Small and Medium-Sized Enterprises Internationalization from Developing Countries: History
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Contributor:
Md. Touhidul Islam
,
Md. Aminul Islam
,
Muhammad Muazzem Hossain
,
Oluwaseyi Ebenezer Olalere

Internationalization has become increasingly important to the competitiveness of firms of all sizes, including small and medium-sized enterprises (SMEs). SMEs play a crucial role in the development of lower-income countries. Firm internationalization, which refers to the increasing involvement of organizations in international markets, is a key instrument for companies seeking global horizontal integration and developing countries seeking to ensure the long-term viability of their development in various manufacturing and service sectors. As barriers to internationalization gradually rescind, firms in developing countries recognize that competing globally is no longer a choice but a necessity.

  • SMEs
  • Bangladesh
  • developing countries
  • Uppsala model
  • firm internationalization

1. Introduction

Bangladesh, a developing country [1] in South Asia between Myanmar and India on the Bay of Bengal. It is a country with a population of 170.279 million [2] and a total GDP of 416.26 billion, according to the 2021 World Bank Country Data [3]. According to the World Economic Outlook Database, Bangladesh is considered as one of the emerging and developing countries in the world [1]. The projected real GDP growth in percent and inflation rate in percent of SAARC countries (South Asian Association of Regional Cooperation) is mentioned in the following chart. This chart indicates the expected economic performance of Bangladesh among SAARC countries (Figure 1).
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Figure 1. Note: Real GDP growth% and inflation rate% as of April 2023, collected from IMF Country Information [2]. Source: International Monetary Fund (IMF), IMF Country Information, 2023.
Bangladesh is also one of the lowest labor cost providers among many Asian countries. The wage growth rate is also one of the lowest, which is indicated in the following chart (Figure 2).
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Figure 2. Note: Real wage growth rate of some Asian countries, collected from ILO Stat Database. Source: International Labor Organization (ILO), 2020 [4].
SMEs are seen as growth engines and innovators. They contribute significantly to economic growth and job creation. SMEs are changing the face of the Bangladeshi economy. SMEs are critical to the country’s rapid industrialization, economic growth, job creation, and poverty reduction. The importance of SME cannot be overstated. According to Fjose, Grunfeld, and Green, SMEs make up the majority of businesses in sub-Saharan Africa. They are important contributors to employment, income, integration, and innovation and are present in both developed and emerging economies [5]. Regardless of a nation’s income level, SMEs contribute significantly to employment, with a concentration in developing nations [6]. Additionally, Criscuolo, Gal, and Menon give research that supports the fact that SMEs account for a significant portion of employment in OECD nations [7]. According to data, large corporations only account for 37% of all employment in OECD nations, while SMEs, including microenterprises, account for 63% of it [8]. The total number of SMEs in Bangladesh is estimated to be 7.9 million, of which 93.6 percent are small and 6.4 percent are medium-sized firms. According to the 2003 Private Sector Survey, around 6 million SMEs have less than 100 employees. SMEs account for 80 to 85 percent of industry employment and 23 percent of total employment in Bangladesh [9]. Bangladesh’s SMEs constitute the backbone of the country’s economy.
SMEs are non-affiliated, self-contained businesses with fewer than a certain number of employees. This figure differs per country. The most common upper limit for defining an SME in the European Union is 250 employees. According to the National Industrial Policy Order 2010, the Bangladesh Bank has updated the definitions of small and medium enterprises (SMEs). Bangladesh Bank believes banks and financial institutions will benefit from their definition. Small companies in manufacturing are those with assets of $46,219.26 to $924,602.97, with 25 to 99 employees. In addition, small enterprises will employ 10 to 25 in the service industry and business and have assets worth $4622.84 to $92,460.30. Medium-sized enterprises in manufacturing have assets worth $924,602.97 to $ 2,771,787.75 (excluding land and factory buildings but including replacement value) and employ 100 to 250 people. On the other hand, medium businesses in the service industry and business will employ 50 to 100 people and have assets worth $92,438.53 to $1,386,590.86 (Note* 1US $ = 108.18 Bangladesh Taka as of 23 June 2023).
Several foreign companies are operating in Bangladesh. Aside from these, there is a long list of franchise foreign companies run by Bangladeshi entrepreneurs under their brand names. Additionally, many big companies in Bangladesh are engaging in internationalization. However, SMEs are not engaging in internationalization compared to large firms. The lack of involvement of the SMEs in Bangladesh is not a good sign, as the total number of SMEs in Bangladesh is estimated to be 79,00,000, of which 93.6 percent are small and 6.4 percent are medium-sized firms. By engaging in internationalization, SMEs can grow, increase their revenue, and minimize business risks. These firms are missing the opportunity to gain recognition and the chance to increase their business. Some factors are perceived to be hindering these SMEs from engaging in internationalization.

2. Firm Internationalization

An internationalized firm is defined as a firm which has expanded its operations beyond its home market through exporting, non-equity entry modes (such as licensing and franchising), strategic alliances (such as joint ventures), acquisitions, or the establishment of subsidiaries [10].
Technology and communication advancements have made it easier for businesses of all sizes and locations to do business with one another. The globalization of major corporations and service providers has enhanced the opportunity for SMEs to participate in various aspects of those companies’ value chains [11].
Internationalization is increasingly crucial for long-term success. In today’s context, SMEs that start with a global strategy can immediately take advantage of cross-border activities, which provide chances for revenue development, knowledge exchange, and capability enhancement, enhancing the firm’s long-term competitiveness [12].

3. Developing Countries

Compared to other countries, a developing country is a sovereign state with a less developed industrial base and a low Human Development Index. A developing country, a less developed country, or an emerging market have a lower GDP than developed countries and a less mature and sophisticated economy than developed ones [13]. (Developing country firms are often small and have resource constraints that limit their contact with local and international contexts [14]); it is critical to investigate the concerns they encounter.
SMEs in developed countries take less time to internationalize. In contrast, SMEs in developing countries are resource-constrained, lack international orientation, face decision-making inertia, and have no domestic or international political ties, making them more vulnerable and taking longer to internationalize. Internationalization may be a key economic contributor in developing countries and a development engine for individual small businesses [15]).

4. Uppsala Model

The Uppsala model is one of the concepts describing the internationalization process of firms. The theoretical foundation of the Uppsala model is the firm’s behavioral theory [16][17]. According to Forsgren et al. [18] the Uppsala model’s core concerns are how firms learn and how that learning impacts the firms’ investment judgments. According to the literature, internationalizing companies are classified into five phases based on their level of involvement and the amount of money they commit; export, licensing, franchising, joint ventures (partnerships), and wholly owned subsidiaries are some of the options available [19][20]. According to this perspective on internationalization, the lack of expertise and psychic distance is the most significant impediment to firm internationalization. If the countries have similar levels of development in terms of population, GDP per capita, social literacy rate, trade statistics, geographical distance, or political structure, they are psychically close to one another [21][22].
The Uppsala model is constructed on four core concepts: market commitment, market knowledge, current activities, and commitment decisions. These four concepts are then divided into state aspects and change aspects. The two state aspects are market commitment, which is the resources committed to foreign markets, and market knowledge, which is the knowledge about foreign markets and operations possessed by the firm at a given time. The two change aspects are current activities and commitment decisions [23][24]. According to the Uppsala model, two inextricably linked factors are market knowledge and commitment. Knowledge can be regarded as a human resource, implying that the more knowledge a company has about a business, the more important the resource and the more committed the company is to that market [25].

5. Technological Capabilities

Technological capability is defined as a company’s ability to design and develop new processes and products, uniquely upgrade knowledge and skills about the physical environment, and transform that knowledge into instructions and designs to efficiently create a desired performance [26]. Technological capability is vital in achieving high internationalization performance [27][28] because it allows a company to perform core business activities such as offering products and services, gaining market acceptance, surviving in competitive markets, and achieving financial success.
Three indicators are used to measure technological capabilities: R&D investment compared to competitors, technological competence in meeting the needs of overseas customers or developing new products [28] and product quality compared to competitors [29].
The findings of empirical research conducted on Korean and Canadian SMEs demonstrate that R&D and product features have a substantial impact on worldwide performance. The case studies discovered a favorable relationship between R&D intensity and motivation for export operations [27]. Esteve-Perez and Rodriguez used firm-level data on Spanish SME manufacturers to empirically research the substantial connection between R&D and export activity [30]. They strongly suggest that participating in R&D activities increases a company’s chances of exporting, increasing its chances of R&D success. Empirical studies show that technological expertise is a valuable resource for SMEs, especially in high-tech industries, and that technical skills and superior products and services are necessary for achieving high worldwide performance [28][29].

This entry is adapted from the peer-reviewed paper 10.3390/su151511654

References

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