This sub-section surveys the importance of services industries and the contribution of SMEs to the global economy. While disaggregated information on the size of internationalising Australian services firms is not available, both manufacturing and services SMEs share many characteristics and thus might experience similar barriers to internationalisation.
In most OECD countries the service sector accounts for more than 60% of the gross domestic product and this share is constantly increasing (Apfelthaler & Vaiman, 2012). While exports of services contribute only 19% of the global trade (4,425 billion US$ in 2013), the contribution in value added terms is 45% of the total world trade (OECD and
52 WTO, 2012; World Trade Organisation, 2013). Further, according to UNCTAD’s World Investment Report (2014), foreign direct investment in services reached $540 billion in 2013, representing 53% of the total FDI and surpassing the manufacturing sector. During 2012-13, services were the fastest growing sector in terms of the value of announced greenfield projects (+20% increase compared to 2012) (UNCTAD, 2014). The increase in services FDI is not limited only to developing countries; in 2011, the service sector FDI inflows into China surpassed the manufacturing sector (UNCTAD, 2012). Recent publications (e.g. Apfelthaler & Vaiman, 2012; Freeman & Sandwell, 2008; Simon & Welsh, 2009) provided evidence that services SMEs are playing a significant role in national and transnational economies. Thus, the internationalisation of services industries is becoming increasingly important to global business activities. An OECD (2012) report depicted strong dominance of large firms in exporting activities (goods and services) with the only exceptions being Italy and France. The extent to which SMEs operate abroad varies significantly with the mode of internationalisation. In case of the European Union, 25% of small firms engage in export activities whereas only 2% of them commit to Foreign Direct Investment (European Commission, 2011). Across countries, the propensity of SMEs to commit to FDI is lower than their commitment to export activities. Technological advances, globalisation and improved information flows have facilitated the ability of SMEs to internationalise and there is an increasing engagement of smaller firms from manufacturing and services industries during the past decade (OECD, 2005). Access to information and knowledge provides substantial internationalisation opportunities for entrepreneurial SMEs (Liesch & Knight, 1999). However, the lack of knowledge accumulated through experiential learning can still act as a barrier to international entrepreneurship (Casillas, Moreno, Acedo, Gallego, & Ramos, 2009). SME internationalisation is positively related to economic growth and job creation, hence, it is important to gain a clear understanding of SME knowledge accumulation (OECD, 2005).
As a result of trade liberalisation and economic deregulation since the 1980s, some Australian SMEs actively joined large corporations in accessing foreign markets. Australian internationalisation in the last 20 years has been dominated by large firms (Dick & Merrett, 2007). During 2012-2013 approximately 11% of all Australian SMEs exported goods, accounting for 84% all Australian firms that export goods and services (ABS, 2013, 2014; Sensis, 2012). Even so, SMEs contribute only 5% to the value of all
53 goods exported from Australia (ABS, 2014). At the same time, internationalisation of Australian SMEs is lagging behind other regions. As an example, 25% of European SMEs engage in export (European Commission, 2010). Austrade (2008) reported that Australian SMEs are finding it difficult to tap into the foreign markets.
Services firms account for only 7% of Australia’s export community (firms that export goods and services) (ABS, 2014). This is significantly lower than their manufacturing counterparts. The total number of Australian services exporters is 3,323 firms, while the total of goods exporters was 43,045 in 2013. The Business Council of Australia (2008) expressed their concern with the fact that the nation’s market share of international services exports declined when compared to the levels attained in mid 1990s. Their report prioritised developing and implementing strategies to enable Australia’s services sector to increase its global market share. The slowing growth in export of services is ‘a significant issue for the continuing development and competitiveness of Australia’s economy … it is an area that should be a source of future competitive strength’ (Business Council of Australia, 2008: 19).This can be achieved by further development of relevant skills and recognition of the importance of research in services disciplines (Business Council of Australia, 2008: 10).
During 2012-2013, there was an increase in the number of service exporters by 13% (ABS, 2014). This increase was due to a rise in the number of exporters with exports less than $1m (ABS, 2014). While the Australian Bureau of Statistics does not provide data on the business size of the service exporters, it can be claimed that, similar to the manufacturing sector, most of the Australian service exporters can be classified as SMEs. The benefits of internationalisation have long been accepted; internationalised firms have higher than average productivity, tend to be more productive and innovative, and the exporting community alone provides one in five jobs in Australia (Austrade, 2002; UKTI, 2007). Therefore, it is important to do more to capitalise on the opportunities present in global markets. The key barriers that Australian SMEs (goods and services) experience during the internationalisation are: limited information to identify suitable foreign business opportunity, inability to establish links with reliable foreign representatives and potential customers (OECD, 2009).
The Australian Trade Commission (Austrade) responded to these barriers by facilitating introductions to overseas buyers and partners, as well as providing onshore and offshore
54 networks to identify market opportunities and relevant information (Austrade, 2008). Austrade took active steps to facilitate partnerships, develop export alliances and business networks in order to encourage relevant managerial knowledge exchange. However, studies by Export Finance and Insurance Corporation (2008-2010) suggest that information gaps remain a critical challenge to the internationalisation of Australian SMEs. In an era when extensive information is publicly available, Australian SMEs still appear to lack relevant international experience and knowledge (Fenwick, Edwards, & Buckley, 2003; Freeman, 2008; Lewis & Zalan, 2005; Zalan & Lewis, 2006).
The underlying reason for this seems to be the lack of relevant international experience and knowledge. The following section will define experiential knowledge, because, it is - in line with the Uppsala model assumption - a prerequisite for internationalisation and foreign market commitment of firms.