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Paper Topic:

SME

Small and Medium-sized Enterprises or SMEs are companies that have less than 250 employees and , in Europe , has either an annual turnover not exceeding 50 million euros or an annual balance sheet exceeding 27 millions euros . Also , 25 percent or more of the voting rights are now owned by one enterprise (SME Definition 2006

The new definition is aimed at promoting micro enterprises improve access to capital prevent the abuse of SME status promote innovation and to improve access to research and development (SMEs : As it is 2006

The abbreviation SME is commonly

used in many countries including the European Union and in other international organizations such as the United Nations , World Bank and World Trade Organization . In few other countries , SMEs are commonly called as Small or Medium-sized Business or SMB (Small and medium enterprise 2006

However , according to the Organization for Economic Cooperation and Development (OECD , there are other countries that set the limit to the number of employees at 200 . Also , the United States include firms with fewer than 500 employees in their definition of SMEs . Additionally , SMEs in the United States are determined by the type of industry in which it thrives , where the income and number of employees is the determining factor whether a company is categorized as a small business or not (Small and medium enterprise 2006

OECD (2000 ) further describes small firms are generally those firms or businesses that have no less than 50 employees in their workforce while those with five , and some cases , ten employees , are categorized as micro-enterprises

SMEs usually dominate most economies of many countries . In member-countries of the European Union , for instance , small and medium-sized comprise about 99 percent of all companies registered and these employ a combined enterprise 2006 . With such great contribution to employment , SMEs are being deemed to be a vital part of economic growth

In fact , the economic activity spurred by the SMEs help the population to weather unexpected fallouts from brought about by certain global crises

SMEs are great contributors to a nation 's economy , so much so that many business schools have introduced modules related to entrepreneurship These small and medium enterprises are credited for generating employment among the population , thereby contributing to economic growth and as agents of innovation , wealth creation and entrepreneurial development (Poutziouris 2003

These small firms are composed of diverse and independent entrepreneurs with similarly diverse kinds of ventures which make the SME sector a vibrant and thriving part of an economy

Furthermore , entrepreneurial firms provide other benefits . These small new firms are dynamic and change rapidly which in turn provide a large number of independent experiments on how to conduct a business (McMillan and Woodruff 2002

Majority of SME jobs are found in the service sector . Smaller firms are particularly engaged in wholesale and retail trade , the hotel and restaurant business , communications and business services , and in construction . There is also an increase in the number of small firms that are venturing in the technology-driven industries such as information and communication technology and biotechnology (OECD 2000

Also stated in its on SMEs , OECD (2000 ) further said that because of increased outsourcing of big manufacturing firms , SMEs have also penetrated the important strategic business services subsector including those relating to computer software and information processing , business organization , human resource development and research and development

With the advent of globalization and trade liberalization , new opportunities and challenges are now being presented for the further development of SMEs . Although SMEs are traditionally focused on the local marketplace and many will , in fact , remain so , others have started to internationalize by bringing their products or services to foreign markets

However , these opportunities cannot be fully realized by the SMEs especially among the developing countries , because of different constraints and challenges which have to be addressed beforehand (United Nations Conference on Trade and Development (UNCTAD ) 2005

Internationalization can help sustain the growth of SMEs , thereby ensuring their growth and continued contribution to employment generation and the economy in general

But , unfortunately , there are several major impediments that hamper the internationalization of SMEs

The major impediments to SMEs ' internationalization can be categorized into two factors , internal and external . Internal factors include informational barriers , such as the unreliable data about the international market functional barriers , such as the lack of competencies and training among SME personnel product and price barriers , such as the difficulty in matching a competitor 's price due to higher labor cost , raw materials , etc and the lack of bargaining power , distribution and logistics barriers such as the intricacy of foreign distribution channels (UNCTAD 2005

On the external side of impediments , SMEs suffer from poor and inefficient infrastructure , the lack of financial resources , lack of conducive regulatory and macroeconomic policies and unfair trade policies . There are also procedural barriers such as unfamiliarity about exporting procedures governmental barriers such as unfavorable home laws and rules customer and foreign competitor barriers such as the lack of knowledge on different competition behavior business environment barriers such as foreign exchange risks including fluctuations and depreciations of currencies and tariff , non-tariff barriers such as the lack or inadequate protection of property rights (UNCTAD 2005

Low interest rates , low inflation , a stable exchange rate and ample reserves are the macroeconomic pre-conditions that can guarantee growth for small and medium-sized enterprises . With such a conducive business environment , small firms are able to plan ahead and are more likely to be prepared to take risks (Williams 2006

And although there are economies where a package of services for internationalization is provided , not many of these are centered to the needs of smaller firms

Because of the nature of its size , SMEs are often prevented from going global because of financial and risk-management services , including insurance , bank guarantees and advice (OECD 2000

The advent of Internet-based electronic commerce is one of the new markets where SMEs can play a major role . But again , there are problems that SMEs have to hurdle in to maximize this new marketplace . The problem lies on some of the SMEs themselves . Many are slow to adopt new technologies because of limited understanding of the complexity of electronic operations , the inadequate skills of personnel and the high initial investment required to develop a viable e-commerce plan (OECD 2000

Other factors for the slow adoption of SMEs to the use of e-commerce are the infrastructure access and costs . Also it is difficult for SMEs to build a reputation and establish consumer trust in the wireless market because of problems linked to e-commerce like authentication and certification data security and confidentiality , and the resolution of commercial disputes (OECD 2000 . Large corporations are way ahead of SMEs in the electronic commerce market

Other negative factors related to SME internationalization are the lack of information about the host country markets and regulations , and the access to finance , insurance coverage . Another factor is lack of human capital and the limited knowledge about the process of internationalization itself (UNCTAD 2005 . Because of flaws in the financial markets , SMEs do not enjoy the same access to finance compared to larger companies . For example , commercial banks are reluctant to extend credit to SMEs because of their perceived greater risk compared to a large and stable company . Sometimes , credit is extended to SMEs although in such unfavorable and higher-cost term loans . The home governments can help the SMEs in this aspect by offering to commercial banks a loan guarantee scheme wherein the government will guarantee the repayment of loans by small firms . This kind of credit guarantee scheme is one of the most popular support schemes that governments around the world provide for their SMEs

Another aspect that is hampering the internationalization of SMEs is the human factor . While the most important factor for business growth is the overall market demand for its services and /or products , other contributing factors are the attitudes of owners or managers of SMEs toward change and organizational development (Poutziouris 2003 . Some owners are just too hesitant to embrace the changes especially when these changes are viewed to accompany risks for the company

It is therefore not surprising that many small firm owners overlook the growth opportunities for their companies and sometimes even jeopardize their companies ' growth potential because of shortsightedness and the failure to grasp the overall financial , managerial , technological and marketing side of running a business (Poutziouris 2003

On the risk factor side , a number of those identified that contribute to the impediment of SME internationalization is the probable failure of the venture , loss of capital or closure and of being taken over by a foreign firm (UNCTAD 2005

In addition to the major impediments hampering the growth of SMEs to go international is the introduction of a new concept called Born Global ' which is fast making a niche in the foreign market

Born Global is a relatively new phenomenon that was first coined almost ten years ago in an Australian report by McKinsey Co (Rasmussen and Madsen 2002 . Since then , Born Global has been used along with other similar concepts like International New Ventures and High-Technology Start-Ups

In direct contrast to an SME which establishes itself in its home country and considers the international market as an expansion , a Born Global firm concentrates on the foreign market from the start

The Born Global concept is a universal phenomenon . Born Global firms can be found in the majority of trading countries covering all industry sectors but the factors that drive the rapid internationalization of these firms is still not fully comprehended (Born Global : A new breed of business 2005

The Born Global concept is a result of studies of the export behavior of firms for the past five to ten years . It has been found out that many firms of recent do not develop in gradual stages with respect to their international activities . Instead , firms are reported to start their international activities right from their founding , entering foreign markets in several countries right away , and forming joint ventures without prior experience . This new strategy is what Born Global is all about . Distinctively , SMEs are expected to build a secure domestic position before embarking on internationalization (Rasmussen and Madsen 2002

The explanation for this new phenomenon is said to be the conducive global market condition , new developments in transportation and communication technologies and the number of individuals with experience in the international market atmosphere (Rasmussen and Madsen 2002

This new breed of firms does not start with the traditional domestic markets but instead directly bring innovative and new products to the world marketplace . These small firms seem to bypass the dangers experienced by SMEs at the early of operation (Born Global : A new breed of business 2005

Although a lot of SMEs will remain focused on their respective local markets , those that are brave enough to expand and plunge into the international market with proper safeguards and support , will surely thrive and survive . SMEs that are not afraid to embrace the export challenge and are equipped with knowledge to adopt new technology enforce new systems , and offer innovative products that are globally competitive will earn their niche in the international market and can competitively compete with the new concept of Born Global firms

In the same way , the Born Global phenomenon is a test for those involved in the export market . It is imperative to study the growth of this new concept in the internationalization of firms and the reason for its success . It is also important to study the internationalization of SMEs in the context of the Born Global phenomenon

List of References

Born global : A new breed of business 2005 . UQ News Online , [internet] . 3 May Available from : http /www .uq .edu .au /news ?article 7023 [cited 24 September 2006]

McMillan , J Woodruff , C . 2002 . `The Central Role of Entrepreneurs in Transition Economies . Journal of Economic Perspectives . vol . 16 , no . 3 pp . 153-170

Organization for Economic Cooperation and Development , Public Affairs Division 2000 , Small and Medium-sized Enterprises : Local Strength Global Reach , Washington D .C

Poutziouris ,

.Z . 2003 . `Researching the Small Enterprise .-book review ' Organization Studies , [Online] Available at http /www .findarticles .com /p /articles /mi_m4339 /is_2_24 /ai_

Rasmussen , E .S . and Madsen , T .K . 2002 . `The Born Global Concept for the EIBA conference , Denmark

Small and medium enterprise 2006 , Wikipedia , [Online] Available at http /en .wikipedia .org /wiki /Small_and_Medium-sized_Enterprise

SME Definition 2006 , Europa , [Online] Available at http /ec .europa .eu /enterprise /enterprise_policy /sme_definition /index_en .htm

SMEs : As it is 2006 , Prospects .ac .uk , [Online] Available at http /www .prospects .ac .uk /cms /ShowPage /Home_page /Explore_job_sectors /SM Es /As_it_is /p !edcaXFi

United Nations Conference on Trade and Development 2005 , Report of the Expert Meeting on Enhancing Productive Capacity of Developing Country Firms Through Internationalization , Geneva

Williams , E .S . 2006 . `Supporting the Growth of Small and Medium Enterprises . Central Bank of Trinidad and Tobago , Trinidad and Tobago

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