Internationalization and destination selection of emerging market SMEs: Issues and challenges in a conceptual framework

Introduction

Small and medium-sized enterprises (SMEs) play an important and dominant role in contributing to the economy of any nation, whether developed or emerging (Todd and Javalgi, 2007). The role of SMEs in emerging markets such as China and India has become increasingly significant in recent years under the influence of economic reforms with a ‘market-orientation’, as was the case with Deng Xiaoping’s ‘Open Door’ policy in 1979 or India’s economic liberalization in the early 1990s. For example, SMEs in India employ almost 40% of the workforce and contribute 17% of the overall gross domestic product (GDP; Goyal, 2013). In addition, China has the largest number of SMEs in the world, with almost 50 million and India is close behind with 48 million SMEs (Goyal, 2013). Both economies need closer examination by scholars in this domain, as this is a much underexplored area of research.

As globalization has led to increased international expansion of firms, companies from emerging markets, including SMEs, are also seeking to integrate into the global economy (Hoskisson et al., 2000; Khanna and Palepu, 2000). This démarche has led to a spurt in international activities by SMEs based in emerging markets to share the benefits from these international opportunities vis-à-vis market expansion (Aulakh et al., 2000; Khanna and Palepu, 2000). In fact, a number of incentives have been given to SMEs from the government to ‘go global’ and export. This boost is due to the shift of emerging markets from inward-looking import substitution policies to outward-looking export-led growth following economic reforms (Aulakh et al., 2000). It is then not surprising that SMEs in emerging economies are likely to play a significant role in contributing to growth in the economy. For instance, exports by Indian SMEs account for nearly 40% of total Indian exports (Goyal, 2013). Similarly, in China, SMEs contribute more than 68% of exports (Ministry of Commerce of PRC, 2012). These are substantial figures and need further attention by scholars.

While the opportunities and benefits for SMEs in emerging markets to integrate into the global economy are considerable, the challenges that they face are significant. When compared with SMEs in developed countries, they are in general more disadvantaged vis-à-vis resources, technology and innovative brands (Paul and Dikova, 2016; Zhu et al., 2007). SMEs in emerging markets are also disadvantaged due to local institutional factors (Paul and Dikova, 2016; Zhu et al., 2007). Singh et al. (2010) provide supporting evidence of the multitude of barriers that SMEs in emerging countries are likely to face, such as competitive disadvantages, political risks, corruption, poor marketing capabilities, restrictive regulatory frameworks, bureaucracy and poor infrastructure. To this effect, scholars (e.g. Al-Hyari et al., 2012; Tesfom and Lutz, 2006; Uner et al., 2013) have developed a taxonomy of internal and external barriers to exports experienced by SMEs from emerging markets, but they have not identified the reasons for choosing the destination of internationalization and the related challenges.

Therefore, this article contributes to filling the existing gaps not only by developing a more meaningful account of the issues and challenges faced by SMEs in emerging markets but also by investigating the important factors influencing the choice of destination of internationalization and the related specific challenges that SMEs face in their choice of destination. In fact, the reality is that there are certain home country challenges that most SMEs are likely to face, but other challenges will be unique to the destination country for internationalization purposes. The relative advantages that SMEs might enjoy in their home market could disappear when they engage with international markets, and the business outcomes could vary depending on where they seek to internationalize, whether selecting a developed country or another emerging market.

Consequently, it is high-time to develop a comprehensive conceptual framework to understand the current trend of internationalization of emerging market SMEs, particularly the issues and challenges they are facing in this process. The research presented here aims to investigate the following key questions: (1) What are the issues and challenges facing the emerging market SMEs in the process of internationalization in general and their selected destination in particular? (2) What are the strategies and processes being adopted by SMEs to overcome the challenges and limitations with specific reference to international destinations in developed economies as opposed to emerging markets? Addressing these questions will result in a new conceptual framework specific to the internationalization of emerging market SME as the context of emerging markets is very different (Sardana and Zhu, 2016, 2017) and hence the need to examine and consider the heterogeneous aspects of the context (Fayolle and Liñán, 2014; Hoskisson et al., 2013; Liñán and Fernandez-Serrano, 2014). For this very reason, past theoretical lenses and conceptual frameworks for internationalization (refer to Wright et al., 2007) have been questioned by scholars for their debatable applicability for emerging market firms (Paul and Gupta, 2014; Ramamurti, 2012). Taking this concerted approach to focus on emerging market SMEs, this article intends to make an important contribution to understanding how these SMEs operate, overcome challenges and prosper when internationalizing (Knight, 2000; Paul et al., 2017).

To tackle the above-mentioned questions, it is important to take a more nuanced approach to analyse and identify when a particular factor in the emerging market context becomes a facilitator and when the same factor becomes an obstacle in the process of internationalization. For instance, institutional factors in emerging markets have often been considered to hinder the growth and development of businesses, but often it is the concessionary gestures made to SMEs by the same set of institutions (such as liberal policy incentives to export) that tend to benefit SMEs in an emerging market (Jormanainen and Koveshnikov, 2012). On the other hand, institutional voids are considered to impede businesses, but several pragmatic owners of SMEs tend to derive significant advantages by exploiting these voids (Sardana and Zhu, 2017). Therefore, this article is designed to address these issues by comparing and contrasting similar and different patterns and processes adopted by Chinese and Indian SMEs in internationalizing their businesses into developed and emerging markets.

Considering that the broader aim of this article is to develop a conceptual framework that would reflect issues and challenges relating to the internationalization of SMEs from emerging markets, we have focused on the contextual dimensions in two of the largest and fastest growing emerging economies in the world currently. According to the United Nations and International Monetary Fund, China and India rank second and fifth globally in terms of GDP. Together they are home to almost 35% of world’s population. Hence, by focusing on China and India, we are able to cover substantial ground representing the issues and challenges that are commonly faced by SMEs in emerging markets. Therefore, we would like to clarify the point that this article targets SMEs from China and India as examples of SMEs in emerging markets embarking on internationalization.

In addition to the above, we would also like to state that several issues and challenges that emanate due to context and location are likely to be the same for both SMEs and multinational enterprises (MNEs) from emerging markets. Nevertheless, it is reasonable to ascertain that emerging market MNEs (EMNEs) are likely to have more resources, capabilities and institutional support vis-à-vis SMEs. For this very reason, the severity of the challenges will be vastly diminished for EMNEs compared with SMEs. Therefore, even though EMNEs may face some common challenges that we will draw upon in this article, the discussion primarily pertains to SMEs. At the same time, other factors contributing to the internationalization of emerging market SMEs are more pertinent to these enterprises compared with those affecting EMNEs. For instance, less competition despite the small size of the international destination is likely to be a major pull factor for SMEs, but this may not serve as an attraction to EMNEs.

To address the key issues and questions, this article is structured as follows. After this introduction, we present a preliminary review on the literature related to SMEs from emerging markets seeking to internationalize. Then, the focus is on empirical research on the internationalization of SMEs from China and India. After that, we present a number of mini case studies of Chinese and Indian SMEs regarding their rationale for destination selection, the different challenges faced in developed and emerging markets, and the strategies being adopted to overcome the challenges in both of these international destinations. This extensive discussion leads us to develop a new conceptual framework and pose a number of questions for future research.

Underpinning literature

There are multiple layers of literature relevant to the current study and we start with the definition of internationalization of a business. According to Ruzzier et al. (2006), the internationalization of a business (via SMEs) means that the business ‘establishes and develops positions in relation to other counterparts in a foreign network’. This network-based approach, starting from the domestic business environment, extends to business relationship development and engagement in other countries to achieve international extension, market penetration and business integration. Three sources, namely institutions, business associates and personal relations, work in tandem (Senik et al., 2011) in the process of internationalization. These networking linkages of the three sources can initiate awareness as well as trigger, accomplish, strengthen and sustain SMEs’ internationalization.

The strength of the network approach lies in explaining the process of internationalization with certain benefits such as minimizing the need for the development of extensive knowledge and/or adjustment and exploiting established network positions (Johanson and Mattsson, 1993). However, the weakness of the network approach is that it neglects the strategic position and influence of individuals as entrepreneurs in the SMEs’ internationalization process (Ruzzier et al., 2006). Considering SME internationalization to be an entrepreneurial activity (Lu and Beamish, 2001), and neglecting entrepreneurial dynamism and associated factors such as education and intention, may impact theoretical rigour (Fayolle and Liñán, 2014).

The next layer of relevant literature addresses the reason for SMEs’ internationalization. Generally speaking, there are push factors and pull factors in this regard. In terms of push factors, the push for exports will most likely be by governments in emerging markets (Smallbone et al., 1998) as well as specific policies in emerging markets favouring foreign investment through tax holidays and other preferential treatment. These policies encourage SMEs seeking business expansion to overseas market and/or registering their businesses overseas, particularly in tax heavens, and then reinvesting into their business in home countries to enjoy the benefits as ‘foreign investors’. Another push factor is associated with changing or deteriorating domestic business environments, such as political instability, corruption, institutional barriers, increasing costs of production, restrictive environmental regulations and severe domestic competition.

Pull factors are connected to push factors, such as alternative production sites with lower costs (i.e. resource and transaction costs), potential market opportunities, better business regulation with preferential treatment and less competition compared with domestic markets. Economic regionalism, such as entering regionally based trading blocs (i.e. free trade areas), could be seen as another pull factor for SMEs to benefit from lower taxes and duties and using foreign countries as production sites to gain entry into the third market without quota restrictions. Sourcing of rich material supplies for domestic consumption and obtaining advanced technology through foreign research and development (R&D) alliances could be seen as another important pull factor for SMEs to go overseas (Oviatt and McDougall, 1994; Yamin and Sinkovics, 2006). The last but not the least pull factor is linked to the connections between the local and the global environments with SMEs becoming suppliers to the large enterprises (LEs). By doing so, SMEs can form business clusters with LEs as well as overcome certain barriers (Le Gale et al., 2004; Phelps et al., 2001).

Given the multiple push and pull factors influencing SMEs from emerging markets in their decisions on internationalization, a detailed rationale for selecting strategies of internationalization and destination selection for such international expansion is required. This is another area in which we can make complementary contribution by using examples of the internationalization of SMEs from China and India in this article.

The third layer of relevant literature is the challenges and barriers faced by emerging market SMEs engaging in internationalization. So far, several literature contributions focus on the barriers associated with the internal disadvantages of SMEs in terms of small size, lack of resources (both financial and HR), knowledge and experience, and lack of product distinctiveness and innovation (Smallbone et al., 1998) as well as some external constrains, particularly related to institutional barriers within the home country. These challenges and barriers could have multiple influences on SMEs’ engagement in internationalization. Consequently, SMEs could select alternative business operation sites, such as foreign markets, to avoid home market constrains. To achieve these objectives, SMEs have to rely on the development of entrepreneurial dynamism, internal flexibility and responsiveness to changing circumstances to overcome the challenges and barriers on the home front (Zhu et al., 2012). We will focus on these elements in greater detail in a later part of this article using the examples of SMEs from China and India.

The fourth layer of relevant literature is based on the significant influence of entrepreneurial dynamism in the process of internationalization as one of the advantages associated with SMEs. The process-based internationalization literature has been criticized as neglecting the role and influence of entrepreneurial dynamism in the internationalization process. Hence, it is important to analyse the role and influence of entrepreneurial dynamism in this regard. So far, literature has touched on the opportunities of internationalization to emerging market SMEs as a way of creating value by entrepreneurs exploiting these opportunities (Zahra and George, 2002). By doing so, they can build experiential and tacit knowledge in the process of internationalization (Hitt et al., 2005). These SMEs can exploit the information asymmetry that occurs due to differential times and geography to earn entrepreneurial profits (Zhu et al., 2007). Three important actions enable SMEs to overcome some of the disadvantages through environmental scanning to facilitate internationalization, building close working relationships between business partners and developing allies with prestigious foreign firms and business groups.

In the following section, we discuss in detail entrepreneurs’ decisions and the causes for seeking entry to international markets, whether developed or emerging markets. Our discussion is based on examples of internationalization by Chinese and Indian SMEs.

Drivers contributing to the internationalization of Chinese and Indian SMEs

Until now, a number of publications (as discussed in this section) have focused on Chinese and Indian SMEs engaging in internationalization. The key issues highlighted have been the drivers of internationalization, such as policy influence, and internal and external challenges and opportunities, as well as entrepreneurial strategies for internationalization.

In the case of China, the focus has been on SME internationalization with government involvement in the economy and its push for the ‘go global’ strategy (Deng, 2007). The overall economic reform policy in China has been to decentralize the ‘old’ central planning system. However, the decentralization process has led to two distinct paths, namely the administrative decentralization to local authorities and the economic decentralization to firms (Boisot and Child, 1988; Huang, 2003; Warner, 2014). The former is a presumption in favour of socialism that aims to keep the associated information costs and incentive distortions manageable. The latter is a presumption in favour of entrepreneurship and capitalism (Boisot and Meyer, 2008).

However, the administrative decentralization has led to a feudalization of China’s industrial structure and economic fragmentation of the national economic space (Biosot and Child, 1988). Fragmentation of the Chinese economy has pitted provinces and municipalities against each other in competition to achieve economic targets (Boisot and Meyer, 2008). The ongoing increase of transaction costs associated with doing business across boundaries within China has become one important push factor for the SMEs to go abroad seeking a better business environment.

The Chinese government has provided, for several years, many different preferential policies to attract foreign investors. The favourable treatment of foreign-owned firms has prompted Chinese domestic firms, including a large number of SMEs, to register in foreign countries, particularly in the so-called tax havens, or take over other foreign firms and then reinvest in China as foreign entities, so that they can enjoy the favourable conditions. By doing so, these firms can also enjoy the protection of property rights in foreign countries which have been lacking in China for a long time (Boisot and Meyer, 2008).

Another instance of government policy influencing firms’ internationalization is the more recent conceptualizing and aggressive propagation of ‘One Belt, One Road’ (OBOR) policy, which advocates global networks and international connectivity. This can be seen as the continuation of ‘go global’ strategy which was formally announced in October 2000 by the central government as part of its long-term, innovation-oriented development plan (Deng and Yang, 2015). Under the OBOR policy, Chinese firms, both LEs and SMEs, are encouraged to engage in international expansion with financial support (e.g. low-interest loans). Thus, in more recent years, under the influence of different bilateral and multilateral free trade agreements (FTAs; e.g. with Australia, New Zealand and Association of Southeast Asian Nations) and the OBOR initiative, more favourable policies on cross-country trade and investment have become available, which in general encourages Chinese SMEs to internationalize although subject to certain conditions.

With regard to policy influence in India, government policy support for the development of the IT sector in general, and investment in required telecommunication and electronic infrastructure, in particular, has led to the increase of the overall competitive ranking among SMEs (Todd and Javalgi, 2007). SMEs in the IT sector have been engaged in international supply chains by providing professional services to large MNCs in foreign markets, particularly those located in developed countries in Europe and North America. Gradually, these SMEs have become part of the internationalization process of value-added activities through constellation and investment in more than one country (Prasantham, 2011).

By comparing the internationalization of Chinese and Indian SMEs, a number of common characteristics are evident, namely the government policy of supporting SMEs’ international engagement, such as the ‘go-global’ strategy and ‘OBOR’ initiatives in China and promoting the ‘Make in India’ campaign and global IT supply chains policy in India. This support allows SMEs from both countries to enter the international business arena with the approach of ‘learning by doing’ and accumulating experience.

Although the policy has become more favourable in developing countries towards SMEs that want to embrace international expansion, barriers and obstacles still exist both internally and externally (Tesfom and Lutz, 2006). So far, various scholars have identified a number of issues with regard to internal barriers. In China, for instance, lack of global experience, managerial competence and professional expertise have posed critical bottlenecks for Chinese SMEs’ internationalization according to Luo and Tung (2007). Other aspects of internal barriers among Chinese SMEs can be associated with product (e.g. price, labels and design), operation and logistics (e.g. supply chains, post-sales and distance access), knowledge of international finance (e.g. credit, payment and exchange rate) and skills (e.g. assistance, communications and time; Cardoza and Fornes, 2011).

In the case of Indian SMEs, Todd and Javalgi (2007) identified a number of firm-specific barriers, including capital, training and R&D accessibility. SMEs in India face problems in obtaining financial capital and lack the necessary human resources. For example, Kannabiran and Dharmalingam (2012) claim that lack of financial capabilities and in-house IT human resources are the major internal barriers to technological advancement by automobile industry SMEs in India. SMEs in India experience problems associated with competing with large domestic companies and MNCs in a scarce supply chain and logistics infrastructure that may negatively impact their internationalization (Sahay and Mohan, 2003). Additionally, a study found that, in India, about one-third of companies did not have a supply chain strategy, and inventory management was not given priority (Sahay et al., 2003). The issues and challenges being faced by SMEs in China and India are quite similar and thus can be seen as representing unique characteristics of emerging markets.

With regard to external barriers, the major focus of research has been the institutional barriers, such as competition fairness, access to financing, laws and regulations, tax burden and support systems (Zhu et al., 2012). Other researchers also claim that political ties are more important than business ties in the relationship between innovativeness and the degree of Chinese SMEs’ internationalization (Zhang et al., 2016). However, a salient feature of the government–business relationship in China is that low-cost regulatory resources are not accessible to all SMEs; rather, they are available selectively only to firms with strong political connections and officials in charge (Zhang et al., 2016). In India, similar external barriers exist, such as many structural impediments in the areas of regulatory and commerce infrastructures, legal services, currencies and clearing systems, as well as the banking and financial networks (Todd and Javalgi, 2007). The institutional barriers include the persecution of SME owners who find themselves on the wrong side of current political dispensation due to democratic process, non-transparent rules and bureaucratic hurdles.

A further focal point on Chinese and Indian SME internationalization identified in the literature relates to the rationale or drivers for SMEs adopting internationalization as a business strategy. Under the influence of both push and pull factors which have been discussed earlier, many Chinese firms seek to ‘go global’ for a number of reasons. The study by Child and Rodrigues (2005) considered five drivers; namely, avoiding reliance on highly competitive domestic markets with low margins, benefitting from the cost advantage of exports, gaining from the complementary advantage between cost and differentiation acquired abroad, securing and developing technology and brands, and gaining entrepreneurial and managerial freedom. Several of these factors also hold true in the Indian context.

Internationalization process facilitator

To facilitate the success of SME internationalization, scholars have studied the entrepreneurship dynamism beyond the internationalization process. Given that SMEs face many different constrains at home and abroad, entrepreneurial factors play an important role in the process towards achieving successful outcomes. As Child and Rodrigues (2005) claimed, greater scope for entrepreneurial initiative is crucial and the exercise of that initiative is partly directed towards increasing the autonomy of firms to raise capital abroad and further their internationalization policy. Chinese entrepreneurs are very effective in promoting internationalization by maintaining connections with the state (both home and abroad; Song, 2011), building business/ethnic networks and trust to overcome the ‘foreignness’ and ‘outsider-ness’ (Deng 2007), engaging in ongoing learning on the job (Luo and Tung, 2007) and building effective working relations with host country stakeholders (Luo and Tung, 2007). As Tang (2011) indicated, the ability of Chinese SMEs to plan and invest in networking effectively and deliberately with key partners is beneficial in obtaining the influential resources for accelerating foreign business development. This capability can be seen as a strategic activity.

As for the Indian SMEs, Javalgi and Todd (2011) claimed that entrepreneurial orientation, a commitment to internationalization and the ability to leverage human capital determine the international success of Indian SMEs. In addition, Prasantham (2011) also claimed that, in the context of Indian software SMEs, the scope for cross-border learning is enhanced by the prospect of cultivating co-ethnic advice networks in international markets. This approach, in turn, can potentially help the SMEs to make a foray into new business networks, allowing them over time, to become ‘insiders’ in the host market and thereby increase their competitiveness (Coviello, 2006; Prasantham, 2011). Hence, in the process of internationalization, the business owners of both countries’ SMEs play a crucial role in ensuring entrepreneurial dynamism by exploring opportunities and consolidating social and business networks. These dynamic business owners and their entrepreneurialism can be defined as ‘process facilitators’ of internationalization.

Destination selection: Mini case studies of internationalization among Chinese and Indian SMEs

In the above sections, we discussed issues related to policy influence, barriers, rationale and entrepreneurial intentions for the internationalization of Chinese and Indian SMEs. In this section, we elaborate on the unique opportunities and challenges faced by emerging market firms as they select a destination for internationalization in a developed country or in another emerging country. For this purpose, we discuss the results by using seven mini case studies selected from our fieldwork in Australia, China, India and South East (SE) Asia in the past few years. These mini cases reflect the key issues related to destination selection among Chinese and Indian SMEs entering each other’s markets as well as other markets (i.e. SE Asia and Australia; see Table 1 for the detailed firm profiles).

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Table 1.

Mini cases profile.

C1: Indian SME in China	As one of the earliest Indian IT education services companies entering China, C1 provides an ‘IT Talents’ programme for training and development to build human resources for the IT services industry.
C2: Chinese SME in India	A company owned by a Chinese individual in India to source, brand and distribute mobile phones from China.
C3: Indian SME in China	A mid-sized IT company providing outsourced services to clients.
C4: Chinese SME in SE Asia	A family-owned Chinese textile manufacturing company operating in Laos and later other SE Asian countries (e.g. Vietnam and Cambodia).
C5: Chinese SME in Australia	A Chinese business migrant to Australia with family business in international trade.
C6: Indian SME in Australia	An Indian-skilled migrant to Australia with IT service business.
C7: Chinese SME in Australia	A Chinese-skilled migrant to Australia with computer engineering background and running a new business as digital start-up.

Source: Authors’ fieldwork in Australia, China, India and SE Asia, 2014–2017.

Note: SME = small and medium-sized enterprise; SE: South East.

The case studies conducted on Chinese and Indian firms entering each other’s markets identified the key contextual factors impacting internationalization, including market, institutional and organizational factors. Market factors appear to have a major impact on the success of the internationalization opportunities being pursued since market context determines the value of a company’s offering in the host country, which in turn is affected by other factors, such as country of origin perception, need of that product in the market and competitiveness in the industry.

For example, C1 is an Indian IT education service provider which performed much better in China than it originally expected primarily due to a huge demand and a considerable market for IT development, education and training companies. The attractiveness of the market opportunity is further enhanced if the opportunity is seen to align with the objectives of the local government, and the firm is seen to add value to the local government objectives. This successful firm had the desire to understand the market context, learn from it and adapt its offering, thus further enhancing its appeal in the market segment in which it was competing. With regard to the ‘bigness’ of the markets in China and India, other companies realized after entering the markets, that irrespective of the total size of the market, the quality of the opportunity is at best ‘average’ if there are too many competitors and the internationalizing firm lacks certain key resource endowments.

Institutional factors encompass three essential elements: regulatory, normative and cognitive (Scott, 2001). The case study of C1 provided substantial evidence supporting the assumption that regulatory authorities in emerging markets can have a major impact on businesses. As stated before, C1 had a very positive experience of doing business in China as it found considerable support from Chinese regulatory authorities. This success was a result of the company’s value proposition being considered a contribution to the policies and objectives of the government at various levels.

Normative rules in emerging markets are also different from those in a developed country. Interpersonal relationships are given precedence over contracts. Almost all the respondents in the above-mentioned study confirm this aspect. As for the Chinese firms operating in India, bargaining and negotiation are deeply embedded in Indian culture as indicated by some of the interviewees who stated that clients may even negotiate after signing a contract and are likely to take undue advantage. For example, the Chinese owner–manager of C2 felt that ‘Indian business people emphasized rational thinking in preference to personal relationships in their business decision-making’. It is for this reason that most of the business deals concluded are devoid of any emotional attachment or possibility of long-term association. Contrary to this, Chinese people pay more attention to relationships and respect verbal commitments.

With regard to cognitive aspects, it would appear that the perception of the country of origin has a direct influence on the acceptability of the services and products being offered by foreign firms from a given country. The cognitive aspect can also be seen to affect the market context. For example, the manager of C3, an Indian SME operating in China, pointed out that it is very difficult to sell IT services of an Indian firm in China due to consumers’ preference for either ‘Western’ companies or local firms, despite the Indian company being a reputed company in India. The situation for the Chinese firms operating in India is not very different as C2’s manager told us, agreeing that the country of origin being China does put the product at a certain disadvantage. In addition, industry sectors also influence firms’ internationalization process. Most Chinese SMEs operating in the low-technology sector and specializing in manufacturing at a lower cost seek low-cost material from their neighbouring markets and sell their manufactured goods in those markets. However, firms in the high-tech sector target the US and European markets for expansion, as that is where they are able to use their cost advantage to win new business. In particular, firms in the semiconductor industry, services and software, and consumer electronic and telecom equipment have been successful in competing with foreign challengers for their domestic market and are confident of their success in the international marketplace (Albrecht et al., 2008).

A further influential factor determining internationalization to a particular destination is related to firms’ needs. Many Chinese SMEs face several challenges in their home markets, in particularly related to the increase of cost (e.g. labour, land, material and finance), the oversupply of products with the severe competition and regional trade barriers. Therefore, having obtained information about other emerging markets within the SE Asian region from either private channels or government sources, these SMEs have attempted to enter SE Asian emerging markets. For example, C4, a Chinese SME entering SE Asia, demonstrated that the firm followed a number of textile and garment companies in Jiangxi province to form a cluster and moved these companies to Laos to supply materials and support each other’s production in a newly developed industrial zone. Later, other family relatives and friends joined the companies to explore other business opportunities among SE Asian economies, such as developing mineral exploration and production businesses or manufacturing, production and trade. The labour costs, the requirements for environmental protection and the levels of competition in these markets are less in comparison with the SMEs’ home markets in China. Although SMEs have complained about the policy problems and institutional voids (e.g. corruption) in SE Asian emerging markets when compared with business operations in China, the situation in these emerging markets is similar and the SMEs have become accustomed to dealing with such problems and challenges, using similar strategies, such as building social and business networks and other means to overcome these problems.

In contrast to the above, Chinese and Indian SMEs regard developed markets in general, and the Australian market in particular, as being very different markets from their home markets. For example, C5 is a Chinese SME, which has entered the Australian market. The company found that the reasons for this perception regarding the market differences include the view that, in Australia,

prices are high and doing business is more expensive, the business environment emphasises the ‘rule of law’ and contractual relationships are more important than personal relationship, the government plays a less interventional role in business processes, and competition is related to a greater extent to the quality and reputation of the products and services, rather than cheap prices.

The disadvantage of being ‘latecomers’ is that Chinese and Indian SMEs face difficulties in competing with local companies as well as other experienced foreign companies. Therefore, lack of international business operation experience and insufficient information about the host country’s political, legal, social/cultural and environmental policies and norms could jeopardize the success of Chinese and Indian SMEs’ operations abroad. Other issues are related to cross-cultural management and leadership challenges in a multicultural work environment. Generally speaking, Chinese and Indian SMEs adopt a control-oriented management style with the phenomenon of ‘boss is a boss’. However, this management style could face resistance from local employees in Australia. An important lesson to learn is to ‘adopt a more locally-oriented management practice and not simply adopt home country management systems in their foreign operations’, according to the manager of C5. Therefore, whether the emerging market SME is willing to make these changes and adapt to the destination market is also likely to impact its choice of destination selection.

Discussion and conclusion

The new conceptual framework

Based on the previous literature review and evidence from recent research on Chinese and Indian SMEs internationalization, we present a new conceptual framework by linking multiple separate issues within the current International Baccalaureate literature, namely the drivers, process and destination selection for internationalization with the characteristics of emerging market SMEs (see Figure 1). As Figure 1 demonstrates, we have divided the conceptual framework into three parts: Part I indicates the drivers with detailed components of push and pull factors for SMEs internationalization, part II indicates the process facilitators of internationalization with the influential factors of entrepreneurial dynamism and strategic decision and part III provides the detailed elements of destination selection, including emerging and developed market selection with rationale, advantages and challenges/barriers.

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Figure 1.

Internationalization of emerging market SMEs: Drivers, processes and destination selection. SME: small and medium enterprise; FTA: free trade agreement.

With regard to the drivers, both push and pull factors are influential in adopting internationalization among the emerging market SMEs. Push factors can be associated with (1) home country government policy on promotion of export/internationalization and constraints on business operations, (2) changing overall domestic business environments and (3) SMEs’ business needs and personal/family needs. Pull factors can be related to (1) lower costs or less competition in new markets, 2) better business environments with better host government regulations and business autonomy, (3) benefits from FTAs and economic regionalism, (4) rich resources and/or advanced technology and (5) being part of supply chain/business clusters.

With regard to the process facilitators, the internationalization process is influenced and determined by entrepreneurial dynamism and strategic decision-making, in particular, regarding which destination the SMEs should select through the assessment of their business capabilities, comparative evaluation of business environments between potential destination and home country, and entrepreneurial strategies to overcome challenges and barriers according to the different destinations.

In terms of destination selection, two distinct markets, namely emerging markets and developed markets, have similar and different key elements regarding the selection rationale, advantages and challenges/barriers. By providing a more detailed category, we have divided these elements into a three-factor analysis, namely market factors, institutional factors and organizational factors, in relation to the relevant selection rationale, advantages and challenges (see Figure 1).