Introduction
Internationalization is the process by which enterprises expand their involvement in international markets to benefit their operations. This global expansion of businesses represents a significant shift for small to medium-sized businesses looking to expand from domestic to international operations. As we enter the 21st century, more businesses will have to decide whether to make a substantial move into the global market or continue operating in their domestic markets (Boter & Holmquist, 2019).
Small and medium-sized enterprises (SMEs) employ a distinct strategy for international expansion. The primary reason for this is the significant disparity between the resources of large corporations and those of small and medium-sized businesses, which makes the latter more challenging to grow (Boter & Holmquist, 2019). Despite their differences in size, all these companies are committed to expanding into international markets.
Business expansion overseas sometimes occurs in search of more lucrative overseas markets (Gankema et al., 2019). Having fewer customers in just one market, gaining efficiencies through a broader client base, and being able to compete on a worldwide basis are all additional incentives. This essay will examine two benefits—profit maximization and branding—and two drawbacks—international staffing and taxation.
Profitability of SMEs in Domestic vs. International Markets
Generally, the majority of SMEs generate higher earnings and profits when operating in the global market compared to the domestic market. Since such enterprises have the legal status of a proprietorship or partnership rather than a corporation, their primary focus is on maximizing profits rather than expanding their operations (Falahat et al., 2020). This is because the decisions of the owners determine how the businesses are run. The proprietors finance their companies using their own assets because they believe that earnings are more important than investments.
Certain SMEs may produce non-tradable goods and services in the domestic market (Pilar et al., 2018). A company’s ability to compete effectively against domestic suppliers in overseas markets may be one reason why its market is limited to the domestic environment, thus limiting its ability to maximize profits. There is a distinction between circumstances where products and services are not marketable and cases where they are theoretically transferable. Still, the company does not engage in internationalization, and this distinction needs to be understood (Falahat et al., 2020).
The mindsets, means, and actions of the respective business owners and operators may be to blame for this. SMEs that do not export probably do not want to and/or cannot. Some private companies do not export because they are primarily interested in their domestic market (Falahat et al., 2020). However, by expanding their business into the international market, these SMEs can tap into a huge market for their products and secure a larger audience, thereby maximizing the profits they are realizing.
Additionally, working in the domestic market presents numerous challenges, which may limit the profits a company can realize (Falahat et al., 2020). This is associated with aspects such as government restrictions, which may inhibit the company’s efficiency and reduce the profitability margins. For instance, after Starbucks expanded into the French market, it realized huge profits compared to when it started in the United States. The majority of their clients in the French market preferred to sit and drink their coffee rather than take it to go. This aspect led them to drink even more coffee, thereby enabling the company to achieve high profits in France rather than in the US.
Branding and Market Recognition in International Expansion
Beyond the obvious high profitability margins, an SME that expands into the international sphere also stands to gain from more exposure for its established brand. Because organizations and their goods need to be recognized by their new potential consumer base to succeed in entering these international markets, the process of branding is of utmost significance (Pilar et al., 2018). Due to the difficulty and expense of creating a truly distinctive brand, most small and medium-sized businesses do not place a high emphasis on branding in the domestic market.
Branding is a marketing approach that allows one to create a mental image of your company in the minds of consumers. Successful branding occurs when a market segment learns to identify a product or service with a set of desired attributes (Dominguez & Mayrhofer, 2018). Establishing a name for a company online in the international scene requires extensive outreach marketing, much of which should be directed towards the various social media platforms frequented by the target demographic (Dominguez & Mayrhofer, 2018). Growing one’s company’s brand recognition internationally is a primary goal of any SME that aims to achieve high recognition in the host country (Pilar et al., 2018).
Due to their greater financial resources, larger corporations enjoy a branding edge in the areas of advertising and marketing. When it comes to branding, the adage “bigger is better” holds for the simple reason that people tend to pay more attention to well-known brands when making purchasing decisions. That does not imply you have to be a multinational conglomerate, but it does mean you should strive to expand outside your niche. SMEs tend to enjoy a branding advantage because customers often become involved with a new business when it is first introduced into the market (Dominguez & Mayrhofer, 2018).
However, there is always a need for the management team of an SME to make significant investments in advertising programs to ensure that their products are well-known to the majority of citizens in the host country (Dominguez & Mayrhofer, 2018). An SME’s image can also be enhanced by engaging in international business, as global activities can help develop brand awareness that can be leveraged to support future business scenarios, such as contract negotiations, new marketing campaigns, or even greater growth opportunities.
For instance, Generation Alliance is a corporation specializing in branding and design, offering its services to customers worldwide. They have a core workforce based in Australia, with additional employees and independent contractors in New Zealand, the UK, Germany, Switzerland, Jamaica, Dubai, and Singapore, respectively. Botswana’s rebranding for the international market was one of the most fascinating initiatives they worked on during their time there. Following this expansion into Botswana, the company seized a significant market share, thereby enhancing its branding image and experiencing tremendous growth.
Challenges of Internationalization for SMEs
However, an SME’s expansion from domestic to international operations is associated with challenges related to a lack of proper international staffing. SMEs that wish to engage in international operations must possess the necessary skills and human resource competencies. Humanity is a significant resource, one that has an impact on the discovery and pursuit of possibilities on the world stage (Morais & Ferreira, 2020). Although it is generally accepted that human capital is a significant factor in internationalization, the research conducted has produced contradictory findings.
According to the findings of several studies, the human capital of individuals is a crucial factor in the internationalization of SMEs (Rahman et al., 2020). Most SMEs that have expanded into international operations face the challenge of international staffing as they are required to hire new workers in the foreign country. Since most of these enterprises lack sufficient funding, they often end up hiring incompetent and unskilled workers from other countries. This often leads to poor staffing, which may result in suboptimal performance on aspects related to profitability margins and brand recognition (Morais & Ferreira, 2020).
Additionally, such SMEs face the challenge of cultural and normative barriers for their international staff. For example, when Worketc expanded in Germany, it initially faced challenges related to staffing levels, as some areas were temporarily scaling back operations due to a lack of personnel ready to work according to the proposed company norms. For instance, an SME may require its staff to work throughout the week. In contrast, in a country where they have expanded their business, workers consider certain days of the week as being dedicated to religious activities (Morais & Ferreira, 2020). Therefore, the management team of the SME in the international country needs to devise a strategy that enables them to adapt to the cultural norms of their staff, which may differ from those of their home country (Bołkunow, 2019).
It appears that the human capital of the company’s key personnel is a significant determinant of internationalization. As a result, research on aspects of human capital, including education, job experience, and skills, needs to be given more attention and refined to keep pace with the growth of studies on internationalization (Rahman et al., 2020). There is a need for further research when considering the frequency and degree of internationalization. It appears that there is a need to research the factors that influence the human capital of SMEs. For instance, the unstructured learning that occurs during on-the-job training may contribute significantly to an organization’s growth of human capital.
Another challenge with SMEs expanding into international operations is related to the high taxation in some countries, which limits the company’s growth. The burden of taxes placed on small and medium-sized businesses tops the list of reasons that are stifling the expansion of SMEs in international operations (Rahman et al., 2020). Most international countries tend to tax such companies highly, thus limiting their growth. The more favorable the tax rates, the faster the growth of SMEs.
If the tax rates are high, the profit margins of enterprises become too small to improve the scale and size of the business, as SMEs will hardly have enough money to reinvest (Agbetunde et al., 2020). This is especially true for SMEs that have just expanded their operation into an international company. It is also possible to conclude that more beneficial tax policies have a good impact on the expansion of SMEs, and as a result, the better the growth trends, the more advantageous the tax policies are (Agbetunde et al., 2020).
It has been determined that different kinds of taxes have a substantial impact on the expansion of SMEs. Because the various forms of tax are based on the amount of revenue that SMEs generate, the adoption of more advantageous types of tax would encourage their growth. The implications of international tax on small and medium-sized businesses in the UK that engage in cross-border trade should not be ignored (Agbetunde et al., 2020). Some or all of the taxes withheld in relation to income derived from outside the country may not be recoupable.
Conclusion
In conclusion, it has been demonstrated that, despite enjoying various advantages through international expansion, most small and medium-sized enterprises still face challenges, including taxation and inadequate staffing levels. Some of the key advantages that the paper has analyzed in depth include increased profitability margins, recognition, and the establishment of a strong branding image. These high profitability margins are often realized when the SME has considered operating in a country where operating costs are lower than those in the domestic country.
Such a scenario also occurs when the living standards are lower in the host country and the consumer base is higher. Additionally, a company enjoys a boosted branding image if it promotes its business upon entry via social media platforms such as Twitter, Facebook, Instagram, and YouTube. On the other hand, a lack of proper international staffing may be due to cultural barriers, a shortage of experienced personnel, and inadequate human capital. There is therefore a need for countries to reconsider their taxation policies to boost the internationalization of SMEs.
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