Impact of Globalization and Regional Integration on SMEs

Abstract

This paper evaluates the impact of globalization and regional integration on the ability of small and medium enterprises (SME) to expand their activities in the international market. In particular, the paper highlights opportunities and challenges for SMEs in recent years, amidst globalization and increased economic integration. Some of the opportunities that have emerged for SMEs are; improved access to advanced technology; improved ways of communication; enhanced ability to minimize business risks; better chance for sharing certain costs; and improved access to finance. Among the various challenges highlighted in the paper are increased exposure to international competition, political risks and limiting rules and regulations and theft of intellectual property. As it will be noted, most SMEs have not enjoyed the benefits of globalization and regional integration, mostly due to their low capacity. In this regard, this paper has suggested ways through which the capacity of SMEs can be enhanced. The paper proposes that the capacity for SMEs can be enhanced through improved access to finances, enhanced skills for managers, modification of products and services to fit in the international market and facilitation of collaboration among SMEs. It has also proposed that governments can provide further support through increased regional integration, promotion of foreign direct investment, support for research and development, protection of intellectual property rights and establishment of laws and regulations that are less restrictive to the growth and expansion of SMEs in the international market.

Introduction

Globalization simply refers to the process of formation of an international network of social, political and economic systems. Among other aspects, the phenomenon of globalization is characterized by integration of national and regional economies, leading to the formation f a global economy (Haq & Sen, 2010, p. 136). The process of globalization and regional economic integration has opened opportunities and increased pressure for SMEs to expand their activities in the international market. However, the low capacity of most SMEs has greatly reduced their ability to globalize their activities and to exploit emerging opportunities in the international market. At the same time, the process of globalization has posed various challenges to SMEs, which have also contributed to reduction of the potential for these firms to access and enjoy the fruits of globalization (Haq & Sen, 2010, p. 136). In this view, this paper examines the opportunities and challenges posed by globalization and regional economic integration to SMEs. As well, the paper proposes ways through which the capacity of SMEs can be enhanced in order to increase their growth potential.

Opportunities

The process of globalization and economic integration has opened several opportunities for the growth of SMEs. Over the last two decades, there have been concerted efforts in many parts of the world to liberalize trade through reduction in tariff and non-tariff barriers to trade (Gaston & Khalid, 2010, p. 57). This has been achieved through formation of unilateral and multilateral agreements and unions. Examples of famous agreements that facilitate trade liberalization among members are General Agreement on Tariff and Trade, World Trade Organization, the American Free Trade Agreement and the Asia-Pacific Economic group (Krishna, 2005, p. 12). Generally, trade liberalization has made it easier for SMEs to penetrate into new, more lucrative international markets.  Despite this, most SMEs have focused on serving local niches, especially due to lack adequate resources and required expertise to expand activities into international market (Singh, Garg & Deshmukh, 2010, p. 56). Secondly, globalization and economic integration has facilitated advancement and diffusion of technology across countries. Increased emphasis in innovation has led to rapid change in technology in various parts of the world. SMEs can access newer and better technology and technological products which can enhance productivity (Cavusgil, 2009, p. 57). However, most SMEs have not been able to exploit this opportunity due to lack of adequate financial resources (Singh et al, 2010, p. 56).

Further, advancement in information technology has facilitated communication and interaction among human beings across the world. Communication over the internet, for instance, has increased at a high rate. This has opened an opportunity for SMEs to market and sell their products and services in the international market. As well, SMEs are able to access useful information through the internet, which can help to support innovation and development (Ervin & Smith, 2008, p. 34). Just as other profit-oriented organizations dealing with products and services, SMEs face various risks when expanding to new markets, such as commodity risk and currency risk. However, SMEs are able to minimize the risks through integration. Precisely, the process of globalization has opened opportunities for SMEs to form partnerships or strategic alliances with foreign and multinational organizations which facilitate production, sale and distribution of products in the global market (Vakharia & Yenipazarli, 2009, p. 18). This can be achieved through joint venture, merger, equity strategic alliance, non-equity strategic alliance and global Strategic Alliances (O’Dwyer, Gilmore & Carson, 2011, p. 93). As O’Dwyer et al (2011, p. 94) explain, partnerships enable an enterprise to access essential information regarding the target market such as culture and resources needed for penetration into the market. Thus, risks associated with lack of insufficient information and resources are eliminated. As well, globalization has provided an opportunity for SMEs from different regions and countries to share costs (As O’Dwyer et al, 2011, p. 94). For instance, organizations can set up a joint research and development facility and share the costs incurred in the process. Lastly, globalization has increased opportunity for SMEs to access finance from local and foreign commercial banks, equity markets and government agencies (Caprio, 2012, p. 222).

Challenges

Globalization and regional integration has posed various challenges to SMEs. To start with, globalization and economic integration have led to increased exposure of SMEs to international competition. As Singh et al (2010, p. 55) explain, increased trade liberalization has facilitated penetration of well-established firms into underdeveloped foreign markets. This has facilitated the loss of local markets to foreign firms offering lower-priced products and services. In some countries, increased competition from foreign firms has made it difficult for local SMEs to survive in their respective markets (Singh et al, 2010, p. 55).

Further, globalization has increased vulnerability of globalizing SMEs to political risks. Political instability in any of the nation where an SME operates may affect its performance.  Political relationships between countries in which an SME operates may also have a significant impact on its performance. Desp.............