How Small Players Look Big on a Global Stage

For many small and medium-sized enterprises (SMEs), the siren call of global expansion is hard to resist. After all, their lack of scale need not be a roadblock to accessing a globalized supply chain and foreign markets.

Some SMEs, particularly those in large domestic markets such as the U.S. and China, prefer to build out their presence at home before venturing abroad, if they do at all. Others view their small size and lack of know-how in conducting business internationally as insurmountable obstacles. In either case, the decision is clear for these resource-constrained firms: either exploit domestic markets or venture out into global markets.

“Larger firms have the resources to pursue multiple options in both domestic and foreign markets,” says Anthony Goerzen, Donald R. Sobey Professor of International Business at Smith School of Business, Queen’s University. “With small and medium-sized firms that have much more limited resources, however, they have to be more careful about which opportunities to explore.”

Goerzen wanted to know the conditions under which it paid off for SMEs to go global. For SMEs that choose to look past the obstacles, what do they gain from international expansion as opposed to domestic expansion over time? Can their technical know-how and marketing skills overcome the inherent liabilities of their size?

Overcoming Obstacles

Goerzen and colleagues Lei Li (Nottingham University Business School), Dan Li (Kelley School of Business), Weilei (Stone) Shi (Zicklin School of Business) set out to find an answer. They studied the performance of 70 U.S.-based biopharmaceutical SMEs over a period of 14 years, which gave them the opportunity to view a longitudinal picture.

“We chose to study firms based in the U.S. because we wanted to examine a context where not going global was viable,” says Goerzen. “The U.S. is a large and rich market that is seen as being one of the best markets in the world. So in that favourable home market, when a firm chooses to go global, what is the net impact on its performance?”

Their work yielded two key insights for leaders of small and medium-sized firms.

Only over the long term do firms aiming for global expansion experience better financial growth than those that opt for domestic expansion

The first is that internationalized SMEs face a prolonged struggle to succeed. It’s only over the long term that firms aiming for global expansion experience better financial growth than those that opt for domestic expansion.

For SMEs in a research-intensive industry with a large domestic market, the study suggests that they should focus on exploiting national markets rather than exploring international ones. But over the long term, says Goerzen, this appears to be a short-sighted strategy. “Our results show that it is difficult for domestic-focused SMEs to achieve superior long-term accumulation of financial resources as compared to internationalized SMEs.”

The SMEs that thrive on the global stage understand that innovation happens on the edges and where new technologies in one industry are applied in another. “To stay at home, to remain in your own world, means that you become totally invested in your familiar milieu,” says Goerzen. “Whereas when firms are able to create connections to international sources, it puts them in a position to understand market trends and technical trends sooner and to assimilate them quicker.”

Dynamic Capabilities

The second insight is that “dynamic capabilities” are key drivers for long-term SME success in the global marketplace. Dynamic capabilities are essentially grand learning loops — making sense of the environment, assimilating information, and adjusting products and services accordingly.

Dynamic capabilities are both internal — specifically R&D — and external — building and sustaining alliances that generate new knowledge. The researchers found that alliance capabilities are even more important than in-house technological capabilities for firms needing to quickly adapt in a dynamic global environment.

“Firms that have the capability to develop robust partnerships and alliances seem to do better in international markets over time,” Goerzen says. “Firms that had this dynamic alliance capability started to break free of the pack as compared to their internationalized firms that didn’t have those capabilities and those firms that focused on their domestic market.”

Alliance capabilities, however, take time to develop. It may be that SMEs were well-positioned even before they successfully ventured out into the world. The researchers found that internationalized SMEs tend to have far more alliances than their domestic counterparts prior to international expansion.

While this research focused on SMEs in the U.S., the lessons are even more compelling for firms in smaller markets such as Canada. “For small and medium-sized companies in Canada that don’t have the domestic market to rely on,” says Goerzen, “it’s even more important to develop in-house alliance capabilities that complement their marketing and technical assets.”

—Alan Morantz