Succeeding In Overseas Ventures for SMEs
By Mr Ang Ser Keng
There are many reasons as to why a Singapore SME may wish to venture abroad. An often-cited reason is that the domestic market is too small, and that moving businesses abroad is crucial for survival. Other SMEs see the overseas markets as an opportunity to extend the reach of its superior or unique products and services. Regardless of the underlying motivations for venturing abroad, there are a number of key considerations that an SME needs to address in order for this significant endeavor to yield positive results.
As the first step in preparation for venturing abroad, an SME should conduct a thorough strategic review of itself, specifically its internal strengths, capabilities and readiness to venture abroad. Only when a firm has determined that it is capable and ready, then it will avail itself of the full opportunity set for the endeavor.
The next critical step is to understand the alternative means for venturing abroad. These include basic methods such as exporting and riskier methods such as acquisitions. The ideal choice of a method depends on several factors that will be discussed later in this article.
If the SME cannot conclude that it is fully ready, it can only consider the most basic form of expansion abroad, which is simply to engage in exporting, the first step. Otherwise, it may consider adopting an active approach to ascertaining what it lacks, in order to avail itself with the full opportunity set for venturing abroad.
Meeting the basic requirement: strong domestic business
One of the key outcomes of venturing abroad is the introduction of uncertainties to the business. In the extreme case of an acquisition of an overseas company, it can be highly stressful for the organization, since the action will invariably thrust the business into a state of flux. Unless the domestic business has a good foundation, the entire business may be adversely affected. In perspective, an SME can ill afford to focus on its overseas operations, while leaving the backdoor open to danger of attacks from competitors.
A strong domestic business forms a solid foundation upon which the overseas venture can leverage on. It becomes a base upon which you can launch an international business strategy – the SME should use the capabilities, cash flow and resources from the local business to support its overseas business.
Clarity of the rationale for the overseas venture
Assuming that the conclusions from the prior exercises are positive, the next step is to gain clarity on the rationale of establishing its business abroad. The result of this exercise will guide the SME in the choice of methods applied to expand abroad while at the same time assist in the evaluations of different companies. Subsequently, this would allow for a more informed decision on which company to acquire, if applicable, enabling for a more successful and compatible overseas venture.
In this respect, it is useful for the SME to be sure about its rationale for the overseas venture. Specifically, it needs to be clear about what this effort aims to achieve. Some critical questions that an SME needs to ask itself include: Is it access to foreign markets? Is it to gain knowhow? Is it a brand that can be used in the domestic market? Is it lower cost of production? Is it to gain market share? How does this venture relate to the future and vision of the firm? What is the level of risk does this venture entail? What happens if the firm does not venture abroad?
Having sufficient resources
A significant part of the process also involves business planning to gain a deeper appreciation of the resources that are needed to pursue the overseas expansion strategy. Resources needed include the availability of internal and external sources of financing, as well as having ample management bandwidth and human talent that can support the overseas expansion. This will, in turn, also guide the choice of expansion strategy.
In term of financing, the SME has to be aware that the funding of the overseas venture has to be done in foreign currency. This is important as an expansion overseas would require the business owner to start to think about managing the SME’s exposure to foreign currency risks.
Finding a trusted foreign partner
In some cases, there may be a need to look for a foreign partner. The need for a foreign partner becomes more critical under the following conditions:
· Regulatory risks are high
· Risk appetite of the SME is low
· Barriers to entry into the foreign markets are high
· If there is insufficient resources
· Cultural differences are high
· SME is lacking in overseas experience and exposure
If a foreign partner is needed, no effort should be spared to determine the quality of the foreign partner. This would encompass reputation, capability and financial might. A foreign partner who is credible can be relied upon to help grow the business together with the SME, whereas one who is not credible could give the SME a lot of trouble either by unwinding the partnership or controlling the damage to the reputation and brand name of the SME caused by the foreign partner.
Protecting your Intellectual Properties (IP)
Before expanding to overseas market, it is extremely important that the SME ensures that its IPs are sufficiently protected in the foreign markets that it will be operating. This will minimize the damage caused by the copying of its products or brands, and safeguard its market and/or profitability. With sufficient protection, the SME will be able to seek legal redress in the foreign courts.
It is important for the SME to recognize that IP governed by national laws. Each country establishes its own set of rules to govern IP. The lack of standardized international laws can result in conflicts between governments & companies operating in different jurisdiction. If there is a competitor operates in a foreign country or countries, then the entrepreneur should consider seeking IP protection in that country or countries.
The kinds of IP that can be protected include new products or services; processes; new designs; packaging and marketing promotions. These can be recognized as trademarks, copyrights, patents and trade secrets.
Venturing into an overseas market is an important milestone for an SME. Given the limited resources of an SME and the risks involved, it is worth the while for an SME to thread carefully. One should not underestimate the value of addressing the critical aspects that SMEs must be considered, before expending time, money and resources to even explore the possibility of an overseas venture. If approached in a systematic and disciplined manner, the SME will not only be able to expand its business potential, but will also be able to provide both learning and growth opportunities for everyone in the organization.
About the writer:
Ang Ser-Keng is the Director of UOB-SMU Asian Enterprise Institute and a Senior Lecturer of Finance, Lee Kong Chian School of Business. Prior to his career in academia, he was an investment banker in Hong Kong, London and Singapore. He has years of experience in assisting his clients grow their businesses abroad. He can be reached at email@example.com
This article first appeared in Lianhe Zaobao, 15 January 2015.
Last updated on 12 Jul 2016 .