Currently, the problem of the SME sector in Pakistan is that it is not performing at the level it is expected to. Although large corporations have already started regaining their power lost during the industrial crisis of the previous decade, SMEs are still unable to reach their full potential after all those years of recession (Bari, Cheema & Haque 2005). SME Bank and Small and Medium Development Authority (SMEDA) have been established by the government in order to foster the process of SMEs recovery whereas State Bank of Pakistan has been made responsible for the promotion campaign.
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State Bank of Pakistan classifies all the organizations having up to 250 (if the firm is involved in manufacturing) or up to 50 employees (if the organization deals with service provision or trading) under the category of SMEs. The other criteria that have to be met, according to the Bank, are (SME Bank):
- A trading organization can be categorized as SME only under the condition that its total assets do not exceed Rs. 50 Million, not including the land and building.
- A manufacturing organization can be categorized as SME only under the condition that its total assets do not exceed Rs. 100 Million, not including the land and building.
- Any firm can be categorized as SME under the condition that its annual sales are less than Rs. 300M.
If the organization classified as SME by the initial parameters exceeds any of the mentioned limits, it is automatically excluded by the State Bank of Pakistan.
At present, the country has almost 3.2 million manufacturing and trading units that come under the category of SME. Since such firms provide a large number of jobs, the whole sector currently employs approximately 80% of the total labor force of Pakistan (excluding those involved in agriculture). Furthermore, besides solving the problem of unemployment, SMEs also increase the GDP of Pakistan by 30%. It is worth mentioning, however, that the majority of these organizations operate in the small wholesale or retail business and rarely employ more than 5-10 people. The research of the market conducted by World Back revealed that 98% of SMEs in the country employ up to 5 workers while 99% of them have no more than 10 employees (Khawaja 2006).
Although the contribution of the sector to the development of the economy is hard to overestimate, it is still far from being well-organized and operated. 98% of all SMEs are sole proprietorships, while only 2% are partnerships; practically none of them hire professionals to deal with their business affairs. As a result, such organizations are quite profitable for their owners; yet, their growth rate is slow. This implies that their sustainability is questionable when they have to deal with a crisis. They are not able to bear recessions and simply disappear from the market. Only 4% of them were able to survive previous economic shocks (Khawaja, 2006).
In contrast to the situation in the majority of developed countries, the SME sector is not the leading one in Pakistan, which is explained by poor policies, unfavorable macro-environment, lack of financial resources, and underdeveloped infrastructure. All these factors hinder the advancement of SMEs, preventing them from making a better contribution to the economic growth and job creation (Shahab, Khawaja 2001).
The study at hand is going to collect relevant data concerning SMEs to identify and describe the challenges that the sector has to encounter in the process of internationalization.
The company is nicknamed Auto Solutions as per the request of its administration so that the real name of the enterprise should not be mentioned in the paper.
Overview of the Company
The company is a private limited organization involved in manufacturing in the capital city of the country. It has been successfully producing equipment (such as CNG compressors, CNG dispensers, and CNG kits, rickshaws, motorcycles, generators, and other parts) in Pakistan since 1992. Auto Solutions has earned a good reputation since all its products meet the international standards and are approved by the regulatory authorities of the oil and gas industry as well as by the British Electrotechnical Approvals Board and British Gas. The organization presently employs 200 people (the medium size firm category), who are highly experienced in their field despite their average educational background. In order to use the company for achieving the purposes of the given study, the managing director was interviewed.
The Process of Internationalisation
The process of the internationalization of Auto Solutions began in 2000 from the expansion of exports to the British market. Recently, the focus has been shifted to the developing markets of Indonesia, Bangladesh, and Malaysia. The choice of the neighboring countries is a non-random one. According to the managing director, it was easy for the company to win a competitive edge in these markets due to low prices and high quality of the products offered. Presently, Auto Solutions, which has already achieved significant results, generates more than 30% of its total profit from foreign sales.
The idea to start internationalization from Great Britain is explained by the presence of networks in the British market as well as by more substantial knowledge of the market potential. The expansion into Asia began later when the organization already gained some experience in international trade. The respondent also mentioned that the company is considering the idea of finding foreign partners in order to strengthen its position. Now, the products are distributed by authorized representatives since there is no production office in the global market.
As far as innovation is concerned, the leaders of the firm realize the importance of new product development for increasing competitiveness in foreign markets. That is why new ideas are introduced every year. Uppsala internationalization model is given preference since it allows gaining maximum knowledge to win neighboring markets. The organization is currently in the second stage of the process since its exports are stable and regular (Johanson & Vahlne 1977). Although it still resorts to outsourcing, hiring services of the third party in China and Europe, the office in Bangladesh manages all activities by itself. Thus, it can be concluded that the combination of direct and indirect entry mode (coupled with the selected distribution strategy) allows the company to expand its presence in the global market.
The manufacturing facility of the firm is located in the most intensive zone Islamabad industrial sector. Since it began operating in 2000, the financial position has been stable, without any considerable deviations from the average level. However, the organization was still negatively affected by the recent economic crisis. While it was previously possible to maintain operations with the owner’s capital as the only source of finances, it is now crucial to find external resources coming from other firms of the government. It was found out in the course of the interview that the banking sector of the country can provide considerable support during recession times. Therefore, the company resorts to short and long-term loans to be able to continue penetrating into foreign markets. The land the firm uses for its manufacturing facility is leased from the government of Pakistan.
There are three major categories of intangible resources: technology, human resources, and brand name. 160 employees of the firm are engaged in factory work as technical and labor staff; 30 people work in office as clerics or managers. Some of the latter have higher education and rich experience. However, there are still many of those who are poorly educated although being rather experienced. As far as the factory staff is concerned, most of the technical specialists and engineers have an average educational background and considerable work experience.
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There are certain difficulties connected with the introduction of innovative technologies into the process of manufacturing since the majority of employees lack sufficient knowledge and skills to be able to operate new, more advanced equipment. That is why Auto Solutions has to adhere to old-fashioned machines and methods.
The organization has registered trademark “X”, which is practically unknown beyond the borders of the country. The major goal of the firm as per the brand name is to win international recognition due to the quality of its products. However, for this purpose, it is essential to improve the managerial style to be able to compete with established brands.
According to the respondent, the major resource at the current stage of the internationalization process is the knowledge that the company is gaining about the global market in general and foreign markets, in which it currently operates, in particular. For obtaining maximum information, a lot of sources are used, including the Internet, business reports of other organizations, trade shoes, etc. The key goal is to identify whether the requirements of the customer in other markets correspond with those that the company has identified for the domestic market. This way the firm can create high demand for its goods.
Small and medium businesses in Pakistan are supported by SMEDA, the government authority that is aimed to maintain the domestic market. Yet, this support is not provided for the purposes of internationalization. The managing director states that the absence of support is one of the major factors making it complicated for SMEs to collect data about necessary for successful global operation. That makes Auto Solutions rely on the owner’s capital as the key source of finances. Due to the fact that its internationalization process gives considerable results, it receives a tax rebate, which is also beneficial for further development. The firm can now afford to hire specialists whose task is to gain all the required information about the market, the industry, the key competitors, and the customer demands. Yet, only employees within the company’s own network are trusted to represent the products on the global level.
Global Business Drivers
Overview of the Company
Global Business Drivers is a well-known SME that was established in 2004. The company is headquartered in Islamabad, Pakistan, and is currently manufacturing sports equipment, including football, baseball, cricket, and other accessories. Considering the economic situation in the country, the organization shows rather good performance indicators. Its effective operation in the domestic market is largely explained by the international presence. The firm is categorized as a small-size enterprise. In order to collect necessary information about its business processes, the marketing manager was interviewed.
The process of Internationalisation
The firm started exporting its goods to foreign markets in 2007 when its domestic performance allowed expansion. Its success in the global market is accounted for by the growing demand for sports-related goods, the popularity of which has been spreading from the West. The marketing manager of Global Business Drivers believes that entering the global market was inevitable since it was the only way the company could increase its profit margin, which was no longer possible in Pakistan. However, despite the significance of this step, the organization will generate 80% of its revenue in its home country. Its goods are now distributed in Europe and Asia; the major export is football accessories due to the popularity of this sport in both markets.
The company relies on promotion opportunities as the major criteria for selecting new markets. Owing to the fact that exports of the firm are still irregular, it has not gone further than the first stage of internalization yet. The company applies the Uppsala model to explore the nearest markets and to gain necessary information for further expansion. The current knowledge of the international market is rather low which makes Global Business Drivers resort to the services of third parties to be able to export their products to the chosen areas.
The key resources of the company are its finances, the best part of which comes from the owner. A small part of the capital is gained from the support of various financial and other institutions. However, despite several sources of investment, the firm still has to rely on its own revenue. The problem is that receiving finances through banks implies high-interest rates and long-lasting procedures. Moreover, banks in Pakistan do not easily trust SMEs since, in case of a crisis, the majority of them are unable to pay their debts. However, internationalization activities give the company a tax rebate. This does not make a lot of difference but is still an encouraging sign.
Global Business Drivers has several departments that together employ 20 people. Most of those who work in the administration have degrees in management and rich work experience in the field. The respondent explains this by the necessity to have professional staff in order to ensure the effective running of the business. He himself is capable of managing the company’s activities at the highest level since his graduate degree is coupled with industrial experience. As far as production assembly workers are concerned, they are not required to have higher education (although prior experience is welcome).
In order to investigate foreign markets and gain more information about their customers, the organization conduct meetings with international delegation. The major factors that presently determine its activities include the quality of products and product services, customer demand, and short lead-time.
According to the managing director of the International Business Resources, both domestic and foreign operations of the company rely on finances as the resource. Among other resources, there are agents and representatives networks. Another significant success factor is the implementation of modern technologies since the product requires modern equipment. However, more financial resources would solve all other related issues.
As has already been mentioned, the company does not receive any significant support on behalf of financial institutions, which implies that its key internationalization goals are achieved independently. The assistance provided by the government and banks is sufficient to cover the expenses required for global expansion. According to the respondent, the main problems that prevent the firm from cooperating with banks include high-interest rates, unavailability of both financial and non-financial resources in due time, and a complex application procedure. It is much easier for the owner to do business with private organizations. However, it is still rather pressing due to high margins on loans and short loan periods.
Overview of the Company
Islamabad Textile was founded in 1998 and, as it is evident from the name of the organization, is involved in textile production, including cotton, fabrics, polyester, and other materials. As the previous companies, this one is located in Islamabad, Pakistan. Since the textile industry is gaining popularity both in the domestic and international markets, there are good expansion opportunities for the organization. However, the major obstacle is high competition since a lot of firms in Pakistan produce textiles. Still, Islamabad Textile continues to export its goods to foreign markets, and the performance it shows fully answers its standards. The company employs 150 people, which allows categorizing it as a medium-sized enterprise. For the purposes indicated in this paper, the managing director of the firm was contacted.
The company made a decision to expand its operations to foreign markets in 2000 since the Pakistan textile industry is huge indeed, which does not allow increasing profit margins. Therefore, the leader of the company concluded that a high level of competition and the promising prospects offered by foreign markets made internationalization the only effective solution. Currently, the major export goods of Islamabad Textile are towels and bedsheets. The firm is developing rapidly in all directions: it already has a presence in Europe, Asia, and the Middle East. However, despite all the enumerated challenges in Pakistan, the organization still has rather a big consumer market there.
The decision to enter this or that new market is based upon profit margins they can provide, the ability to build a sustainable customer network, and the complexity of the export process. The investigation of potential markets is usually performed during exhibitions, trade shows, and online communication with other firms’ representatives. The Uppsala internationalization model is applied to the company’s foreign operations. Islamabad Textile is still at the first stage of the process since its exports are irregular. The organization outsources its activities in other markets, which allows stating that an indirect approach is used (Kotler & Keller 2006).
In the case of this firm, the amount of physical and financial resources needed for successful internationalization is defined by the peculiarities of the target market. Yet, regardless of the country, the company still lacks sufficient finances to be able to meet international standards, which significantly hinders its performance and does not allow full satisfaction of potential customer needs. The problem is that the company’s local profit is practically the one resource covering the needs posed by internationalization.
That is the main reason Islamabad Textile is looking for support from both government and private financial units. Although there is an opportunity to take SME bank loans, the company prefers to do without it since interest rates are too high whereas the sum is far from being satisfactory. Thus, its growth is considerably slowed down due to the lack of investment. However, the firm resorts to the services provided by some lease companies that offer machinery and technology since the costs of equipment are high. The company receives a tax rebate, which is too small to be considered as a source of additional financing.
The organization employs 150 people from different educational backgrounds and experiences. The majority of managerial and administrative staff have a graduate degree and a minimum of 5 years of work experience in the textile industry while textile engineers have an engineering degree with a minimum of 3 years of professional experience. All other workers involved in manufacturing have average education and different experience in this or other industries.
The owner of the company also has a related education, which helps him better understand all organizational processes and make reasonable decisions that contribute to the future success of the firm. In order to win customer loyalty and attract business partners and investors, the company organizes trade shows and meetings with foreign traders. It has also registered its official brand name “Pearl Capital Textile” to ensure recognition in the global market. According to the managing director, the major success factors of the organization are high-quality products, cost-effectiveness, and in-time delivery of exports.
As in the case of the two companies discussed above, the resource playing the major role in the internalization of the firm is money. Furthermore, the significance of innovation is also high due to the fact that the textile industry is an ever-changing one. Thus, companies operating in this sector must be able to apply new practices to improve quality, product design, technologies, and materials to be able to stay afloat. This requires huge investments from outer sources. According to the managing director, the main reason that the budget is insufficient is that the organization fully relies on its internal resources.
As mentioned above, the firm disposes of its own reserves to foster development. Since this amount is inadequate to satisfy all needs of the company, financial support on behalf of the government and private organizations would be welcome. There are several private banks that cooperate with Pearl Capital Textile; however, they provide only short-term loans to be on the safe side. Another supporting organization is SMEDA that finances training for employees. Some help is also received from the government for achieving internationalization goals. The financial director of the company is convinced that increased investments will lead to dramatic improvements in the firm’s performance.
Having provided brief overviews of the three companies, the paper will proceed with comparing them in the present section. The major similarities include the application of the Uppsala model for internationalization and the use of indirect approach (exclusively or in combination with the direct one). All organizations require additional financial resources to foster their development in foreign markets.
However, for one company, the key problem is still the lack of market knowledge rather than money. All the case studies reveal that there are certain government and private institutions that provide some support to SMEs in the country; yet, they mainly support the domestic market. If compared with developed countries, such enterprises in Pakistan do not receive sufficient support to maintain their operations in the international market.
Having conducted three interviews with the leaders of the three case organizations, it was identified that Pakistani SMEs use different strategies as per their local and international activities. Despite the importance of international presence, the case analysis proves that SMEs still earn much more in the domestic market due to their high potential. All three firms under analysis are similar in their strategies to explore new markets; however, they opt for different approaches to guide their internationalization process. It was also identified that partnerships with foreign companies are not uncommon for Pakistani firms. These collaborations help them deepen their market knowledge and understand customer demands. Outsourcing is quite popular despite the fact that a direct approach is also used.
The Uppsala model all three companies use directs them to the closest Asian markets as a good start for the internationalization process since these markets present fewer risks and promise more opportunities for future expansion. Besides, this choice is explained by the desire of all companies to enter those markets about which they have obtained maximum information. It has been found out in the present research that Pakistani firms tend to opt for agents’ services in order to penetrate into a new market.
They do not generally expect quick results and prefer taking incremental steps. It is typical of them to rely on market research and practical knowledge before deciding to expand their business activities. The major difficulties they have to encounter are connected with the lack of innovative solutions and equipment, language barriers, and strong competitors from developed countries. All these factors make it too difficult for them to open subsidiaries in foreign markets and create the necessity to seek partners, improve technological provision, and foster innovation.
All three interviews conducted with managing directors of the companies reveal that despite some profits obtained through internationalization, the performance of SMEs cannot be called fully satisfactory due to the lack of advanced technology and innovative methods of manufacturing. Besides, the distribution of profit is a very demonstrative indicator in this case. The major turnover of the firms comes from their domestic operations, which means that the success of industrialization is currently not decisive.
According to Westhead, Wright, & Ucbasaran, (2001), this might be explained by the fact that the success of companies in the global market is typically determined by the number of resources, of which they can dispose. Therefore, despite using appropriate strategies for each new market, these organizations do not obtain any considerable results. Although all kinds of resources are crucial for success, the major focus is still on finances and technology and innovative manufacturing practices. Labor resources of each company are largely dependent on financial ones since they define how many well-qualified professionals can be hired. Since direct and indirect approaches are combined in the operation of Pakistani SMEs, it allows partially compensating for the lack of language and market knowledge.
That is why investment is the key problem that has to be solved. All the interviewed authorities agreed that the support provided by the government and private businesses is insufficient and is mostly aimed at improving their domestic activities since internationalization is too expensive to sustain. Thus, for succeeding in foreign markets, companies have to implement various strategies. Generally, they either create a competitive edge by setting low prices in comparison to the market average or select those markets where their superiority will reveal itself from the start.
In order to assess the performance of SMEs at the global level, the about of turnover is used as the main indicator. In the analyzed cases, it does not exceed 30%, which means that the domestic market is much more profitable for these firms. However, due to the unstable character of the Pakistani economy and the lack of domestic demand, many SMEs now opt for taking risks in the international arena.
Comparison of Major Resources
The initial stage of the internationalization process is marked by a number of issues Pakistani firms have to solve. Since they tend to rely on their internal resources as well as the support of private organizations, the major focus is on obtaining additional finances. If compared to Sweden, the situation with funding is much more pressing and difficult to resolve. There is a possibility to take loans from both government and private banks on high interest. Moreover, Pakistan is less developed in terms of technology, which makes its goods less competitive.
Another important obstacle to internationalization is the lack of well-educated and skilled workers. This keeps entrepreneurial activities at a low level. Yet, the absence of a suitable managerial style may also undermine success (Bari, Cheema & Haque 2005).
All these problems can be easily resolved by finding new sources of investment since the major resource required for internationalization is money. That is the reason firms typically rely on domestic operations before sufficient market knowledge is gained. Finances are also needed for winning the trust of the most progressive banks that are eager to invest in the company. It is impossible to receive a loan, equity, or a grant from venture capitalists no having any kind of financial provision.
Despite the fact that there are plenty of those who believe in the extremes, there are still people who understand that small size, high competition, scarce resources, and their unavailability in due time are the only factors having real significance (Brush & Changanti 1998). Also, regardless of the confidence of managing directors that additional sources of money will solve all the enumerated concerns, creating a network or establishing valuable business connections may produce even more impressive results. In the process of investigation, it becomes clear that compared to companies form the West, the tree firms analyzed show considerably less need for being directly present in other markets. Outsourcing is widely implemented as well as the usage of the third-party network.
Comparison of External Support
Although SMEs in Pakistan are willing to expand their operations beyond the borders of the country, their growth at the global level is hindered by a number of factors described above. Yet, the internationalization of these enterprises is beneficial is not only for company owners but also for the entire economy. Even though the government realizes how much SMEs may contribute to the economic development of the country, they still refrain from lending any considerable assistance owing to a high rate of failures, labor unit activities, bankruptcies, and political motifs. As a result, only a few government authorities take the risk of directly supporting SMEs.
Since the position of SMEs that have to rely exclusively on their own profits is rather shaky, they have to look for external support provided by private investors. SMEDA is the organization that makes a lot of difference since its activities facilitate business development, provision of services, and development. Moreover, SMEDA assists SMEs in obtaining international certificates, such as CE, JIS, KS, UL, ASME, DIN, and others), which allows them to attract the attention of potential investors or partners.
There are also other organizations including SME banks and various financial units that may support SMEs in terms of finances; however, their offers are far from being cost-effective or generous. While it is still possible to find additional sources of money, the situation is quite different from marketing links, knowledge, and creativity development as there is no organization that would be able to lend assistance in these aspects.
It is a typical strategy for SMEs to use the owner’s wealth combined with loans provided by private banks if there is no option of dealing without the latter. When SME is in need of training for its employees, legal services, database facilities, strategic solutions, or business plan improvements, it may resort to the services provided by SMEDA. It may provide good guidance for the growth opportunities both in the local and international markets with the focus on the former. Although this support is relevant in certain cases, SMEDA does not provide timely financing, which is its major disadvantage.
Thus, organizations have to overcome plenty of obstacles to struggle against the lack of money, information, and experience in global trade. Since they lack the necessary knowledge, have weak networks, and cannot make use of additional sources of investment, they have to struggle hard against numerous competitors to find their way in the process of internationalization. Their major support is money they earn within the country. This restriction slows down the process of growth and does not allow making any future prognoses.
SMEs in Pakistan does not currently manage to perform at their utmost due to a number of complicating factors (Bari, Cheema & Haque 2005). SMEDA is presently the only authority that provides at least some assistance in the development of these organizations, helping them in policymaking, services provision, obtaining international certificates, and finding other sources of financial support. If such investors are found, they are typically private companies since government authorities are unable to meet the financial needs of internationalization even though it promises a lot of benefits for the economy of the country.
However, there are problems even with private institutions. The procedure of application for a loan from the bank is overcomplicated while the interests are high indeed. Since only small sums are provided, they do not cover the needs of SMEs. That is why most of them prefer to refrain from these services. As far as SMEDA is concerned, its services mostly concern the operations in the domestic market. This is not suitable for the purposes of internationalization.