forms of entry of portuguese smes in external markets · before we start addressing the reasons why...
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FORMS OF ENTRY OF PORTUGUESE
SMES IN EXTERNAL MARKETS
Master Science in Business Administration
Doing Business Internationally
Lisbon, July 1st, 2010
Andreia Lopes
Gonzalo Bonilla
Joana Mendes
Luís Ângelo
Naim Tajdin
Sven Wieler
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INDEX
INTRODUCTION
DECISION TO INTERNATIONALIZE
1. Internal Factors
2. External Factors
BASIC ENTRY DECISIONS
THE ENTRY MODE
1. EXPORTING/IMPORTING
2. LICENSING
3. FRANCHISING
4. JOINT VENTURES
5. FOREIGN DIRECT INVESTMENTS
ANALYSIS OF EXPORTING/IMPORTING, FOREIGN
DIRECT INVESTMENT AND JOINT VENTURES
RECOMMENDATIONS
CONCLUSIONS
BIBLIOGRAPHY
3
4
5
6
7
9
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14
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20
21
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INTRODUTION
In a globalized and complex context such as the ones companies face nowadays, fast answers
and solutions are demanded. Sometimes, those solutions can not be found in the national
market. The Portuguese market is small when compared to other countries, therefore a
Portuguese SME to grow may have to internationalize.
This paper focuses on Small and Medium Enterprises since they represent the majority of
companies in Portugal. In fact, SME’s are becoming increasingly important in the current
economic situation. Economic crisis and high unemployment rates are just two of the many
factors that lead people to create their own job.
There are several decisions a company faces when it decides to enter external markets. First of
all a company needs to understand why there is a need for internationalization. In this stage
there are internal and external factors to look in as we will further discuss.
The next stage is to decide where and when to enter, and on what scale. A deeper analysis of
the external market needs to be done and there are some specific indicators to consider.
The final decision is the entry mode which is our centre of attention. There are several ways
that companies can choose to get into external markets (Export/Import, Licensing, Franchising,
Joint Ventures, and Foreign Direct Investment). This paper will provide a simple study of each
mode with some advantages and disadvantages, illustrated with an example of a Portuguese
company.
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DECISION TO INTERNATIONALIZE
Before we start addressing the reasons why Portuguese SME’s should follow different entry
modes to internationalize, we would like to present some important facts about European
SME’s Trends. Afterwards, an Internal / External analyses will help us define why Portuguese
SME’s should internationalize and pick different entry modes.
Our research showed us that “of the more than 20 million enterprises in the EU non-financial
business economy, about 99.8 % are SME’s (i.e., having less than 250 employed persons).
Within the SME-sector, the vast majority (92 %) are micro enterprises, having less than 10
employed persons. The typical EU business is increasingly a micro business”1. Whereas in
Portugal, as we can see from fig.12 enterprises have a relatively high presence of Micro
enterprises in difference to the EU-average.
Figure 1 – SMEs in Portugal – basic figures
Also with extreme relevance is the Value Added that Portuguese SME’s show, with 67.3%
compared with the average of EU (57.9%). This fact streams an important issue regarding
Portuguese economy, which is the Portuguese entrepreneurial spirit, many times due to lack
of job opportunities or situation where structural unemployment created the need to follow
different paths.
Bearing in mind what is presented above it’s now of extreme importance to address a strategic
vision through an external and internal analysis that intend to evidence major factors that lead
to Internationalization of SME’s.
1 European SME’s under Pressure Annual Report on EU SME – sized enterprises 2009
2 European SME’s under Pressure Annual Report on EU SME – sized enterprises 2009
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1. Internal Factors
There are internal factors imposed by conditions of the company itself (pull factors) or by
conditions that the company faces (push factors). These kinds of factors, independently of
being Pull or Push Factors, can both lead to internationalization.
Some reasons from Pull Factors:
Management team with high education;
Most of the Portuguese Business Schools have focused the last years on an
international scope, leading to new staff or the existing one being more prompt to
Internationalization;
Competitive advantage (related with Products/Services);
Innovation on the delivered outcome;
Governmental support to Internationalization (e.g. PME Academy – Directed by IAPMEI;
EU funds resultant form QREN available to new Entrepreneurs and existing ones);
Governmental simplification (bureaucratic simplification in matters related to
Enterprises- Simplex Program);
Counseling process through some governmental institutions, such as AICEP and IAPMEI,
which made their international knowledge available to Portuguese SME’s;
Improvement of communication roots ease transportation and make them faster (TGV;
motorways; Airport; Airlines companies, mainly Low Cost companies increasing their
availability in Portuguese Airports);
Geographical position tend to be highly strategic, since Portuguese companies have a
simple access to the American, North African and African Market in general as well as
Europe;
Strong relationships with ex-colonies (e.g Brazil; Angola; Mozambique; Cape Verde,
etc.) especially the first ones in recent years have caused an increasing GDP.
Some reasons from Push Factors:
A product in the declining phase of Product Life-cycle can be a good opportunity to bet
on new markets for that product/service;
Excess of production, leading to stock turnover or accumulation of inventory;
Product demand more international than national;
Overcapacity;
Economic crisis opened space opportunities abroad.
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2. External Factors
The attitude of a company facing the external context can be more proactive or, on the
opposite, more reactive. Having the same logic as we had in the Internal Factors, we now show
Proactive and Reactive external factors can lead to Internationalization.
Proactive factors:
Foreign markets opportunities (strategic space available);
Tax benefits;
Lowering costs through economies of scale;
Gaining know-how on new markets, leading to new strategic visions;
Trade promotion (EU/ Nafta/Mercosul);
Liberalization of trade tariffs (host country);
Increasing importance of E-commerce;
Social networks with high importance on the brand awareness to enter in new markets;
Resources availability (credit/raw materials).
Reactive factors:
Competitive Pressure in domestic market can be an open window to diversification of
markets;
Saturated Domestic Market in result being in the declining phase of Product Life Cycle;
Limited size of domestic market;
Increasing need to be near of customers and ports.
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BASIC ENTRY DECISIONS
After a SME decides to internationalize there are some basic decisions that it has to make:
what markets to enter, when to enter and on what scale.
The decision of which country to enter is determined by its potential to generate long-term
profitability. Consequently, the attractiveness of each country is influenced by economic,
political and legal factors. The political regime of the country, the economic system in which it
operates and the legal system that protects it are the main factors to examine. From this point
on, the decision which external market to enter should be based on a mixture of benefits,
costs and risks of doing business back there.
The economic benefits of doing business in a country depend on the size of the market, the
purchasing power of the consumers in that market and the potential future wealth of
consumers.
The associated costs may be connected to the possibility of paying some political influence (i.e.
bribes), the need of new infrastructures, the mandatory compliance of safety standards (in the
workplace, product and with environment), the well-regulated business practice and the
protection of intellectual property.
The risk of doing business in a country is determined by political, economic and legal factors. It
is related with indicators such as inflation rate, overall level of debt, strikes, terrorism and
conflict acts.
Usually, this benefit-cost-risk analysis tends to be more favourable in countries that are
politically stable and developed, with free market systems and no drastic changes in inflation
rate and overall debt level. On the contrary, it is less favourable in developing countries that
are politically unstable with market systems that are partially or totally controlled, or that have
had speculative finances that resulted in high debt levels.
The decision about which country to enter is also linked to the value that the company can
create. Meaning that, if a company offers a product that adds value and is able to fulfil unmet
needs, the product is more likely have a greater value in the eyes of consumers which can be
translated to charging higher prices or increasing sales volume more rapidly.
A tool that can be very helpful when making such a decision, is the ranking provided by Doing
Business3. It is a project that measures a set of variables in 183 countries thus providing a
ranking of ease of doing business in these countries. Further, it presents detailed information
per country.
The following decision is related to the Timing of Entry. In this stage, there is a clear trade off
between first-movers and later entrants. First-movers can establish brand name, build sales
3 http://www.doingbusiness.org/economyrankings/
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volume, control the learning curve ahead of its rivals and create high switching costs. All this
advantages of first-movers are the disadvantages for a later entrant. First-movers may also
have to support the pioneering costs like the effort needed to gain local knowledge and/or the
costs of educating consumers. Pioneering costs are costs that later entrants can avoid.
The final basic decision concerns the Scale of Entry which is if a company enters in a small or
large scale. It is a matter of value and risk. That is, a small scale entrant limits its risk but it also
may miss some advantages of first-movers or early-movers.
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THE ENTRY MODE
Choosing the right entry mode for a target country is a critical managerial decision and affects
the long-term success of a firm. It is fundamental for a company to choose the appropriate
mode for entering different markets in different countries. When we talk about the entry
modes of a business, we refer to Export/Import, Licensing, Franchising, Joint Ventures, and
Foreign Direct Investment.
1. EXPORTING/IMPORTING The most common mode of internationalization for European SME’s is the combination of
import and export. Export and import are much more common among older and larger SME’s
than for young and small ones. Still, some recently established firms start exporting short after
inception. These firms are characterized by extremely high growth rates, and are most
common in high technology sectors. In general, SME’s in high tech sectors are more
internationalized than SME’s in other sectors.
Internationalized SME’s report faster growth in employment, value added and labour
productivity. Especially in the years following the foreign market entry, both exporting and
importing SME’s experience very high growth rates. Despite the risks involved in
internationalization, both import and export have a positive impact on the firm’s survival. It
can lead to increasing productivity through economies of scale. Also export-oriented
entrepreneurship contributes more strongly to macro-economic growth than entrepreneurial
activity in general.
Despite the advantages of today’s globalization and the risks of not being part of it many
European SME’s still remain focused on their national markets. Only 8% of SME’s export and
only 12% of the inputs of an average SME are purchased abroad. The main reported reasons
are a lack of financial resources but most of all lack of skills or skilled human capital to
approach internationalization.
Companies with a structured market strategy are more active exporters than firms lacking
formal planning. Also, the more systematic the selection of foreign target markets is, the
higher the export performance will be for SME’s. Generally it can be seen that the larger the
size of the SME, the more internationalized they are:
COMPANY SIZE % of Exporters
1 – 9 employees 17
10 – 49 30
50 – 249 54
SME Total 20
Source: Supporting the internationalisation of SMEs; European Commission
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Barriers to export refer to all those constraints that have an impact on the firm's ability to
initiate, develop, or sustain business operations in foreign markets. Small business firms were
reported to have common internal barriers such as financing export, finding the right
customers and distributors as well as external barriers such as exchange rate fluctuations, high
competition, language barriers, bureaucracy, and government regulations at home and
abroad.
ADVANTAGES
Importing and Exporting is a relatively low-cost activity to get involved in international
business and expand profit. A firm can further create economies of scale which should lead to
lower cost and hence expansion of profit. Importing /Exporting can help a business:
Enhance domestic competitiveness;
Increase sales and profits;
Gain global market share;
Exploit corporate technology and know-how;
Extend the sales potential of existing products;
Stabilize seasonal market fluctuations;
Enhance potential for corporate expansion;
Sell excess production capacity;
Gain information about foreign competition.
DISADVANTAGES
On the other hand, in relation to location economies, a firm may not always be located in the
best region for that specific area and is therefore restricted to the cost disadvantages of the
current location. A firm is further depended on the fluctuation of transportation costs. High
transportation costs can make it uneconomical to get involved in the import or export of a
certain good. Related to this is the fact that exposure to a foreign market will likely involve
government regulations. One of these can be the availability of trade barriers such as tariffs
and quotas or other hidden barriers. By being involved in Importing/Exporting a business may
be required to:
Develop new promotional material;
Subordinate short-term profits to long-term gains;
Incur added administrative costs;
Allocate personnel for travel;
Wait longer for payments;
Modify the product or packaging;
Apply for additional financing;
Obtain special export licenses.
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EXAMPLE
In result of our analysis we found one Portuguese SME that used Exporting as a mode of entry
in foreign markets. The company is Vision Box. This company has offices in 5 different markets
such as, Qatar, Brazil, Germany, South Africa, UK, and the Headquarter in Lisbon, Portugal.
They have been present in some important events, like conferences and commercial events in
foreign markets such as:
At Cartes from 17-19 November 2009, France;
At Security defense world, from 9-10 Feb. 2010, UK;
At Ifsec, from 10-13 May 2010, UK;
At Frontex, from 24-25 May 2010, Poland
At Identity Technology conferences, in 28th June 2010, USA
Their success has allowed them to have clients in UK, South Africa, France, and Finland, and as
far as we found they are trying to expand to Brazil and USA.
This strategy has granted them a few awards internationally and also the Portuguese
Government awarded them with the prize of Líder SME.
2. LICENSING Licensing is where your own organization charges a fee and the right for the use of its
technology, brand or expertise. It is considered as a contractual agreement in which the owner
of a protected asset, known as the licensor, grants another entity, the licensee, for royalty or
some other consideration, the right to use the asset in producing or distributing a good or
service. It is important to mention the fact that the licensed asset may be tangible or
intangible, such as a trademark, patent, trade secret, or production process.
ADVANTAGES
Good way to start in foreign operations and open the door to low risk manufacturing
relationships;
Linkage of parent and receiving partner interests means both get most out of marketing
effort;
Capital not tied up in foreign operation;
Options to buy into partner exist or provision to take royalties in stock.
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DISADVANTAGES
Limited form of participation - to length of agreement, specific product, process or
trademark;
Potential returns from marketing and manufacturing may be lost;
Partner develops know-how and so license is short;
Licensees become competitors - overcome by having cross technology transfer deals;
Require considerable fact-finding, planning, investigation and interpretation.
EXAMPLE
YDreams is a Portuguese company that is running on technological industry. Their huge
success was due to their innovative products that had been register as YDreams’ intellectual
property.
So YDreams Company is a great example of Licensing. YDreams has invented some innovative
products such as “Augmented Reality”. This “Augmented Reality” is YDreams’ property and if
any company wants to use this technology, have to buy the license to be able to use. YDreams
had already projects in Spain, namely in Madrid, where companies have been licensed to sell
YDreams products.
3. FRANCHISING
In theoretical terms, franchising could be defined as “a form of marketing and distribution in
which the franchisor grants to an individual or company (the franchisee) the right to run a
business, selling a product or providing a service under the franchisor's business format and
identified by the franchisor's trade mark or brand.”4
In other words, the franchising is a different way of entry external markets under a well-known
brand that could bring more revenues than running their own business under an own brand.
Franchising gives the opportunity to the franchisee (who buys the franchising) of taking
advantage of economies of scale of some brand in another country, also the franchisee has to
pay a royalty payment to the franchisor (who sells the franchising) that is, usually, a
percentage of the franchisee’s revenues.
In conclusion, the franchisor not only sells intangible property to the franchisee but also insist
that the franchisee stand by the rules of the company.
4 http://www.franchisedirect.com/information/introductiontofranchising/definitionoffranchising/7/80/
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ADVANTAGES
The Franchising has some advantages for who decides to adventure on external markets, such
as:5
Your business is based on a proven idea. You can check how successful other franchises
are before committing yourself. And you can use a recognized brand name and
trademarks. You benefit from any advertising or promotion by the franchisor.
The franchisor gives you support - usually including training, help setting up the
business, a manual telling you how to run the business and ongoing advice. This because,
the franchiser wants that the brand worldwide maintain the same values and quality so
will give any support that franchisee would need.
Financing the business may be easier. As you will trade a well-know brand, the Banks
are more willing to lend money because they know that have more probability to have
success. You benefit from communicating and sharing ideas with and receiving support
from other franchisees in the network
Relationships with suppliers have already been established, so the franchisee will not to
worry about.
DISADVANTAGES
Although, the franchising also has some disadvantage that could pull away the investors on
this kind of entry in external markets, such as:6
Costs may be higher than you expect. As well as the initial costs of buying the franchise,
you pay continuing management service fees and you may have to agree to buy products
from the franchisor.
The franchise agreement usually includes restrictions on how you run the business. You
might not be able to make changes to suit your local market. You have to stand by the
main company’s rules.
Other franchisees could give the brand a bad reputation. You could suffer for trawling,
because if some other franchisee run badly their business, this will affect the image of the
brand that you are representing.
All profits are shared with the franchisor. So, the more you increase your profits the
more you have to share with the franchisor and the less you will have to invest.
5 http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1073791408&type=RESOURCES
6 http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073791408
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EXAMPLES7
The VIVAFIT is a great example of Portuguese franchising with international presence. The
VIVAFIT is a unique gym concept only for women, this concept is based on a 30-minute
exercise session per day that will help women to improve their quality of life, which means
VIVAFIT will guarantee results after 14 days if woman practice 30 minutes per day on their
gym. This concept will allow woman go more often to the gym and then reach a great quality
of life.
This business is already on Spain after fantastic results in Portugal and the tendency is to grow
up for another countries. The franchisee in Spain had the obligation to follow the culture and
values of the main company in Portugal and also to provide a royalty for using the brand
awareness and publicity.
As we can see, the franchising allows companies to use an existing concept in a country and
then use the success of this concept in their own purpose on another country. The risk of
failing will be much lower because already exists a proven idea.
4. JOINT VENTURES A joint venture is a contractual agreement between two or more parties with the purpose of
executing a particular business undertaking. It is similar to a business partnership but with the
main difference is that a partnership normally involves a long-term business relationship,
whereas a joint venture is based on a single business transaction. Joint ventures can be distinct
business units (a new business entity may be created for the joint venture) or collaborations
between businesses.
Succinctly, a joint venture correctly chosen and implemented can be a great way for small and
medium business to enter in foreign markets, and take advantage from opportunities (and
profits) that otherwise would miss out.
The parties have to sign a contract or an agreement where are specified their mutual
responsibilities and goals in order to avoid troubles later. All joint ventures also involve certain
rights and duties: the parties have a mutual right to control the enterprise, a right to share in
the profits, and a duty to share in any losses incurred.
7 http://www.bestfranchising.pt/Ficha.aspx?idfranquicia=1853
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ADVANTAGES
Joint ventures offer a number of advantages:
It is a way of minimizing the costs and risks associated with an entrance at a foreign
market (usually very high) because the investment cost and risk is shared with the local
partner.
There is a combination of complementary resources and know-how. The company can
benefit from the local partner’s knowledge of the host country’s competitive conditions,
culture, and political and business systems. Thus, the companies share the strengths and
increase competitive advantages in the marketplace (specialized staff and technology).
In some countries is the easiest or even the only way to enter at the market due to
political considerations or restrictions. As a result the companies have the opportunity to
enter at related business or at new geographic markets or gain new technological
knowledge.
It can be a flexible alliance, because it is possible to define the contract duration and
specifications, thus limiting your commitment and business’ exposure.
DISADVANTAGES
The major disadvantages in relation to the joint ventures are listed below:
Identifying the appropriate partner and agreeing appropriate contractual terms involves
time and efforts.
Can be difficult to manage the relationship with the foreign partner, because the shared
ownership arrangement can lead to divergences in the definition and control of
goals/objectives if they have different views of what strategy should follow.
There is the risk of the company gives control of its technology to his partner, losing it
competitive advantage and his partner becomes a competitor.
It can be difficult to integrate and coordinate the activities across national boundaries,
and that can influence the arising of situations where the partners do not provide enough
leadership and support at specific stages.
EXAMPLE
The Portuguese wine company Dão Sul is a good example of this form of entry. This company
created a joint venture in China to export its wines to this important country in Asia. The
company already exports to Brazil, Macau and China, but with this alliance they expect to
multiply its current orders by six to this last country. This alliance will also create the possibility
to increase the promotion of its wines and act like a gateway for its wines in this region.
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5. FOREIGN DIRECT INVESTMENTS Foreign Direct Investment is the form of entry in a market that occurs when a company (direct
investor) resident in one economy intends and establishes a relationship (often long-term
relation) with an enterprise (direct investment enterprise) that is resident in an economy
outside of the one of direct investor.8
To clarify what is explained above we will address more deeply the concept of Direct Investor
and Direct Investor Enterprise.
Direct Investor is an entity or enterprise resident in one country “that has acquired, either
directly or indirectly, at least 10% of the voting power of a corporation (enterprise)”9.
Direct Investment Enterprise is an entity or enterprise “resident in one economy and in
which an investor resident in another economy owns, either directly or indirectly 10% or
more of its voting power”.10
Having in mind the previous explanations, the basic types of enterprises relationships go as
follow:11
“Subsidiary is an enterprise in which the investor has control of more than 50% of the
voting power”;
“Associate is an enterprise in which the investor has control of at least 10% of the voting
power and no more than 50%”;
“Fellow enterprises are enterprises which do not have enough (or any) voting power in
each other to constitute FDI influence but have a common parent”.
ADVANTAGES12
Full control of resources and capabilities;
Facilities integration and coordination of activities across national boundaries;
Acquisitions allow rapid market entry;
Greenfield investments allow development of state of the art facilities and can attract
financial support from the host government.
8 OECD Benchmark Definition of Foreign Direct Investment, 4
th Edition, 2008. Pages 48-50
9 OECD Benchmark Definition of Foreign Direct Investment, 4
th Edition, 2008. Pages 48-50
10 OECD Benchmark Definition of Foreign Direct Investment, 4
th Edition, 2008. Pages 48-50
11 OECD Benchmark Definition of Foreign Direct Investment FOURTH EDITION, 2008
12 Exploring Corporate Strategy; Johnson, G.; Scholes, K.; Whittington, R.; 7
Th edition 2005, Prentic Hall
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DISADVANTAGES13
Substantial investment in and commitment to host country leading to economic and
financial exposure;
Acquisitions may lead to problems of integration and Coordination;
Greenfield entry time-consuming and less predictable in terms of cost.
EXAMPLE
An actual example of foreign direct investment is Portugal Telecom (PT) over VIVO in Brazil. PT
is a Portuguese company, in telecommunications industry, that had invest capital on VIVO, a
Brazilian telecommunications company. Actually, VIVO is being part of PT’s strategy, since a
couple of years ago, and this could be considered as foreign direct investment (“Direct
Investor”) because PT, as shareholder, has direct impact on the VIVO’s operations and this is
the essence of foreign direct investment.
Nowadays, this foreign direct investment could disappear from PT because Telefónica, who is
another company that made foreign direct investment on VIVO, wants to buy PT’s shares on
VIVO to increase their foreign direct investment on Brazil and then have higher returns.14
13 Exploring Corporate Strategy; Johnson, G.; Scholes, K.; Whittington, R.; 7
Th edition 2005, Prentic Hall
14 In this case we haven’t found any example of a Portuguese SME’s that have already followed an FDI
strategy so we chose to present an example of a large company to make clear this kind of entry mode.
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ANALYSIS OF EXPORTING/IMPORTING, FOREIGN DIRECT
INVESTMENTS AND JOINT VENTURES
The table below presents both weighted and not weighted results on exports, imports and
foreign direct investments (FDI). It shows that the 40% of SME’s that are active in importing,
exporting and FDI can be divided in three main groups: only importing and exporting 15%; only
importing 13% and only exporting 9%.
Not weighted number and weighted percentage of SME’s with various international business
activities in 2006-2008:
Frequency Percent
Mode of Internationalization Not Weighted Weighted
Only Import 1 470 13%
Only Export 830 9%
Only FDI 160 1%
Only Import and Export 2 300 15%
Only Import and FDI 74 –
Only Export and FDI 90 –
Import and Export and FDI 449 1%
No Import, or Export, or FDI 4 107 60%
Total 9 480 100%
Source: Survey 2009, Internationalization of European SMEs EIM/GDCC (N=9480).
All enterprises that are engaged in importing, exporting and foreign direct investments (FDI)
started on average with each mode of internationalization as followed:
Exporting Being subcontractor to foreign firms FDI
Importing Foreign subcontractors Technical cooperation
1994 1995 1998 1999 2000 2003
For the 2300 enterprises that are both importing and exporting 39% started first with
importing, 18% started first with exporting and 42% started with import and export in the
same year. This is an interesting result, as import is not always considered to be a serious step
in the internationalization process of firms. Many support measures are focused on supporting
the first attempts to export. It seems however that through importing, enterprises can learn
how to work in the international market, with international clients, other cultures and
languages. These experiences are very useful when it comes to export opportunities; the next
step towards exporting is then easier to make. Only about 2% of European SME’s are investing
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abroad. Half of these enterprises are also engaged in import and export and nearly all of them
started with importing and exporting before starting with investments.
Overall the figures for Portugal are aligned with the European average. This is due to e.g. the
recourses (energy, raw materials, etc.) purchased abroad (20 %) and the turnover gained from
exporting (5 % of total turnover). The share of SME’s gaining income from subsidiaries or joint
ventures abroad is significantly higher in Portugal (10 %) than the EU-average (5 %). The time
duration required for exporting is higher for Portugal, while the equivalent value for importing
is in line with the EU average.
Indicator Portugal EU - Average
10.1 Share of turnover from export (% of total) 5.00 5.58
10.2 Share of SMEs gaining any income from subsidiaries
and/or joint ventures abroad (%)
10.30 4.76
10.4 Number of days required to export 16.00 11.25
10.5 Number of days required to import 16.00 13.44
10.6 Share of SMEs exporting outside the EU-27 to all SMEs
(in terms of number of enterprises)
n/a n/a
10.10 SME enterprise had any own imports in 2006-2008 40.33 39.17
10.11 SME enterprise had any direct exports in 2006-2008 32.69 27.13
10.12 SME enterprise invested abroad in 2006-2008 0.32 3.68
Source: SBA Fact Sheet PORTUGAL 2009
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RECOMMENDATIONS
SME’s constitute a vast majority of the corporate environment in Portugal. Therefore, it is very
important to help companies understand the internationalization process. Export/Import,
Licensing, Franchising, Joint Venture and Foreign Direct Investment are some of the many
entry modes that exist. In this paper we decided to focus our analysis on the ones we consider
to be the most important ones.
As previously described, there are advantages and disadvantages for all of them, and there is
not a correct path to internationalize due to the fact there are many factors to take into
account. The economic and political environment, the market that the company decides to
enter, and the company culture are just some of these factors.
Bearing this in mind, it is crucial to make a deep analysis of the market that the SME wants to
enter, the product that is going to be traded, and the risk uncertainty linked with that move.
So, it is not an overnight decision, instead it should be an advisable alternative that SME’s can
consider and evaluate as a solution to their problems or as a growth opportunity. Nonetheless,
it is important to measure the pros and the cons of the vary modes of entry and chose the
most efficient one.
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CONCLUSIONS
Conquering a new market, establishing brands or achieving a certain level of recognition
sometimes requires large initial investments and may lead to a monetary loss in the beginning.
Usually only large companies can provide sufficient financial resources to proceed on their
own. SME’s on the other hand, have to pursue other strategies that match their financial and
economic situation.
Very important aspects in dealing with future problems in the SME area are
cooperative solutions. Such relationships can vary from research to production and from
procurement to sales. It does not necessarily need to be a partner company in the target
region, also cooperating with a company from the home market, which does not operate in
the same value chain, are appropriate.
Other options with low initial investments are licensing, franchising or joint ventures. The
benefits range from providing required local, technical and market-related know-how up to
activities performed by a motivated, independent contractor.
But all of these forms of a cooperative market entry include a high risk, especially if the partner
has the opportunity to become independent after having received enough know-how. It is
therefore important for the expanding company to keep control over the core competencies.
Large companies usually realize their expansion through mergers and acquisitions. These
takeovers are often too costly for SME’s and create a lot of difficulties. Different corporate
cultures and the underestimation of different legal and accounting standards are often
responsible for a failure of mergers and acquisition.
Doing Business Internationally
22
BIBLIOGRAPHY
Charles W. L. Hill; International Business: Competing in the Global Marketplace; New
York, McGraw-Hill, 2000.
Johnson, G.; Scholes, K.; Exploring Corporate Strategy; Whittington, R.; 7Th edition
2005, Prentic Hall
OECD Benchmark Definition of Foreign Direct Investment FOURTH EDITION, 2008.
Pages 48-50
Supporting the internationalisation of SMEs; European Comission
http://www.pmeportugal.com.pt
http://www.ensr.eu/index.cfm
http://ec.europa.eu/enterprise/policies/sme/index_en.htm
http://www.iapmei.pt/
http://www.portugalglobal.pt/
http://www.doingbusiness.org
http://www.franchisedirect.com
http://www.vision-box.com
http://www.bestfranchising.pt
http://www.vivafit.pt/
http://wapedia.mobi/pt/Internacionalização
http://www.oje.pt/noticias/negocios/dao-sul-cria-joint-venture-na-china-para-
aumentar-exportacoes
European SME’s under Pressure Annual Report on EU SME – sized enterprises 2009