Market orientation and internationalization of MSMEs

Market orientation is “the organization-wide generation of market intelligence about current and future customer needs, dissemination of intelligence across departments and the organization-wide responsiveness to it”¹⁴⁰. The primary focus of market orientation is to understand customer needs in both domestic and international markets so that enterprises can develop products and services to meet these requirements. In short, market orientation means implementing a firm’s marketing concept and business philosophy to achieve a greater degree of market access. In this regard, many researchers have demonstrated a combined effect of market orientation and innovation on firms’ positive performance¹⁴¹. The critical elements of market orientation include customer orientation, competitor orientation, inter-functional coordination, long-term focus and profitability, intelligence generation, intelligence dissemination, and responsiveness.¹⁴²

Given that many domestic markets for MSMEs in Asia-Pacific countries are limited, mainly in the least developed countries, MSMEs are encouraged to gain access to international markets to foster their growth. As such, market-orienting efforts such as providing information and incentives to promote their penetration into the global markets would prove beneficial. The market orientation of MSMEs is conceptually related to the phenomenon of internationalization, which is a broad term used by different scholars to connote “exporting, trade, cross-border clustering, cross-border collaboration, alliances/subsidiaries, branches and joint ventures that extend beyond the home country environment”¹⁴³. It should also be noted that exporting is at the lower end of the spectrum of internationalization in terms of the time and resources necessary, which reflects the idea that MSMEs are subject to more significant resource constraints than large firms¹⁴⁴. Therefore, the choice of entry mode is a process of cost-benefit analysis.¹⁴⁵

Internationalization is fundamentally an entrepreneurial activity that requires recognition of potential opportunities and a corresponding readiness to undertake new types of activities. These approaches require new skills and capabilities and entail taking on more risk, e.g., entering new markets and developing and marketing new products. Internationalization involves increasing direct and indirect linkages to international markets and cross-border operations. Policy attention is often focused on exporting goods and services directly to final customers in global markets. However, internationalization is much broader and can involve a variety of modes, including direct and indirect exports, licensing, franchising, joint ventures, strategic alliances; mergers and acquisitions, the establishment of wholly-owned subsidiaries in foreign markets, and international subcontracting by exporting or by supplying international firms/buyers in the domestic market, but subject to a variety of international standards and requirements.

MSMEs are likely to serve international markets from a domestic production base through direct or indirect exporting, including suppliers in global value chains (GVCs) to domestic or international firms, a critical route to crucial industries. The type of policy attention and support MSMEs may need on their method of internationalizing. GVCs refer to global production sharing, which is broken into activities and tasks carried out in different countries. In GVCs, the operations are spread across national borders (instead of being confined to the exact location). Cross-border production has been made possible by the liberalization of trade and investment, lower transport costs, advances in information and communication technology, and innovations in logistics (e.g. containerization).

Trade promotion tools for MSMEs
MSMEs need to leverage other trade promotion tolls to stimulate foreign buyers' interest and increase their business by exposing them to new buyers. Effective trade promotions can result in increased foreign orders for domestic exporters and suppliers. Export-oriented economies in Asia and the Pacific use these tools to garner interest from foreign buyers. Trade promotion tools have been a key driver for continued economic growth in the region. Specific objectives of export promotion initiatives include:

a) Developing or refining products (and services) for export by communicating with potential customers; 
b) Gaining new customers/intermediaries in neighbouring, regional and global markets; 
c) Strengthening relationships with existing customers and intermediaries; and 
d) Increasing the volume of exports.

Three primary trade promotion tools include trade fairs, buyer-seller meetings, and trade missions. Trade fairs are often collaborations between governments and business associations, and can be domestic or international. These fairs can be significant for MSMEs who cannot afford global advertising to market their products to foreign customers. Buyer-seller meetings are a form of initial communication that provides a path for information exchange between key players in demand and supply. In general, buyer-seller meetings are face-to-face negotiations or conducted through the Internet, telephone, video etc. Many government agencies provide website services where buyers and sellers can post their needs or offer goods and services. Some agencies act as intermediaries that collect orders from buyers and distribute them to one or several eligible sellers to provide goods and services.¹⁴⁶ Trade missions are international trips that national agencies organize for government officials and business representatives to explore international business opportunities in target nations. Representatives from the private sector are introduced to crucial local business contacts and relevant government officials and thus have important contacts for developing business relationships. Getting access to trade missions, for MSMEs or MSME association representatives, can assist with the internationalization of MSMEs.

Global value chains
On the ‘supply side’, the internationalization of MSMEs increasingly takes place through participation as suppliers at various stages in GVCs. Around 80 per cent of world trade now takes place through GVCs.¹⁴⁷

Reaching international markets is challenging for MSMEs. The fragmentation of production creates new opportunities for the supply of products (e.g., parts, components) and services, through linkages with larger firms and foreign buyers and affiliates, in a wide range of industries and value chains, e.g., electronics, automotive, garments, agro-industry¹⁴⁸. Participation in GVCs can bring both growth opportunities and increasing stability of demand to MSMEs. It provides easier access to critical inputs, including information on markets, technology, and best practice, and allows firms to increase productivity, expand markets, and strengthen the capacity for innovation. However, to be a supplier in GVCs places significant demands on SMEs’ skills, managerial and financial resources, and ability to meet a diversity of international standards. More fundamentally, to be such suppliers, MSMEs must be internationally competitive. Therefore, a fundamental challenge of internationalization through participation in GVCs is to loosen constraints on MSME competitiveness (e.g., productivity).

On the ‘demand side’, research on ASEAN and East Asia show that MSMEs can internationalize or access markets in three general ways.¹⁴⁹

a) direct sales of final goods and services, exporting to 'retail' customers (business-to-consumer); 
b) as suppliers in regional production networks within the framework of GVCs-that is, selling parts, components, and tradable services to other enterprises who use them as inputs in their production and business systems (business-to-business); and 
c) innovating for new types of markets and retail customers whose characteristics differ significantly for developed economies, the region's firms' traditional markets (business to new types of consumer).

Box 14 shows the stages of internationalization of MSMEs.

The benefits of MSMEs integrating into GVCs include strengthening the technical and managerial capabilities of firms, increasing capacity utilization and production efficiency, strengthening the reputation and credibility of the firm, and providing a manageable way for MSMEs to reach and compete in global markets. Participation in GVCs also places great demands on small firms to deliver the right product (product standards), in the correct quantity (production capacity), with the right quality (quality standards), at the right time (efficient logistics), and produced in the right way (process standards). These are significant challenges for MSMEs. 

International trade and FDI are the main defining features and key drivers of GVCs. The opportunities for MSMEs to participate in GVCs are vast. Participation in value chains exposes them to a large customer/buyer base and opportunities to learn from prominent firms and from engaging and surviving in the hotly contested sectors of the global marketplace. This process can enhance MSME competitiveness, create more jobs, and promote inclusive growth in the Asia-Pacific. The penetration of GVCs, however, also presents often formidable challenges for MSMEs. They may fail to gain a foothold and have to do without large market development expenditures as a result.

GVCs have brought to light and given the greater focus on the interdependencies between trade and FDI.  Research shows how companies organize their production regionally and globally by blending trade with investment and on a range of non-equity, contract-based partnerships.¹⁵⁰

The analysis demonstrates that GVCs attract MNEs that establish linkages with local MSMEs, attract foreign investors that are SMEs following the big MNEs in competition with local MSMEs, or develop local MSMEs as suppliers to foreign buyers.¹⁵¹ MNE activities are thus a combination of trade, FDI and strategic partnerships. All businesses rely on a mix of these different types of corporate relationships. Also, the configuration of trade, investment and strategic partnerships varies across sectors, businesses and markets. Thus, the advent of GVCs has been beneficial to the expansion of MSMEs in developing countries because they allow MSMEs to initially specialize in specific tasks rather than producing a complete product, simplifying their entry into manufactures trade.

General investment climate factors are essential if countries want to attract. One key factor is macroeconomic stability and balance of payments management, such as low inflation and a stable currency conducive to business. Microeconomic factors include access to labour relative to capital or natural resources. These factors thus determine if a country can attract FDI or even stimulate domestic investment. In addition, business support functions emerge as crucial building blocks in GVCs, which suggests that policy reforms in sectors that support GVCs should warrant special attention. Therefore, it is essential to share some of the challenges MSMEs face in joining GVCs (see Table 5 below).

Table 5. Major challenges for MSME participation in regional and global value chains

Source: ESCAP, Policy Guidebook for SME Development in Asia and the Pacific (2012).