Examining Effectiveness of Resource and Institutional based Entry modes of SMEs in Emerging Market

Introduction:

Due to the rapid growth of globalisation, emerging markets offer many opportunities for businesses to expand their operations. The world, including emerging markets, is more connected than ever before through trade and movements of capital, people and information (Dobbs, Manyika & Woetzel, 2015). Several factors influence the decision of SMEs to enter the developing markets that includes liberalisation measures, availability of resources, cheap labour, exploration to joint ventures, local government support, straightforward foreign direct investment, acquisition. Besides, SMEs extend support to host countries by increasing employment opportunities, competition, innovation, trade of skills, technological advancement, and industry expansion. In addition, considering factors such as increased competition, scarcity of resources, less technological advances and a shortage of skilled labour, SMEs seek to enter new markets or economies in order to utilize the local resources and achieve growth.

Moreover, by geographical expansion SMEs emphasise product development and broadening their target audience in the new market and take competitive advantage of developing economies. In addition, strong competition in the home market makes SMEs seeks better possibilities of operational and financial growth in an emerging market. Also, emerging economies offer a significant difference in the formal and informal institutions. Thus, identifying appropriate rising markets is the core strategic decision that enables businesses to set long term targets and objectives. Nevertheless, SMEs can expect growth opportunities in the emerging markets, though they ought to consider risk factors.

Key Characteristics of Emerging Market:

Emerging markets refer to the economies that experience less economic growth in comparison to the economically developed nations.  Emerging economies experiencing rapid economic growth including, a rise in GDP, increase in per capita, and trading by attracting global investors and businesses to operate in their market. The BRICS economies are a group of nations that consist of Brazil, Russia, India, China and South Africa. These large economies have changed their business and trading environment by opening doors for investors, SMEs, MNCs, and talent and technology exchange. Emerging markets are a union of emerging fields, new activities, products and services for which shared rules and norms are not yet in place (Maquire, Hardy and Lawrence, 2004). Although emerging markets offer great potential, firms in countries with large, and well-organised economies might have difficulty exploiting them, which makes it difficult for them to manage volatility and uncertainty.

In recent years, many companies put extra effort to establish their presence in an emerging market by investing or sifting manufacturing and take advantage of low-cost labour, resources, better business exposer, and increased customer base. Furthermore, three main factors influence SMEs’ decision to enter emerging markets. First, work productivity in developing economies is higher than in developed economies. Therefore, the quality of work productivity affects a firm’s performance, sales, and the economy. The second is urbanisation and infrastructure development. Rural populations comprise the bulk of the population in emerging economies. As a result, people migrate to developed areas in search of better education, medical services, infrastructure, and transportation facilities, which increase demand for goods and services, which leads to better business growth. Third, the demography aspect of the emerging economy consists of an average young population. This young population will lead to a skilled younger workforce. In addition, they increase demand and supply in the consumer market, which contributes to GDP growth.

SMEs Entry mode in Emerging Market in context of Institution and Resource-based Entry:

To expand internationally, small and medium-sized enterprises need to safeguard their domestic market from resource constraints along with the emergence of international opportunities. Thus, the decision of considering a suitable entry mode is an essential task for SMEs. In general, the differences between home and host countries internal and external environments influence SMEs decisions about choosing resource or institutional base entry mode as a joint venture, acquisition, and greenfield are other options that allow firms to enter a foreign market. SMEs entry strategies focus on several factors such as understanding the local market, local firms’ performance, access to resources, ownership structure, and market volatility. Thus, to avoid the negative effects of a wrong entry mode on a firm’s performance when entering an emerging market, it is necessary to carry out extensive pre-entry market analysis and get acquainted with local resources.

To facilitate the efficient operation of a market economy, institutions are crucial to its operations. They can ease the ability of firms and individuals to engage in transactions without unnecessary risk. The institution provides support in market assessment before entry as it provides facts and statistics on businesses and their market behaviour which is helpful to reduce failure.  Hence, a well-built institutional framework attracts more businesses and allows them to operate at an affordable or moderate cost. Institutions in host countries represent the market condition that helps SMEs set objectives and formulates a strategy to attain competitive advantage.  Hence, institutional development and the needs of investors to access local resources influence the entry strategies of firms. SME’s seek market effectiveness in this entry mode by adapting their entry as a joint venture or acquisition.  Likewise, when the institutional support is weak in emerging economies, firms face considerable risk. In addition, joint ventures and acquisitions provide means of resources such as networking. Similarly, improved foreign direct investment regulation creates opportunities for more sectors and reduces formalities such as getting permits and licences. Hence, firms will no longer only rely on Joint ventures and acquisitions to access the resources and understand local business environments.

Moreover, resource-based entry modes help firms to determine their need for resources as well as their capabilities. The resource-based view suggests that firm internationalization is dependent upon the resources and capabilities of the firm and that organizational knowledge is a prerequisite for competitive advantage (Barney, 1991; Wernerfelt, 1984). In addition, establishing a well-built relationship in the domestic market extend support in accessing information, market analysis, finance and labour force from the beginning phase of the establishment. While learning about the sources and capabilities of their partners, the relations are increased steadily (Johanson and Vahlne, 2009; Kamakura et al., 2012). Hence, learning about resources and capabilities helps SMEs to gain stability and long-term relations with firms and institutions in emerging markets. Additionally, a company’s entrepreneurship and internationalisation go hand in hand, particularly for SMEs. Through networks, firms can enhance their capabilities to exploit business opportunities entering a foreign market.

Conclusion:

To conclude, global expansion can extend market opportunities, increases customer base, reduce trade and transaction costs while increasing profits (Kogut, 1985).   Moreover, it can boost the competitive advantage and performance of the firms (Kogut, 1985; Porter, 1985). The growing middle-class communities in emerging economies increase target group and consumer purchasing power that impact firms’ performance and profitability in the new market.  For SMEs, choosing ways to enter a market is a critical strategic decision since entry involves committing resources to different target markets with varying levels of risk and profit return. Due to their flexibility and low-cost structures, SMEs tend to perform their business activities within the low-risk formation. Thereby they can reduce the perceived risk associated with operating in emerging economies. To be successful in emerging markets, companies need access to local resources, decrease entry risks, increase profitability, and overcome challenges.  Therefore, networks and relationships with other firms, agents in the distribution channels, and government authorities are vital assets in emerging economies (Peng and Heath, 1996).

References:

Barney, J., (1991), “Firm Resources and Sustained Competitive Advantage,” Journal of Management, 17(1), 99-120.

Berglund, H., & Malmsjö, O. (2009). SME Entry Strategy in Foreign Markets (Master Thesis). Baltic Business School, University of Kalmar.

Dobbs, R., Manyika, J., & Woetzel, J. (2015). No Ordinary Disruption: The Four Global Forces Breaking All the Trends.The Perseus Books Group.

Hofer, K. M. (2015). How do Austrian small and medium-sized service enterprises internationalize? Entry strategies into the emerging markets of Central and Eastern Europe and the role of relationships. International Journal of Business and Economics, 14(1), 23.

Johanson, J. and J.-E. Vahlne, (2009), “The Uppsala Internationalization Process Model Revisited: From Liability of Foreignness to Liability of Outsidership,” Journal of International Business Studies, 40, 1411-1431.

Kamakura, W. A., M. A. Ramón-Jerónimo, and J. D. Vecino Gravel, (2012), “A Dynamic Perspective to the Internationalization of Small-Medium Enterprises,” Journal of the Academy of Marketing Science, 40(2), 236-251.

Khalil, D. (2017). Expansion of SMEs into Emerging Markets. Lecture, Zuyd University.

Kogut, B. (1985). Designing global strategies: Comparative and competitive value-added chains. Sloan Management Review, 26(4), 15–28.

Laufs, K. (2015). Foreign Market Entry Mode Choice of Small and Medium-Sized Enterprises (Doctor). University of Düsseldorf.

Lin, F., & Ho, C. (2019). The knowledge of entry mode decision for small and medium enterprises. Journal Of Innovation & Knowledge, 4(1), 32-37. doi: 10.1016/j.jik.2018.02.001

Lindsay, V., Rod, M., & Ashill, N. (2015). SME entry into an emerging market: a resource based and institutional approach, 1-16. Retrieved from https://ro.uow.edu.au/cgi/viewcontent.cgi?article=1698&context=dubaipapers

Maekelburger, B., Schwens, C., & Kabst, R. (2012). Asset specificity and foreign market entry mode choice of small and medium-sized enterprises: The moderating influence of knowledge safeguards and institutional safeguards. Journal of International Business Studies, 43(5), 458-476. doi: 10.1057/jibs.2012.12

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.

Meyer, K., Estrin, S., Bhaumik, S., & Peng, M. (2009). Institutions, resources, and entry strategies in emerging economies. Strategic Management Journal, 30(1), 61-80. doi: 10.1002/smj.720

Michael, & Hitt (2015). THE INTERNATIONALIZATION OF SMES IN EMERGING ECONOMIES: INSTITUTIONAL.

Peng, M. W. and Y. Luo, (2000). “Managerial Ties and Firm Performance in a Transition Economy: The Nature of a Micro-Macro Link,” Academy of Management Journal, 43(3), 486-501.

Peng, M.W. & Heath, P.S. (1996). The growth of the firm in planned economies in transition: institutions, organizations, and strategic choice. Academy of Management Review, 21(2), 492-528.

Porter, M. E. (1985). The competitive advantage: Creating and sustaining superior performance. New York: Free Press.

Techo, Vincent. (2018). Introduction to Emerging International Markets. 10.13140/RG.2.2.18491.72482.

Wernerfelt, B., (1984), “A Resource-Based View of the Firm,” Strategic Management Journal, 5(2), 171-180.