SME Entry Modes in North American Markets


Term Paper, 2015
24 Pages, Grade: 1.3

Excerpt

Outline

II. List of figures and tables

III. List of abbreviations

1 Introduction
1.1 Research problem
1.2 Course of investigation

2 Internationalisation of SMEs
2.1 Characteristics of SMEs
2.2 Internationalisation of SMEs
2.2.1 Characteristics of internationalisation
2.2.2 Motives and goals of internationalisation
2.2.3 Possible risks and barriers of internationalisation
2.3 Entry modes
2.3.1 Characteristics of entry modes
2.3.2 Non-equity entry modes
2.3.3 Equity entry modes

3 North American markets
3.1 Choice of market and location
3.2 Characteristics of North American markets and NAFTA
3.3 United States of America

4 Entry modes for SMEs in the US market
4.1 Benefits and barriers of the US market
4.2 Advantages and disadvantages of SMEs entry modes in the US market

5 Conclusion
5.1 Summary
5.2 Critical acclaim
5.3 Outlook

IV. Glossary

V. List of references

Abstract

Internationalisation is an important factor when it comes to successful and sustainable business management. This also especially applies for small and medium-sized enterprises (in the following SMEs), since internationalisation of SMEs can be a critical challenge.

The success of internationalisation for SMEs is depended on many factors like the actual size of the company or already existing foreign experiences. To generate a successful access to foreign markets the choice of an internationalisation cannot be a spontaneous one. It has to be premised on a strategic plan. Hence in terms of international expand it is important for companies to balance the benefits and the risks of the environment as well as the firm-specific strengths and weaknesses and to formulate a suitable internationalisation strategy. Important factors of this strategy are the choice of a market and location and the choice of an entry mode.

Keywords: small and medium-sized enterprises, globalisation, international trade, US JEL classification: O51, F23, F60, F1

II. List of figures and tables

Figures:

Figure 1: Goals of internationalisation

Figure 2: Internationalisation entry modes

Tables:

Table 1: Definition of SMEs by the Statistical Office of the European Communities

Table 2: US economic data in the year of 2013

III. List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

1.1 Research problem

The process of internationalisation improved strongly over the last decades. By now nearly every enterprise is affected by the globalisation. Increased international expansions of numerous industries induce more and more SMEs to intensify their sale activities on foreign markets.

Behind the realisation of a successful international expansion is a complex planning process that requires the consideration and reconciliation of different and in most cases interdependent aspects. One of these aspects is the choice of a suitable foreign market. Because of a reportedly low risk potential and a high market appeal (Meissner and Erpenbach, 1999, p. 73) many companies are attracted to North American markets, especially the market of the United States of America (in the following US), when it comes to international expansion.

Another important aspect in terms of internationalisation is the consideration of reasonable entry modes. Various options of entry modes and strategies are available for enterprises when entering a foreign market. However, not all of them are suited for SMEs and thus the internationalisation of SMEs can pose a critical challenge. Therefore it is especially important for such enterprises to formulate their chances and risks of internationalisation as well as their strengths and weaknesses to be able to develop a strategy for international expand.

The aim of this research paper is to illustrate different entry modes of internationalisation and to analyse which entry modes SMEs use when entering North American markets. The focus will be on the advantages and disadvantages of the different SME entry modes in the US market.

1.2 Course of investigation

The internationalisation of SMEs will be the central point of chapter two. Characteristics of SMEs will be defined and motives and goals as well as potential risks and barriers of internationalisation will be described. Furthermore chapter two will deal with internationalisation strategies including the characteristics of entry modes and an overview on the different entry modes.

Chapter three will explain how the choice of markets and location affects the decision of entry modes. It will also give an overview on North American markets. Done so, by describing North American markets and the North American Free Trade Agreement (in the following NAFTA). Lastly the distinction of the US market will be made.

The focus of chapter four will be on the internationalisation of SMEs on the US market. Benefits and barriers of the US market will be clarified and the advantages and disadvantages of different entry modes for SMEs on the US market will be defined.

Concluding with chapter five a summary of the given remarks will follow including an answer to the research question. Furthermore a critical observation will state possible restrictions of the findings. An outlook into the future will be given.

2 Internationalisation of SMEs

2.1 Characteristics of SMEs

SMEs have an important meaning for the economy as a whole. About 23 million SMEs existed in the European Union in the year of 2006, representing about 99% of all running enterprises. In Germany even 99.7% of all active firms were SMEs in the year of 2010 (Eiche, 2010, p. 3). Despite the importance of SMEs there is no set definition for this term that became permanent prevalent (Kabst, 2004, p. 2). Over 200 definitions and periphrases of “small and medium-sized enterprises” already existed in the 1960s (Abrahamczik, 2012, p. 14). It can be assumed that the number has increased since (Kabst, 2004, p. 2). However, SMEs can be distinguished from large-scale enterprises in terms of quantitative and qualitative criteria (Abrahamczik, 2012, p. 14). Common quantitative elements relate to the number of employees, amount of turnover or profit and total assets. Though there is no consistent determination of the numbers and amounts for quantitative criteria (Nienaber, 2003, p. 14-15). An example for a distinction of SMEs provides the institution Eurostat, the Statistical Office of the European Communities, as shown in table 1.

Table 1: Definition of SMEs by the Statistical Office of the European Communities

Abbildung in dieser Leseprobe nicht enthalten

Source: European Commission, 2009, p. 3

Because quantitative criteria often don't rate as adequate for the distinction of SMEs from large businesses, SMEs can also be characterised by their qualitative criteria. Qualitative characteristics include leadership specific, organisational, financial and personnel elements (Abrahamczik, 2012, p. 16). They are necessary to understand motives, conditions and specifics of SMEs (Eiche, 2012, p. 3). Under the consideration of qualitative criteria enterprises can overrun the upper limit of number of employees or amount of turnover and still remain a SME. Examples for qualitative elements are a basic organisational structure, little departmentalisation, brief, direct lines of communication, barely any coordination problems and a high level of flexibility (Nienaber, 2003, p. 15-16). Some of those elements might suit the description of a large enterprise. Therefore it is important for the characterisation of SMEs not only to use one criterion but to adduce several quantitative and qualitative criteria (Abrahamczik, 2012, p. 16).

2.2 Internationalisation of SMEs

2.2.1 Characteristics of internationalisation

The definition of internationalisation has been frequently discussed and interpreted differently in the past. In general internationalisation can be described as an entrepreneurial business activity on foreign markets (Bamberger and Evers, 1995, p. 2). Enterprises pertain as internationalised when they have a turnover on foreign markets, when they produce their products somewhere else than the domestic country, when they raise capital from foreign investors or when their place of business is not in the home country. Since there is no consideration of the extend of those foreign activities, there is no need for a certain volume of business activities in foreign countries to speak of an international company. However, the consideration of the intensity of internationalisation is not entirely unimportant, since imports are also understood as an international business activity. Although the intake of imports is a form of internationalisation, it is not an internationalisation form for entering international markets (Nienaber, 2003, p. 5-6). Hence there is a further definition of internationalisation, which explains internationalisation as a process that includes growing involvement on international markets. International expanding decisions involve not only the inclusion of international activities but also the sequence of steps that lead to an increasing level of internationalisation. Thus internationalisation represents a dimension of the strategic behaviour of business enterprises (Bamberger and Evers, 1995, p. 2-3).

2.2.2 Motives and goals of internationalisation

There are different reasons for internationalisation that vary, depending on the size of enterprise and industry (Abrahamczik, 2012, p. 21). Opening up new markets, higher sales and profits, risk diversification, avoidance of trade barriers, cost benefits and foreign activities of the competition can be named as the most important motives for international business expansion (Walldorf, 2000, p. 319).

Manufacturing and service businesses may also enter international markets because domestic markets are at a standstill or foreign markets are growing faster. Others may go abroad to follow important domestic customers that are going international (Root, 1987, p. 1). Whatever the case may be, motives for international business expansion are usually connected to increasing sales and profits (Awe, 2009, p. 1).

Having an agenda for internationalisation has an influence on the choice of entry methods (Nienaber, 2003, p. 27). The success and the reasonableness of internationalisation can be measured by the achievement of the formulated goals (Mäder and Hirsch, 2009, p. 115). Most of these goals can be classified as selling- oriented, costs-oriented, recourses-oriented, competition-oriented or others (Nienaber, 2003, p. 28). The following figure provides a detailed list of possible goals of internationalisation.

Figure 1: Goals of internationalisation

Abbildung in dieser Leseprobe nicht enthalten

Source: Own figure based on Nienaber, 2002, p. 29-32

2.2.3 Possible risks and barriers of internationalisation

Like in any other business activities uncertainty and risks are significant topics of internationalisation. The main risks of internationalisation for any kind of enterprises are commercial concerns, foreign exchange fluctuations, political issues and shipping or transportation issues. Commercial concerns e.g. not being paid or goods not delivered arise in international business as well as in the domestic. Foreign exchange fluctuations are always present in the context of international trade. Currency fluctuations can cause changes in the market-based exchange rates (Awe, 2009, p. 2-3). Political and sociocultural issues of the target country such as revolution or expulsion can also have a big impact on the process of international expand (Root, 1987, p. 10). Shipping or transportation issues include damaged or lost goods in transit (Awe, 2009, p. 3).

Besides the major areas of risk that apply for any kind of enterprises there are additional barriers that SMEs need to overcome. Scarce resources, low foreign experience and the lack of equilibrated internationalisation strategies can endanger the success of SMEs in international markets (Abrahamczik, 2012, p. 5). Often SMEs are missing the necessary resources of employees and the required departments such as an export department to be able to establish an international business policy. One of the biggest barriers of SMEs is the lack of knowledge (Puchta und Röder, 2009, p. 8). However, the demand of information is immense in terms of internationalisation. It includes information on the market environment, cultural aspects, legal policies and regulations in the target country as well as in the home country (Bockholt, et al., 2009, p. 82). The major weak point in knowledge of SMEs is the state of know-how in the range of international marketing such as international customer behaviour or international distribution channels (Hering, et al., 2001, p. 13). It is a special challenge for SMEs to procure this information. Depending on the manufactured products of the company and some national regulations of particular countries some information is difficult to obtain (Bockholt, et al., 2009, p. 82).

However, all risks and barriers can be managed and controlled with accurate planning and proper goal setting (Awe, 2009, p. 3).

2.3 Entry modes

2.3.1 Characteristics of entry modes

An international market entry mode or strategy can be described as an institutional arrangement. Aim of this arrangement is the possibility to enter a foreign country market with products, technology, human skills, management or other resources of a company (Jones and Young, 2009, p. 7-9). There are numerous options of market entry strategies (Awe, 2009, p. 87), which can be divided in different categories dependent on the equity participation and the transfer of resources (Brösel and Buchert, 2004, p. 337) as visualized in the following figure.

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Details

Title
SME Entry Modes in North American Markets
College
Hamburg University of Applied Sciences
Grade
1.3
Author
Year
2015
Pages
24
Catalog Number
V489340
ISBN (eBook)
9783668968936
ISBN (Book)
9783668968943
Language
English
Tags
small and medium-sized enterprises, globalisation, international trade, US, SME
Quote paper
Kristina Gribanov (Author), 2015, SME Entry Modes in North American Markets, Munich, GRIN Verlag, https://www.grin.com/document/489340

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