International Marketing BU 5836 Report- Summer school 2008.

Due date: 4th July 2008 Word count: 2451 Topic: When entering international markets, do larger firms have an advantage over smaller firms. Group 5 Group Members: Kjersti Salvesen 07969811 Nicole Petrak 07986197 Sebastian Pilling 07978367 Nakul Bansal 07979452 Hideo Yamane 07967957 Ahmed Yasser Soliman 07970063 Saurabh Singh 06962060 Wong Kam Ling Nancy 07968109 Pascal Maduekwe 07981504 Arsalan Nisar 07976898 Ankur Chauhan 07987772

Table of content

Introduction If a firm, small or large, wishes to achieve growth in this century, it usually means that the firm has to expand internationally. When entering into foreign markets, firms usually meet both opportunities and threats that their not familiar with. This report will discuss if larger firms have advantages over smaller firms when entering into international markets. The question the report is going to address is therefore; When entering international markets, do larger firms have an advantage over smaller firms? First it is necessary to define the characteristics of large firms and smaller firms. It is very difficult to give an answer to what characterises a large firm vs. a small one; a small financial-service institution with a certain amount of employees might be a more significant 2

player in an international market compared to a garment-making firm with the same number of employees. One example of how to define firms by size is the definition given by the European Union (EU). This definition defines small and medium sized firms as the ones with less than 250 staff, and the large firms as the ones with over 250 staff. (Doole and Lowe, 2008) The Unites States of America (US) Small Business Administration (SBA) on the other hand defines small firms as the ones employing less then 500 persons (http://www.sba.gov/advo/stats/ch_em97.pdf), which is twice the size of what the EU defines as a small- medium sized company. The report will take these differences in definitions into consideration when giving examples of large firms versus small firms. As mention above, it is also a question about different industries. The report will discuss the differences, advantages and disadvantages of large firms vs. small ones in the following sections before summing the whole discussion up in a conclusion.

A Note on Modes of Entry There are several methods of undergoing an international expansion of any size. The main ones are discussed in the text below. It should be noted however that while the size of the firm does influence a predisposed tendency to favour one method, governmental restrictions aside, any size of firm can undertake any entry strategy. For instance, pairing up with a foreign company has enormous benefits for a small business but large firms do also use this method. For example, Puma engages in joint ventures in Japan, China, Taiwan, but operates through subsidiaries in India and Dubai (Survey- The Economist, Feb, 2007).

Governmental barriers to trade affect all sizes of business but the effect may be greater for large companies due to an existing negative reputation in the international community. Despite using an Indian company as a distribution channel, Pepsi faced a lot of Nongovernment organisations (NGO) and governmental opposition to their presence in India. It wasnt until the Indian economy was liberalized and an agricultural division of Pepsi was negotiated that they were allowed access to the market.

Large Firms Operating in markets which are saturated by small businesses and oligopolies, an internationalization plan is almost compulsory for large businesses to remain competitive. The greatest advantage possessed by large firms is their scale of factor inputs through which they can support foreign ventures with less risk than a small company (Jeong, 2003).

Equity-Based Market Entry While small and medium sized enterprises (SME) prefer to take a contractual approach, large firms more often use direct, equity-based strategies to enter foreign markets. Entering the foreign markets primarily through the use of financial means requires less time consuming acts of researching local businesses and negotiating the terms of a joint venture agreement. This advantage is further extended by the degree to which small firms administrative procedures are undeveloped and their decision making processes less systematic with input from a smaller number of specialists (Pangarker & Klein, 1998). Having a larger financial stake grants a greater degree of control over decision making and allocation of profits (Hollenstein, 2003).

Access to Intellectual Capital Large firms benefit in several ways from having financially-backed resources. In domestic markets, large firms can entice graduates and experienced workers with high financial compensation and through brand leveraging. Where the demand for jobs outstrips the supply, firms can afford to select like-minded people to craft their organizational culture which allows greater influence over employees. This benefit transcends cultural boundaries and financial resources can be used to attract the top local talents and bring them into the structure of the organization providing foreign representation and a network through which entry into the markets can be better established. The implications are widened when considering that the access to foreign market and technological information is more difficult for SMEs; therefore their competencies in penetrating new markets and gathering global information is more limited compared to with a larger company (Pangarker & Klein, 1998; OECD, 2006).

Exporting When adopting an exports strategy, it is no surprise that large firms have the advantage of economies of scale. Large firms have the ability to standardize and leverage their brand reputation to enter a market (Mittelstaedt et.al, 2003). Strong financial investments in 4

exporting activities allow decisions and long term strategies about the maturation in the market to be made as well as the commencement of marketing plans around these decisions. This is a luxury which most small firms can not afford. Large firms can use large investments in conjunction with economies of scale to standardize their products with cost-effective and precedence-setting influences on the industry. However, although large firms have the advantage in terms of low cost and better support for marketing the brand, it is not conclusive that there is significant ease of entry into foreign markets over small firms. The advantage to large firms here is on a cost and standardization basis but there are other ways in which small firms can differentiate their product offerings to enter and sustain their presence in foreign markets.

Small/ Medium Firms When considering the thought of small and medium enterprises (SMEs) competing with large firms in any business forum the immediate reaction is to conclude that large firms will always have the upper hand. In modern markets, large firms already benefit from infrastructure, a multitude of competencies and by definition, a higher supply of capital and labour resources (Hamid, 2004). These points, in conjunction with a lower degree of risk due to multiple domestic revenue streams, makes it unsurprising that larger firms are more likely to internationalize their business divisions and become a greater global success (Hollenstein, 2003). The literature available on direct comparisons between small and large firms is limited but of the small amount that exists, some conclude that small firms can incorporate foreign 5

expansion into their business activities as easily as large firms (Pangarker & Klein, 1998). It is only when considering the survival rate that a divergence in success occurs. However, there is a great distinction between the survival rate and entrance strategy into international markets. In entering a foreign market, a small firm must consider the approach to entry and develop a short term plan to lay the foundation of the business. The operational aspects and leadership characteristics of SMEs are different than from of large firms and so there are access methods that SMEs can use which tend to differentiate themselves from their larger counterparts.

Stage Theory One popular theory that describes the SME internationalization approach is the Stage Theory. This theory has been adopted by many European SMEs since the opening of the EU free market and outlines five stages through which SMEs can take to enter global markets (Snuif, 2000, Hollenstein, 2003): Domestic marketing > Pre-export > Experimental involvement > Active involvement > Committed involvement Although the model has been criticized for excluding the time factor of stage transition, subsequent research has shown that firms in different industries proceed at different speeds. In the technology sector, stages can be progressed though in a matter of months or weeks while other market sectors can take up to two years. The speed at which firms move to the next stage or leapfrog ahead has implications for success where firms appear to be penalized for failing to move quick enough in implementing their international strategy (Snuif, 2000). This is reflected in the concerns expressed in the Organization for economics co-operation and development (OECD) 2006 report that the learning curve for entering international markets is steep and therefore SMEs will be at a disadvantage when they lack the factor inputs to advise them of the best approach. However, through this model it can be seen how the flexibility of small firms can play to their advantage over large firms. The tighter decision making structure and lesser obligation to commit to a decision once it has been made and filtered through the company put them in the position of entering foreign markets more nimbly, in incremental steps. Small firms can move in and retract out of markets with greater ease because of the smaller amount of resources they commit to a project which allows greater responsiveness to the market environment (Karragianni & Labrianidis, 2001).

Contracts and Joint Ventures One method which reflects a distinction between small and medium businesses is to engage in contractual arrangements with foreign firms, or piggybacking, taking on a network perspective (Hollenstein, 2003). The behavior of medium firms in the foreign direct investment approach is more similar to that of large firms where a majority stake in the foreign affiliate is preferred. This is due to the fact that the size of a medium firm is a result of their ability to generate suitable revenue by being a dominant knowledge competitor in their industry (Hollenstein, 2003). For small firms, minority investments still allow an exchange of competencies between firms, an extremely important factor in global markets where competition is increasing on the basis of increased knowledge of science, economics, innovation, high cost of producing knowledge and shortening product life cycles (Hollenstein,

2003). Contract-based internationalization can also grant economies of scale and costeffective access to assets.

Entrepreneurship Utilizing the contractual approach requires a competency of dealings with other managers for the sake of building relationships. Therefore, a word must be said about entrepreneurship and managerial talent in the determination of small firms expanding outside the domestic market. The ability to network with the right individuals has appeared to be an important factor in the internationalization of small firms. The leadership structure of small firms requires a, motivated leader who has incentives and is motivated enough to build relationships and networks for the benefit of the firm. Networks allow access to trade fairs, links to businesses and government organisations, and access to supply channels (Hutchinson et al. 2006). Furthermore, these networks may provide crucial links to foreign market information which can help strategically in both the construction of a contract and also help to create a competitive advantage, especially with regards to firms who choose to partake in export activities.

Exports Instead of investing in foreign companies and establishing a network, small companies can also expand their overseas business activities by launching an export distribution channel, much like large companies. Exporting benefits small companies in several ways and allows them to overcome some of the strategic, operational and information-based obstacles they face when negotiating joint venture agreements or founding a foreign subsidiary. To compete on the basis of exports, would imply that a small company would have to compete against the economies of scale of large companies; a difficult and perhaps futile task given the propensity to be driven out of the market on price. Fortunately, to compete in exports does not consequently mean that a strong marketing approach must be applied but that a marketoriented approach should be adopted to serve a specific niche in the market (Fillis and Wagner, 2005; Hutchinson et. Al.2006). By catering specifically to a niche, SMEs can enter the export market by positioning their brands and product range as luxury goods. If this approach does not resemble the brands offerings then there are a number of ways to differentiate (Hutchinson et al., 2006). Some recommended ways are to appeal to a specific lifestyle or image, engage in e-business to cut operational costs, or to differ on the basis of location, features, supplementary goods, product mix and reputation of the brand (Porter, 1980; Simpson & Thorpe, 1996) Conclusion In conclusion; there is no standard answer as to whether larger firms have advantage over small ones when entering into international markets. However, this report argues that large companies do have several benefits compared to smaller companies when entering international market. Firstly, as discussed earlier, most large companies are likely to have financial advantage over small ones. For example, the can have a larger financial stake in a potential joint venture which might give them a greater degree of control over decision making and allocation of profits. Their financial resources might also give them the opportunity to acquire the best information possible when entering new markets, while smaller companies often have to make decisions on background of less accurate information.

Another benefit gained from financial resources are that they grant entry into international markets on the basis of making a loss in the first years which can be recouped in the longer term due to large revenues. This is a benefit that small companies most likely do not have, which makes their decision of which country to enter very critical. But smaller companies do have benefits that larger one struggles to achieve; one might be the smaller companies flexibility. Smaller companies have fewer barriers when developing and implementing new strategies. They can easily turn around and change when adapting to foreign markets. On the whole, this report argues that larger companies do have the advantage of ease over small firms when entering into international markets, especially in form of financial resources. However, there is no evidence that large companies have an absolute advantage. On the other hand, small companies can use methods to enter international markets just as easily as larger firms, especially in terms of knowledge intensive technologies and certain niche- industries.

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