If you thought that major conglomerates were solely steering the forces of globalization and single-handedly reaping the rewards of a global economy, youd be ignoring perhaps the real driving influence and the key to the future integration and success of international markets: small businesses.
While big businesses often gain attention for spreading their tentacles overseas, their smaller compatriots are going global in record numbers. Today, 97 percent of U.S. companies that export are small businesses, according to the U.S. Small Business Administration, and in the last decade the number of small businesses that export has tripled.
Perhaps this trend is not so surprising considering the technological forces unleashed in the last decade. Technology has rapidly broken down barriers and led to the development of a global economy in which many can participate. The information revolution in particular has significantly lowered the costs of doing business for new entrants and increased the competition. With changes in communication and information technology, its easier to get into the game, says FDU Assistant Professor of Entrepreneurial Studies James Almeida.
The advent of the Internet and the e-commerce revolution is at the heart of smaller companies thinking global, says Assistant Professor of Entrepreneurial Studies Ethné Swartz, but other technological changes have supported this trend. Our world is shrinking due to the greater ease and accessibility of international travel.
The result is a level of interconnectedness that has never before been imagined. There is a tighter coupling between countries and time zones, Swartz says. Over the last five years that coupling has resulted in a small cohort of companies being pulled into the global economy. Small software companies with offices or partnerships in developing countries in Eastern Europe or Asia provide good examples of how these new opportunities may be exploited.
Almeida and Swartz themselves have been pulled overseas, and their career paths led to FDUs Rothman Institute of Entrepreneurial Studies, which offers one of the top entrepreneurial studies programs in the country.
Almeida studied in his native India at the University of Bombay, then at the University of South Carolina and the London Business School. He also worked as a product manager in the Indian pharmaceutical industry. His research has focused on international growth opportunities for small firms and the development of global start-ups in the United States.
Swartz has degrees from the University of Cape Town and Rhodes University in South Africa, as well as from Manchester Metropolitan University and UMIST, University of Manchester in England. She has conducted research in information systems in small firms and has an interest in the success strategies of women and minority entrepreneurs. She also worked as a human resource manager for General Motors and Kodak in South Africa.
For Swartz, the level of interconnectedness brought about by globalization is well illustrated by the outbreak of foot-and-mouth disease in Britain and Europe, which triggered a U.S. ban on meat products from the European Union. This has hurt agricultural firms and farmers, and the impact has snowballed to other segments of the British economy. For example, the much bigger tourism industry in Britain could lose $1.5 billion to $5 billion this year, according to a recent New York Times report. Globalization has changed the extent of the connections, Swartz says, and also the potential for a domino effect if anything goes wrong.
built for speed
Both Swartz and Almeida see an irrevocably altered economic landscape, but one that small businesses may be better suited to manage than their mega-competitors because of the very essence of what constitutes a small business. While various definitions exist, the U.S. Small Business Administration considers those firms with 500 or fewer employees as small or medium-sized businesses. But numbers aside, the essence of a small business firm lies in the nature of how it operates. There is usually a different mind-set at small companies, says Swartz. Unlike many large companies, small firms tend to have structures that encourage agility and communication. This is vital if you want to innovate and respond to new opportunities.
That helps explain, she says, why smaller companies frequently drive new waves of innovation in some sectors, even though they have fewer resources than large companies. This is well illustrated in areas such as e-commerce, biotechnology and information technology. Indeed, smaller firms have played crucial roles in developing some of the very innovations that have made globalization possible.
Yet, the pivotal part small businesses play in the economy is sometimes overlooked. In total, small businesses represent more than 99 percent of all employers and provide about 75 percent of the net new jobs, according to the U.S. Small Business Administration. In fact, small businesses have provided almost all of the nearly 20 million net new jobs added to the U.S. economy since 1992.
Furthermore, says FDU Assistant Professor of Entrepreneurial Studies Tom Kaplan, most small businesses are family businesses, and many of them have specific strengths that greatly benefit the economy. Kaplan, who specializes in family business and strategic planning, works closely with FDUs Family Business Forum, where he spoke on Five Family Business Crises And How to Avoid Them. Before coming to FDU, he was the co-founder of the Family Business Forum at Virginia Commonwealth University, Richmond, Va.
Family businesses sometimes get a bad rap, Kaplan says, because we usually only hear about wealthy family enterprises whose members are fighting among themselves. What we dont see are the incredible stories of stewardship and building things for future generations.
Kaplan adds that family businesses and small businesses are really about building something for the future. They create more jobs over longer periods of time and are much less likely to cut people when times get tough.
Family businesses and smaller firms sometimes avoid the intense short-term market pressures that obsess big companies. That could help them in the long term. Ironically, Kaplan notes, big companies that are doing well today are trying desperately to act like small companies because the benefits of size arent going to do a whole lot of good when what really is needed is speed and flexibility, as well as a willingness to kill off your old products before they die of old age. That does not come easily to a large, publicly traded company that cant miss its numbers next quarter.
Almeida adds that hes seen many large businesses try to mimic the structures of smaller businesses by creating more autonomous product teams, pushing decision making down to the lower levels and giving line managers more say in making decisions. Still, for some large firms, it is difficult to escape the problems of inertia. They are used to doing things in a particular manner, and it is difficult to break out of that mold, says Almeida.
eyeing the opportunities
Although small businesses can be innovative and better suited to adjust to the speed and pace of the global economy, that doesnt necessarily mean they all should be looking to cross new frontiers. And, interestingly, many arent. Although the number of small firms going global is increasing, Kaplan says many of them are approaching the global market conservatively. I dont believe a lot of small businesses have significantly changed their strategies. Obviously the Internet has allowed people to throw their products out there, but other than that, many small firms seem to have adopted a wait and see what happens philosophy.
Indeed, the opportunities awaiting small businesses overseas reveal more about what has not happened yet. In 1999, small businesses accounted for 47 percent of total domestic sales, but only 31 percent of export sales, says the Small Business Administration. And, only about 1 percent of all small businesses are currently exporting.
Almeida adds that just because small businesses can move with agility and speed, that doesnt mean they should. They instead have to look at each situation and define whats best for them. A lot of small businesses get enamored with growth but for some firms growth is neither necessary nor possible.
Kaplan agrees, Many small companies are constrained by their own limitations. They clearly cannot handle the complexity of getting into another market. Its a daunting move, and you really need to harness your resources well if you are going to succeed.
the elephant in the room
Still, the global economy cannot be ignored. As Kaplan points out, What happens now is that, with technology, competitors from all over the world view your market as a global market, so it doesnt really matter if you want a piece of their action overseas, theyre coming to get a piece of your action.
There are many examples of this, says Almeida, citing, for instance, the influx of Japanese machine-tool manufacturers, which sent shockwaves through the Midwest, where the U.S. machine-tool industry was dominated by small firms. Its an interesting dilemma if youre in a business dependent on a single market. If overseas competitors come in, they can usually sell at lower prices because they are not as dependent on your market. Often, your only option as a domestic business is to try and cut your prices in your home market, but that will really hurt your operations. If you compete overseas, however, and lets say a Japanese or European firm enters your market and tries to initiate some adversarial moves (e.g. undercut your prices), you can reciprocate in those markets where the competitor is more dependent. Thus, a signal is sent to your competitors that if you do certain things in my market, I will make it more difficult for you in the markets in which you are more dependent.
In short, adds Almeida, being global gives companies more options to make strategic decisions. A number of small companies are realizing that, even if they may not be terribly interested in going global, they are required to do so from a competitive standpoint. And, with the majority of the worlds population and purchasing power outside the United States, the lure to cross borders is very appealing.
slow out of the gate
In a global context, Americas small businesses are actually behind many of their international brethren. Almeida says that many small firms in other countries have long looked beyond their domestic markets. If you look at firms in countries like Taiwan or Australia or in Europe, where the domestic market is small, these companies have commonly considered international business a necessity. Whereas, he adds, in the United States, the domestic market is large enough that most firms have not previously considered offshore markets.
Any advantage foreign firms may have in conducting international business can be overcome, he says. There will be a learning stage for many U.S. businesses looking to go overseas, says Almeida, but one factor in their favor is that they already have survived in the U.S. market, which is probably the most competitive market.
Kaplan, however, cautions firms that a little humility is in order. Companies cant think that just because theyve conquered the U.S. market theyre invincible, he says. Theres been an American attitude of arrogance that has gotten more than a few firms in trouble. You really have to take the time to understand how business is done in other countries.
Even big companies with lots of money have failed to grasp some essential differences, down to the very basic concept of language translations. The gaffes have been comical, except of course to the parties involved. The Coca-Cola name in China, for example, was initially translated as bite the wax tadpole. Pepsi didnt fare much better in China when its slogan, Come alive with the Pepsi Generation, was translated as Pepsi brings your ancestors back from the grave. And the Chevy Nova was exported to Latin America and failed. In Spanish, No Va means it doesnt go or it doesnt work.
with open minds
The variety of factors to consider when approaching other countries can seem imposing. Obviously, companies need to consider the language differences and the political climate in their desired destinations. Thomas Friedman, in The Lexus and the Olive Tree, quotes economist Jeffrey Sachs, who found that open economies grew 1.2 percentage points per year faster than closed economies, because the more open you are, the more integrated you are into todays world network of ideas, markets, technologies and management innovations. But this also must be placed in context within a countrys unique features. Almeida notes that the economies of some countries, like Taiwan, have enjoyed high growth despite a significant degree of protection for domestic industries.
Politics and language are obvious challenges but other issues that might affect a business operation also need to be considered. Almeida, for example, lists telephone services, utilities, roads and highways. You must be sensitive to a countrys infrastructure and to things that we take for granted in the United States.
The impediments for operating a small business have traditionally been less significant in the United States than in many other countries. In India, Almeida says, For many years, control was so pervasive that to even add to its production capacity, a business had to get a government license. And in the United Kingdom, he adds, the requirements for the disclosure of financial information and the regulatory atmosphere in general are much more stringent than in the United States.
In addition, U.S. small businesses have been aided by the existence of antitrust laws that prohibit monopolies from dominating industries and encourage the independence of small firms. In countries like Korea and Japan, in contrast, mega-sized firms have traditionally dominated certain sectors.
Cultural differences also must be well understood. Almeida notes that in the United States, for example, the entrepreneur is recognized to be an individual who can generate significant value for the economy, while in other countries, entrepreneurship may not be viewed as being quite the economic cornerstone. For a long time in places like India and the United Kingdom, working for your own business was not high in the pecking order of career choices.
international vs. global
While many companies boast of having an international reach, Swartz says that just having a presence in another country is not being truly global. She says, Being global means actually being able to put yourself in the minds of people who live in that country. Global also means a company will adopt a single strategy that tries to exploit the similarities across countries, and tailor such a strategy to be sympathetic to the economic, cultural and political nuances of individual countries.
Swartz emphasizes that the key to being global and not just international is for firms to develop a greater market orientation. By that, she means focusing on the needs of your customers, being aware of what competitors are doing and adapting to change in the external environment. This requires companies to be engaged in market research and to track changes in the environment.
This takes resources, though, which are often in short supply in smaller companies. As a result, more and more smaller firms are forming alliances with other small companies and big businesses overseas. In some cases, small firms in a particular country can combine their knowledge of local resources and cultures with the resources of an overseas firm. For example, Swartz says, in the last five years, some U.S.-owned pharmaceutical companies interested in plant-based products in South Africa have begun working with local authorities and companies. This is an exciting trend and will likely lead to benefits for all participants.
Kaplan points out that these alliances can go a long way toward overcoming the many barriers to working overseas, and collaborating with those who know the area best will only increase the chances for success.
on the horizon
Trading with or operating within other cultures can be less daunting if someone has ties to that region. Swartz says minority-owned small firms, particularly those owned by African-American and Hispanic entrepreneurs, may be able to forge important links to the global economy. When ready to trade overseas, those with backgrounds from different countries will naturally seek opportunities in those countries, Swartz says. If youre from South America and youre looking to join the global economy, youll probably do business first in South America. You know the language, the people, the values.
Another trend to watch, Swartz says, is the continued expansion of female-owned small businesses in the United States and abroad. Previously, female-owned businesses were mostly found in specific areas of the service sector, particularly retailing and consumer services. But in the 1990s, Swartz adds, women began reaching into new areas, such as e-commerce and technology-based firms, and women have had more success at obtaining debt financing.
There are great opportunities ahead for female-owned small businesses in high-tech areas, says Swartz, because there is a great gap to close in the funding received by women for high-tech firms. In 1997, of the nearly $12 billion in venture capital funding, only about 2 percent was given to female-owned firms.
back to basics
The high-tech sector indeed offers a world of promise for all entrepreneurs and small firms. But recent stock market trends prove that technology alone isnt enough. Technology is a tool and if you know how to use it, you can leverage a good idea much better than before, says Kaplan. If you understand the basics of business, technology can make you better and can bring you closer to your customers, but understanding what makes your customers tick and filling a need remain the most important elements to success.
Almeida points out that in the global economy developing sound business techniques is more important than ever. Because of the rapid dissemination of information and the speed at which businesses need to move, the environment is less forgiving than ever before, and that trend will definitely continue, if not become more acute. Before, a business could afford to be behind the curve or fail to identify a trend early and survive. A large business may still be able to get away with such missteps, but for a small business, the margin of error continues to get smaller.
With opportunities far and wide, the key to success still boils down to fundamental elements. We are living in a changing world that presents numerous opportunities for commerce, but the nature of business has not and will not change, and that applies to both large and small businesses, Almeida says. Although technology has enhanced the ability of a business to serve customers and has expanded the geographic scope of its markets, the business will only develop an advantage over its competitors if it provides a better product and superior value.