A new survey for a courier company has revealed the common fears about expanding abroad that SMEs share around the world, including those in Canada. A study conducted for DHL has found that SMEs are concerned about elevated risk when operating in emerging markets and that they are hobbled by a lack of knowledge on how to expand internationally.
The study, created by the Economist Intelligence Unit (EIU) for DHL, found that SMEs often prize the stability and predictability of developed markets over the larger potential for growing in emerging markets, usually because of the higher risk they associated with the new markets. Indeed, many respondents believe that investing in emerging markets isn’t possible without higher standards of physical and political infrastructure, better regulatory practices and stable operating environments.
The study found that SMEs in 12 countries—including Canada—acknowledge that international expansion is very important to their destinies, with a majority of them expecting to earn 11% to 50% of their revenues internationally within five years. But their concerns about new markets is even greater: The more undeveloped a market is—particularly Africa—the more that SMEs shy away from it. They cited lack of infrastructure in Africa compared to, say, China (they also appreciated China’s autocratic but speedy decision-making). Of all the emerging markets, SMEs surveyd by the EIU picked China as the most desirable emerging market in which to do business.
Companies prefer to expand into markets similar to their own—hence SMEs in Canada look to the U.S., western Europe and Australia ahead of emerging markets—even though trade between Australia and Canada is actually very low and their markets are too similar to offer a lot of new opportunities.
The study interviewed one Canadian firm, Clevest Solutions of Richmond, B.C., which has successfully expanded into the U.S., Europe and China. CEO Thomas Ligocki said that building business partnerships has been instrumental in his firm’s success in China. It takes time, he said, to build those linkages, but local partners are inevitably closer to end-use customers and know their needs and wishes. In addition, a good partner will share some of the costs involved in setting up locally.
Ligocki added that analysis of a target markets’ business practices is best conducted on a sector-specific basis. Some sectors are more vulnerable to the unpredictable political and economic gyrations of developing markets, while other sectors—in Clevest’s case, services to electrical utilities—are more insulated owing to their central role in the economy.
Among the other challenges that SMEs face in emerging markets are poor infrastructure—particularly IT and communications—and, to a lesser degree, political infrastructure. One respondent suggested adding a new line item to the cost side: Something called “procedural costs.” These are the hassles of dealing with unfamiliar governments, interpreting exotic customs valuations, cargo-clearance delays, capricious rule changes that are not communicated, and social expectations.
And there are new challenges arising all the time, even in developed countries. One concerns data privacy. Numerous nations are currently re-evaluating how they regulate data privacy and data transfer to other countries. Some proposals, such as storing all data in the country you are operating in, threatens to swamp SMEs with extra costs. The government of Australia, for example, has strict rules on how and where companies can store individuals’ information and what they can allow done with it.
Several SMEs in the DHL survey gave their prescriptions for successful exporting. Among them:
- Targeting markets that often ignored by other companies operating in your own industry.
- Partnering with governments to maintain valuable (and often free) support in countries of interest.
- Keeping business activity strictly separate from government relations.
- Knowing one’s “destiny”: reconciling that not every small company is going to grow into a Siemens or a Unilever, and sticking to doing one thing really well in only a few markets.
- Focusing on high-quality products or services not offered by other suppliers in the markets you’re entering.