Background of Study
Globalisation has forced large companies and small and medium-sized enterprises (SMEs) to internationalise their business. This internationalisation process is seen as a diversification strategy to make a business appear in international markets and exploit the market opportunities (Verdier et al., 2014). During recent years, SMEs have experienced significant development in internationalising their activities in foreign markets. The SMEs of the UK have also experienced exuberant growth through internationalising their business. In the UK, the internationalisation of many SMEs has generated quite an interest among researchers. In this sense, internationalisation is a strategy that provides an SME with the opportunity to achieve economies of scale, reduction in business risk, market power effects, and learning effects, among others (Rhaiem, 2015).
Generally, it is perceived that internationalisation improves the performance of an SME by enabling several advantages. In reality, internationalisation may not always increase performance due to an SME’s potential lack of resources, innovation, and global reputation. Apart from the benefits of internationalisation, an SME may experience increased cost structure arising from unfamiliarity with the host country’s environment due to internationalisation. Empirical results regarding the impact of internationalisation and SME performance are decidedly mixed. Some studies found a positive internationalization-performance relationship (Ramsey, Barakat, and Cretoiu, 2013; Chelliah, Sulaiman, and Yusoff, 2014; Fernández Olmos and Díez-Vial, 2015) while some studies found no relationship (Hsu, Chen, and Cheng, 2013; Lecerf, 2012) and even negative relationship (Yeoh, 2013; Smolarski, and Kut, 2014).
This study is motivated by these conflicting empirical results and intends to investigate the impact of internationalisation on the performance of SMEs in the UK. In recent times the SMEs of the UK have experienced significant advantages through internationalisation, while some SMEs failed to increase their performance through such activity (Gattai, 2016). This study specifically focuses on the financial performance of SMEs, which could be measured by the numerical figures of the respective companies. However, the Uppsala Model and the Transaction Cost Theory of internationalisation has also been considered in this study to determine the process of internationalisation by the SMEs of the UK.
Internationalisation is one of the processes of globalisation or trade liberalisation. Internationalisation facilitates the exchange of production factors between two or more countries in business or trade. However, internationalisation of business is equated with a businesses’ foreign expansion, which may comprise any business activity undertaken abroad or with foreign business partners (Chiao, Yang, and Yu, 2015). These activities are undertaken to achieve higher profitability through increasing business expertise and performance. The performance of a business, financial performance, in particular, is dependent on several factors which need to be studied thoroughly for proper understanding (Decramer, Goeminne, and Smolders, 2013). This study tried to establish a link between the factors of internationalisation and financial performance measurement factors to examine the impact of internationalisation on the financial performance of SMEs.
Background of the SME Industry of the UK
A grocery store started its operation from a market stall in East London in 1919. The store sold only £4 on its first day with a profit of £1 (approximately £178 in sales and £44 profits in today’s money). Today, that very business generates more than £50 billion in annual revenue and employs more than 475,000 people worldwide. Today, that business is well-known as TESCO. This story tells and signifies the importance of SMEs in the development of an economy. The UK economy is largely dependent on its SME industry as the industry contributes more than 50% of UK GDP. The SME industry of the UK employed more than 15.6 million (60% of all private-sector employment) (Federation of Small Business, 2016). The SME industry of the UK has seen sustained growth of over 8% since the 1980s, with an increase of +55% since 2000 and +3% since 2014. More than 57% of the SMEs have internationalised their business, and most of those SMEs have successfully gained internationalisation (Federation of Small Business, 2016).
Research Aim and Objectives
This study aims to investigate the impact of internationalisation on the financial performance of SMEs in the UK. The objectives of this study are:
- To apprehend the internationalisation process followed by UK SMEs.
- To understand the factors of internationalisation and major determinants of the financial performance of SMEs.
- To determine the relationship between internationalisation and the financial performance of SMEs.
- To examine the impact of internationalisation and financial performance of SMEs of the UK.
The motivating questions of this research are:
- What are the underlying factors of SME internationalisation?
- What relationship exists between internationalisation and the financial performance of SMEs?
- Does internationalisation improve the financial performance of SMEs?
The rationale of the Study
What is the Research Issue?
The specific issue of this research is the internationalisation and financial performance of SMEs. Empirical evidence did not provide the exact relationship between these two factors as firm-specific factors, and the level of internationalisation is not the same for all SMEs. In the UK, the characteristics of SMEs are a lot different from that of Asian or European SMEs. The UK SMEs operate under strict regulation but offer infrastructural and functional support from Regulatory authorities. Furthermore, SMEs can expand their operation in the European region at a minimal level of regulation and investment. Therefore, the internationalization-financial performance scenario may be different for UK SMEs.
Why is it an Issue?
Internationalisation is seen as an expansion strategy that allows businesses to maximise the market potentials available in the host country. Internationalisation surely benefits businesses through several advantages but can be costly and risky as well. Therefore, it will not be prudent to say that internationalisation always benefits businesses. Rather, the issue of internationalisation and financial performance must be studied for a generalised outcome.
Why is it an Issue Now?
The UK economy has done well in recovering from the financial crisis, and in recent times the economy has seen enthusiastic forecasts. The SME industry of the UK is very critical for its economic development as the SME industry alone provides over 67% of the UK’s private sector jobs and contributing over 50% of UK GDP. Many of Today’s large multinational companies of the UK were SMEs at their inception. Today’s SMEs of the UK also seek expansion opportunities available beyond their home country. Consequently, many SMEs have internationalised their business. But the question still remains; does internationalisation offer sufficient improvement in the financial performance of UK SMEs? This question opens the door to investigating this issue.
What could this Research Shed Light On?
This study particularly focused on the investigation of the internationalization-performance relationship, financial performance in particular. This study considers several variables of internationalisation as well as financial performance to measure the issue. Moreover, this study will also provide a critical review of the empirical literature, which could further be used to guide future research on this issue.
Structure of the Study
The first chapter of this study covers a brief discussion of the background of this study. Research aims, objectives, and questions are defined in this chapter alongside the rationale for the study.
The second chapter of this study includes a critical discussion on empirical literature relevant to internationalisation and financial performance and SMEs.
The third chapter provides the methodological framework of this study. Finally, the fourth chapter provides the analysis outputs obtained through statistical analyses.
The fifth chapter includes findings obtained through analyses and discussion on the findings. Finally, the final chapter provides concluding remarks of the study along with a recommendation, if feasible.
Reference and Bibliography
Chelliah, S., Sulaiman, M. and Mohd Yusoff, Y. (2014). Internationalization and Performance: Small and Medium Enterprises (SMEs) in Malaysia. IJBM, 5(6).
Chiao, Y., Yang, K. and Yu, C. (2015). Performance, Internationalization, and Firm-specific Advantages of SMEs in a Newly-Industrialized Economy. Small Bus Econ, 26(5), pp.475-492.
Decramer, A., Goeminne, S. and Smolders, C. (2013). The impact of internationalization on volume and quality of scholarly publication performance. Public Money & Management, 33(2), pp.111-117.
Federation of Small Business, (2016). Small Business Statistics. [online] Fsb.org.uk. Available at: http://www.fsb.org.uk/media-centre/small-business-statistics [Accessed 20 Jul. 2016].
Fernández Olmos, M. and Díez-Vial, I. (2015). Internationalization pathways and the performance of SMEs. European Journal of Marketing, 49(3/4), pp.420-443.
Gattai, V. (2016). Internationalization and Performance of Italian Enterprises. SSRN Electronic Journal.
Hsu, W., Chen, H. and Cheng, C. (2013). Internationalization and firm performance of SMEs: The moderating effects of CEO attributes. Journal of World Business, 48(1), pp.1-12.
Lecerf, M. (2012). Internationalization and Innovation: The Effects of a Strategy Mix on the Economic Performance of French SMEs. IBR, 5(6).
Ramsey, J., Barakat, L. and Cretoiu, S. (2013). Internationalization and its possible impact on subjective and objective performance: Evidence from Brazilian TNCs. Transnational Corporations, 21(2), pp.21-46.
Rhaiem, K. (2015). The Impact Of Strategic Management And Innovation On Internationalization: An Empirical Study Of Canadian Manufacturing SMEs. IJBR, 15(1), pp.101-116.
Smolarski, J. and Kut, C. (2014). The impact of venture capital financing method on SME performance and internationalization. Int Entrep Manag J, 7(1), pp.39-55.
Verdier, S., Prange, C., Atamer, T. and Monin, P. (2014). Internationalization performance revisited: the impact of age and speed on sales growth. Management international, 15(1), p.19.
Yeoh, P. (2013). Internationalization and Performance Outcomes of Entrepreneurial Family SMEs: The Role of Outside CEOs, Technology Sourcing, and Innovation. Thunderbird International Business Review, 56(1), pp.77-96.