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
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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).
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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
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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.
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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
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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
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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.
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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
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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.
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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
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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
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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.
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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.
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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.
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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
discrete structural alternatives. Administrative Science Quarterly, 36(2) 269-296. Williamson, O. E. (1998). Transaction cost economics: How it works; where it is
headed. The Economist, 146(1), 23-58. Young, S., Hamill, J., Wheeler, C., & Davis, J. R. (1989). International Market Entry and
Development. Harvester Wheatsheaf, Prentice Hall.
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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
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- 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.
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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
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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.
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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).
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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).
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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