FORMS OF ENTRY OF PORTUGUESE SMEs IN EXTERNAL MARKETS · Before we start addressing the reasons why...

FORMS OF ENTRY OF PORTUGUESE

SMES IN EXTERNAL MARKETS

Master Science in Business Administration

Doing Business Internationally

Lisbon, July 1st, 2010

Andreia Lopes

Gonzalo Bonilla

Joana Mendes

Luís Ângelo

Naim Tajdin

Sven Wieler


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INDEX

INTRODUCTION

DECISION TO INTERNATIONALIZE

1. Internal Factors

2. External Factors

BASIC ENTRY DECISIONS

THE ENTRY MODE

1. EXPORTING/IMPORTING

2. LICENSING

3. FRANCHISING

4. JOINT VENTURES

5. FOREIGN DIRECT INVESTMENTS

ANALYSIS OF EXPORTING/IMPORTING, FOREIGN

DIRECT INVESTMENT AND JOINT VENTURES

RECOMMENDATIONS

CONCLUSIONS

BIBLIOGRAPHY

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INTRODUTION

In a globalized and complex context such as the ones companies face nowadays, fast answers

and solutions are demanded. Sometimes, those solutions can not be found in the national

market. The Portuguese market is small when compared to other countries, therefore a

Portuguese SME to grow may have to internationalize.

This paper focuses on Small and Medium Enterprises since they represent the majority of

companies in Portugal. In fact, SME’s are becoming increasingly important in the current

economic situation. Economic crisis and high unemployment rates are just two of the many

factors that lead people to create their own job.

There are several decisions a company faces when it decides to enter external markets. First of

all a company needs to understand why there is a need for internationalization. In this stage

there are internal and external factors to look in as we will further discuss.

The next stage is to decide where and when to enter, and on what scale. A deeper analysis of

the external market needs to be done and there are some specific indicators to consider.

The final decision is the entry mode which is our centre of attention. There are several ways

that companies can choose to get into external markets (Export/Import, Licensing, Franchising,

Joint Ventures, and Foreign Direct Investment). This paper will provide a simple study of each

mode with some advantages and disadvantages, illustrated with an example of a Portuguese

company.


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DECISION TO INTERNATIONALIZE

Before we start addressing the reasons why Portuguese SME’s should follow different entry

modes to internationalize, we would like to present some important facts about European

SME’s Trends. Afterwards, an Internal / External analyses will help us define why Portuguese

SME’s should internationalize and pick different entry modes.

Our research showed us that “of the more than 20 million enterprises in the EU non-financial

business economy, about 99.8 % are SME’s (i.e., having less than 250 employed persons).

Within the SME-sector, the vast majority (92 %) are micro enterprises, having less than 10

employed persons. The typical EU business is increasingly a micro business”1. Whereas in

Portugal, as we can see from fig.12 enterprises have a relatively high presence of Micro

enterprises in difference to the EU-average.

Figure 1 – SMEs in Portugal – basic figures

Also with extreme relevance is the Value Added that Portuguese SME’s show, with 67.3%

compared with the average of EU (57.9%). This fact streams an important issue regarding

Portuguese economy, which is the Portuguese entrepreneurial spirit, many times due to lack

of job opportunities or situation where structural unemployment created the need to follow

different paths.

Bearing in mind what is presented above it’s now of extreme importance to address a strategic

vision through an external and internal analysis that intend to evidence major factors that lead

to Internationalization of SME’s.

1 European SME’s under Pressure Annual Report on EU SME – sized enterprises 2009

2 European SME’s under Pressure Annual Report on EU SME – sized enterprises 2009


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1. Internal Factors

There are internal factors imposed by conditions of the company itself (pull factors) or by

conditions that the company faces (push factors). These kinds of factors, independently of

being Pull or Push Factors, can both lead to internationalization.

Some reasons from Pull Factors:

Management team with high education;

Most of the Portuguese Business Schools have focused the last years on an

international scope, leading to new staff or the existing one being more prompt to

Internationalization;

Competitive advantage (related with Products/Services);

Innovation on the delivered outcome;

Governmental support to Internationalization (e.g. PME Academy – Directed by IAPMEI;

EU funds resultant form QREN available to new Entrepreneurs and existing ones);

Governmental simplification (bureaucratic simplification in matters related to

Enterprises- Simplex Program);

Counseling process through some governmental institutions, such as AICEP and IAPMEI,

which made their international knowledge available to Portuguese SME’s;

Improvement of communication roots ease transportation and make them faster (TGV;

motorways; Airport; Airlines companies, mainly Low Cost companies increasing their

availability in Portuguese Airports);

Geographical position tend to be highly strategic, since Portuguese companies have a

simple access to the American, North African and African Market in general as well as

Europe;

Strong relationships with ex-colonies (e.g Brazil; Angola; Mozambique; Cape Verde,

etc.) especially the first ones in recent years have caused an increasing GDP.

Some reasons from Push Factors:

A product in the declining phase of Product Life-cycle can be a good opportunity to bet

on new markets for that product/service;

Excess of production, leading to stock turnover or accumulation of inventory;

Product demand more international than national;

Overcapacity;

Economic crisis opened space opportunities abroad.


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2. External Factors

The attitude of a company facing the external context can be more proactive or, on the

opposite, more reactive. Having the same logic as we had in the Internal Factors, we now show

Proactive and Reactive external factors can lead to Internationalization.

Proactive factors:

Foreign markets opportunities (strategic space available);

Tax benefits;

Lowering costs through economies of scale;

Gaining know-how on new markets, leading to new strategic visions;

Trade promotion (EU/ Nafta/Mercosul);

Liberalization of trade tariffs (host country);

Increasing importance of E-commerce;

Social networks with high importance on the brand awareness to enter in new markets;

Resources availability (credit/raw materials).

Reactive factors:

Competitive Pressure in domestic market can be an open window to diversification of

markets;

Saturated Domestic Market in result being in the declining phase of Product Life Cycle;

Limited size of domestic market;

Increasing need to be near of customers and ports.


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BASIC ENTRY DECISIONS

After a SME decides to internationalize there are some basic decisions that it has to make:

what markets to enter, when to enter and on what scale.

The decision of which country to enter is determined by its potential to generate long-term

profitability. Consequently, the attractiveness of each country is influenced by economic,

political and legal factors. The political regime of the country, the economic system in which it

operates and the legal system that protects it are the main factors to examine. From this point

on, the decision which external market to enter should be based on a mixture of benefits,

costs and risks of doing business back there.

The economic benefits of doing business in a country depend on the size of the market, the

purchasing power of the consumers in that market and the potential future wealth of

consumers.

The associated costs may be connected to the possibility of paying some political influence (i.e.

bribes), the need of new infrastructures, the mandatory compliance of safety standards (in the

workplace, product and with environment), the well-regulated business practice and the

protection of intellectual property.

The risk of doing business in a country is determined by political, economic and legal factors. It

is related with indicators such as inflation rate, overall level of debt, strikes, terrorism and

conflict acts.

Usually, this benefit-cost-risk analysis tends to be more favourable in countries that are

politically stable and developed, with free market systems and no drastic changes in inflation

rate and overall debt level. On the contrary, it is less favourable in developing countries that

are politically unstable with market systems that are partially or totally controlled, or that have

had speculative finances that resulted in high debt levels.

The decision about which country to enter is also linked to the value that the company can

create. Meaning that, if a company offers a product that adds value and is able to fulfil unmet

needs, the product is more likely have a greater value in the eyes of consumers which can be

translated to charging higher prices or increasing sales volume more rapidly.

A tool that can be very helpful when making such a decision, is the ranking provided by Doing

Business3. It is a project that measures a set of variables in 183 countries thus providing a

ranking of ease of doing business in these countries. Further, it presents detailed information

per country.

The following decision is related to the Timing of Entry. In this stage, there is a clear trade off

between first-movers and later entrants. First-movers can establish brand name, build sales

3 http://www.doingbusiness.org/economyrankings/


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volume, control the learning curve ahead of its rivals and create high switching costs. All this

advantages of first-movers are the disadvantages for a later entrant. First-movers may also

have to support the pioneering costs like the effort needed to gain local knowledge and/or the

costs of educating consumers. Pioneering costs are costs that later entrants can avoid.

The final basic decision concerns the Scale of Entry which is if a company enters in a small or

large scale. It is a matter of value and risk. That is, a small scale entrant limits its risk but it also

may miss some advantages of first-movers or early-movers.


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THE ENTRY MODE

Choosing the right entry mode for a target country is a critical managerial decision and affects

the long-term success of a firm. It is fundamental for a company to choose the appropriate

mode for entering different markets in different countries. When we talk about the entry

modes of a business, we refer to Export/Import, Licensing, Franchising, Joint Ventures, and

Foreign Direct Investment.

1. EXPORTING/IMPORTING The most common mode of internationalization for European SME’s is the combination of

import and export. Export and import are much more common among older and larger SME’s

than for young and small ones. Still, some recently established firms start exporting short after

inception. These firms are characterized by extremely high growth rates, and are most

common in high technology sectors. In general, SME’s in high tech sectors are more

internationalized than SME’s in other sectors.

Internationalized SME’s report faster growth in employment, value added and labour

productivity. Especially in the years following the foreign market entry, both exporting and

importing SME’s experience very high growth rates. Despite the risks involved in

internationalization, both import and export have a positive impact on the firm’s survival. It

can lead to increasing productivity through economies of scale. Also export-oriented

entrepreneurship contributes more strongly to macro-economic growth than entrepreneurial

activity in general.

Despite the advantages of today’s globalization and the risks of not being part of it many

European SME’s still remain focused on their national markets. Only 8% of SME’s export and

only 12% of the inputs of an average SME are purchased abroad. The main reported reasons

are a lack of financial resources but most of all lack of skills or skilled human capital to

approach internationalization.

Companies with a structured market strategy are more active exporters than firms lacking

formal planning. Also, the more systematic the selection of foreign target markets is, the

higher the export performance will be for SME’s. Generally it can be seen that the larger the

size of the SME, the more internationalized they are:

COMPANY SIZE % of Exporters

1 – 9 employees 17

10 – 49 30

50 – 249 54

SME Total 20

Source: Supporting the internationalisation of SMEs; European Commission


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Barriers to export refer to all those constraints that have an impact on the firm's ability to

initiate, develop, or sustain business operations in foreign markets. Small business firms were

reported to have common internal barriers such as financing export, finding the right

customers and distributors as well as external barriers such as exchange rate fluctuations, high

competition, language barriers, bureaucracy, and government regulations at home and

abroad.

ADVANTAGES

Importing and Exporting is a relatively low-cost activity to get involved in international

business and expand profit. A firm can further create economies of scale which should lead to

lower cost and hence expansion of profit. Importing /Exporting can help a business:

Enhance domestic competitiveness;

Increase sales and profits;

Gain global market share;

Exploit corporate technology and know-how;

Extend the sales potential of existing products;

Stabilize seasonal market fluctuations;

Enhance potential for corporate expansion;

Sell excess production capacity;

Gain information about foreign competition.

DISADVANTAGES

On the other hand, in relation to location economies, a firm may not always be located in the

best region for that specific area and is therefore restricted to the cost disadvantages of the

current location. A firm is further depended on the fluctuation of transportation costs. High

transportation costs can make it uneconomical to get involved in the import or export of a

certain good. Related to this is the fact that exposure to a foreign market will likely involve

government regulations. One of these can be the availability of trade barriers such as tariffs

and quotas or other hidden barriers. By being involved in Importing/Exporting a business may

be required to:

Develop new promotional material;

Subordinate short-term profits to long-term gains;

Incur added administrative costs;

Allocate personnel for travel;

Wait longer for payments;

Modify the product or packaging;

Apply for additional financing;

Obtain special export licenses.


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EXAMPLE

In result of our analysis we found one Portuguese SME that used Exporting as a mode of entry

in foreign markets. The company is Vision Box. This company has offices in 5 different markets

such as, Qatar, Brazil, Germany, South Africa, UK, and the Headquarter in Lisbon, Portugal.

They have been present in some important events, like conferences and commercial events in

foreign markets such as:

At Cartes from 17-19 November 2009, France;

At Security defense world, from 9-10 Feb. 2010, UK;

At Ifsec, from 10-13 May 2010, UK;

At Frontex, from 24-25 May 2010, Poland

At Identity Technology conferences, in 28th June 2010, USA

Their success has allowed them to have clients in UK, South Africa, France, and Finland, and as

far as we found they are trying to expand to Brazil and USA.

This strategy has granted them a few awards internationally and also the Portuguese

Government awarded them with the prize of Líder SME.

2. LICENSING Licensing is where your own organization charges a fee and the right for the use of its

technology, brand or expertise. It is considered as a contractual agreement in which the owner

of a protected asset, known as the licensor, grants another entity, the licensee, for royalty or

some other consideration, the right to use the asset in producing or distributing a good or

service. It is important to mention the fact that the licensed asset may be tangible or

intangible, such as a trademark, patent, trade secret, or production process.

ADVANTAGES

Good way to start in foreign operations and open the door to low risk manufacturing

relationships;

Linkage of parent and receiving partner interests means both get most out of marketing

effort;

Capital not tied up in foreign operation;

Options to buy into partner exist or provision to take royalties in stock.


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DISADVANTAGES

Limited form of participation - to length of agreement, specific product, process or

trademark;

Potential returns from marketing and manufacturing may be lost;

Partner develops know-how and so license is short;

Licensees become competitors - overcome by having cross technology transfer deals;

Require considerable fact-finding, planning, investigation and interpretation.

EXAMPLE

YDreams is a Portuguese company that is running on technological industry. Their huge

success was due to their innovative products that had been register as YDreams’ intellectual

property.

So YDreams Company is a great example of Licensing. YDreams has invented some innovative

products such as “Augmented Reality”. This “Augmented Reality” is YDreams’ property and if

any company wants to use this technology, have to buy the license to be able to use. YDreams

had already projects in Spain, namely in Madrid, where companies have been licensed to sell

YDreams products.

3. FRANCHISING

In theoretical terms, franchising could be defined as “a form of marketing and distribution in

which the franchisor grants to an individual or company (the franchisee) the right to run a

business, selling a product or providing a service under the franchisor's business format and

identified by the franchisor's trade mark or brand.”4

In other words, the franchising is a different way of entry external markets under a well-known

brand that could bring more revenues than running their own business under an own brand.

Franchising gives the opportunity to the franchisee (who buys the franchising) of taking

advantage of economies of scale of some brand in another country, also the franchisee has to

pay a royalty payment to the franchisor (who sells the franchising) that is, usually, a

percentage of the franchisee’s revenues.

In conclusion, the franchisor not only sells intangible property to the franchisee but also insist

that the franchisee stand by the rules of the company.

4 http://www.franchisedirect.com/information/introductiontofranchising/definitionoffranchising/7/80/


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ADVANTAGES

The Franchising has some advantages for who decides to adventure on external markets, such

as:5

Your business is based on a proven idea. You can check how successful other franchises

are before committing yourself. And you can use a recognized brand name and

trademarks. You benefit from any advertising or promotion by the franchisor.

The franchisor gives you support - usually including training, help setting up the

business, a manual telling you how to run the business and ongoing advice. This because,

the franchiser wants that the brand worldwide maintain the same values and quality so

will give any support that franchisee would need.

Financing the business may be easier. As you will trade a well-know brand, the Banks

are more willing to lend money because they know that have more probability to have

success. You benefit from communicating and sharing ideas with and receiving support

from other franchisees in the network

Relationships with suppliers have already been established, so the franchisee will not to

worry about.

DISADVANTAGES

Although, the franchising also has some disadvantage that could pull away the investors on

this kind of entry in external markets, such as:6

Costs may be higher than you expect. As well as the initial costs of buying the franchise,

you pay continuing management service fees and you may have to agree to buy products

from the franchisor.

The franchise agreement usually includes restrictions on how you run the business. You

might not be able to make changes to suit your local market. You have to stand by the

main company’s rules.

Other franchisees could give the brand a bad reputation. You could suffer for trawling,

because if some other franchisee run badly their business, this will affect the image of the

brand that you are representing.

All profits are shared with the franchisor. So, the more you increase your profits the

more you have to share with the franchisor and the less you will have to invest.

5 http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1073791408&type=RESOURCES

6 http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073791408


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EXAMPLES7

The VIVAFIT is a great example of Portuguese franchising with international presence. The

VIVAFIT is a unique gym concept only for women, this concept is based on a 30-minute

exercise session per day that will help women to improve their quality of life, which means

VIVAFIT will guarantee results after 14 days if woman practice 30 minutes per day on their

gym. This concept will allow woman go more often to the gym and then reach a great quality

of life.

This business is already on Spain after fantastic results in Portugal and the tendency is to grow

up for another countries. The franchisee in Spain had the obligation to follow the culture and

values of the main company in Portugal and also to provide a royalty for using the brand

awareness and publicity.

As we can see, the franchising allows companies to use an existing concept in a country and

then use the success of this concept in their own purpose on another country. The risk of

failing will be much lower because already exists a proven idea.

4. JOINT VENTURES A joint venture is a contractual agreement between two or more parties with the purpose of

executing a particular business undertaking. It is similar to a business partnership but with the

main difference is that a partnership normally involves a long-term business relationship,

whereas a joint venture is based on a single business transaction. Joint ventures can be distinct

business units (a new business entity may be created for the joint venture) or collaborations

between businesses.

Succinctly, a joint venture correctly chosen and implemented can be a great way for small and

medium business to enter in foreign markets, and take advantage from opportunities (and

profits) that otherwise would miss out.

The parties have to sign a contract or an agreement where are specified their mutual

responsibilities and goals in order to avoid troubles later. All joint ventures also involve certain

rights and duties: the parties have a mutual right to control the enterprise, a right to share in

the profits, and a duty to share in any losses incurred.

7 http://www.bestfranchising.pt/Ficha.aspx?idfranquicia=1853


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ADVANTAGES

Joint ventures offer a number of advantages:

It is a way of minimizing the costs and risks associated with an entrance at a foreign

market (usually very high) because the investment cost and risk is shared with the local

partner.

There is a combination of complementary resources and know-how. The company can

benefit from the local partner’s knowledge of the host country’s competitive conditions,

culture, and political and business systems. Thus, the companies share the strengths and

increase competitive advantages in the marketplace (specialized staff and technology).

In some countries is the easiest or even the only way to enter at the market due to

political considerations or restrictions. As a result the companies have the opportunity to

enter at related business or at new geographic markets or gain new technological

knowledge.

It can be a flexible alliance, because it is possible to define the contract duration and

specifications, thus limiting your commitment and business’ exposure.

DISADVANTAGES

The major disadvantages in relation to the joint ventures are listed below:

Identifying the appropriate partner and agreeing appropriate contractual terms involves

time and efforts.

Can be difficult to manage the relationship with the foreign partner, because the shared

ownership arrangement can lead to divergences in the definition and control of

goals/objectives if they have different views of what strategy should follow.

There is the risk of the company gives control of its technology to his partner, losing it

competitive advantage and his partner becomes a competitor.

It can be difficult to integrate and coordinate the activities across national boundaries,

and that can influence the arising of situations where the partners do not provide enough

leadership and support at specific stages.

EXAMPLE

The Portuguese wine company Dão Sul is a good example of this form of entry. This company

created a joint venture in China to export its wines to this important country in Asia. The

company already exports to Brazil, Macau and China, but with this alliance they expect to

multiply its current orders by six to this last country. This alliance will also create the possibility

to increase the promotion of its wines and act like a gateway for its wines in this region.


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5. FOREIGN DIRECT INVESTMENTS Foreign Direct Investment is the form of entry in a market that occurs when a company (direct

investor) resident in one economy intends and establishes a relationship (often long-term

relation) with an enterprise (direct investment enterprise) that is resident in an economy

outside of the one of direct investor.8

To clarify what is explained above we will address more deeply the concept of Direct Investor

and Direct Investor Enterprise.

Direct Investor is an entity or enterprise resident in one country “that has acquired, either

directly or indirectly, at least 10% of the voting power of a corporation (enterprise)”9.

Direct Investment Enterprise is an entity or enterprise “resident in one economy and in

which an investor resident in another economy owns, either directly or indirectly 10% or

more of its voting power”.10

Having in mind the previous explanations, the basic types of enterprises relationships go as

follow:11

“Subsidiary is an enterprise in which the investor has control of more than 50% of the

voting power”;

“Associate is an enterprise in which the investor has control of at least 10% of the voting

power and no more than 50%”;

“Fellow enterprises are enterprises which do not have enough (or any) voting power in

each other to constitute FDI influence but have a common parent”.

ADVANTAGES12

Full control of resources and capabilities;

Facilities integration and coordination of activities across national boundaries;

Acquisitions allow rapid market entry;

Greenfield investments allow development of state of the art facilities and can attract

financial support from the host government.

8 OECD Benchmark Definition of Foreign Direct Investment, 4

th Edition, 2008. Pages 48-50





11 OECD Benchmark Definition of Foreign Direct Investment FOURTH EDITION, 2008

12 Exploring Corporate Strategy; Johnson, G.; Scholes, K.; Whittington, R.; 7

Th edition 2005, Prentic Hall


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DISADVANTAGES13

Substantial investment in and commitment to host country leading to economic and

financial exposure;

Acquisitions may lead to problems of integration and Coordination;

Greenfield entry time-consuming and less predictable in terms of cost.

EXAMPLE

An actual example of foreign direct investment is Portugal Telecom (PT) over VIVO in Brazil. PT

is a Portuguese company, in telecommunications industry, that had invest capital on VIVO, a

Brazilian telecommunications company. Actually, VIVO is being part of PT’s strategy, since a

couple of years ago, and this could be considered as foreign direct investment (“Direct

Investor”) because PT, as shareholder, has direct impact on the VIVO’s operations and this is

the essence of foreign direct investment.

Nowadays, this foreign direct investment could disappear from PT because Telefónica, who is

another company that made foreign direct investment on VIVO, wants to buy PT’s shares on

VIVO to increase their foreign direct investment on Brazil and then have higher returns.14

13 Exploring Corporate Strategy; Johnson, G.; Scholes, K.; Whittington, R.; 7

Th edition 2005, Prentic Hall

14 In this case we haven’t found any example of a Portuguese SME’s that have already followed an FDI

strategy so we chose to present an example of a large company to make clear this kind of entry mode.


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ANALYSIS OF EXPORTING/IMPORTING, FOREIGN DIRECT

INVESTMENTS AND JOINT VENTURES

The table below presents both weighted and not weighted results on exports, imports and

foreign direct investments (FDI). It shows that the 40% of SME’s that are active in importing,

exporting and FDI can be divided in three main groups: only importing and exporting 15%; only

importing 13% and only exporting 9%.

Not weighted number and weighted percentage of SME’s with various international business

activities in 2006-2008:

Frequency Percent

Mode of Internationalization Not Weighted Weighted

Only Import 1 470 13%

Only Export 830 9%

Only FDI 160 1%

Only Import and Export 2 300 15%

Only Import and FDI 74 –

Only Export and FDI 90 –

Import and Export and FDI 449 1%

No Import, or Export, or FDI 4 107 60%

Total 9 480 100%

Source: Survey 2009, Internationalization of European SMEs EIM/GDCC (N=9480).

All enterprises that are engaged in importing, exporting and foreign direct investments (FDI)

started on average with each mode of internationalization as followed:

Exporting Being subcontractor to foreign firms FDI

Importing Foreign subcontractors Technical cooperation

1994 1995 1998 1999 2000 2003

For the 2300 enterprises that are both importing and exporting 39% started first with

importing, 18% started first with exporting and 42% started with import and export in the

same year. This is an interesting result, as import is not always considered to be a serious step

in the internationalization process of firms. Many support measures are focused on supporting

the first attempts to export. It seems however that through importing, enterprises can learn

how to work in the international market, with international clients, other cultures and

languages. These experiences are very useful when it comes to export opportunities; the next

step towards exporting is then easier to make. Only about 2% of European SME’s are investing


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abroad. Half of these enterprises are also engaged in import and export and nearly all of them

started with importing and exporting before starting with investments.

Overall the figures for Portugal are aligned with the European average. This is due to e.g. the

recourses (energy, raw materials, etc.) purchased abroad (20 %) and the turnover gained from

exporting (5 % of total turnover). The share of SME’s gaining income from subsidiaries or joint

ventures abroad is significantly higher in Portugal (10 %) than the EU-average (5 %). The time

duration required for exporting is higher for Portugal, while the equivalent value for importing

is in line with the EU average.

Indicator Portugal EU - Average

10.1 Share of turnover from export (% of total) 5.00 5.58

10.2 Share of SMEs gaining any income from subsidiaries

and/or joint ventures abroad (%)

10.30 4.76

10.4 Number of days required to export 16.00 11.25

10.5 Number of days required to import 16.00 13.44

10.6 Share of SMEs exporting outside the EU-27 to all SMEs

(in terms of number of enterprises)

n/a n/a

10.10 SME enterprise had any own imports in 2006-2008 40.33 39.17

10.11 SME enterprise had any direct exports in 2006-2008 32.69 27.13

10.12 SME enterprise invested abroad in 2006-2008 0.32 3.68

Source: SBA Fact Sheet PORTUGAL 2009


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RECOMMENDATIONS

SME’s constitute a vast majority of the corporate environment in Portugal. Therefore, it is very

important to help companies understand the internationalization process. Export/Import,

Licensing, Franchising, Joint Venture and Foreign Direct Investment are some of the many

entry modes that exist. In this paper we decided to focus our analysis on the ones we consider

to be the most important ones.

As previously described, there are advantages and disadvantages for all of them, and there is

not a correct path to internationalize due to the fact there are many factors to take into

account. The economic and political environment, the market that the company decides to

enter, and the company culture are just some of these factors.

Bearing this in mind, it is crucial to make a deep analysis of the market that the SME wants to

enter, the product that is going to be traded, and the risk uncertainty linked with that move.

So, it is not an overnight decision, instead it should be an advisable alternative that SME’s can

consider and evaluate as a solution to their problems or as a growth opportunity. Nonetheless,

it is important to measure the pros and the cons of the vary modes of entry and chose the

most efficient one.


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CONCLUSIONS

Conquering a new market, establishing brands or achieving a certain level of recognition

sometimes requires large initial investments and may lead to a monetary loss in the beginning.

Usually only large companies can provide sufficient financial resources to proceed on their

own. SME’s on the other hand, have to pursue other strategies that match their financial and

economic situation.

Very important aspects in dealing with future problems in the SME area are

cooperative solutions. Such relationships can vary from research to production and from

procurement to sales. It does not necessarily need to be a partner company in the target

region, also cooperating with a company from the home market, which does not operate in

the same value chain, are appropriate.

Other options with low initial investments are licensing, franchising or joint ventures. The

benefits range from providing required local, technical and market-related know-how up to

activities performed by a motivated, independent contractor.

But all of these forms of a cooperative market entry include a high risk, especially if the partner

has the opportunity to become independent after having received enough know-how. It is

therefore important for the expanding company to keep control over the core competencies.

Large companies usually realize their expansion through mergers and acquisitions. These

takeovers are often too costly for SME’s and create a lot of difficulties. Different corporate

cultures and the underestimation of different legal and accounting standards are often

responsible for a failure of mergers and acquisition.


22

BIBLIOGRAPHY

Charles W. L. Hill; International Business: Competing in the Global Marketplace; New

York, McGraw-Hill, 2000.

Johnson, G.; Scholes, K.; Exploring Corporate Strategy; Whittington, R.; 7Th edition

2005, Prentic Hall

OECD Benchmark Definition of Foreign Direct Investment FOURTH EDITION, 2008.

Pages 48-50

Supporting the internationalisation of SMEs; European Comission

http://www.pmeportugal.com.pt

http://www.ensr.eu/index.cfm

http://ec.europa.eu/enterprise/policies/sme/index_en.htm

http://www.iapmei.pt/

http://www.portugalglobal.pt/

http://www.doingbusiness.org

http://www.franchisedirect.com

http://www.vision-box.com

http://www.bestfranchising.pt

http://www.vivafit.pt/

http://wapedia.mobi/pt/Internacionalização

http://www.oje.pt/noticias/negocios/dao-sul-cria-joint-venture-na-china-para-

aumentar-exportacoes

European SME’s under Pressure Annual Report on EU SME – sized enterprises 2009

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