Can SMEs hold their own in the international arena?

By Han Byung-koo

Han Byung-koo

There’s an old boxing adage which says, “a good big one will always beat a good little one.”

The same statement might easily be applied to the prospects of smaller businesses going up against multinational or state-owned companies in the global marketplace.

Trading across borders can be a time-consuming, complex and risky business. Researching market opportunities, finding partners and distribution channels, negotiating licenses and permits, navigating customs, establishing production and building a customer base in an overseas market usually requires considerable financial firepower, resources and all the other factors that favor heavyweight businesses.

Stepping into the international ring with them, entrepreneurs and small businesses are in for a grueling fight with the odds stacked against them.

A research paper issued in October by the Economist Intelligence Unit (EIU), Breaking Borders, paints a rather gloomy picture about the international trading environment for SMEs.

The companies surveyed highlighted a large number of barriers standing in the way of their global expansion. Infrastructure problems, prohibitive costs of establishing operations and networks abroad, bureaucracy, corruption and political instability were all cited as reasons for not entering overseas markets.

The risks posed by these barriers, in the eyes of many, outweigh the rewards of international business. Of those that were venturing abroad, the vast majority were doing so tentatively ㅡ 84 percent of respondents cited cultural factors and language as important to them, which would explain why most SMEs expand into markets similar to their own.

Despite the opportunities offered by air travel, telecommunications networks and the Internet, it looks like globalization is still principally being driven by the big players.

The EIU paper also offers a mixed assessment of the world’s growth markets. China remains the most attractive developing market for the majority of SMEs, mainly because of its enormous consumer base and the country’s economic policies, which continue to support growth.

There are reservations, however, about the appeal of Africa, with 40 percent of surveyed companies saying that they see no potential in the continent. This suggests that it is mainly multinationals and state-owned companies with extensive resources and deep pockets that are taking advantage of Africa’s growth story.

However, at the same time, despite the doom and gloom, the EIU paper still revealed a positive outlook. Most of the SMEs projected to generate more than 50 percent of their revenue from outside their home market within five years. Part of the reason could be defensive: as globalization has taken hold and markets have opened up, competition has intensified for smaller businesses.

Domestic economies in most markets have also slowed or stagnated, which has put their margins under pressure, shrunk their customer base and tightened the screws on cash flow. This is forcing businesses to look abroad to grow (or in some cases, even survive).

It’s not just a question of defense, however. A 2013 study by IHS Global Insight and DHL revealed that small and medium enterprises that trade internationally are twice as successful as those who trade only within their home market.

Small business owners may wonder how they should enter the international stage without the financial “power” and manpower. Breaking Borders reveals that partnerships and a robust supply chain are necessary.

To minimize the trial and error, SMEs should make a wise decision when to step into the international ring. In order to ensure finding decent partners in the unfamiliar market and to establish an effective supply chain, it is especially important to collaborate with global logistics companies who possess accumulated expertise of international trade.

With the extensive worldwide networks of global logistic firms and the profound information on each region’s distribution channel and supply chain, SMEs can discover a short-cut in expanding its business into overseas markets.

The writer is the CEO of DHL Express Korea