According to Kraus et al. (2017), internationalization is a common growth strategy for SMEs. However, SMEs face several challenges within the process of internationalization.
According to Winch & Bianchi (2006), for many SMEs the challenge of going global brings along another dimension of challenge to SMEs already difficult environments.
Kraus et al. (2017) explains that as SMEs are characterized by limited resources, managers are constantly involved in a decision-making process concerning the allocation of the
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SMEs’ resources. Therefore, internationalization can be understood as a complex, multidimensional decision process. (Kraus et al. 2017.) According toLópez González &
Sorescu (2019), it is important to ask what companies and policymakers can do to promote further SME integration into global markets.
For many companies, internationalization poses challenges and difficulties. According to Khojastehpour and Johns (2014) a variety of barriers to successful export operations can be identified. Some problems mainly affect the export start, as others are encountered in the process of exporting. Leonidou (2004) stated that barriers to exporting refer to all those constraints that hinder the firm’s ability to initiate, to develop, or to sustain business operations in overseas markets. According to López González & Sorescu (2019), SMEs face many challenges in internationalization, both internal and external. Internal challenges relate to factors such as the lack of scale or experience, low productivity and lagging adoption of technology. External challenges relate to the environment companies encounter when getting products to foreign markets. (López González & Sorescu 2019.) Leonidou (2004) classified export barriers as internal, barriers associated with organizational resources/capabilities and company approach to export business, and external, barriers stemming from the home and host environment within which the firm operates. (Leonidou 2004.) According to Karagozoglu and Lindell (1998), the main barriers of internationalization keep inside the lack of managerial knowledge and competence, and the importance of personal factors like international business skills and perceptions of the environment (Winch & Bianchi 2006).
According to Czinkota & Ronkainen (2010), internationalizing companies need to actively adapt to the changing global environment to succeed. Internationalizing companies must encounter distribution systems, pricing, and address ethical issues such as legal systems related to monitoring pollution, maintaining a safe work environment, copying of technology or trademarks, and dealing with demands for bribes. (Czinkota & Ronkainen 2010.) The incremental character of internationalization (according to the Uppsala model) is largely attributed to a lack of market information. This lack of market information will strongly influence the manager’s perceived psychic distance from the home country to the
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host country. Increasing the foreign market knowledge will decrease the psychic distance.
However, the distortion of information transmission associated with psychic distance implies the necessity of trust development. This means that trust plays a crucial role in overcoming the challenges to successful international relationship building to the foreign partners. (Khojastehpour and Johns, 2014.)
According to Fliess & Busquets (2006), there are several factors indicating why SMEs are more exposed to the effects of internationalization barriers than larger companies. Larger companies occupy the resources to leverage internationalisation risks in several ways, such as by diversifying operations, possessing in-house trade or international departments, creating economies of scale, and strongly lobby for favourable laws and regulations. Often, SMEs have limited resources and a lower capability to absorb risks, especially when operating in extremely competitive markets. When trade barriers occur, SMEs might have to bypass a market, giving up the opportunity to grow the business. This leads to becoming more prone to increasing import pressure in the home market. (Fliess & Busquets 2006.)
2.3.1 Classification of internationalization barriers
According to Shaw and Darroch (2004) there have been a number of studies, which have focused on the barriers to internationalization by exporters and/or non-exporters in general (e.g. Morgan, 1997). Much less attention has, however, been paid to the perception of barriers to internationalization by smaller, more entrepreneurial firms. (Shaw and Darroch, 2004.)
According to Morgan (1997), the barriers to internationalization can be classified into five areas: financial, managerial, market based (including domestic and international markets), industry specific and firm specific. Morgan (1997) stated, that it is widely recognized that the barriers to internationalization can exist at every stage in the process of internationalization (Morgan, 1997). Leonidou (2004) presented a comprehensive analysis of 39 export barriers extracted from a systematic review of 32 empirical studies conducted
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on the subject. These have been classified into internal (incorporating informational, functional, and marketing) and external (comprising procedural, governmental, task, and environmental) barriers. (Leonidou, 2004). The next chapters involving internal and external barriers base on the authors analysis of export barriers.
According to Leonidou (2004), internal barriers to internationalization are those difficulties that relate to organizational resources and capabilities. There are three types of internal barriers, which are identified as informational barriers, functional barriers, and marketing barriers. Informational barriers refer to problems in identifying, selecting, and contacting international markets due to information inefficiencies. Four barriers fall under this category: locating/analyzing foreign markets, finding international market data, identifying foreign business opportunities, and contacting overseas customers. Functional barriers relate to inefficiencies of the various enterprise functions, such as human resources, production, and finance, with regard to exporting. This category contains four barriers relating to limitations in managerial time, inadequacies in export personnel, unavailable production capacity, and shortages of working capital. Marketing barriers deal essentially with the company’s product, pricing, distribution, logistics, and promotional activities abroad. (Leonidou, 2004.)
Leonidou (2004) separates external barriers into procedural, governmental, task, and environmental barriers. Procedural Barriers focus on operating aspects of transactions with foreign customers and include three items: unfamiliarity with techniques/procedures, communication failures, and slow collection of payments. Governmental barriers pertain to actions or inaction by the home government in relation to its indigenous exporters. Here, the emphasis is on two problem areas: (1) the limited interest shown by the government in assisting and in providing incentives to current and potential exporters; and (2) the restrictive role of the regulatory framework on export management practices. Task barriers focus on the firm’s customers and competitors in foreign markets, which can have an immediate effect on its export operations. Environmental barriers category incorporates barriers referring primarily to the economic, political–legal, and sociocultural environment of the foreign market(s) within which the company operates or is planning to operate. These
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barriers usually are subject to rapid changes and are very difficult to predict and control.
(Leonidou 2004.)
According to the OECD (2009) the following are categorized as top barriers for SME internationalization. The first barrier, highlighted as the lead barrier, is the shortage of working capital to finance exports. This refers to limitations in finance. The second barrier is the limited information to locate/analyze markets. Insufficient knowledge of foreign market also emerged as a top barrier. The third barrier, inability to contact potential foreign customers is also highlighted as a top barrier. The last barrier, lack of managerial time, skills and knowledge, refers to having limited managerial knowledge. This factor was also identified as a lead obstacle for internationalization of SMEs. (OECD 2009.)
2.3.2 Barriers hindering internationalization initiation
According to Mueller-Using et al. (2020), most studies neglect internal barriers of internationalization. Hollensen (2017), states that critical factors hindering internationalization initiation include mainly internal barrier such as insufficient finances, insufficient market knowledge, lack of foreign market connections, lack of export commitment, lack of capital to finance expansion into foreign markets, lack of productive capacity to dedicate to foreign markets, lack of foreign channels of distribution, management emphasis on developing domestic markets, cost escalation due to high export manufacturing, expenditures, distribution and financing. Inadequate information on potential foreign customers, competition and foreign business practices is a key barrier facing active and prospective exporters. Obtaining adequate representation for overseas distribution and service, ensuring payment, import tariffs and quotas, and difficulties in communicating with foreign distributors and customers are also major concerns. Serious problems can also arise from production disruptions resulting from a requirement for non-standard export products. This will increase the cost of manufacturing and distribution.
(Hollensen 2017.)
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2.3.3 Barriers hindering the further process of internationalization
Critical barriers in the process of internationalization can generally be divided into three groups: general market risks, commercial risks, and political risks, all seen from the company perspective. General market risks include the factors such as comparative market distance, which refers to each additional foreign market creating additional organizational costs, and differences in culture and language increasing the amount of market risks information that managers must collect to manage and coordinate across the foreign markets. Another factor, adaptation to foreign markets refers to the products and services that companies produce abroad which often the same as at home but even in that case, producing and selling abroad involves higher costs than doing it at home. It requires modifications to the production process and marketing mix. General marketing risks also include competition from other firms in foreign markets, adapting products and services to new local conditions, difficulties in finding the right distributor in the foreign market, differences in product specifications in foreign markets and complexity of shipping services to overseas buyers. (Hollensen 2017.)
According to Hollensen (2017), commercial risks include exchange rate fluctuations when contracts are made in a foreign currency, failure of export customers to pay due to contract dispute, bankruptcy, refusal to accept the product or fraud, delays and/or damage in the export shipment and distribution process and difficulties in obtaining export financing.
Political risks result from intervention by home and host country governments. The risks keep inside factors such as foreign government restrictions, national export policy, foreign exchange controls imposed by host governments that limit the opportunities for foreign customers to make payment and lack of governmental assistance in overcoming export barriers. (Hollensen 2017.)
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