowed smaller, quicker “micro-multinationals” which
are becoming successful in the global market previously dominated by macro multinationals (WTO, 2016).
Studies are showing that SMEs starting with an international strategy have a higher chance of swiftly taking
advantage of cross-border activities which offers visions for increments in revenue and the exchange of
knowledge (Wilson, 2006). Saturation of domestic markets and shortage of foreign currency have also been
highlighted as major drivers for export growth oriented policies. As businesses venture into the international
markets there are prospects of internal growth and this result in the development of competencies, thus firming
competitiveness of the firm in the long run. The paper is concerned with small enterprise development in
developing countries, concentrating on the interrogation of the prospective for making use of connections and
relationships with large business organizations as part of a strategy for the development of the SMEs sector.
The study further scrutinizes the role of government in the creation and implementation of sound policies to
stimulate growth of SMEs and cements the relationship between the SMEs and MNCs.
1 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
2. BACKGROUND
Africa faced by myriad challenges namely high rate of unemployment, increasing trade and budgets deficits,
collapse of social spending and increased poverty resulting in aggravated conflicts on the continent needs to
address the issues. There have been efforts to integrate African economies with the launch of the African
Continental Free Trade Area (AfCFTA) being the latest. The AfCFTA seeks to address the aspiration of
African Agenda 2063 which emphasizes the need for a self-sufficient and self-sustenance African economy.
The question which has remained unanswered is, whose integration is it if SMEs are still marginalized? New
venture creations, growth and development are crucial and important to a healthy economy (Storey, 2008).
Africa has remained among the poorest in the world despite laws meant to attract FDIs and this has been
blamed on its negligence on local SMEs and industry in favor of foreign investors. Research has shown that
the answer to African problems is how its policies responds to SMEs which have the potential to transform
the continent (Ndemo & Smallbone, 2015). SMEs make intense contribution to the achieving of the important
goals to any national economy hence backbone of social-economic progress (Druker, 2009). This entails
the central role SMEs should position themselves in the designing and formulation of national and
international policies affecting their business operations.
The debate is centered on the ways in which the business environment is key to internationalization prospects
of SMEs taking into consideration the existence of linkages between them and MNCs. SMEs covers a greater
part of the domestic business sector, hence the overcoming of barriers to linkages between large and small
enterprises is of paramount importance (UNCTAD, 2005). Most concentration of most of African economies
has been on promoting Foreign Direct Investments (FDIs) as countries jostle for the dwindling investments
by trying to outclass each other. Linkages between SMEs and MNCs have been proffered as a solution to
SMEs both in academic and professional papers; the challenge has always remained of how to integrate it into
real policy objects. As developing countries seek to balance between the foreign direct investments and SMEs
to achieve growth of their economies they have been forced to align their trade policies in favor of foreign
investors. According to Masroor and Asim (2019:640) due to political pressure from MNCs home countries
and over dependence on foreign investments the hosting governments of MNCs mostly make amendments
that suit MNCs over SMEs.
This has left the SMEs vulnerable to both external shocks and stiff competition from the established business
corporations. In support possible Duran and Carrillo (2008) asserts that the development of linkages between
foreign and domestic firms’ foster growth and it increases competition among them to get the most foreign
direct investment. This has promoted best policies aimed at attracting foreign investors at the expense of local
investors who have remained stranded by lack of policy support. The paper will review existing literature and
various experiences of SMEs documented to contribute to the debate of internationalization of SMEs through
MNCs social capital. The study seeks to explore the functions of social capital for the SMEs as well as the
importance of government policies in nurturing the MNCs and SMEs linkages. Even though it is a fact that
SMEs are contributing greatly to the domestic economy government has not crafted policies to enhance their
contribution or rather increase their competitiveness.
The paper seeks to contribute to the literature on how the vitality of SMEs can be transformed into policy and
have them benefit from the existing and new policies. SMEs have managed to absorb semi-skilled workforce
and transformed them as they make use of local materials and knowledge that would otherwise be neglected
(Hussain, 2000). SMEs are playing a key role in the African economies giving them a vital position which
cannot be ignored by policy makers. The success of SMEs has been linked to attainment of sustainable
development in the developing countries. Most governments have no documented and reliable statistics on
SMEs which can be utilized for policy making (UNCTAD, 2005). Rapidly small and medium sized enterprises
(SMEs) confronted with international competition and therefore being forced to enter the international
markets (Onkelinx & Sleuwaegen, 2008). This paper deliberates on modalities and instruments which can be
adopted by SMEs for establishment of horizontal links among themselves and vertical linkages with larger
business corporations accessing domestic and regional markets and overcoming identified challenges
hindering their growth. This has to be supported at both regional and national level if SMEs are to succeed
and continue contributing to economic and social development. Development organizations are progressively
opting for the use of a market-driven methodology to support the growth of SMEs by supporting relationships
to MNCs in impenetrable development contexts (Quak, 2019).
2 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
3. LITERATURE REVIEW
The paper reconnoiters on how SMEs can make use of MNCs social capital on their desire to access foreign
markets as an alternative or extension to their domestic markets. Developing countries under pressure from
the bulging population are seeking for remedies for their ailing economies and SMEs have pinpointed to be
key economic development in these countries. The informal small enterprise sector deals with secondary
activities such as food processing, cosmetics, building, footwear and garments, and tertiary activities which
are transport and mechanics repair, retail, food preparation and distribution (Hussain, 2000).
The scholarship was primarily scanned to get know-how of the main theoretical underpinnings which
contribute to the actual debate and represent the foundation paradigms on SMEs and MNCs linkages for the
promotion of internationalization. Research studies done on Africa SMEs has shown that there is potential
which has to be harnessed through trade policies supporting economic linkages among SMEs themselves and
with other large business enterprises (Fjose et al 2010; UNCTAD 2005). There have been various theoretical
propositions which has been coupled with paper commitment on the need to enhance SMEs productivity and
capacity as a way of ensuring sustainable development in Africa. The paper acknowledgement without policy
support and real initiatives has left the SMEs as paper tigers who are much adored but nothing materializing.
The issue of sustainability of SMEs in Africa has been researched and what this paper seeks to bring about is
how to link the theoretical propositions with the actual needs of the SMEs. This has been necessitated by the
lack of tangible results on SMEs against a backdrop of much available literature on them. This entails that all
stakeholders have a crucial role to play including government, trade organization, large corporation and the
SMEs among others with the expanding digital era and proliferation of free trade agreements (FTAs) SMEs
need to consider expanding into regional and global markets if they are to survive trade liberalization effects.
The domestic markets are reaching saturation and extensive competition from MNCs has crowded out the
SMEs from the formal sector resulting in them becoming more informal. Developing countries have been left
at the mercy of MNCs which come as Foreign Direct Investments (FDIs) as their economies suffer. According
to Fjose et al (2010) a number of credible literatures has it that there is a strong correlation between the
business milieu and the opportunities of growth. SMEs are considered vehicle for world economies and the
stepping stone to industrialization in both developed and developing economies (Murithi, 2017; Karadag
2016; Chowdhury 2011). It is noteworthy that SMEs are important because of their role in reduction of
poverty, improving of the Gross Domestic Product of a country and provision of employment to a larger
portion of the population (Benzing, Chu & Callanan, 2012). The definition of SMEs has been derived from
their turnover, size, activity, ownership and legal status (Hussain, 2000; Wilson, 2006). There has been a
developing consensus that number of employees stands out to be the most germane in defining characteristic,
given the heterogeneity of enterprises operating in this sector.
Hussain (2000) expressed SMEs as characterized by easy of entry, dependent on indigenous resources,
family owned of the businesses, small scale operation, labor intensive and easily adaptable to technology,
skills are acquired independently from the formal school,unregulated and highly competitive markets.
SMEs participation in trade has been viewed as moderately frail, resulting in their failure to take advantage of
economies of scale (Rhyner, Perez, & Finkbeiner; 2017). Tariff and Non-tariff barriers have also added to the
list of impediments to SMEs` participation in international trade as compared to their counterparts. The SMEs
have contributed immensely creation of jobs and contributing to national revenue in Africa despite all the
challenges they are facing. In the absence of Small-Medium Enterprises many African governments are likely
to go through fiscal and development related challenges, all which would contribute to the worsening of the
standards of living of those low income earners served by the sector (Santrelli & Vivarelli, 2007). The SMEs
have been linked with the discovery of new markets and manipulating them to their benefit making them the
basis of establishing new projects and a great source of income and employment for majority of people in
Africa (Muriithi, 2017). Research and papers on SMEs have been done pointing out to the same problems
which have remained unresolved for a long time spanning across decades.
The gains realized from the participation of SMEs in domestic economies needs to be sustained through
policies at national and regional level in Africa. According to Hussain (2000:91), suggests that the economic
growth can be sustained through the promotion and development of SMEs which can potentially lead to
growth, job opportunity creation, income generating as well as product diversification. The concept of
internationalization of small businesses has been supported by academics and professionals seeking to bring
3 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
about the importance of exports as an alternative to domestic markets. Hitt, et al (2001) defines
internationalization as a naturally occurring domain in strategic entrepreneurship. Internationalization is also
defined as the approach taken by businesses involved in foreign activities (Welch & Luostarinen 1993). This
entails that internationalization is just means taken by those businesses seeking to explore and take advantage
of available foreign markets. According to Wright and Ricks 1994 cited in Prashantham and McNaughton
(2006:03) in the current global environment entrepreneurs and their businesses are striving to enter the realm
of international businesses SMEs exist in a world already dominated by MNCs and its how they relate with
these MNCs which has shaped their contributions to global trade.
SMEs lack knowledge and necessary resources to overcome the hindrances associated with international hence
need to rely on the links and networks of partners in which these resources can be shared (Onkelinx &
Sleuwaegen, 2008). According to Mugwika (2013) strong networks are likely to give SMEs competitive
advantage such as superior performance in quality, efficiency, marketing and distribution. SMEs lack
necessary resources to support internationalization (Rodrigues and Child 2012; Buckley, 1989; Fujita, 1998).
Remote working, artificial intelligence, mobile apps, and social media have contributed to providing SMEs
with more agile tools for expansion and internationalization (Dabic et al 2019; Lee et al.
2012). Internationalization takes various forms which are direct and indirect exports, Foreign Direct
Investments, cooperation with foreign enterprises and other forms of equity agreements (WTO 2016).
Theoretical and Conceptual papers majoring on the pros and cons for linkages of SMEs and larger
enterprises dominate the available literature on linkages of SMEs and large enterprises and this has been
done using data from MNCs (Quak, 2019). The ultimate benefits of MNE/SME linkages to the host country
depend on the enabling environment for investment as well as the strategies of foreign-invested
companies (OECD, 2005). Gullatti (1996) asserts that social capital is seen to be emanating from network
relationships which provide small and new firms interested in going international with vital networks.
Prashantham and McNaughton (2006:07) refer to social capital as the all the actual and potential resources
embedded within available through and emanate from the network of relationships owned by individuals or
a social unit. Nahapiet and Ghoshal (1998: 244) suggest social capital as an objective configuration of
linkages between people and in which it may refer to the overall pattern of connections between actors in the
network. Social capital has been summed up as the result of both network and assets that becomes available
through the already existing relationships (Nahapiet & Ghoshal, 1998).
Researches done has shown how networks and relationships both local and international can be significantly
essential to SMEs willing to invest abroad or export (Rodrigues & Child 2012). Social capital is now regarded
as a critical element in the counterbalancing of the liabilities that SMEs face, and it is becoming instrumental
in overcoming the problems credibility, experiences and limited resources (Lu & Beamish, 2001). By
operating in different countries MNCs have vast experience and understanding of different needs to different
cultures. The paper seeks to create a debate centered on how the MNCs can contribute to the growth of SMEs
both according to Prashantham and McNaughton (2006:447) MNCs social capital is particularly valuable as
it is a form of bridging (socially heterogeneous) rather than bonding/ socially homogeneous social capital,this
results in the generation of new information, ideas and opportunities which are beneficial to the SMEs as they
seek international markets.
Social capital is different from financial, physical or human capital which are not positioned in a certain but
rather entrenched in relations of actors in a social network (Adler and Kwon, 2002; Coleman, 1988; Nahapiet
and Ghoshal, 1998). According to Nahapiet and Ghoshal (1998:243), social capital is referred to as all the
actual and potential resources associated with network relationships of social units or individuals. Social
capital is dynamic hence can increase or decrease as enterprises strengthen the already available relations,
create newones as well as put an end to troublesome ones (Larson and Starr, 1993; Rauch, 2001). It should
be noted that social capital is not always beneficial as for instance a close network might limit group’s access
to new information and adapting new ways of doing things or capital partners becoming untrustworthy
resulting in firm’s performance deteriorating (Nahapiet and Ghoshal, 1998). Nonetheless less capital
is disadvantageous as it may expose the firm to opportunistic behavior (Walker et al, 1997).
4 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
4. THEORETICAL FRAMEWORK
Internationalization Network Theory Model
Different scholars advocate for an internationalization network theory as most suitable in terms of
internationalization of SMEs through MNCs social capital. Network Theory model is viewed as
internationalization by enterprises through the establishment and cultivation of relationships with foreign
networks by international extensions (Hakanson, 1982; Johanson & Mattson, 1983; Munro,1997). It entails
an incremental process of internationalizing SMEs by starting as domestic firms and slowly developing
international business capacity and eventually access and become active on the international markets. This
group of firms is known as incremental internationalization SMEs. This theory states that SMEs use their
networks and pre- existing relationships to internationalize.
External social links family firms to various networks. This theory better explains SME internationalization
through MNC’s Social Capital. MNCs have relations and networks in different countries which might work
to SMEs advantage especially if the MNC has high credibility. This theory works well with the question under
study which seeks to use social capital as a resource for internationalization since the Theory deals with social
networks and relationships. It better describes how the foreign networks by MNCs may be of advantage to the
SMEs seeking to extent or rather to access foreign markets. It is quite difficult for SMEs to penetrate the
international markets on its own due to issues of lack of knowledge and information as well as resource
constraints, therefore, SMEs require the networks, links, and relationships of credible MNCs in order to access
these international markets. It is important to note that internationalization can be done through many different
approaches which may include The Born Global Approach, The Electric Model, the Product International Life
Theory Model, The Classical Economic Theory but in this context the involvement of social capital requires
networks and relationships hence finding Network Model more appropriate.
5. FORMS OF INTERNATIONALIZATION BY SMES
Internationalization by SMEs takes various forms as adopted by each firm in trying to access international
markets. There is no agreed formula on how to internationalize and its dependent upon the product or service
the SMEs want to export and the market intended for the export. This is as a result of the heterogeneity of the
SMEs sector. As a result, internationalization is depended on the various factors which include the size of the
firm, nature of the goods or services to be exported, the business climate of the targeted market among others.
The internationalization of SMEs should be seen as a holistic process that is deriving from insights of various
theoretical frameworks that may include neoclassical theories, stage models and network theories (Onkelinx
& Sleuwaegen, 2008).
The theoretical models give the guide to the whole process which is highly dependable on the applicability of
the chosen tenets against the reality in the field. This result in the mixed approach where tenets of each model
end up being used and a hybrid model being the best to express and define the outcome. SMEs has been
assumed to have some similarities on how they operate and are formed, this however does not take away their
heterogeneous in the products and services offers. Their variedness makes it almost impossible to come up
with a fair analysis on forms which can be adopted for internationalization. Literature has it on record that
firms can engage in regional and global transactions through export, contractual modes or foreign production,
which allows them to take advantage of the economies of scale and improve their whole value chain
(UNCTAD, 2005).
5.1 Direct Importing and Exporting
Importing and exporting of goods and services are the best known forms for SMEs to enter the foreign
markets and usually importation of goods and services is their starting point (European Commission, 2010).
SMEs mainly export their products in order to penetrate and access the international markets as a way of
internationalization. Export and import of goods are easy to understand and they move through border that is
through customs and free zones changing ownership. WTO, Online states that these depends on the location
of both parties when the activity takes place.
5.2 Investment Abroad
International investments may include foreign direct investment (FDI) and foreign portfolio investment (FPI).
FDI replicates investment in a foreign economy and is long term. Foreign Direct Investment encompasses
5 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
direct purchase of a foreign firm, creation of a facility, the machinery, equipment establishment. According to
(Yuhua, 2015) Investment abroad involves ownership of about 10% either directly or indirectly or if the
investing enterprise owns 100% (wholly owned subsidiary) it gets more voting power and a very high degree
of influence on its management. FPI on the other hand involved a purchase of share of security of less than
10% of the equity invested thereby no voting powers (UNCTAD, 2009). Under FPI the investor is mandated
to have a specialized knowledge for the monitoring of foreign markets and performances of the portfolios
abroad, which then happens to be a greater challenge and costly for SMEs. FPI is less rigid yet not mostly
used for internationalization of SMEs. SMEs may then make investments in foreign lands in order to access
and become active on the foreign markets hence internationalizing.
5.3 Subcontracting to Foreign Enterprises
As network of production as well as value chains grow, business become global and SMEs enter these systems
as sub-contractors of MNCs. Sourcing out of parts of a product or rather other process from another enterprise
is referred to a subcontracting (Kimura, 2001). SMEs need to be either higher or at least lower tier
subcontractors of big enterprises such as multinational companies so that they get to work closer to the
production networks or the international value chains. Subcontracting unlocks doors for SMEs to enjoy
economies scale and the scope (OECD, 2004). APEC (2013) stipulates that there are certain SMEs that
provided MNCs such as Coca Cola with stainless steel tanks for storage. Cooperation with Foreign Enterprises
SMEs are involved in cooperation with international enterprises European Commission (2003) states that
SMEs in European foreign cooperation is being helpful to them being competitiveness.
5.4 New Joint Ventures
A joint venture is defined as a partnership of two or more independent firms that share control and are equally
accountable for the cost and profits of the venture. For the purposes of internationalization, the ventures
involve at least one local firm and a foreign firm. The control differs from that of FDI since in SMEs all
investing firms have control distributed among them. Joint venture in some cases prove to be the available
key for SMEs to access international markets and it is a reliable means of internationalizing.
5.5 Strategic Alliance
It is referred to as a formal agreement that involves two or more enterprises for a common strategic goal. A
non-equity alliance does not involve equity arrangement; hence it has no impact on control or management.
Partners provide strategic resources to each other, such as products, distribution channels, manufacturing
service, capital, know- how and intellectual assets. Non- equity alliance with foreign enterprises helps to lower
the business risk when accessing international markets; hence SMEs use strategic alliance because of the less
risk.
6. THE ROLE OF SMES IN DEVELOPING COUNTRIES
SMEs create employment, promote economic stability and development, promote competitiveness of
enterprises, produce creativity and innovation as well as highly value added products. This therefore suggests
that SMEs play a vital role in developing economics. According to Keskin et al (2010) SMEs are important
and key in developing countries as they adapt quickly, require less capital but low intense labor and its
management is less complex. Most of the big enterprises originate from SMEs thus they are a basis for
industrialization. SMEs are significantly contributing in employment growth than bigger enterprises. SMEs
happen to be the backbone of market economy and in the long term might employ more than the
currently60%.
They produce predominantly for local markets using the domestic resources that is local skills and
technologies. SMEs greater elasticity result from the fact that they understand the market better that is the
needs and wants of their customers and have intimate relations with their employees. According to Herr &
Nettekoven (2017) SMEs do not create employment only but are a source of innovation and increased
productivity.
6.1 Enhance Competition
SMEs enhance competition which happens to be very helpful in terms of prices, product quality as well as
efficiency. These deal away with big enterprises reluctance and do away with monopolies of big companies.
6 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
SMEs are being actively involved in the new, better and more competitive economy, this enhances competition
that improves the product pricing, design and quality as well as deals away with the problems of monopolies.
These SMEs are therefore a vehicle for competition which helps mainly in issues of pricing in developing
countries where poverty is high. Competition brought by SMEs puts pressure on big enterprises to produce
high quality products and at very low prices that can be afforded in developing countries where poverty is
dominant. Competition brought about by SMEs helps competitiveness in terms of consumer satisfaction.
6.2 Highly Innovative and Flexible
There is high innovation and flexibility in SMEs than in big enterprises. Even though big enterprises have
Research Departments they are very rigid and there is less innovation thus they concentrate more on
developing the old products. The case is however, different from that of SMEs where there are very innovative
and very flexible. SMEs are quite good and very useful in producing and introducing new technologies. Unlike
big enterprises which are good and best at reviving the dead woods, SMEs are very innovative and creativity.
The creativity of SMEs helps in terms of producing technologies and products that are better suitable for
developing countries. In support Neagu (2016) states that most of the new products and technological process
emerge from SMEs whilst big enterprises only focus on improving the old products despite the fact that they
have very strong research departments, they only want to produce in larger qualities those old products in
order to gain general advantage in dimensional economy. SMEs concentrate and invest in new products that
help them being adaptive to the dynamic markets.
6.3 Employment Creation
SMEs are a vehicle for employment creation. Studies show that the SMEs employ more people than even the
government. They also make use of semi-skilled labor force. Approximations in the studies done emphasizes
that SMEs own about 95% of businesses in the globe and employ about 60% and their GDP contribution is
40% (Bell, 2015). The employment percentage covered by SMEs is way above 50% which reflects that SMEs
are dealing away with issues of unemployment and poverty as well as crimes related to unemployment and
poverty. SMEs employ more semi-skilled labor which has a low labor cost leading to them hiring more labor
because of its favorable cost. SMEs need to be supported so as to help in the restructuring of large enterprises
by rationalizing production developments so that there is a separate sale for units not directly linked to the
primary activity, improving efficiency of the remaining enterprise. Cooperation may result in the raising of
the level of skill with their flexibility and innovativeness, thus SMEs can generate important benefits in terms
of creating a skilled industrial base and industries, and developing a well-prepared service sector capable of
contributing to GDP through higher value-added.
7.0 CHALLENGES FACED BY SMES IN INTERNATIONALIZATION
There have been many strides at to address trade facilitation impediments at national and global level. The
initiatives have failed to address the concerns of SMEs who have continually marginalized. The SMEs have
remained outside trade policies as they have remained disaggregated. This has created allowed policy makers
to shift the blame of failure of SMEs in trade to them and cover up for the failure of national and regional
trade policies at large. Barriers have remained in place regardless of efforts to stir up SMEs development and
their internationalization. Barriers are classified into two categories as external and internal. Wilson (2006)
postulates that external factors affecting internationalization of SMEs are administrative rules both the local
and international rules as well as trade barriers (formal and informal). These are a result of poor policies and
their removal is highly dependent on the external forces which include state and non-state actors at both
national and global level. External barriers have been viewed as originating from both the host and home
countries’ milieu. The host country has a responsibility to address the external barriers to SMEs
internationalization and SMEs through their associations and trade institutions should continue lobbying and
advocacy for their removal.
The internal milieu of SMEs affects its operations also, this may include inadequacy of skills and information,
lack of networks, financial incapacity as well as cultural and language barriers (Wilson, 2006). External
barriers may be categorized into procedural barriers, government barriers, environmental barriers as well as
task barriers. Westhead, Wright, Ucbasaran (2004) outlines four types of hindrances to exporting that are
strategic, operational and logistical, informational as well as process based barriers. In formally regulated
economies SMEs are challenged by some bureaucratic practices that are used and strengthen large enterprises.
7 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
This motivates SMEs to operate informally out of government regulation. Most SMEs choose not to operate
in the government environment’s standards because of lack of support, time consuming, lots of paperwork
and less confidence in external interference. The regulations crafted by government better suits big enterprises
than small enterprises therefore no ability to follow and implement them. Logistical difficulties related to
lending money to SMEs result in them being underfinanced. Loans given to SMEs by Banks seem to have
unfavorable terms due to high fixed costs related to transactions.
8.0 ROLE OF STATE AND MNCS IN ADDRESSING CHALLENGES FACED BY SMES
SMEs play a key role in the economy that is employment creation, promotion of stability and development of
regional economies, production of much of the creativity and innovation that helps economic
progress, promotion of competition and cooperation as well as production of highly valued added products.
Public policy at all levels may be helpful in encouraging entrepreneurship and SME internationalization by
curbing various market failures that may occur (Wilson, 2006). One of the main challenges faced by export
models is on the development of linkages among export firms at the economy at large (Duran and Carrillo
2008). Public policies are important in providing a conducive environment as well as incentives at all levels
that is local, regional and national levels. Moreover, government’s role should be facilitative rather than
dictatorial and the public financial support not exceeding 50%. The business scope includes small and medium
enterprises, multinational enterprises, local chambers of commerce, cooperatives, associations, foundations as
well as individual networks. Universities, Local government, banks, financial systems and other research
organizations are also included. SMEs has highlighted above they ought to be market-driven and competitive
in order to survive and be sustainable than depending on public support. The environment is dynamic so are
opportunities of SMEs. Due to the environment being dynamic governments, academia, SMEs, specialized
agencies need to become entrepreneurs as well as adjust and fit the ever changing environment so that their
approaches suit the current affairs and future rather than concentrating on past problems. Policing should
follow adequate and reliable data of SMEs in a country or region. Initiatives meant to develop the international
orientation of leaders and key decision makers in SMEs could prove beneficial (Lloyd-Reason, 2004).
Governments have established hub centers that strengthen value chains as a way of supporting regional and
industry linkages. The effectiveness of a policy can be measured against the initial main goal set, based on
this, industrial policy models have proved to be successful at all stages in promoting capacity creation, product
diversification and export capacity creation. According to (Onkelinx & Sleuwaegen, 2008) suggests that
integrating policies on entrepreneurship, innovation and internationalization can improve the effectiveness of
government policies. In addition to the general support of SMEs, the government must make more selective
interferences to overcome information and management of externalities it is important for the government to
ensure that its policies are designed to effectively promote the growth and sustenance of SMEs. Policies are
required that create institutions to support SMEs, improve the general environment for SMEs enforce social
upgrading and support current SMEs and start-ups in a discerning way (Herr & Nettekoven, 2017). SMEs
development and internationalization has been noticed to be depended on national trade policies which come
as a result of intensive consultations with intended beneficiaries of the policy. The design and formulation of
economic and trade policies seeking to assist in supporting national and regional linkages of SMEs and MNCs
should be all inclusive and adopt a bottom up approach. Accordingly, development of policies that boost and
aid SMEs development in developing countries through FDI requires co- ordinated actions on a number of
fronts involving various partners including policy makers in developed countries; those in transition and
developing countries; donors and international organizations (Ndemo & Smallbone, 2015).
9.0 CONCLUSION
SMEs fail to respond to changes in the business milieu due scarcity of resources and disincentives of their
scale of operation. Developments in transportation and communication technologies have been successful in
reducing the challenges of internationalization making it possible for SMEs to access international markets.
In order to internationalize SMEs, take advantage of the international experiences of their network that is
current buyers and suppliers. Internationalization takes the form of joint ventures, investment abroad which
include Foreign Direct Investment, cooperation with foreign enterprises among others like franchising,
licensing and strategic alliance. SMEs are very critical in developing countries because they make a very
significant contribution in terms of employment creation, enhancing competition through their innovation and
flexibility. SMEs however, are faced with a number of challenges which include language and cultural
8 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
variance, inadequate skills and information, lack of networks as well as difficulties in accessing finances and
foreign markets. The paper concluded that with proper government initiatives and policies on the management
and promotion of linkages of SMES and MNCs all these challenges will be addressed. Governments need
develop hub centers to strengthen value chain, integrating policies on entrepreneurship, innovation and
internationalization. Both government and MNCs have benefited directly or indirectly from the continued
existence of these SMEs. MNCs social capital should a leverage for the growth of SMEs regionally and
globally.
10. REFERENCES
Adler, P.S. and Kwon, S. W. (2002) “Social capital: Prospects for a new concept”, Academy of Management
Review, Vol. 27 No. 1, pp. 17-40.
APEC. (2013). Small and Medium Enterprise Working Group (SMEWG), SME Monitoring Index.
Bell, S. (2015). Small and medium enterprises (SMEs) finance, The World Bank Brief, available at:
http://www.worldbank. org/en/topic/financialsector/brief/smes-finance. accessed 20 th of June 2017.
Buckley, P. J. (1989). Foreign direct investment by small- and medium-sized enterprises: the theoretical
background. Small Business Economics, 1(2), 89-100.
Benzing, C., Chu, H.M. & Callanan, G. (2012). A regional comparison of the motivation and problems ...
Entrepreneurship & Regional Development, 24 (1–2), pp. 1-6.
Hill, C. (2007). International Business Competing in the Global Marketplace.
Chowdhury, S. R. (2011). Impact of global crisis on small and medium enterprises. Global Business Review,
12(3), 377- 399.
Neagu, C. (2016). The importance and role of small and medium-sized businesses Theoretical and Applied
Economics, XXIII, (3(608), Autumn), 331-338
Coleman, J.S. (1988). “Social Capital in the Creation of Human Capital”, American Journal of Sociology,
94, pp. S95-S120.
European Commission. (2011). Supporting the internationalization of SMEs: Good Practice Selection.
Brussels: Directorate-General for Enterprise and Industry, European Commission.
Dabic, M., Maley, J., Dana, LP., Novak, I.Pellegrini, M.M. & Caputo, A. (2019). Pathways of SME
internationalization: a bibliometric and systematic review. Small Bus Econ 55, 705–725 (2020).
https://doi.org/10.1007/s11187-019-00181-
Druker, P.F. (2009). Innovation and Entrepreneurship, New York: Harper Collins.
Ndemo, E.B., & Smallbone, D. (2015). Linkage Dynamics between Small and Large firms in Kenya, 1(5).
Keskin, H., Senet, C., Sungur, O. & Kiris, H.M. (2010). The Importance of SMEs in Developing Economies.
Jenkins, H. (2006). Small Business Champions for Corporate Social Responsibility. Journal of Business
Ethics, 67, 241-256.
Eriksson, K. Y., & Chetty, S. (2003). “The Effect of Experience and Absorptive Capacity on Foreign Market
Knowledge”. International Business Review, 12(6): 673-695.
United Nations Conference on Trade and Development. (2005). Improving The Competitiveness of SMEs
Through Enhancing Productive Capacity.
OECD. (2005). ENCOURAGING LINKAGES BETWEEN SMALL AND MEDIUM-SIZED COMPANIES AND
MULTINATIONAL ENTERPRISES: An overview of good policy practice by the OECD Investment
Committee
Hakanson, H. (1982). International Marketing and Purchasing of Industrial Goods. Ed.New York, John Wiley
& Sons.
Rodrigues, S. B., & Child, J. (2012). Building Social Capital for Internationalization
9 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
Riddle, L., George, A., Hrivnak, T. & Nielsen.M. (2010). Transnational diaspora entrepreneurship in emerging
markets: Bridging institutional divides: Journal of International Management, 16 (4), 398-411.
Keskin, H., Senturk, C., Sungur, O. & Kiris, H.M. (2010). The Importance of SMEs in Developing Economies.
European Commission. (2011). Opportunities for the Internationalization of European SMEs: Final Report.
Brussels: Directorate-General for Enterprise and Industry, European Commission. European
European Commission. 2010. European SMEs under Pressure.
European Network for SME Research (ENSR). 2003. SMEs in Europe.
Fujita, M. (1998). The transnational activities of small and medium sized enterprises. Boston: Kluwer
Gulati, R. & Gargiulo, M. (1999). “Where do interorganizational networks come from?”, American Journal
of Sociology, 104(5), 1439-1493.
Herr, H., & Nettekoven, Z.M. (2017). The role of small and mediumsized enterprises in development what
can be learned from the German experience? Berlin. Retrieved from
https://library.fes.de/pdffiles/iez/14056.pdf
Hitt, M., Lee, H & Yucel, E. (2002). The importance of social capital to the management of multinational
enterprises: Relational networks among Asian and Western firms. Asia Pacific Journal of Management 19
(2/3). 353–372
Hussain, N.M. (2000). Linkages between SMEs and Large Industries for Increased Markets and Trade: An
African Perspective. African Development Bank Economic Research Papers No 53. African Development
Bank, Abidjan
Johanson, J. & Mattson, L.G. (1988). Internationalization in Industrial Systems—A Network Approach. In:
Hood, N. and Vahlne, J., Eds., Strategies in Global Competition, Croom Helm, New York
Onkelinx, J. & Sleuwaegen, L. (2008). Internationalization of SMEs.
Karadag, H. (2016). The Role of SMEs and Entrepreneurship on Economic. Growth in Emerging Economies
within the Post-Crisis Era: an Analysis from Turkey. Journal of Small Business and Entrepreneurship
Development, 4.
Kimura, F. (2001). Subcontracting and the Performance of Small and Medium Firms in Japan
Lee, H., Kelley, D., Lee, J., & Lee, S. (2012). SME survival: the impact of internationalization, technology
resources, and alliances. Journal of Small Business Management, 50(1), 1–19.
Leonidou, L.C. (2004). ‘An Analysis of Barriers Hindering Small Business Export Development’, Journal of
Small Business Management, 42(3), pp.279–302
Reason, L. (2004). “Internationalization Process, SMEs and Transitional Economies: A Four-Country
Perspective”, International Journal of Entrepreneurship and Innovation Management, Vol. 5, No. 3-4,
Inderscience Publishers, pp. 206-226.
Lu, J. W., & Beamish, P. W. (2001). The internationalization and performance of SMEs. Strategic
Management Journal, 22(6-7), 565-586. doi: 10.1002/smj.184
Madok, A. (1998). The nature of multinational firm boundaries, International Business Review 7(3):259-290
Masroor, N., & Muhammad, A. (2019). SMEs in the Contemporary Era of Global Competition. 632(641),
158.
Mugwika, G.R. (2013). The Impact of the East African Community Integration on small &
MediumEnterprises. Case of Kenya.
Munro, R. (1997). ‘Power, Conduct and Accountability: Re-distributing Discretion and the Technologies of
Managing’, Proceedings of the 5th Interdisciplinary Perspectives on Accounting: 4.2.2–
4.2.10, Manchester: University of Manchester
10 www.diverseresearchjournals.com | info@diverseresearchjournals.comDiverse Journal of Multidisciplinary Research (DJMR)
ISSN: 2704-4777
Volume 3, Issue 1, January 2021
Nahapiet J. & Ghoshal S. (1998). Social capital, intellectual capital, and the organizational Advantage,
Academy of Management Review, 23, 242-266.
Rhyner, N., Perez, D.S., & Finkbeiner, S. (2016). SMEs: how to integrate them into the international trade
framework? “Case for the Model WTO 2017” University of St. Gallen St. Gallen, Switzerland, 2016
OECD. (2003). Entrepreneurship and local economic development, programme and policy recommendations.
Paris: OECD Publishing.
OECD. (2005). OECD Factbook: Economic, Environmental and Social Statistics, OECD Publishing, Paris.
OECD [Organisation for Economic Co-operation and Development]. (2004a). Small and Medium-Sized
Enterprises in Turkey Issues and Policies, OECD Publications, [available at
http://www.oecd.org/dataoecd/5/11/31932173.pdf]
OECD. (2003). Officially-supported export credits and small exporters, Organization for Economic Co-
operation and Development, France.
Quak, E. (2019). The impact of creating backward and forward linkages between lead firms and SMEs in
conflict settings Institute of Development Studies 5 May 2019
Muriithi, S.M. (2017). African Small and Medium Enterprises (SMEs) Contributions, Challenges and
Solutions.
Santarelli, E. & Vivarelli, M. (2007). Journal of Small Business and Entrepreneurship Development, Oxford
University Press, 16(3), 455-488.
Prashantham, S & McNaughton. R.B. (2006). Facilitation of links between multinational subsidiaries and
SMEs: The Scottish Technology and Collaboration (STAC) initiative, International Business Review, 15, (5),
447-462
Storey, D J. (2008). ``Entrepreneurship and SME policy'', World Entrepreneurship Forum, available from
http://www.world-entrepreneurship-forum.com
Fjose, S, Grünfeld, L. A., & Green, C. (2010). SMEs and growth in Sub-Saharan Africa Identifying SME roles
and obstacles to SME growth MENON-publication no. 14/2010 June 2010
UNCTAD Secretariat. (2005). Improving the competitiveness of SMEs through enhancing productive
capacity: proceedings of four Expert Meetings. Geneva. New York; Geneva: UN, 2005.
UNCTAD. (2010). Integrating Developing Countries’ SMEs into Global Value Chains. Geneva, Switzerland:
United Nations Conference on Trade and Development.
Walker, G. Kogut, B. & Shan, W. (1997). “Social Capital, Structural Holes and the Formation of an Industry
Network”, Organization Science, Vol. 8 No. 2, pp. 109-125.
Welch, L. S., & Luostarinen, R. K. (1993). Inward-outward connections in internationalization. Journal of
International Marketing, 1(1), 44-56.
Welch, L., & Luostarinen, R. (1988). “Internationalization- evolution of a concept”, Journal of General
Management, Vol. 14, No. 2, pp. 34-55.
Westhead, P., Wright, M.& Ucbasaran, D. (2004). Internationalization of private firms: environmental
turbulence and organizational strategies and resources, Entrepreneurship & Regional Development, 501-
522.
Wilson, K. (2006). Encouraging the Internationalization of SMEs, 6, OECD, Paris, 43–66
Wright, R.W. and Ricks, D.A. (1994). Trends in International Business Research Twenty-Five Years Later.
Journal of International Business Studies, 25, 687-701.
WTO. (2016). World Trade Report—Levelling the Trading Field for SMEs. Washington: World Trade
Organization.
Yuhua, B.Z. (2015). SME Internationalization and Measurement
11 www.diverseresearchjournals.com | info@diverseresearchjournals.comYou can also read
