To shed light on the external barriers to the internationalization of SMEs, it is worth considering the external environment in which firms operate, as suggested by numerous
authors (Calof and Beamish, 1995; Collis, 1991; Melin, 1992; Zou and Stan, 1998). The external environment consists of factors outside a firm’s direct control (Calof and Beamish, 1995; Porter, 1980). They include the export market characteristics, geographical distance, domestic market characteristics, trade barriers and industry characteristics (Zou and Stan, 1998). Specifically, Melin (1992) suggests paying attention to the social and cultural contexts; due to the very fact of firms’ internationalization, they operate in a number of different social and cultural contexts. Other external impediments to the internationalization of SMEs originate at the level of the national economy. They can include poor institutions, policies, telecommunications and transport infrastructures (OECD, 2005). Deficiencies related to them in developing countries explain why firms from developing countries underperform in international markets (Collier and Dollar, 2002).
As there are many factors that determine the environment and some of them may have a greater impact on firms’ environment than others, Porter (1980) recommends analysing the industry29 structure, which determines the intensity of competition (the firms’ environment) that the firms face. The structural analysis of the industry uncovers the most important constituents affecting firms’ environment and enables firms to design strategies30 based upon the analysis of their strengths and weaknesses in relation to the industry to which they belong. According to Porter (1980), the five forces that affect competition in an industry (the industry environment) and determine the industry structure in any country or international market are: i) the threat of entry into an
industry,31 ii) the threat of substitute products or services, iii) the bargaining power of
29 There is no generally accepted definition of an industry as any definition of an industry essentially involves a choice regarding where to draw the line between established competitors and substitute products, between existing firms and potential entrants, and between existing firms and suppliers and buyers (Porter, 1980).
30 The strategies resulting from this analysis encompass a strategic combination of firms’ resources and capabilities that will allow firms to deal with their environment (Porter, 1980).
31 It includes the barriers to entry and reactions from existing competitors that the entrant can expect, including economies of scale, product differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of scale, government policy (standards, regulations) and expected retaliation (Porter, 1980).
suppliers, iv) the bargaining power of buyers and iv) the intensity of rivalry among the current competitors.32
The paragraphs above show that there are many challenges or barriers stemming from the external environment that may affect the internationalization of SMEs. According to various authors (Acs et al, 1997; OECD, 2005; OECD, 2007b), these barriers are systematically higher for SMEs than for larger firms due to the lack of resources and the lesser ability of SMEs to shape their environment. They impose pressure on firms’ performance and the firms must adapt to the environment to survive and prosper (Collis, 1991). In this regard, the analysis undertaken by Porter (1980) of firms’ environment (the intensity of competition in an industry) stresses that firms can overcome the barriers and threats stemming from the environment by designing strategies that are developed upon their resources and capabilities. The latter highlights the importance of firms’ internal resources and capabilities to deal with external barriers.
2.5.2.1 Classification of External Barriers to the Internationalization of SMEs
Regarding the classification of external barriers hindering the internationalization of
SMEs, Fliess (2007), Leonidou (2004) and the OECD (2005; OECD, 2007b) consider as
external barriers: i) the existing laws and regulations; ii) the product standards; iii) the lack of credit for SMEs; iv) the lack of support and/or advice; v) the cultural and language differences; and vi) the demand conditions.
Leonidou (2004) classifies the above external barriers into four categories:
i) Procedural (unfamiliarity with exporting techniques/procedures and communication failures);
ii) Task (different foreign customer habits or attitudes and intense competition);
32 This includes numerous competitors, slow industry growth, a high fixed or storage cost, a lack of differentiation or switching costs, high strategic stakes and high exit barriers.
iii) Environmental barriers (e.g. strict foreign country rules and regulations, non- tariff barriers, unfamiliar business practices, different socio-cultural characteristics, verbal and non-verbal language differences);
iv) Governmental (lack of home government assistance/incentives for exporting). Other barriers to trade that are not mentioned as often but that still exist include: i) Anti-competitive behaviour on entry by other competing foreign firms (Acs
et al, 1997; OECD, 2007b);
ii) Costs of market entry33 (Acs et al, 1997; OECD, 2005);
iii) Distance.. This increases the transport costs34 and affects the flows of
knowledge as knowledge is transferred through interaction (Nauwelaers and Wintjes, 2003).
It is worth highlighting that of all the external barriers mentioned in this section,
government and policy barriers are considered to be the most pervasive barriers to SMEs’
internationalization (Acs et al, 1997; Alexander and Warwick, 2007; Leonidou, 2004). A variety of authors and supranational organizations, such as Acs et al (1997), the IDB (Llisterri and Angelelli, 2002), Leonidou (2004) and the OECD (2007b), have recognized that firms may have to deal with the anti-competitive behaviours of domestic and foreign origin imposed by governments. The government barriers of domestic origin include infrastructure problems, taxes, corruption and bureaucratic practices (Acs et al, 1997). The actions or inaction of the home government in relation to its indigenous exporters are also government barriers that inhibit the internationalization of SMEs (Leonidou, 2004).
Regarding the government barriers of foreign origin, they can take different forms such as safety and environmental standards, inspection procedures and bureaucratic practices (Acs et al, 1997), taxes and tariffs (Llisterri and Angelelli, 2002) and strict foreign country rules and regulations that strongly affect SMEs’ export performance (Leonidou, 2004;
33 They include costs related to consultancy, product adaptation, travel expenses and higher business and financial risks (OECD, 2005).
34 The World Bank. [Online] Available from:
Llisterri and Angelelli, 2002). In particular, governmental barriers from developed countries, which are more subtle and are becoming stricter and more demanding, strongly affect the internationalization of SMEs from developing countries (Acs et al, 1997; Cruz et al, 2004a). These requirements can be seen as a threat of entry into a specific industry undertaken by governments, which is one of the five forces determining the industry structure, aiming to influence the intensity of competition and profitability in a particular industry35 (Porter, 1980).
This section has highlighted the importance of considering the environment (the industry environment, the national environment and the environment of the country in which the SMEs aim to enter). All of these environments need to be included when analysing the overall environment for the internationalization of SMEs. This is because when firms internationalize in other nations, in addition to the industry environment (the intensity of competition in an industry), there are other factors stemming from the environment that affect firms’ internationalization (external barriers), such as differences in the institutional set-up between the home country and the targeted market in terms of language, culture, norms, habits, laws, economic, knowledge, financial and technological development levels, etc.