Dr Mohammed Khalil
Expansion of SMEs into Emerging Markets
Inaugural lecture given by Dr Mohammed Khalil, marking his
professorship of International Trade Management at the Faculty of
International Business and Communication, Zuyd University of
Applied Sciences, on Friday 17 February 2017
Table of Contents
1 Introduction 4 2 Hidden markets, scarcity and leapfrog
technologies 10 3 Disrupt yourself or others will do it for you 16
4 Market, price, value in emerging markets 20 5 Entry modes ancient
and new 26 6 Where does the internationalization of SMEs’ knowledge
fall short? 32 7 Lines of research, research strategy and
management 40 8 Conclusion 52 9 A final word of thanks 54
About Dr Mohammed Khalil 57 Abstract 58 Glossary 62
3
Why are emerging markets relevant?
Some 85 per cent of the world’s population, 5.8 billion people,
live in emerging and poor countries. The gross domestic product
(GDP) of emerging countries is roughly 35 trillion US dollars,
nearly half of the world GDP. These countries are likely to account
for at least two thirds of world GDP growth for decades to come
(Vijay Govindarajan, 2012).
What are ‘emerging markets’ – which are also referred to as
‘developing countries’ or ‘developing economies’?
These are mainly large economies that in recent decades have
changed their economic and business environments fundamentally by
opening up to global capital, technology and talent. As a result,
their GDP growth rates have dramati- cally outpaced those of more
developed economies, lifting millions out of poverty and creating
new middle classes and vast new markets for consumer products and
services (Khanna & Palepu, 2010). Some even label these markets
as ‘emer- ging competitors’. The best known are the BRICS (Brazil,
Russia, India, China and South Africa). There are also the Next
Eleven (N-11), the eleven countries – namely Bangladesh, Indonesia,
Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, Egypt,
South Korea and Vietnam – identified by Goldman Sachs investment
bank as having a high potential of becoming, along with the BRICS
countries, among the world’s largest economies in the 21st century
(Martin, 2012). There are also smaller emerging markets in the
Middle East, North Africa, eastern Europe and sub-Saharan Africa.
Not all countries in these regions are interesting to multina-
tionals, but they are close to Europe and can be growth sources for
Limburg’s small and medium-sized enterprises (SMEs).
For Maguire, Hardy and Lawrence (2004), emerging markets are
markets comprising a multitude of emerging fields, new activities,
products and services for which shared rules and norms are not yet
in place.
Khanna and Palepu (2010) gave a structural definition of emerging
markets. Their definition is: ‘Countries where a myriad of
institutions required in product, labour and capital markets to
support simple or complex transactions between buyers and sellers
of goods and services are missing or poorly functioning.’ They used
the term ‘institutional voids’ to refer to lacunae created by the
absence of specialized intermediaries, regulatory systems and
contract enforcing mechanisms.
1 Introduction
Dear Board, Dear deans, Dear distinguished professors, Dear
honoured colleagues, Dear students, Dear family and friends
We live in an increasingly complex and exciting world of rapid,
let’s say exponen- tial change and unprecedented opportunities and
challenges. Challenges include climate change, urbanization and
population growth, and at the same time, aging and accelerated
disruptive technological change (Dobbs, Manyika & Woetzel,
2015). Most of the challenges are happening in emerging markets and
most of the opportunities will come from there. The centre of
economic activity and dynamics is shifting east and south to
emerging economies. Growth has moved to Asia, Latin America, the
Middle East and Africa. Today’s global trading system is a complex
web that sometimes links individuals who never meet each other, do
not speak the same language, are geographically distant and do not
have the same culture. The world, including emerging markets, is
more connected than ever before through trade and through movements
of capital, people and information (Dobbs, Manyika & Woetzel,
2015).
6 7
High-end products and services are widely available in emerging
markets for the very few who can afford them.
Emerging markets are the focus of multinationals based in developed
countries and of emerging multinationals in emerging countries. For
western multinatio- nals, emerging markets are growth drivers amid
the stagnation in developed economies. Emerging multinationals need
more room than their own markets to grow, and the focus on similar
emerging markets seems natural. There is also a difference in
attitude. Chen, Dollar and Tang (2015) concluded, for example, that
China’s outward direct investment is uncorrelated with a measure of
property rights or rule of law. Chinese investment in strong and
weak governance environ- ments is about the same, but its share of
foreign investment is higher in the weak governance states in
Africa (Chen et al., 2015).
For small businesses and households in emerging markets and in
other poor countries, advanced emerging markets are sources of
machinery, appliances and other consumer goods. The quality is not
that of European multinationals, but for many it resolves the
issues of affordability and accessibility. In addition to the
prospect of millions of ‘middle-class’ consumers in developing
countries looking for products from multinationals, there are
billions of aspiring poor people who are joining the
market economy for the first time (Prahalad, 2006) – and they are
looking for affordable, accessible products that meet local
features. A Nigerian ex-colleague once told me that 10% of
Nigeria’s population are rich by European standards. This statement
takes on a different meaning when one is told that, according to
the United Nations’ latest estimate (Worldometer, 2016), in Decem-
ber 2016 the population of Nigeria was 189 million.
Thus, this 10% is larger than the whole Dutch population, which is
around 17 million. No wonder multinatio- nals and emerging
multinationals target this segment with products that have global
features, global quality and global price. The question is, who
serves the other 170 million people in Nigeria and similar
potential consumers around the world? What are their needs? What,
where and how to serve them? And who’s going to do it?
Emerging markets represent an enormous opportunity, but one that
will not be easy to capture for companies that are based in
countries that have an abundance of everything, are
well-structured, and are not used to managing randomness and
volatility. It is possible that marketing, supply chain management,
laws and regulations, financing mechanisms, etc. as taught in
western business schools are not immediately applicable in emerging
markets. It is unrealistic to expect rich-world products and
services to have much of an impact on a large population in
emerging countries. Should it ever be necessary to innovate for
emerging
Suzana Rodrigues (2013) defined institutional voids as gaps between
formal rules and norms, and their enforcement in daily practice.
The quality of institutional systems in terms of capacity to
establish, communicate and enforce rules may differ from one
emerging country to another. These differences can be found even
between regions of the same country. Given these institutional
voids, it should not be surprising that many businesses and
entrepreneurial activities remain informal in emerging markets.
Informal businesses operate in an invisible economy. They are
unregistered and, as a result of these factors, they are not
subject to regulation. In some legal systems, the penalties for
breaking the law can be of little significance compared to the
gains obtained from transgressions. In 2006, the size of the
informal economies in Brazil, Russia and Mexico corres- ponded to
approximately 39%, 42% and 29% of GDP, respectively. It should also
not be surprising that institutional voids are misused and can be a
source of advantage for those companies, foreign or domestic, that
have local knowledge, privileged access to resources or other
capabilities that can help compensate for absent market
institutions (Khanna, Palepu & Sinha, 2005).
Economics share of world GDP at market exchange rates, %
75
70
65
60
55
50
45
40
35
30
25
Developed markets Emerging markets
Source: Economist, AT Kearney, Bloomberg, BP, dotMobi, Fortune,
IMF, UBS, UN, World Bank, World Steel Association, WTO
Forecast
8 9
References Chen, W., Dollar, D., & Tang, H. (2015). Why is
China investing in Africa? Evidence
from the firm level. Brookings Working Papers. Dobbs, R., Manyika,
J., & Woetzel, J. (2015). No Ordinary Disruption: The
Four
Global Forces Breaking All the Trends.The Perseus Books Group
Govindarajan, V. (2012). Reverse Innovation: Create Far from Home,
Win Everywhere.
Harvard Business Press. Jaarsma, M., & Lemmers, O. (2014).
Robust growth trade with emerging markets.
https://www.cbs.nl/en-gb/news/2014/29/robust-growth-trade-with-emer-
ging-markets.
Khanna, T., Palepu, K. G., & Sinha, J. (2005),
Strategies that fit emerging markets, Harvard Business Review,
83(6):63-74, 76, 148.
Khanna, T., & Palepu, K. G. (2010). Winning in Emerging
Markets: A Road Map for Strategy and Execution, Harvard Business
Press.
Maguire, S., Hardy, C., & Lawrence, T. B. (2004), Institutional
Entrepreneurship in Emerging Fields: HIV/AIDS Treatment Advocacy in
Canada, The Academy of Management Journal, Vol. 47, No. 5 pp.
657-679.
Martin, E. (2012). Goldman Sachs’s MIST Topping BRICs as Smaller
Markets Outperform. Bloomberg Business.
Morczec, K. D. (2014), Transactional cost in institutional
environment and entry mode choice. International Journal of Social
Behavioural, Educational, Economic, Business and Industrial
Engineering, Vol, 8, No 4.
Neubert, M. (2015). Early internationalisation of high-tech. Int.
J. Teaching and Case Studies, Vol. 6, No. 4, pp. 353–369.
Palepu, T. K. (2010). Winning in Emerging Markets: A road map for
strategy and execution. Harvard Business Press.
Prahalad, C. (2006). The Fortune at the Bottom of the Pyramid.
Pearson Prentice Hall. Rodrigues, S. (2013). Farewell:
Understanding the Environments of Emerging
Markets: The Social Costs of Institutional Voids. Erasmus Centre
for Emerging Economies [ECEE], Rotterdam.
Worldometer (2016)
http://www.worldometers.info/world-population/nigeria-
population)
markets? Why not just export products and services that already
exist and are successful? (Govindarajan, 2012). The answer is
because they are not affordable and accessible, and they do not
meet the customers’ needs.
Affordability and accessibility are probably the most important
components of an offering in emerging markets. Because of their
diversity, and the cultural aspect that these words together with
the word ‘quality’ have, they are very difficult to define for
emerging markets. The combination of institutional voids, limited
formal distribution networks, the often rigid business models
including the process of developing new products or services, makes
it very difficult for multinationals to expand beyond their natural
niche of global quality at a global price. On the other hand,
emerging giants in emerging economies are coming up with products
that match the concepts of local features and affordability, but
are still to come up with new business models to resolve the
accessibility issue. It’s not surprising that start-ups, or
companies with start-ups’ attitudes, in emerging markets have the
edge in bringing offerings to market that require new ways to turn
a profit. This makes emerging markets enormous living labs for
product validation.
What about the Dutch case?
The share of total Dutch exports to European countries remains much
larger than the share of exports to emerging markets. While still
small, the latter share, however, is gradually increasing. The
share of total Dutch goods exports to Mexico grew from 0.1% in 1996
to 0.7% in the first quarter of 2014. Germany’s share, on the other
hand, decreased from 28.5% to 24.4% during the same period (Jaarsma
& Lemmers, 2014).
Are complicated emerging markets that are not interesting to
multinationals an opportunity for the successful expansion of SMEs
in Limburg? After all, many of these markets are close to home.
Here, the question is: where, and in which segments, and with which
entry modes? And how to get ready for this jump?
I believe these markets do offer opportunities. And we can make a
difference by initiating and conducting research projects in
international trade management, more precisely on the expansion of
SMEs into emerging markets, and delivering new tools, models and
knowledge that can be successfully used by both SMEs and academic
colleagues.
10 11
right way. The more appropriate approach would be to trade off
expensive features and functions that customers don’t need for less
expensive ones that they do need. But this may prove to be
problematic for large companies with classic vendors in the field
who are not used to translating customers’ insights into product
characteristics, and for developers who grew up, studied and worked
in countries with abundance and seldom had to manage scarcity.
Creating for emerging markets, or imagining applications of
existing products in emerging markets, is probably a big challenge
to business models and strategies. To capture this opportunity in
emerging markets, co-creation and innovation are a must (Vijay
Govindarajan, 2012).
To illustrate this point, let’s consider examples from the health
sector and one example from maintenance, repair and overhaul (MRO)
in emerging markets. I’ve chosen these examples because they are in
line with Zuyd’s spearheads and with sectors that are leading in
the province of Limburg: healthcare, new materials, and life
sciences/food & nutrition.
It is wrong to think that in emerging markets only the wealthy care
about their health and spend a considerable amount of money on it.
People even at the bottom of the pyramid also care about their
health and spend a considerable amount of time and money on it. The
big issue is that they do it too late. The high level of illiteracy
prevents access to basic health knowledge, which leads to low
levels of preventive measures. There are 775 million illiterate
people in the world. For them, basic medication labels, thermometer
or blood pressure monitor readings, appliance usage, etc. are
inaccessible, which minimizes their chances of having a healthy
life. Given the low level of prevention in emerging markets, often
the first access of low-income people to healthcare is diagnostic
and cure (Banerjee & Duflo, 2011). This late access is
expensive both financially and socially. Given the lack of
financial means and the weaknesses in transport infrastructure,
care delivery systems and health insurance, the effective total
cost can be much higher for low-income than for high-income people.
Family members and friends contribute their time and money. Worse,
families often face financial catastrophe if wage-earners fall ill.
This is a nightmare for governments and NGOs. Here, there is a
great opportunity for e-health systems and smart medical
systems.
The first example is diabetes. Globally, there are 415 million
people living with diabetes. By 2040 this figure will rise to 642
million (IDF, 2015). Eight of the top 10 countries for diabetic
population size are emerging markets: China, India, Brazil, Russia,
Mexico, Indonesia, Egypt and Pakistan. As many as six Middle
Eastern countries are among the top 10 countries globally in terms
of type 2 diabetes
2 Hidden markets, scarcity and leapfrog technologies
The perception that emerging markets smaller than BRICS are not
viable markets for SMEs fails to take into account the hidden
market that is not visible to regular marketing studies. Given
institutional voids, marketing studies are often difficult to carry
out using standard marketing research methods, and if they do use
these methods, they are not reliable. Another aspect that often
strengthens this perception may be the application to SMEs of
conclusions from business case studies done by western
multinationals. A market that is not relevant to multi- nationals
does not mean it is irrelevant to SMEs. Global product thinking,
net present value, internal rate of return, required minimum
turnover and required payback time used by the corporate sector for
investment decisions are based on price and quantity assumptions
that are often not adapted to the contexts of emerging economies.
The analysis may lead either to too optimistic conclusions, that
are often not consistent with the reality on the ground, or to
‘keep away’ decisions.
Any visit to any emerging market confirms a simple fact: the
quality and quantity of products and services from several sectors
that are available to the majority of the population are generally
low. This massive segment of the global population – along with its
massive market opportunities – is often hard to reach via
conventional distribution, credit and communication, and thus
remains largely inaccessible or even invisible to the corporate
sector (Prahalad & Hart, 2002). The informal economy, which by
some estimates accounts for 40–60% of all economic activity in
developing countries, is dominant. In these informal markets, the
word ‘invoice’ or ‘tax’ may surprise or frighten many. Thinking
that downgrading products is the way to balance the affordability
requirements of emerging markets with realizing acceptable margin
levels is probably not the
12 13
their office, allowing the manufacturing process to be done in
shorter times everywhere in the world (Molitch-Hou, 2015). This
would enhance job creation and innovative entrepreneurship with new
business models.
The third example is urinary incontinence. It affects 200 million
people world- wide (WHO/49, 1998). People living with the condition
are often too embarrassed to discuss it with others, but it is also
difficult to hide. For many it is a taboo. It is not to be spoken
aloud (Vulker, 1998).
Consider any rural area in any emerging market and a hypothetical
women suffering from urinary incontinence. Like a woman in a city
with money and access to facilities, she would face costs for adult
incontinence pants and laundering clothing and bed sheets. But here
there is a difference: she doesn’t have many clothes or bed sheets.
There is no shop close to her where she can buy adult incontinence
pants. And if they were available, she would probably not be able
to buy them regularly. And to wash her clothing and sheets, she
needs water and free time. But access to water is limited as she
has no running water at home. She could have a washing machine. But
there is also a limitation: she is one of 1.2 billion people around
the world with no access to electricity. The best solution would be
to have access to affordable, reliable adult incontinence pants or
to any other means that would help her to manage the consequences
of her urinary incontinence. But this is not possible today.
Corporates dominating the inconti- nence business focus on the
urban sector, especially the middle and upper middle classes, and
seldom venture into the vast rural areas and their huge populations
(Gouher, 2016).
Expanding the market footprint for existing products to rural areas
will require innovation in designing a marketing channel strategy
in rural emerging markets. This effort may be left to local
entrepreneurs, as they know the market and the culture. A business
case that takes into account research on and the development of
materials and redesign efforts to adapt the incontinence pants to
rural needs considering cultural constraints, may lead to the
conclusion that the gain would be marginal. Solving such societal
problem requires a niche thinking that is not natural for
corporates. Is this something for SMEs in developed countries? How
to build a system that will make this locally possible and develop
a long-term profitable business?
Inconsense smart, a start-up in Heerlen that collaborates with
Zuyd, proposes a system for healthcare facilities to manage
incontinence materials and human resources by providing real-time
information on saturation levels of incontinence pants (Inconsense
smart, 2016). The system alerts staff when changing is
needed.
prevalence. These countries struggle to deal with such a large
patient population requiring medical attention, in addition to the
silent effects of high rates of undiagnosed cases. In Africa, more
than two thirds of people with diabetes are undiagnosed (IDF,
2015).
Affordable and accessible medical devices would help to solve the
problem. In addition to blood glucose (blood sugar) monitoring
tools, home blood pressure monitoring may be useful in the
management of many patients with diabetes (White & Schick,
2004). The accessibility, affordability, reliability and ease of
use of those two monitors would result in less need for clinic
visits and, possibly, reductions in the costs associated with
complications related to diabetes. At the moment, I don’t know
whether such medical devices that can be used by illiterate
populations exist. An SME in Morocco linked to a micro-electronics
and medical devices cluster is developing a smart blood pressure
monitor for North and West African countries. This SME told us that
they need to collaborate on design, certification and scaling up
production. We recently initiated a discussion about developing a
case study on developing a strategic alliance with Dutch
SMEs.
The second example is from dentistry. In emerging markets, the
wealth of the middle class is growing and middle-class consumers
are increasingly willing to invest in personal dental care.
Low-income people, however, have a low use of preventive care
means, such as toothbrushes and toothpaste, and a high con-
sumption of low quality sweets, which of course results in serious
tooth decay. In order to improve their appearance, many people in
their fifties have removable full dentures for both jaws made by a
dental prosthetist, or through a dentist, if there is one in the
neighbourhood. Although this ‘solution’ is low cost, the lack of
trained, certified dental prosthetists and the low quality of
products, leaves many people with problems eating, talking or
laughing, or pain and wounds inside their mouths.
Can these issues of accessibility, affordability, quality and costs
of dentistry be solved for middle-class and low-income people in
emerging markets? 3D printing and the availability of materials
that can be used to 3D print the bases of dentures will
revolutionize the denture manufacturing process. The creation of
perfectly tailored dentures and baseplates from patient scans will
make the denture production process both quicker and more accurate.
The skills that prosthetists must have and the training of
prosthetists will be changed and simplified. It may enable the
creation of dental prosthetics clinics or dental prosthetics
laboratories closer to customers in areas with low or no dental
services in emerging markets. This would create incredible
possibilities for patients, as dentists and dental prosthetists
would be able to 3D print final dentures at their office or close
to
14 15
Nobody can solve these issues with existing offerings. Economies of
scale, as multinationals define them, reaching customers, and
affordability will all be challenged. Innovation in products and in
business models is required.
What must be done to make technology-based SMEs in Limburg’s region
think beyond Germany and Belgium and consider the growth
opportunities that emerging markets may offer them?
References Banerjee, A. V., & Duflo, E. (2011). Poor
Economics: A Radical Rethink of the Way to
Fight Global Poverty, Public Affairs, New York. Gauntlett, C.
(2013). Diabetes in the Middle East and North Africa: a high
growth
pharmaceutical market receptive to innovation,
pharmaphorum.com/views-and-
analysis/diabetes-in-the-middle-east-and-north
africa-a-high-growth-phar-
maceutical-market-receptive-to-innovation/
Gouher, A. M. K. (2016). The Dynamics of Rural Marketing in
Emerging Market. The Journal of Global Business Management, pp.
Volume 12, Number 1.
Govindarajan, V., & Trimble, C. (2012). Reverse Innovation:
Create Far from Home, Win Everywhere. Boston, Harvard Business
Review Press.
Harford, T. (2006). The undercover economist. London: Hachette
Livre UK Company. IDF (2015), Diabetes Atlas 7th Edition,
International Diabetes Federation. Inconsense smart (2016),
http://www.incosensesmart.eu/ Molitch-Hou, M. (2015). Dentures Get
3D Printed Boost with DENTCA’s FDA Approval.
Retrieved from 3D Printing Industry:
https://3dprintingindustry.com/news/
dentures-get-3d-printed-boost-with-dentcas
fda-approval-55274/.
Prahalad, C. K., & Hart, S. (2002). The Fortune at the
Bottom of the Pyramid. Strategy+Business 26: 54-67.
Vulker, R. (1998). International Group Seeks to Dispel Incontinence
Taboo. JAMA, pp. 951-53.
White, J. R., & Schick, J. (2004), Home Blood Pressure
Monitoring and Diabetes, Clinical Diabetes ; 22(1), pp.
28-31. http://dx.doi.org/10.2337/diaclin.22.1.28
http://clinical. diabetesjournals.org/content/22/1/28.
WHO/49 (1998). Press Release,
http://www.who.int/inf-pr-1998/en/pr98-49.html
Could this system be adapted to the needs and possibilities of
patients with urinary incontinence in emerging markets? Inconsense
smart may not be interested in or have the means to work on this
issue, may even not have a slight idea that opportunities exist for
them in emerging markets. But somewhere in emerging markets there
is a possible partner that can co-develop it, adapt it for the
local market. How to find that partner? How to develop a business
with it? What is the role of local knowledge centres, the local
government and NGOs in the process?
The last example is from maintenance, repair and overhaul (MRO).
The tendency in emerging markets is to extend ‘indefinitely’ the
lives of machines with limited MRO. Due to the difficult access to
genuine new spare parts, the circular eco- nomy is almost a way of
life in emerging markets. In the absence of a rapid solution to
spare parts scarcity, ‘we manage’ is what is said to be the
solution. In 2010, during a flight from Paris to Bamako in Mali, my
neighbour, who happened to be the head of an official Chinese
delegation, told me: ‘This continent [Africa] has one huge issue:
maintenance. We sell many machines and appliances here. Maintenance
is also our problem: organizing our after-sale services for that.
We are too far for this. Maintenance business, as a recurrent
service, is probably larger than the business of selling machinery
to this continent.’ I have recently seen the creation of SMEs in
emerging markets with ambitions to be specialized in maintenance
services including on demand ‘spare parts’ for machinery,
appliances, etc. The idea is to use 3D printing for rapid
prototyping, testing spare parts and producing them even for a
tempo- rary usage. Replicating parts without moulds is a
revolution. A director of such a company told me: ‘If in Europe
manufacturing is the standard, here repairing is the standard. With
3D printing, we will have the mastery of maintenance, repair and
overhaul even for aircraft. We have the urgent needs, the talents
and a favourable total cost of ownership when compared to the cost
of downtime. There is a huge market for customized manufacturing
and small series here. Additive manufacturing is a big
enabler.’
Now, what do all four examples above have in common?
1. Need for access and affordability. 2. All are niches that can be
served in one region of a country at a time. 3. Need for innovation
or incremental innovation in products, services and
business models. 4. Possibility of technology leapfrog.
16 17
looking to serve the real local market for global quality with
local features and local prices. These SMEs, when technology based,
often do more than box shifting and are adding local value. They
know about market needs, issues and evolutions and reach market
layers that the vendors of multinationals never meet. Lacking
technology or access to key components, they are frustrated that
they cannot deliver solutions with the features and prices their
market is asking for. I often heard the following from SMEs: ‘We
need enablers to offer fit for use solutions. We need consultative
sellers more than vendors. We are ready to invest to meet the
required norms.’ They complain that the highest level they can
discuss with at a multinational is a vendor, who is more interested
in an order than in their vision.
Vendors from multinationals, often local people, know all that but
they can’t do anything that is not aligned with the central
strategy. One regional general manager of a multinational once told
me about his vendors in an important emerging market: ‘My vendors
have two competencies: product identification codes and prices.
They do not need more here. These new technology-based SMEs in
emerging markets cannot afford the quality offered by
multinationals, are price sensitive and have a low annual volume.
They are not interesting.’
There is a new reality that is overlooked by many western
companies: access to technology is not as complicated as it used to
be, and the same applies to technical knowledge. Many emerging
markets have good universities and a new generation of talents
dreaming of delivering meaningful solutions in healthcare,
education, energy, maintenance, food and water. While I was working
for a multinational, a director of a value added reseller of high
technology products in an emerging market told me the following
story that illustrates the situation: ‘We’ve been using and
distributing products from a multinational for 20 years. Fifteen
years ago we told our partner that one of their good selling
products has to be redesigned to meet the local feature
requirements, reduce the price and reach more market segments. We
were told that the product is global and that redesigning a product
for a region and small market was costly. Five years ago we told
our partners that we are going to redesign it ourselves. The
partners gave us the authorization and warned us that it was an
impossible mission. We did it with success. With our product we
could reach other segments of the market. The warranty we offer and
services for repair and maintenance that we are able to deliver
play an important role in the value we deliver. We agreed to
rebrand it to our local brand. What had changed in 10 years? New
talents, information technology, closeness to our customers and our
focused competencies’. The threat to western companies operating in
emerging markets is coming from other advanced emerging markets
that have been through similar situations. An SME owner in an
emerging market who, for years, had sourced products from a
European multinational for his projects, expressed this as follows:
‘When we could
3 Disrupt yourself or others will do it for you
I believe that for emerging market coverage, multinationals segment
countries into strategic, important, relevant and less relevant
markets.
- Strategic countries are those where investments are made in
production and even R&D. These countries have a large internal
market, such as China, India, Brazil and Russia. Years ago, a
regional general manager of a multinational told me: ‘We set up a
production facility in a country where there is a possibility to
make ten.’
- Important countries are those where a national sales organization
is installed and often operates regionally to serve several
neighbouring countries.
- Relevant countries are those where carefully selected
distributors are the channels to the market. Resellers, retailers
in less relevant countries, have to address their requests to
accredited distributors in their region.
This segmentation is often done according to the expected turnover
in each country. The turnover threshold is used for the entry mode
adaptation in the spectrum from export to wholly owned subsidiary.
Marketing theory advises using relationship marketing or
consultative sellers (Hanan, 1999) for key customers, and
transactional marketing for less important customers. This is
consistent with the policy of many multinationals of serving the
global segment with global features, global quality and global
price. Multinationals typically optimize their operations at a
global level by standardizing product characteris- tics,
administrative practices and even pricing, all of which can hamper
their flexibility. To realize this on the ground, thousands of
vendors are trained and spread around the globe for
business-to-business activities. Requirements related to minimum
order quantity, volume sale and global business practice (Schuster
& Copland, 2007) mean that these vendors seldom deal with local
SMEs
18 19
References Hanan, M. (1999). Consultative Selling, The Hanan
Formula for High-Margin Sales at
High Levels. New York: AMACOM. Harford, T. (2006). The undercover
economist. London: Hachette Livre UK Company. Salim, I. (2014).
Exponential Organizations: Why new organisations are ten times
better,
faster…. New York: Diversion Books. Shi Dongwei, V. P. (2016).
Cross-border e-commerce helps SMEs reach global
markets. Retrieved from tradeforum.org:
http://www.tradeforum.org/CrossborderecommercehelpsSMEsreachglobalmarkets/
Yi, S. X. (2003). The Haier way: the Making of a Chinese Business
Leader and a Global Brand. Homa & Sekey Books.
not speak English, had difficulties travelling far, had very
limited access to currency, and Chinese and Indian suppliers were
not reliable, multinationals made the rules. Now we have to
discuss. We discus prices when there is nothing else to
discuss.’
When western multinationals operating in emerging markets come up
against competition, it often comes from emerging multinationals
with different business models. Zhang Ruimin, CEO of Haier, one of
the world’s leading household appliance brands, cared about the
least significant customer and once said: ‘No matter how small they
are, they are ours to keep’ (Yi, 2003). He also said: ‘If we can
effectively compete in the mature markets with such brand names as
GE, Matsushita and Philips, we can surely take the markets in the
developing countries without much effort’ (Yi, 2003).
There is a large underserved segment in emerging markets with
aspirations and needs that most current multinationals’ products
and business models do not meet. Fortunately, nowadays small teams
can do big things (Salim, 2014). I believe that technology-based
SMEs that are flexible, focused and open minded can outperform
multinationals in some well-defined segments in emerging markets.
Building an ecosystem where SMEs in developed countries partner
with SMEs in emerging markets to add economic and social values
will be an accelerator of shared growth.
As Steve Forbes sees it: ‘Disrupt yourself or others will do it for
you.’ This applies to every market geography and industry.
20 21
multinationals based in China, India, Russia, South Africa, Turkey
and other countries, ‘shop and ship’ local importers, and the
dynamic informal market combined with the local scarcity of
products fills the gap. This system provides consumers with both
affordability and accessibility – the two most important factors
for low-income populations and a good share of the new middle
class. The quality and security of the imported products is often
low, but the weakness of the legal and regulatory framework that
protects the consumers maintains the flow of low-quality products
that, in the end, are not cheaper when considering the total cost
of ownership (TCO), that is, the combination of the purchase price
of an asset plus all other costs for operating and maintaining it,
minus any income received over the its lifecycle (Branch, 2013).
This applies to many ‘consumer’ sectors where products can be found
in informal markets, such as home comfort, entertainment,
communication, transport and traditional medicine.
Two examples of high-end products with substitutes are medicines
and gas water heaters. Most countries in Asia, Africa and Latin
America use traditional medicine to help meet some of the primary
healthcare needs. In Africa up to 80% of the population uses
traditional medicine for primary healthcare. The efficacy and
safety of medicinal plants is not always certain but it meets the
affordability, accessibility and availability criteria. As for gas
heaters, they normally need to be professionally installed and
properly looked after by qualified and registered service agents,
or gas heating specialists. The combination of the untraceable
origin of heaters, a lack of professional installers and qualified
and registered service agents, and a lack of maintenance culture
leads to unsafe situations. House fires and deaths occur regularly,
with almost no consequences for the importers, distributers or
installers. The cost of non-quality, or the cost of doing things
wrong, is here borne fully by the customer. This is not that
strange when quality is defined as ‘conformance to requirements’
and that the only require- ments that seem to exist at the level of
the consumer in emerging markets are affordability and
accessibility. No wonder that the concept of TCO is perceived
differently in emerging than in developed markets. While a lower
TCO is better value for money in the long term, difficult access to
financing and short-term thinking makes it difficult for people in
emerging markets to think beyond purchase price. In emerging
markets, the concept of product life is very relative. If, for
example, any of these low cost products don’t work, they will try
to repair them or buy substitutive ones. This is part of intuitive
risk management related to not knowing or not caring whether the
seller was reliable or not.
4 Market, price, value in emerging markets
Large multinationals prefer to focus on large, well-structured and
researchable markets. Marketing studies, business cases, business
plan tools and proven entry modes are feasible for these markets.
Markets where these proven processes are not possible or are
difficult to apply get low priority. An absence of precise data on
the size and the boundaries of markets or the low relevance for
multinationals should not be mistaken for an absence of
opportunities for SMEs. The markets and opportunities that
multinationals are not serving are not per se those that SMEs
cannot serve. The issue is often how to identify, unlock and
develop these opportunities. It is a matter of accurate market
selection in line with entry mode possibilities and readiness to go
to these markets. Because SMEs are often specialized, market
definition is probably a better wording than market selection. For
technology-based SMEs, expanding beyond their home market, product
and technology, applications, price level, quality, customer groups
and finally regions are all criteria to consider (Simon, 1996).
Probably the most important when considering expansion into
emerging markets, is the ecosystem for own products or industry:
capable local SMEs, talent readiness, clusters, etc. Successful
local technology-based SMEs are more often than not strong in small
and narrow markets, usually due to market constraints rather than
by strategy or design. One of their characteristics is that their
customers cannot find or do not seek a substitute for their
offering.
This concept of finding a substitute is very important in emerging
markets. It is often a problem that multinationals face when
operating there: low- and middle-income layers look for substitutes
for products that are served to the top layer but that the former
cannot afford. They often find them, offered by local producers,
sourced from other more advanced emerging markets or in the form of
counterfeits that are locally made, imported or smuggled. Several
emerging
22 23
their possible low literacy or non-acquaintance with advanced
technologies? Would the TCO argument, namely that farmers could
have their investment paid back within few months, be relevant if
they cannot finance the system in the first place? This being a
societal and environmental solution, what could be the possible
roles of the government, NGOs and local knowledge institutions in
the business development and delivery of economic and societal
values?
I faced these questions on the ‘value–quality–price’ triangle first
hand as a business creation manager in new growth markets for
multinationals and as director of my own small enterprise. More
often than not, the discussions with local companies were mainly on
price because they lacked the background to understand quality and
value. We had to educate them, and this led to very good results.
Local government structures supported capacity building on this
aspect of value adding. As a representative of a renowned
multinational, decision making units at governmental levels were
easy to access. Their expectation was invariably focused on foreign
direct investment or, when this was not possible, partnering with
selected SMEs that were local ‘high value’ market leaders for local
or regional content generation. Recommended local SMEs often didn’t
pass the partner assessment tests. In many cases, relationships had
to stay at the transactional level, and only when the business
volume allowed it.
I have always seen these local technology-based SMEs as potential
good partners for SMEs in developed countries wanting to expand
into emerging markets. They know the local needs, have access to
these markets, have access to talents when based in regions with
good universities, and benefit from governmental support because of
their ability to generate qualified jobs for graduates and to
contribute to exports. Some SMEs, supported by government policies,
have the ambition to become OEMs (original equipment manufacturers)
to serve multinationals regionally or even to become original
design manufacturers with manufacturing subcontracted to more
advanced new growth countries such as China. To grow they need
industrial experience, access to a developed supply chain that is
willing to serve them, a name and respected references. SMEs in
developed markets may technically be able to meet several urgent
demands in emerging markets, but they lack customers’ insights to
develop locally fit-for-use products and services, access to
markets, knowledge of how to manage local institutional voids and
environmental contexts, and a name and respected references. This
complemen- tarity and potential interdependence between well
selected SMEs in developing countries and SMEs in developed
countries may be the ingredients for building partnerships capable
of solving scarcities of local products and services. To bring
these SMEs together, an ecosystem that creates confidence and
legitimacy and speeds up the process is needed. Local government
and NGOs may be involved to
Fortunately, concepts of quality, value and price are perceived
differently in sectors where expertise is not available to the
informal market. This is the case, for example, for healthcare and
areas where productivity and return on invest- ment are monitored.
An absence of substitutes for global products, with global features
and global prices, keeps services using those products limited to
developed regions or to top layers of society. This is the case
with, for example, medical imaging, dentistry, hearing and vision,
and many measurement tools mainly in healthcare, agriculture, etc.
These are areas where innovation and the adaptation of existing
products will lead to new market creation, delivering high-quality,
reliable products to huge populations of customers. Nobody, not
even someone who is very price sensitive, wants to buy an
unreliable blood pressure monitor, bad quality hearing aids or
deficient wheelchairs. Affordability, accessibility, quality of the
products – or better, the products of the products – closeness to
the customer and after-sales services are key success factors. I
argue that these are golden opportunities for technology-based
SMEs.
Let’s take an example from measurement in agriculture. More than
2 billion people – a third of the world’s population – depend
on food produced by small farmers (IFC, 2013). Water management is
of critical importance to small farmers in many developing
countries. They depend on well water, which in extremely dry areas
is depleting faster than replenishment can occur, and must make
decisions every day – whether to irrigate, when to irrigate, how
much to irrigate, whether irrigation does what it is expected to
do, whether irrigation sets need to be adjusted. The quality of the
decisions has an impact on yield and profit as well as the water
reserves and energy and fertilizer consumption. Imagine an SME in
Venlo or Wageningen that offers a hardware and software field
monitoring solution that is easy to install, quick to relocate,
maintenance-free and modular, and that frequently measures and
tracks key parameters for irrigation manage- ment. Imagine that the
delivered data are presented in a way that is usable and actionable
by farmers who are not acquainted with technology and have limited
literacy. Imagine that the solution is affordable or financeable
and that it pays for itself quickly by reducing water consumption,
pumping costs and the use of fertilizer, while increasing yields.
Presented like this, this system is a dream solution for every
farmer in an emerging market who uses irrigation and faces water
scarcity issues.
If this system has to go to an emerging market, which one to select
and enter first? If an entry node is found, which entry mode to use
and with whom to have the right pricing, volume and margins? What
levels of resources, risk and control are compatible with the SME’s
characteristics and with post-entry development targets? How to
reach farmers and convince them to acquire this system
despite
24 25
References Hermann, S. (1996) Hidden Champions: Lessons from 500 of
the World’s Best Unknown
Companies, Harvard Business School Press, Boston Massachusetts. IFC
(2013). The power of partnership. International Finance
Corporation (IFC) annual
report. New Zealand Government (2013). Total Cost of Ownership: an
introduction to
whole-of-life costing. A guide for government agencies and
suppliers. MBIE-MA- KO-7741817.
Radjou, N., & Prabhu, J. (2016). Frugal Innovation: How to do
better with less. Profile Books, Public Affairs, The
Economist.
guarantee market creation and development. This may require the
design of a new entry mode and new business models. The export of
goods, intellectual property, licences, business models and
franchising are not always immediately applicable, as solutions
that meet the accessibility and affordability requirements usually
have to be developed. Equity entry modes may not fit either, given
the characteristics of SMEs, at least in the early stage of their
expansion.
This adaptation requirement is also experienced by multinationals.
In early 2000, when China and India began their rapid growth,
Siemens initially attempted to sell its sophisticated high-end
products imported from Germany. But Chinese and Indian customers
found them too expensive, and too complex to operate and maintain.
Worse, these high-quality products often broke down because of
local weather conditions and usage patterns. Christophe de Maistre,
who ran several business units for Siemens in China, said: ‘We were
humbled. For over a century Siemens had equated quality with
technological sophistication. China and India forced us to reframe
the notion of quality in terms of value perceived by clients in the
local context. We realized our Indian and Chinese clients wanted
“good enough” products that are simpler and cost-effective to
install, operate and maintain.’
Later, Siemens introduced a formal innovation strategy called
SMART: Simple, Maintenance-friendly, Affordable, Reliable and
Timely-to-market for a mid-range product line that sells to
cost-conscious European and US clients (Radjou & Prabhu, 2016
).
Serving emerging markets requires the solution of a system with
three variables – value, price and quality – taking into account
local market boundary conditions.
26 27
Hundreds of years BC, trade flourished in ancient Persia. A road
network that linked the coast of Asia Minor with Babylon, Susa and
Persepolis enabled a distance of more than 1,600 miles to be
covered in a week (Frankopan, 2016). Persians took charge of the
maintenance and repair of the road system. Alexan- der of Macedon,
who assumed the throne in 336 BC, moved east as Europe offered
nothing at all: no cities, no culture, no prestige and no reward.
Under the Han dynasty (206 BC–AD 220), China expanded west. Much
later, traders came from as far as North Africa to source in China.
Rare and high-value goods were transported over long distances,
crossing mountains and deserts. Silk, a luxury good, was the most
valuable product. Easy to trade everywhere at that time, silk
became an international currency. This led to the birth of the Silk
Roads. The caravans that used these roads were clusters of small
and medium-sized traders. Investors back home took high risks, used
limited resources, expected high returns and had limited control
over the sourcing process.
Beyond international flows of goods, international trade leads to
the internatio- nalization of other aspects. For example, as early
as the eighth century Muslim expansion had brought a vast web of
trade and communication routes under their control, with the west
of China linked to North Africa and to Andalusia in Spain.
Brilliant minds, many of them not Muslims, came to Baghdad and to
centres of academic excellence in Central Asia, such as Bukhara in
Uzbekistan, as well as in Islamic Spain and Egypt. Research in
mathematics, astronomy, optics, physics and medicine were driven by
practical needs. This was motivated by military needs, building,
water adduction and religion, like positioning Mecca for prayers.
The translation of many references and from many advanced languages
at that time, such as Greek and Indian, was flourishing. The
translated texts were used by scholars for their research. All this
progress and all these innovations and new ideas were intimately
linked to international trade, broad-mindedness, openness and a
passionate zeal for progress (Frankopan, 2016).
Later, in the fifteen century, there was a need for a labour force
in colonies. The slave trade was born. Between 1450 and 1850, at
least 12 million Africans were taken across the notorious Middle
Passage of the Atlantic, mainly to colonies in North America, South
America and the West Indies. The slave trade created and then
relied on a large support network of shipping services, ports, and
finance and insurance companies. New industries were created,
processing the raw materials harvested or extracted by slaves in
the Americas. The slave trade contributed significantly to the
commercial and industrial revolutions (Hartford, 2016).
5 Entry modes ancient and new
Expanding beyond borders, doing business away from the own culture,
is nothing new. Entry modes have evolved from military expeditions
organized by dynasties to expand their territories, to today’s born
global micro-enterprises serving customers around the globe through
channels or platforms they do not own. Trade has evolved from
sending buyers to far countries to source valued products for own
local markets, to e-commerce platforms through sending vendors
around the world, and having distributors or agents where required.
Until recently, products were designed in western countries with
global features and manufactured in other countries where it was
competitive to produce. The availability of a reliable supply
chain, qualified labour, reliable communication systems and a
reliable financial environment was, and still is, key when
selecting where to source, produce or distribute. Early Persian,
Roman, Chinese and Arab dynasties, and later states, created these
conditions where they were absent. The four factors discussed in
recent literature on entry modes – namely return, risks, resources
and control – can be traced back to entry modes used millennia
ago.
28 29
Changes in the global business environment, the multiplication of
international free trade agreements, improvements in global
transport networks and lower communication costs have substantially
reduced barriers to international trade, making global markets
accessible even to the youngest and smallest of firms. This has
added a layer of complexity to market selection, and until recently
entry modes studies focused on multinationals based in developed
countries. It may be frightening for SMEs to know that
multinationals, despite their ability to change the contexts, face
difficulties expanding into countries with institutional voids,
unskilled intermediaries, and important gaps in the development of
their communication, energy and transport infrastructures (Guillen,
2012; Luo, 2001; Tepjun, 2016).
Is there an opportunity for SMEs in the developed markets to expand
into and grow in emerging markets?
I think the answer is yes, and I have at least three arguments to
support this:
1. Flexibility, agility: Although many imported products and
services in emerging markets are controlled by large multinationals
and, increasingly, by emerging multinationals, there are numerous
highly specialized niche markets that are not accessible or not
interesting to multinationals. SMEs that are active in a relevant
niche such as healthcare, education, manufacturing, food
processing, IT solutions, logistics or financial services can find
ways to these markets and succeed in them. It is true that
multinationals enjoy superiority in marketing and production
capabilities, and rely on the benefits arising from economies of
scale and brand name. But it is also true that many multinationals
are acting in emerging markets as they do in the western market,
and rather than adapting to local conditions, they are forcing
business models based on practices established and proven in the
markets of the developed world. Their success often remains limited
to global products that are of global quality and have global
prices. Given their flexibility, agility and capacity to adapt,
SMEs can address a niche of consumers in a region of an emerging
market that will generate enough business for them to grow.
2. Small size may matter: Fortunately, SMEs are not smaller
versions of big businesses. For most multinationals, the name of
the game is selling huge volumes (economies of scale). As an
ex-colleague at a multinational once told me: ‘The effort to sell
100 pieces is almost the same that is required to sell one million.
We go where one million is possible.’ This leaves market niches
open to SMEs that have good insight into customer needs and can
develop finely tailored product and service offerings selling on
value, not on price. By focusing on niche
For centuries, international trade served high-quality global
products to high- end market segments. Requirements of the economy
of scale that came with industrialization meant that large
companies extended their market reach to the middle class. The form
of international business operations, or entry modes, lay between
simple exports on the one hand and wholly owned foreign
subsidiaries on the other.
Much academic research was done in the twentieth century on the
entry modes that companies use to supply markets, as they have a
major influence on success overseas. Entry modes were studied
extensively and several theories were developed. Three broad
approaches have been used to establish the most appropriate foreign
market entry mode: the economic approach, the stage-of- development
approach and the business strategy approach (Young et al., 1989).
The most well-known theories are transaction cost economics
(Williamson, 1985, 1991, 1998), the eclectic or OLI paradigm
(ownership, location, internationaliza- tion) (Dunning, 1988),
institutional theory (North, 1990; Scott, 1995), social network
theory (Adler & Kwon, 2002; Coleman, 1990), resource-based
theory/ organizational capability (Barney, 1991; Agarwal &
Ramaswami, 1992) and bargaining power (Boddewyn & Brewer,
1994). Studies were done mainly to identify the internal and
external factors that influence the entry mode decision process and
how companies actually make an entry mode decision for a given
market. Theories analysed the link between the level of resources,
risks, returns and control, and the choice of non-equity or equity
modes ranging from export to wholly owned subsidiary.
30 31
segments, SMEs are able to offset their limited size and resources.
The small size of these segments also means the marketing approach
can be different, leading to budgets that are in line with what
SMEs can afford.
3. Closeness to customers: Networking is an important success
factor when entering emerging markets. Having local partners allows
firms to gain knowledge and skills as well as access to markets
that require high resources and capabilities (Spence, 2003).
Networking is also key to understanding, managing and overcoming
host country risks related to the institutional environment, such
as government intervention, restrictions and regulations, known,
hidden, missing or volatile (Polesello et al., 2013; (Luo, 2001).
The interface between two SMEs can be much larger than between a
multinatio- nal and an SME. The owner of an SME in a developed
country can discuss directly with owners of SMEs in emerging
markets about partnerships, strategies and product portfolio. Their
workers can work together to execute the strategy or co-develop
products or services.
How can an SME in a developed country with an abundance of
everything (even regulations) select and enter an emerging market
with a scarcity of everything and a different culture?
Papadopoulos and Denis (1988) considered two major traditional
approaches to market selection: a systematic and a non-systematic
approach. SMEs have a tendency to approach internationalization in
a non-systematic way. SMEs can follow the market selection modes
used by multinationals: target countries that have remarkable
growth and a huge potential market due to the dramatic expansion of
their middle class, and that have opened their markets to foreign
investment and trading. But the question is: do they have the means
for the entry modes multinationals can use in these countries? Can
we separate the market selection from entry mode selection (Musso
& Franciono, 2014)?
Others may just seize opportunities that come their way and
‘manage’. Leticia Osafo-Addo, founder and chief executive officer
of SAMBA Foods, Ghana, told me recently: ‘Root causes of problems
in emerging markets are difficult to identify. When I face a
problem, I will first try to go around it, then under it, then
above it and if all this does not work, I will go through
it.’
References Adler, P. S., & Kwan, S. W. (2002). Social capital:
Prospects for a new concept.
Academy of Management Review, 27(1). 17-40. Barney, J. (1991), Firm
resources and sustained competitive advantages. Journal of
Management, 17 (March), 99-120. Boddewyn, J., & Brewer, T. I.
(1994). International business political behaviour:
new theoretical directions. Academy of Management Review, 19, 1,
119-43. Chen, W., Dollar, D., & Tang, H. (2015). Why is China
investing in Africa? Evidence
from the firm level. Washington DC: Brookings Institution.
Coleman, J. S. (1990). Foundation of social theory. Cambridge: MA.
Harvard University. Dunning, J. H. (1988). The eclectic paradigm of
international production: A
restatement and some possible extensions. Journal of International
Business Studies. 19 (1), 1-31.
Frankopan, P. (2016). The Silk Roads: A New History of the World.
Bloomsbury Publishing PLC.
Guillen, M., & Garcia-Canal, E. (2012). Emerging Markets Rule:
Growth Strategies of the New Global Giants. McGraw Hill
Professional.
Hartford (2016). http://www.hartford-hwp.com/archives/20/040.html
Luo, Y. (2001). Determinants of entry in an emerging economy: A
multilevel
approach. Journal of Management studies, Blackwell Publishing 38(3)
Musso, F., & Franciono, B. (2014). International strategy for
SMEs: criteria for
foreign markets and entry modes selection. Journal of Small
Business and Enterprise Development (JSBED), vol. 21, no. 2, pp.
301-312
North, D. C. (1990). Institutions, institutional change and
economic performance. Cambridge University Press.
Papadopoulos, N., & Denis, J. E. (1988). Inventory, taxonomy
and assessment of methods for international market selection.
International Marketing Review, 5(3), 38-51
Polesello, D., Amal, M., & Hoeltgebau, M. (2013). Determinants
of international market entry choices: a case study of a Brazilian
multinational, Revista de Administracao e Contabilidade da
Unisinos, 10(2), 181-194.
Scott, W. R. (1995). Institutions and organisations. London, UK:
Sage. Spence, M. (2003). International strategy formation in small
Canadian high-tech-
nology companies: a case study approach. Journal of international
entrepreneur- ship 1(3), 277-96.
Williamson, O. E. (1985). The economic institutions of capitalisms.
New York: The Free Press. Williamson, O. E. (1991). Comparative
economic organisation: The analysis of
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economics: How it works; where it is
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and
Development. Harvester Wheatsheaf, Prentice Hall.
32 33
to address what should be done for the operationalization of entry
modes, and how to be ‘expansion ready’ to manage for value creation
and value capture over time in emerging markets. This is also an
opportunity to innovate in entry modes or at least to adapt them by
integrating new factors that affect international trade.
Given the business pressure of income generation, the challenge for
an SME is the ‘proof of market’, or the first successful
acquisition of a local customer. Only after it has acquired a
customer by creating a business opportunity, does it care about
market entry barriers or other uncertainties. While a systematic
approach to selecting and entering foreign markets is probably a
must, SMEs have a tendency to choose an unsystematic approach. It
is then not surprising that SMEs tend to internationalize
regionally, predominantly within the free-trade area in which they
are located. As exporting is strongly supported by government
through policy measures, SMEs – given their limited resources
(time, finances, human) – may find it difficult to go beyond the
traditional export mode.
Laufs and Schwens (2014) emphasized the importance of foreign
market entry mode choice in the context of SMEs. This is also valid
for market selection. SMEs, as opposed to large multinationals,
have specific characteristics that are likely to influence their
foreign market selection and entry mode choice in terms of the
level of commitment to the foreign market, how they deal with risks
in the host country, and the controllability of foreign market
activities. Among these characteristics (Laufs & Schwens,
2014):
- SMEs have limited financial and personnel resources (Brouthers
& Nakos, 2004; Nakos & Brouthers, 2002).
- SMEs have a high level of sensitivity to external influences
(Cheng & Yu, 2008; Erramilli & D’Souza, 1995), making it
particularly important for SMEs to find an entry mode that allows
them to deal effectively with the risks that arise in the host
country.
- SMEs have different ownership structure and management
characteristics (Cheng, 2008; Pinho, 2007), as many SMEs are
family-owned and/or owner- managed. Therefore, their choice of
entry mode may differ from that of large multinationals.
Family-owned firms are often less willing to share control with a
partner (e.g. in an equity joint venture) (Fernandez & Nieto,
2006).
6 Where does the internationalization of SMEs’ knowledge fall
short?
Market selection and choice of entry mode are fundamental strategic
decisions in connection with an enterprise’s internationalization.
In his paper titled ‘Do we really need more entry mode studies?’
(Shaver, 2013), Shaver states that substan- tive progress in the
understanding of entry modes has been made. He adds that the
research in this area is becoming more and more marginal and that
only small, incremental steps are being taken rather than
substantive and potentially transformative ones. It is more likely
that researchers have been trying to describe what companies do,
instead of guiding practice effectively by describing what
companies should be doing to be successful. In most papers,
statistical tools rather than conceptual understanding are seen as
the solution (Shaver, 2013). So far, most of the research on market
selection and market entry modes has been done from the point of
view of developed countries and multinational companies. Very few
studies have focused on the expansion of SMEs into emerging
markets.
International trade liberalization, progress in telecommunications
and logistics, and e-commerce have led to the development of
international business in environments that have institutional and
cultural contexts not seen before. The importance of size of the
firm, geographic distances, host market potential (size and
growth), prior international experience and market attractiveness
has been reduced. This situation drives SMEs, mainly those in open
and small markets, to internationalize as it is the way to survive
in the long term (Sveltlcic et al., 2007). The important role of
local government as a customer and of NGOs as partners in emerging
markets are factors that can affect market entry selection and
entry modes in these markets. Research that combines these
additional layers of complexity to unlock opportunities globally,
including emerging markets, is seldom if ever carried out. Research
has to go beyond ‘how it is’ to ‘how it can be’ for SMEs’ expansion
into emerging markets. Beyond entry modes analysis, it has
34 35
- How SMEs develop their own resources and capabilities in order to
commit successfully and strongly to foreign markets (Laufs &
Schwens, 2014).
- How SMEs, mainly small enterprises, can obtain legitimacy in the
host country (Laufs & Schwens, 2014).
The goal of our research should be to develop models and tools that
enable Limburg’s SMEs in particular, and SMEs in small and open
developed markets in general, to access the right networks and
local partners in emerging markets to develop partnerships and
alliances that lead to the successful operationalization of their
market entry. Local partners create business opportunities by
providing access to their networks and by supporting the adaptation
of products, services and processes to local market standards
(Neubert, 2015). Together, they can quickly develop business
opportunities and have a successful and performing post-entry
process. The importance of government as business opportunities
generators, and of NGOs as potential business partners, are
elements that need to be taken into account in the
conceptualization of implementable theories on emerging market
selection, market entry modes and post-entry development.
There is also a need to define the capabilities and competencies
that SMEs in small and open developed markets that enter emerging
markets must have to become top performers there, and how to
develop these capabilities and competencies.
My experience leads me to believe that the SMEs that have the
biggest chances to expand successfully into emerging markets are
those operating in sectors that offer innovative products or
services that provide a value for which clients in emerging markets
are willing to take the risk to order or to partner. These can be
found in sectors where there is a ‘demand-driven purchasing’ like
healthcare, manufacturing, processing industries, education,
software and IT. Even start-ups have chances when they address
issues that deliver economic and societal shared values.
Let me illustrate this with two examples from Limburg.
1. A born global firm According to Cavusgil and Knight (2015) and
Coviello (2015), a ‘born global firm’
(BGF) can be defined as a young firm that develops new foreign
markets early and fast (Madsen, 2013) using export as entry mode.
It is also characterized by limited resources like finance or
equipment (smallness) and a lack of reputa- tion and legitimacy
(newness), and is unfamiliar with various international business
environment (foreignness) (Knight & Cavusgil, 2004). In small
and
The following factors also strongly influence market selection and
market entry modes, mainly when one considers emerging
markets:
- Host country knowledge: This is one of the barriers to
internationalization. Acquiring this knowledge through incremental
experience accumulation takes time, can prove costly and
inefficient, and leads to mistakes (Dierickx & Cool, 1989) that
are more difficult for an SME than a larger firm to bear.
- Context-specific resources: Working through chaos, the ability to
communi- cate and manage local adversities, and the ability to
manage interfaces with local government are all key to entering
emerging markets. These skills are expensive to acquire and time
costly. They could be obtained from network, relationships,
distribution channels and even government authorities when formal
institutions are weak (Peng & Heath, 1996).
- Legitimacy: Legitimacy is crucial to the survival of companies.
Small enterpri- ses with small resources and a lack of proven
products on the market lack legitimacy and attractiveness for
collaboration.
Given the characteristics and factors given above, considering
opportunities in emerging markets other than the BRICs may be a
bridge too far. A particular case is that of ‘born global firms’
(BGF) (Knight & Cavusgil, 1996) and, in particular, high-tech
start-ups in small and open economies. They need to
internationalize early and fast (Brennan & Garvey, 2009;
Trudgen & Freeman, 2014), in markets at large geographical and
psychological distances.
What needs to be done for Limburg’s SMEs to identify and unlock
growth opportunities in emerging markets?
Most researchers answer or attempt to answer the ‘what’ questions
to under- stand the ‘as it is’ situations that are established
through surveys and analyses of existing data. The ‘how’ questions
aimed at ascertaining what companies should be doing to be
successful are not common. Let’s consider, for example, resources
for SMEs. While the literature emphasizes that networks are
important resources for SMEs to compensate for their own lack of
resources when expanding abroad, it fails to explain:
- How the characteristics of the network impact SME foreign market
selection and entry choice (Laufs & Schwens, 2014), and mainly
how they impact its operationalization.
36 37
company is preparing for a joint venture for managing after-sales
activities, including maintenance, locally. The SME is adapting its
entry mode to the changing need of the market. Despite this
optimistic view, questions remain: - Is the joint venture the best
next step in the expansion? - Could this move be predicted and
prepared? - Are the capabilities of the SME and its partner aligned
to serve the market
as it should be?
The research to be done at ITM should propose tools and
methodologies to help answer the kinds of questions given
above.
References Brennan, L., & Gervey, D. (2009). The role of
knowledge in internationalisation,
Research in International Business and Finance, Vol. 23, No. 2, pp.
120-133. Brouthers, K. D., & Nakos, G. (2004). SME entry mode
choice and performance: a
transaction cost perspective. Entrepreneurship: Theory and
Practice, 28 (3), 229-247.
Cavusgil, S. T., & Knight, G. A. (2015). The born global firm:
an entrepreneurial and capabilities perspective on early and rapid
internationalisation. Journal of International Business Studies,
vol. 46, No. 1, pp. 3-16.
Coviello, N. (2015). Re-thinking research on born globals. Journal
of International Business Studies, vol. 46, No. 1, pp. 17-26.
Dierickx, F., Cool, K. (1989). Asset stock accumulation and
sustainability of competitive advantages. Management Science
35(12), pp. 1504-1510.
Erramilli, M. K., & D’Souza, D. E. (1995). Uncertainty and
foreign direct investment: the role of moderators. International
Marketing Review, 12 (3), 47-60.
Fernandez, Z., & Nieto, M. J. (2006). Impact of ownership on
the international involvement of SMEs. Journal of International
Business Studies, 37(3), pp. 340-351.
Knight, G. A., & Cavusgil, S. T. (1996). The born global firm:
a challenge to traditio- nal internationalisation theory. Advances
in International Marketing, vol. 8 No. 1, pp. 11-26.
Knight, G. A., & Cavusgil, S. T. (2004). Innovation,
organisational capabilities, and the born global firm, Journal of
International Business Studies, vol. 35 No. 2, pp. 124-141.
Laufs, K., & Schwens, C. (2014). Foreign market entry mode
choice of small and medium sized enterprises: A systematic review
and future research agenda. International Business Review, vol. 23,
issue 6, pp. 1109-1126.
Madsen, T. K. (2013). Early and rapidly internationalizing
ventures: similarities and differences between classifications
based on the original international new venture and born global
literatures. Journal of International Entrepreneurship, 11(1), pp.
65-79.
open markets, born global status is almost a must to survive. This
often implies a collaboration with strong local partners in the
host markets.
This will be probably the case for a start-up in Limburg that has
developed a
medical device for arterial fibrillation diagnostics and is in the
process of bringing it to the market. The first sales in the home
market are not going as expected in the business plan. The company
had to review its business model and moved from the initial focus
on medical doctors locally to projects globally. Assuming that
there are projects in emerging markets: - Where can they be? How to
reach them when one does not have a trust-
worthy network there and legitimacy (proven product on the market)?
- Selling medical devices requires high-level competencies in
developed
markets. Are these required levels of competencies available in
emerging markets?
- What are the legal, financial, logistic and marketing aspects,
and what resources are available to address them?
- How to go beyond the first project and grow there? - What
in-house skills and competencies are needed to handle all
this?
2. A future ‘hidden champion’ company According to Herman Simon
(1996), there is a relatively large group of SMEs
that are global leaders in their narrowly defined markets; they are
also called ‘super nichists’. These companies are usually privately
held or family owned, single-product manufacturers with a long-term
vision. They have a very strong internally focused organizational
structure, with an emphasis on insourcing. Simon has named them
‘hidden champions’. When operating in narrow markets, at some point
the only way to grow is to internationalize. The
internationalization strategy of hidden champions is to go alone in
foreign markets and establish foreign subsidiaries.
This is probably the case for a Limburg SME specialized in
floriculture
that went bankrupt in 2009 due to a lack of orders, and
is now doing well through innovation and a successful expansion
into emerging markets. It has, for example, customers in Kenya for
its rose grading machines. The SME installs and maintains these
machines (service agreement including spare parts). It also sells
refurbished machines. During an interview with Mrs Marion Huiskes
(ITM), the manager of the SME said that, given the company’s
uniqueness, it has no market selection issue, nor an entry mode
selection issue: the company exports to where its goods are
requested. No measure is taken to safeguard the technology from
misappropriation: continuous innovation makes copying the machines
meaningless. Given their growth, the
38 39
Nakos, G., & Brouthers, K. D. (2002). Entry mode choice of SMEs
in central and eastern Europe. Entrepreneurships: Theory and
Practice, 27(1), pp. 47-63.
Neubert, M. (2015). Early internationalisation of high-tech firms:
past accomplish- ments and future directions, Int. J. Teaching and
Case Studies, vol. 6, No. 4, pp. 353–369.
Shaver, J. M. (2013). Do we really need more entry mode studies?
Journal of International Business Studies, 44 (1), pp. 23-27.
Simon, H. (1996). Hidden Champions: Lessons from 500 of the World’s
Best Unknown Companies. Harvard Business School Press, Boston
Massachusetts.
Sveltlcic, M., Jaclic, A., & Burger, A.(2007).
Internationalisation of Small and Medium Sized Enterprises from
Selected European Economies. Eastern European Economics, vol. 45,
no. 4, July-August 2007, pp. 36-65.
Trudgen, R., & Freeman, S. (2014), Measuring the performance of
gone global firms throughout their development process: the roles
of initial market selection and internationalisation speed.
Management International Review, vol. 54, No. 4, pp. 551-579.
40 41
Krebbekx and de Wolf (2013) concluded in their report that SMEs
from Limburg’s manufacturing industry are increasingly willing to
expand their market internati- onally. Following this report, 87%
of interviewed SMEs expressed their desire to internationalize.
Bloemer (2013) reported that 86% of Limburg’s SMEs that export,
export to Belgium, 80% export to Germany, 26% export to eastern
Europe, 20% export to Asia and 12% export to South America, and
that 59% have not made a success of exporting. The reported
barriers to growth are financing, time and capacity for new
projects, uncertain markets, a lack of human capital (know- ledge)
and a shortage of external knowledge (Krebbekx & de Wolf,
2013). This raises questions about market selection, market entry
mode choice (is export the most adapted mode?) and readiness to
export, or more broadly, readiness to expand into international
markets.
Scope of research application
We segmented Limburg’s SMEs into three focus streams: 1. High-tech
start-ups, as they are expected to go international early and fast.
2. Established small high-tech enterprises with international
activities in
developed markets, with products and/or services relevant to
emerging markets.
3. Established small high-tech enterprises without any current
international activity, with expansion and growth needs.
We restricted the application of our research studies to small
high-tech compa- nies active in healthcare, manufacturing, and food
and nutrition. This can be justified by the following:
a. The dominance of micro and small enterprises in Limburg. b. The
spearheads of Brightlands and Zuyd University of Applied
Sciences,
namely: 1. Healthcare 2. New materials 3. Life sciences/food &
nutrition.
c. The importance of healthcare, manufacturing and food industries
in the region.
d. The strategic importance of healthcare, manufacturing and food
industries in emerging markets.
7 Lines of research, research strategy and management
The following is an excerpt from the International Trade Management
Research Centre prospectus (FIBC, 2013):
The knowledge domain of the research centre focuses on import and
export management of and from Limburg and the Euroregion with
emerging markets (‘growth markets’). The goal is to support
companies in profiling themselves more strongly internationally and
successfully gaining access to new growth markets, such as those in
Asia, Latin America and Russia. The themes the research centre will
address are connected to this area, such as: import and export,
international trade and commercial relationships, market entry
strategies, business innovation, and intercultural business
behaviour in growth markets. Business context
MKB-Limburg reports on its website that 25% of its members are in
business services, 24% are in retail or wholesale, 12% are in
industry, 12% are in care, 10% are in construction, 9% are in
transport/automotive and 8% are in catering (MKB-Limburg,
2016).
When the distinction is made between micro firms (0–9 employees),
small firms (10–49 employees) and medium-sized firms (50–249
employees), the majority of Limburg’s enterprises are
micro-enterprises (67%) (Bloemer, 2013). Small enter- prises
account for 17% and medium for 16%. Of the companies, 71% are
family owned (CBS, 2016).
42 43
I also had several discussions with colleagues at Fontys, TU
Eindhoven and Wageningen University & Research, and with
several start-ups at the High-Tech Campus in Eindhoven and StartHub
Wageningen. All internally and externally gathered input
contributed to the definition of the following research
lines.
Research lines
In the field of business internationalization, Dutch SMEs already
have access to various checklists to support their international
development and growth, for example the export checklist and import
checklist of the ‘Platform internationaal ondernemen’ – a joint
initiative of VNO-NCW, MKB-Nederland, the Ministry of Foreign
Affairs, Rijksdienst voor Ondernemend Nederland (RVO) and NCDO en
Partos, the trade association for international cooperation. These
partners also provide facts and figures on countries and
information to SME entrepreneurs. For entrepreneurs in developing
countries and those in emerging markets who are looking for a
business partner in relation to one of the other RVO instruments,
the Ministry of Foreign Affairs offers a matchmaking programme
(Matchmaking Facility; MMF) to establish structural, long-term
business relationships between Dutch entrepreneurs and
entrepreneurs in developing countries. These business relationships
could result in export or import business opportunities, joint
ventures, public–private partnerships or other types of business
relationships (RVO, 2016).
Some of the questions that remain open are how to select the right
emerging market or partners there, how to design and develop the
business relationship, and how to assess and develop readiness to
expand when you are a technology- based small company in an open
market needing expansion to survive or grow.
To deliver research results that will contribute to answering these
questions, we decided to introduce three complementary and
interdependent lines of research:
1. Emerging markets selection 2. Emerging markets entry and
post-entry development 3. Readiness to expand into emerging
markets.
In the preceding chapters I tried to explain the rationale for
planning these research lines and their contribution to the field
of the expansion of SMEs into emerging markets. I expect that the
work along these research lines will add distinct value to what is
already known in this area for both business and education.
Stakeholders mapping
Given the three responsibilities that the research centre has,
namely:
1. Defining and executing research projects. 2. Contributing to the
professionalization of students, teaching staff and
business partners. 3. Contributing to curriculum renewal and
development.
And given the applied aspect of the research, we did an early
mapping of key stakeholders and gathered their insights for the
definition and design of research lines and the research portfolio.
In addition to our internal stakeholders, which are FIBC Bachelor’s
programmes – namely International Business School, European
Studies, Oriental Languages and Communication, International
Relationships Management research centre and our students, we have
identified and approached several of the following stakeholders,
from whom we need support and commitment:
- Faculties of Zuyd, mainly Beta Sciences and Technology, Health,
and Commer- cial and Financial Management
- Expertise Centre for Innovative Care Technology (EIZT) - LIME
(LImburg Meet) Measuring in Care - Research centres in Material
Sciences, Care at Distance, Smart Devices,
Employability, Innovative Entrepreneurships - Chemelot Innovation
and Learning Labs (CHILL) - KIC (Knowledge and Information Centre)
- LED (Limburg Economic Development) - MKB-Limburg (association of
SMEs in Limburg) - Province of Limburg - Brightlands Chemelot
Campus in Sittard-Geleen, which studies and develops
high-performance bio-based and biomedical materials - Brightlands
Maastricht Health Campus, which focuses on biomedical
imaging,
regenerative medicine and cardiovascular research - Brightlands
Greenport Campus in Venlo, which develops nutrition solutions
based on agribusiness, manufacturing and logistics - Brightlands
Innovation Factory, which incubates, accelerates, validates
and
scales start-ups - Chamber of Commerce - Export Society - CBI
(Netherlands Enterprise Agency).
45
Research line 2: Emerging markets entry and post-entry
development
We keep in mind that entry modes are only a means to an end.
Given the abovementioned SMEs’ characteristics and those of
emerging markets, a combination of institutional theory and
resource-based theory would seem to be the most suitable when
deciding on the entry mode choice of an SME into a new market.
Institutional theory helps to understand factors influencing entry
mode choice such as cultural distance, government intervention,
regulations and marketing channels. It stresses the importance of
networking to overcome institutional barriers and country risks,
and to gain knowledge about the market. Resource-based theory
focuses on an SME’s special resources with the potential to
generate value and capabilities that will enable the SME to
transform its resources into competitive advantages in products or
services. Cooperative entry modes are then to be favoured, because
local partners are able to manage local influences and to reduce
transaction costs utilizing their knowledge, experience and
business networks. Strategic alliances are among these cooperative
entry modes. They are characterized by dynamism, collaboration,
mutual learning, adaptability to change and adjustment over time
(Dioz, 1998). Sharing value is important. A well-designed alliance
is key to their success and that of the operationalization of
market entries. This research line will develop conceptual and
practical tools for designing and managing SMEs alliances and
deliver alliance models for the expansion of SMEs into emerging
markets.
In this research line, there are great opportunities for
collaboration with at least the following research centres: -
International Relationships Management - Innovative
Entrepreneurships - Smart Devices - Care at Distance - Material
Sciences.
Research line 1: Emerging markets selection
Unplanned and reactive internationalization (Hagen et al., 2012,
2014) leads