American statesman and inventor Benjamin Franklin once famously said that nothing is certain in life except death and taxes. Nowadays, no one is more painfully aware of that—at least the part about taxes—than small and midsized enterprises (SMEs) entering foreign markets for the first time.

The complexity of foreign tax, regulatory and legal regimes is the most frequently cited reason why SMEs avoid foreign markets. The range of such barriers is wide, encompassing different tax treatment for similar products in different countries, varying product-composition and packaging rules, different standards for protecting intellectual property (IP), and complicated customs clearance procedures even within a free trade area. While the specific legal and tax barriers vary widely, they all represent essentially the same problem for SMEs: high compliance costs and the risk that, when implemented, regulations will be interpreted in unfavourable ways.

Such risks and costs are at the root of SMEs’ reluctance to export. According to the Confederation of British Industry (CBI), only one-fourth of European companies export. Dutch entrepreneurs’ association MKB-Nederland says that only 20% of Dutch companies export; according to a survey by logistics giant UPS, only 10% of French companies export.

Complex tax and legal issues also explain why SMEs that do export tend to do so only within a free trade area. A large-scale survey of SME owners and directors in seven European countries, carried out by UPS1 in 2015, found that, in four of the seven countries looked at, the complications of clearing customs or of complying with export regulations was among the top three reasons for not exporting outside of the European Union.

Overall, around 80% of EU-based SME exporters confine their exporting to the EU, according to Ben Digby, the CBI’s international director. Others venture farther afield, but to markets with which the EU has a free trade agreement, such as South Korea. An example is offered by UK pottery and tableware manufacturer Portmeirion: It says its export business to South Korea skyrocketed after the country signed a free trade agreement with the EU in 2010. By 2011, South Korea had surpassed the company’s home market in the UK, and became its second-biggest market after the US.

A LABYRINTH OF HEALTH RULES

Examples such as Portmeirion’s should not suggest that a free trade agreement sweeps away all legal and regulatory complications for exporters. Nothing could be further from the truth. Even within the EU single market, among countries with similar standards for products and services, legal and regulatory hurdles arise for exporters. An example is the maze of national rules that determine which pharmaceuticals qualify for medical prescriptions within the national health system.

Laboratoires Expanscience, a French pharmaceuticals SME specialising in skin cosmetics, faced such a problem in the UK. It entered the UK market a few years ago with, among other products, a range of skin creams under the Mustela brand; the creams are used for treating babies’ minor skin problems, among other uses. However, the firm’s UK sales are limited (currently below £1 million a year) because its products are not registered for prescription by the National Health Service (NHS). Registering with the NHS is an expensive and time consuming process: Raj Sandhan, the managing director of Expanscience’s UK distributor, Metro Health and Beauty, says that one of the French firm’s competitors had to wait five years to receive NHS approval. As a recent entrant to the market, Laboratoires Expanscience sells its products instead over-the-counter in independent pharmacies, which limits its sales volumes.

Family-owned with annual revenues of €272m, Laboratoires Expanscience is an active exporter, with subsidiaries in 14 of the 85 countries in which it sells. More than half its total revenue comes from foreign sales. Although it has not applied for NHS approval, its Mustela products are widely available on prescription in other countries. Its Bébé 123 Vitamin Barrier Cream has been classified a drug in the US, meaning that it can be sold on prescription, as well as through retail chains such as Walgreen’s. Obtaining such approvals can be a long process, the firm has found; but the resulting increase in sales that such approval brings makes that investment worthwhile.

INTRICACIES OF VAT

Registering for reimbursement of value-added taxes (VAT) also presents a hurdle for many exporters, even within the EU single market. National VAT rates for the same product vary considerably across the EU: the standard rate varies widely, from 19% in Germany to 21% in the Netherlands and 24% in Greece. Moreover, some states impose ‘additional’ taxes on imported products, leading to variations in tax treatment even within the EU. Belgium taxes imported bottled water and fruit juices, for example, whereas neighbouring France does not. All this causes headaches for importers, who must comply with a patchwork of European tax rules.

At company level, the VAT quilt in Europe causes other types of problems. To receive reimbursement for VAT paid, a company must register with national authorities. The threshold for VAT registration varies widely among EU member states, from €10,000 in Portugal to £83,000 in the UK. One SME dealing with the VAT registration rules is Emois Gourmands, a UK start-up selling French gourmet food in London. Emois Gourmands founder and CEO Cecile Faure says that her firm buys directly from producers in France, does not use middlemen and does not add a big mark-up, thus enabling it to sell products at lower prices than UK supermarkets charge.

But Ms Faure says her firm’s small size puts it at a disadvantage in the VAT department. Her firm is not large enough to qualify for VAT registration in the UK. To avoid paying VAT on imports without being able to offset the tax payment through sales, Ms Faure has to hire a freight forwarder to make the upfront payment. Details such as this can make even a deep free-trade area such as the EU less free than intended. “I applied for VAT registration several times but was repeatedly tuned down,” says Ms Faure. “It’s expensive for a small company.”

UNRAVELLING CUSTOMS CLASSIFICATIONS

A further complication for SMEs is finding a way through the thicket of regulations governing customs clearance and customs classification. An export product’s customs classification is more than just a number: it is a unique identifying code which determines the product’s tariff and VAT treatment, if applicable, and whether the product is permitted to be sold in the destination country in the first place. Some defence-related products, for example, are subject to both export- and import-restrictions. In theory, the World Trade Organisation’s standard product classifications take all the mystery out of identifying products. In practice, it is not so simple, since the WTO’s guidelines can be applied inconsistently across countries. This causes problems for all types of companies, but SMEs, with their relatively limited resources, can be hit particularly hard.

Varying classification of the same product can appear even within a single market such as the EU, according to Christine Debats, international development manager at Conex, a small French company that handles customs clearance for importers and exporters. Television set-top boxes are classified according to their main function, for example. If this is deemed to be recording broadcasts, then imported boxes are subject to a tariff of 13.9%. If the main function is considered to be internet access, then the duty is 0%. The ambiguity comes when the box does both things— leading to a WTO ruling that the EU’s customs treatment of set-top boxes was out of compliance with its rules. That ruling, in turn, forced the EU to issue a complex set of new rules for classifying settop boxes. This example shows how standardised customs classifications sometimes do not keep up with the rapid pace of product development, making it hard to predict the customs treatment of some goods.

But modernising customs classification and clearance can bring pitfalls of its own. In May 2016 the European Commission introduced the Union Customs Code as part of an effort to modernise customs. The initiative aims to enable traders to file all customs declarations remotely by 2020. This will require joining together all of the disparate IT systems used by EU countries—a hugely ambitious undertaking involving a host of detailed changes to the customs treatment of products. This is a huge challenge, considering that “customs classifications change constantly,” says Ms Debats.

PATENT ‘PROTECTION’: ENTER THE TROLLS

Other official attempts to promote efficiency and reduce the paperwork burdens of exporters and investors within the EU are causing a different set of problems. The EU’s planned Unified Patent Court, which is expected to start operating this year, will enable pan-European patent protection via a single filing, thereby cutting the cost of filing patents in multiple national jurisdictions. However, the unified system will also increase the risk of facing patent infringement challenges all across the EU rather than in individual countries.

That risk is increasingly a reality for exporters to and within the EU, as a result of the appearance in Europe of so-called “patent trolls”. These are firms that acquire patents to technologies that they have no intention of developing themselves, for the purpose of blocking others from using the technology. The patent trolls prevent the use of those technologies by threatening firms developing those technologies with patent infringement lawsuits.

The practice originated in the US, where patent trolling has become a big business. Specialist patent trolls are joined by multinationals that actively buy and police patents in their sectors. A surge in patent litigation has led the federal government, as well as some US states, to clamp down on the trolls. One result of the US clamp-down “is that the patent trolls have come over to Europe,” says Edward Borovikov, a lawyer in France with global law firm Dentons.

So far, many of the problems have centred on Germany, where the courts support patentholders’ rights vigorously (as they do in the Netherlands), Mr Borovikov says. However, the pan- European patent system increases trolls’ potential rewards if they win a case, since compensation will be calculated across the entire EU and not only in the affected country. “A case will cost at least €200,000-300,000, which SMEs simply can’t afford,” says Mr Borovikov. “Twenty years ago, intellectual property was not a huge concern in Europe. Now companies must check very carefully for possible patent infringements to avoid being sued by trolls.”

Patent trolls are a particular threat to SMEs. In the US, half of all patent troll lawsuits are against companies with revenues of US$10 million or less. The average cost of defending such lawsuits is US$3.2m—enough to put many SMEs out of business, according to Snapdragon, a consultancy offering intellectual property protections.

Similar cases are emerging against European SMEs. Toll Collect, a mid-sized German company with 600 employees, was targeted recently by such a case. It holds a government contract for a road-pricing system for trucks in Germany, with some terminals placed in neighbouring countries including the Netherlands. Toll Collect was sued by a German firm, Papst, which owns a European patent for road-pricing systems. The case was filed in the Netherlands among other places, and a Dutch court found in Papst’s favour.

Staying clear of patent trolls is not, of course, the only issue for exporters wishing to protect their markets. In many parts of the world, the issue is far simpler: enforcing the IP protections already on the books. In China, for example, “the problem is not necessarily with the legislation, but with the implementation” of IP rights, says Christoph Kaiser, managing director in China for Turck Technology, a family-owned German industrial automation company with annual sales of around €500m. Similarly, Dutch biotech firm Keygene has yet to set up a full subsidiary in China because of IP concerns. CEO Arhen van Tunen believes that IP rights for products such as his—innovative crop improvements—are weak in China. The company holds more than 500 patents, but these are only as good as local enforcement of property rights.

FINDING A WAY

Such concerns keep giant emerging markets such as China and India out of reach for many European SMEs. So, for instance, although most large Dutch companies such as Philips and ABN Amro are well established in both countries, few SMEs have followed their example. Fewer than 200 Dutch firms operate in India. A 2016 survey of Dutch companies active in China, carried out by the Dutch Ministry of Foreign Affairs,4 found only about 1,000 Dutch companies in the country, out of a total of 871,000 Dutch companies, most of them SMEs. “The barriers to doing business mentioned most often concern government relations and the Chinese regulatory environment,” the Ministry says. “Bureaucracy and the lack of transparency in legislation are the most common hurdles.”

Opaque rules and inconsistent application of regulations governing health products, among others, along with customs classification issues and variable VAT rules even within a single market create day-to-day problems for all exporters. These problems are felt most keenly by firms new to exporting and short on resources for figuring out the details of the regulatory, legal and tax systems in each of its export markets. Free trade agreements, along with various initiatives to reduce the paperwork burdens on exporters and cross-border investors, can help. But occasionally well-intended efforts, such as the pan-European patent filing system and the remote customs-clearance initiative, have unintended consequences that actually can increase the burden on exporters. It remains for policy makers to improve on these efforts, to avoid having newly internationalising SMEs turn back from their efforts to venture abroad.

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When a small or mid-sized enterprise (SME) ventures abroad for the first time, its first aim is typically to kick-start sales and build a local market. That, however, only establishes a foothold. To continue growth and development in a new market, SMEs require a broader strategy aimed at developing and maintaining a strong local presence.

This growth strategy has many facets, depending on the nature of the SMEs business, its strengths in its home market, and the nature of its targeted foreign markets. For example, for many SMEs, sustaining growth abroad involves modifying products and even changing entire business models to suit local tastes and conditions. For others, sustaining growth entails partnering with multinationals or with other established players to provide initial entrée –and then ongoing access—to foreign markets.

For yet other SMEs, sustaining growth in foreign markets requires building on a unique proprietary technology and using existing distribution channels to extend the firm’s market reach. Paradoxically, other firms may find they can best sustain their international growth by pulling back from an overly ambitious expansion, thereby keeping the international business manageable.

ADAPTING TO LOCAL TASTES: THE GRAZE EXAMPLE

An example of successful adaptation of both products and business model to sustain growth in a foreign market is offered by Graze, a mid-sized UK snacks maker that made a successful entry into the US market in 2013. Several years before it took that step, the company, which is majorityowned by US private equity giant Carlyle Group, took several measures in its home market that later served it well in the much larger US market.

First, Graze switched from a subscription-only sales approach—in which customers signed up to receive snack packages periodically through the mail—to a multi-channel distribution system including subscriptions, sales of individual items over the company’s website, and sales of individual items through supermarkets such as Sainsbury’s and other retail outlets such as Boots. “Our customers are telling us it would be more convenient if the product were to be available in a number of different ways,” Chief executive Anthony Fletcher said at the time, a year before the firm introduced multiple sales channels in the US market as well.

Second, Graze built an efficient warehousing and distribution system in the UK, thereby acquiring expertise which later helped it to bypass distribution bottlenecks in the US postal system. And third, Graze developed expertise in gathering and analysing customer feedback to tailor products to local tastes. The firm employs a team of ten data scientists at its UK headquarters to analyse thousands of customer ratings, and responds with changed product offerings within a few months. In the US market, this meant dropping British staples such as mango chutney—a food item that befuddled many Americans—and introducing such US standbys as cinnamon buns and peanut cookies.

The distribution and product development expertise developed in the UK worked to Graze’s advantage in the US, the world’s largest snack-foods market. Within a year of entering the US market, the company’s US sales reached an annualised US$35m a year. In 2016 Graze started selling through 3,500 US stores, including Boots’ sister company Walgreens. Overall, the firm grew quickly since its founding in 2007, reaching a turnover of £70 million in the year to February 2016.

Along the way, the firm’s “unique selling proposition” has evolved along with its product line and business model. Originally focusing on snack boxes containing health-oriented basics such as nuts, grains and berries, Graze has since introduced healthy variants on fat- and sugar-intensive snacks. For example, the firm’s American cinnamon buns are not the familiar dough-based, fatand sugar-intensive US staple, but rather are cinnamon fig rolls which, the company says, are healthier and lower in calories. Similarly, Graze’s package of “sweet and salty cookies” sold in America actually consists largely of nuts and is marketed as protein-rich and low in calories.

In adapting itself to the US market, Graze essentially exported business-model modifications— such as continuous product development and multiple-channel selling—that it first introduced in its home market. In this, it is typical of SMEs going abroad: Try an approach at home, develop expertise, and then use it in foreign markets. Yet Graze’s example also shows the importance of building a new brand identity in a foreign market that suits the specific tastes of that market.

USING A LOCAL TOUCH: THE TED BAKER EXAMPLE

Ted Baker, a British luxury clothing brand listed on the London Stock Exchange, offers another example of developing techniques in the home market and then exporting them, while also ensuring a local identity within each foreign market. Ted Baker’s global presence relies on investing in the design of its distinctive and sometimes quirky clothing—as well as paying close attention to smooth-running warehousing and distribution. Much of this foundation work, on both product design and logistics, takes place in the UK. But the work is done with a view to serving a global market.

So, for example, in October 2016 Ted Baker opened a giant warehouse in Derby, UK, run by US multinational XPO Logistics, to operate a Europe-wide delivery system. Efficient distribution forms the basis for a network of own-brand stores and other outlets that has spread beyond the UK to Europe, North America and Asia. In less than three decades after its founding in 1988 as a single store in Glasgow selling men’s shirts, Ted Baker has acquired a global presence. It now has a total of 470 stores, concessions and outlets worldwide, led by the UK (186), North America (106) and continental Europe (97), with smaller presences in Australasia, the Middle East and Africa.

Significantly, all of the Ted Baker stand-alone stores outside the UK are designed to match the local style and culture, rather than following a single global template. The new store in Amsterdam, for example, uses parquet flooring and interior design celebrating Dutch artists including 20th century painter Theo van Doesburg. In contrast, its most recent store in New York City features walls with a rough concrete finish and brushed brass strips lining the walls to recall grids such as the New York street system. Scale-model buildings attached to the walls add a three-dimensional element to the notional cityscape. The overall marketing message in the design touches: Ted Baker, while a global brand, aims to establish a local identity and appeal to local tastes.

In addition to offering a local touch within its global network, Ted Baker provides customers a multiplicity of purchase channels: through Ted Baker-branded stores, concessions within department stores, and online. This variety of sales channels has allowed the firm to weather retail downturns. Any problems at stand-alone stores, for example, can be compensated for by booming online sales, and by concessions and licensing agreements with outside retailers and distributors.

The firm’s global-local strategy, and its focus on central product design and seamless delivery, appear to be working. The company increased sales by 18% to £456 million in the year to January 30, 2016, and then by another 14% year-on-year in the following six months, despite a generally flat retail market.

PARTNERING WITH ESTABLISHED PLAYERS: THE APMT EXAMPLE

Not all firms start an international expansion from a basis of heavy investment in product design and logistics expertise in the home market, which they then use to enter export markets. Some take a more direct route, partnering with multinational companies or with other local players who already have the foreign-market expertise and the distribution networks in place, and use these to gain a toe-hold in new markets.

An example is given by Advanced Polymer Monitoring Technologies (APMT), a small company in New Orleans, which grew out of academic research at Tulane University in 2011. It holds several patents for real-time monitoring equipment that, claims CEO Alex Reed, can reduce chemicals plants’ production costs significantly. With revenues of about US$1 million, APMT is clearly a startup, but one with high growth potential among plastics and pharmaceuticals manufacturers, among others.

To capitalise on that potential, and develop international markets quickly, APMT sought joint ventures with companies that can take its products to foreign manufacturers. In October 2016 it reached an agreement with Austin Chemical Company, a services and products supplier to the life sciences and specialty fine chemicals industries. This agreement should “expand the reach of our offerings to an international network of manufacturers and researchers,” according to Reed. For APMT the challenge is to get its technology adopted by a global industry. “Any of the production plants could use it,” says Reed, adding that real-time monitoring of production allows factories to cut waste and increase efficiency.

In addition to the monitoring technology, APMT has developed a light-scattering tool that helps drug makers test the stability of drug formulas. It shines a ray of light onto the drug being produced, which causes the light to scatter, or deflect. If the drug formula is incorrect then this will be detected through variations in the light scattering, allowing the formula and the manufacturing process to be corrected quickly.

Since APMT feels it has a hot technology in its hands, its aim is to keep its focus on that technology and rely on others for the sales function. Its market-entry strategy, therefore, is to benefit from the local-market knowledge and the marketing and distribution expertise of larger players, rather than developing these skills itself. This approach can allow it to start from a very small base and build up export sales quickly and sustainably.

BUILDING ON A PROPRIETARY TECHNOLOGY: THE GLOBALSTAR EXAMPLE

Some companies sustain their international growth by trying to extend their product range, building upon a unique technology and/or on existing foreign sales and distribution networks. A case in point is Globalstar, a long-established firm with a strong global sales network, which nonetheless needs to find a way to unlock mass sales. Globalstar is a US satellite communications firm set up in 1991 with $1.8bn in funding from industry giants including Alcatel and Hyundai. Now private equity controlled, it supplies navigation and communications equipment to those out of range of conventional mobile phone signals. “Much of the world’s land mass lacks mobile phone connectivity,” says its chairman Jay Monroe. “Even driving across the US there would be large areas lacking coverage.”

Yet with annual sales of around $90m, the firm lacks the product line and brand recognition to reach consumers beyond its small niche. The company has a global sales network in place, since it sells to individuals and firms venturing into remote areas, and many of these are in developing countries, for example in Africa, where mobile phone coverage can be patchy. But the market for its products is limited if the firm remains focused on specialist equipment such as satellite phones.

To address that problem, Globalstar plans to introduce a device that connects conventional mobile phones to its communication satellites when they lose coverage. Partly, it will sell these through its existing international network of dealers and suppliers. The firm is also talking with car manufacturers, who may add the device to improve the connectivity of vehicles.

Whereas Ted Baker has established a brand to market globally, and APMT sought help from multinationals to market an existing and promising technology, Globalstar is approaching export marketing from the opposite direction: seeking to develop technologies which it can market through an established sales network. In doing so, Globalstar hopes to build not only on its existing sales network but also on its core advantage: a satellite system that would be hard to replicate.1

MODERATION IN ALL THINGS, INCLUDING GROWTH: THE WIGGLE EXAMPLE

Either way—whether seeking products for an existing sales network, or seeking a sales network for existing products—amassing a portfolio of export markets can be a tricky business for an SME. As the local-touch strategy implies, every export market is different, with its own culture and history, consumer preferences, and legal requirements. Some SMEs find that building a sustainable international presence means picking and choosing among individualised foreign markets, to avoid becoming overwhelmed by having to meet so many different local market requirements.

A case in point is Butler’s Cycles, a UK-based bicycle store that expanded abroad and found itself a victim of too much success. Two decades ago, the Portsmouth-based shop launched a company specialising in mail-order sales of bicycle parts and accessories. It relied on the thennascent Internet first to build a UK customer base, and then to sell products abroad, eventually changing the name of the firm to Wiggle. Today, half the company’s £179m annual sales come from export markets. With bulk buying keeping prices low, and with efficient delivery, Wiggle was able to compete successfully against local firms even in countries as far away as Australia.

With backing from private-equity owners, Wiggle quickly reached customers in 120 countries. But to make the business more manageable, and to protect profitability, the firm recently cut the number of export markets back to 70. In particular, it chose to focus on fast-growing and profitable markets in the UK and continental Europe. Other markets, for example in Asia, were less lucrative, particularly as exchange-rate differences hurt sales and margins.

Like Graze, Wiggle shows how a successful company can use the Internet to gain entry into export markets globally. But sustaining that success sometimes requires taking a step back and assessing whether all expansions are necessarily good expansions. That calculation is not inconsistent with a key success factor for SMEs entering export markets—namely, the importance of establishing a deep presence in each market. Spreading a small company’s limited resources too thinly around the globe can mean devoting too little attention to acquiring a firm foothold in the markets that matter most to the firm’s growth.

Developing a recognisable local brand, tailoring products to local tastes and ensuring efficient delivery all require a certain focus. If an SME wants sustainable international growth, it may find that, in amassing a portfolio of export markets, sometimes less is indeed more.

The same principle applies to amassing a portfolio of foreign subsidiaries. Each subsidiary represents a range of costs, from start-up to maintenance to ongoing compliance expenses. Velocity Global, a consultancy, estimates the global average cost of establishing a foreign subsidiary at US$15,000-20,000, and the average maintenance costs at US$40,000 per employee per year. To this it adds indeterminate ongoing costs of staying current on changing local tax laws, payroll withholding requirements, employment law, and new banking regulations, among others.

CONCLUSION

There is, of course, no “recipe” for success in sustaining international growth by SMEs. But the experience of some successful SMEs points to guidelines to consider. 

The examples of Graze and Ted Baker show the importance of adapting products—and when necessary, entire business models—to suit local tastes and conditions. APMT’s example showcases the advantage of partnering with established players to ensure both initial and ongoing access to local markets. Globalstar’s example indicates the value of leveraging a unique technology and existing foreign sales and distribution channels to extend market reach.

Wiggle, the UK bicycle parts and accessories exporter, offers a cautionary tale concerning expansion that is too fast and too extensive. In its case, sustaining international growth required, first and foremost, focusing on a portfolio of foreign markets that it could manage effectively. 

All these examples show the diversity of strategies needed to sustain international growth. While the examples are diverse, they share an important success factor in common: All show the importance of firms committing themselves to their chosen foreign markets. More than anything else, that commitment is a prerequisite for sustained growth in those markets.

To a greater extent every day, information technology is levelling the playing field for small and mid-sized enterprises (SMEs). Export markets, in particular, are no longer the exclusive domain of large players with the resources to field global sales and production staffs. Today, even startups can use the Internet to sell abroad, and to commission foreign firms to produce their designs cheaply.

For some new firms, in fact, geographical boundaries hardly come into play at all: they market and sell to consumers worldwide directly, becoming global players almost from the start. A good example is Skype, an Internet phone service set up by two Scandinavian entrepreneurs in 2003. In short order, Skype grew from a start-up to a global player with US$2 billion in annual revenues.

Skype is a classic example of a ‘micro-multinational’, a phrase coined by Google chief economist Hal Varian to describe small firms that acquire a global presence by using technology. However, such instant international presence is more the exception than the rule. Most small companies have to build an international presence the slow way, by building up their brands and creating networks of international business partners. Information technology helps in this effort, but does not produce instantaneous results as it might with specialised communications services providers such as Skype.

Indeed, even technology companies typically need a certain scale and an established brand to expand beyond their home markets. A good example is IceMobile, a Dutch company that creates mobile apps and has launched a successful drive abroad. The firm did do so by first establishing its brand in the Netherlands, and then partnering with another Dutch firm with a complementary product—brand loyalty programmes—to expand abroad. Its experience illustrates that, for most mid-sized firms a certain initial size and heft in the home market is a prerequisite for export success.

Broadly speaking, technology has helped to foster three types of SME exporter. First, there are companies such as IceMobile with established brands at home, which can use technology to export their business models. Second, there are so-called ‘born global’ firms such as Skype, which sell products globally right from the start-up phase. And third, some mid-sized companies use technology to outsource and offshore a core activity.

VENTURING ABROAD

Although technology is fostering a new generation of smaller, export-focused companies, this development should be seen in perspective. Most SMEs remain focused on their home markets and have no plans to venture abroad anytime soon. This is particularly true of SMEs based in large markets such as the United States. US statistics show that 304,000 out of the country’s 5.8m companies—only 5.5% of the total—exported in 2014.1 Moreover, most of those exports went to neighbours Canada and Mexico. “The domestic market is big enough to grow sales in by itself, and small companies often lack the resources to export,” explains Erin Butler, a commercial officer of the US Commerce Department’s Export Assistance Centre in New Orleans.

Most European SMEs focus on their national markets, too, despite the advantages of the European single market. Only about one-fourth of continental European companies trade internationally, according to the Confederation of British Industry (CBI). In fact, the figure is driven upwards by Germany, where more than half (54%) of all manufacturing companies export, according to the Deutscher Industrie- und Handelskammertag (DIKW), an industry body. In the Netherlands, a big trading country, around 20% of firms export, often as suppliers to local multinationals, says the Dutch business federation MKB.

Similarly, France has comparatively few exporting companies, with foreign trade dominated by a relative handful of large firms. In a recent survey, United Parcel Service, the world’s largest package delivery company, found that only 10% of French companies export.2 French government figures show there are only 120,000 French exporting companies, a third of the number in Germany. In the UK, just 8% of companies export directly, and another 7% supply foreign markets indirectly as part of multinationals’ supply chains, the CBI says.

Yet there is evidence that the Internet is changing this picture, encouraging more SMEs to look abroad for growth. For example, Petit Bateau, a privately-owned French children’s clothing company with 2013 sales of €300m, now sells successfully to other European countries over a website launched in 2006. The web site built upon an international chain of shops started by Petit Bateau in 2001, which, in turn, built on a mail-order business the firm started in the late 1980s. The web site, in short, enhances the firm’s international offering, but is not the basis for it. The basis is a fashion business that was developed over decades in the home market, and then expanded through mail order and traditional bricks-and-mortar shops.

Similarly, the director of a successful UK fashion brand, which now earns around half of its £380m annual revenue in foreign markets, expects explosive growth from Internet sales—but sees this growth as building on the firm’s existing brand strength. “The Internet technology became available for us to increase our presence abroad around six years ago,” says an executive of 

the firm, who requested anonymity. The web site automatically detects where a user is based, enabling options such as home delivery or “click and collect” at a local store. 

As with Petit Bateau, these marketing channels complement, rather than replace, an established foreign presence. The UK firm opened its first foreign store in the US in the late 1990s, and then steadily built up a network of shops worldwide, as well as supply arrangements with foreign department stores. As these examples show, the companies that benefit most from leveraging their established brands via the Internet are often those occupying a specialised market niche, such as a fashion brand or a unique technology.

‘BORN—OR RE-BORN—GLOBAL’

Many ‘born global’ companies, in contrast, sell a high-technology product internationally right from the start. As noted above, Skype and social media platforms such as Facebook fit this description. Another example is Bausey Medical Solutions, a US firm marketing a medical diagnostic app. The firm says it has attracted interest from Europe as well as the US. In Germany, start-ups such as SoundCloud, a global online audio distribution platform, and the photo-editing and photo-sharing app EyeEm, have quickly built a global presence. 

In some cases, the growth afforded by Internet marketing is so rapid that a company is, in effect, ‘re-born global’. IceMobile, for example, built an established national presence by providing mobile apps for Dutch companies such as ABN Amro bank and the Albert Heyn grocery store chain. It then proceeded to build an international presence. In 2012 it merged with another Dutch company, BrandLoyalty, which produces loyalty programmes for retailers. Most of its revenues now come from foreign markets, as the combined company uses IceMobile technology to offer shoppers mobile access to their accounts. Clients include companies such as Lowes Foods (US), Dutch-owned SPAR China, and Danish retailer Coop, says its chief executive Jeroen Pietryga. “The possibilities are increasing fast,” he adds, pointing to the possible use of customer data to design and implement loyalty schemes.

Similarly, Globalstar, a listed US communications company, grew quickly in international markets after making major technology investments. “It cost us US$1bn to launch our satellite network,” says Jay Monroe, Globalstar’s chairman, with industry backers including Deutsche Aerospace and Vodaphone funding the launch of a system that supports satellite phone and data transmission. That investment enabled the company to occupy a niche selling global positioning and tracking devices, including satellite phones for individuals visiting remote regions. 

Mr Monroe talks of bringing the retail price down to US$100 (less than half of the launch price at the start of next year). “The potential market could be 500,000 units a year in time,” he claims, with interest from the major car makers (looking for reliable connectivity for their vehicles) as well as retailers. That would be a large increase for a company with 2015 revenues of US$90.5m. The potential is being factored into its share price: the company is valued at more than US$1bn. Like IceMobile’s, Globalstar’s experience shows that technology companies can tap into global markets to win rapid growth, but must have an initial scale and established technology to do so.

OUTSOURCING AND OFFSHORING A CORE ACTIVITY

Mid-sized companies can also expand abroad in a third way: outsourcing a core activity, such as manufacturing, to a foreign partner, using information technology to ensure close adherence to product specifications and guidelines. Mid-sized manufacturers based in Germany in particular have led the movement to move manufacturing to lower-wage partners in Asia and Eastern Europe. In many cases, such moves are in response to technology-driven offshoring of production by the SMEs’ key multinational customers.

This pattern is well established, and predates the Internet revolution. Many German mid-sized firms set up production in Asia as they followed their multinational customers there; leading automakers, for example, have been manufacturing in China since the 1980s. The German Chamber of Commerce says that more than 5,000 German firms now operate in China and that, with local production so well established, attention has shifted to exploiting the huge Chinese market. By now, 93% of German firms say that they are in China for its sales potential, while just 43% are there because of lower production costs.

The shift wrought by information technology is not that it allows firms to outsource or offshore core activities, but that it makes it much cheaper and easier for smaller companies to follow the lead of bigger companies in doing so. A good example is Bowers & Wilkins, a UK company that produces loudspeakers and other audio equipment. Three quarters of its £125 million annual revenue comes from a plant it opened in China to cut costs. That plant allowed it to market speakers priced at just a few hundred pounds, compared to the £35,000 price of some of its UKmanufactured systems (or up to £1 million for a bespoke stadium system). 

Beyond facilitating offshoring, the Internet combined with technologies such as 3D printing and automated manufacturing are changing the nature of manufacturing itself. A case in point is Local Motors, a US company that uses open-source online vehicle designs and then manufactures the vehicles through a global network of small plants, sometimes through 3D printing. The firm employs just 15 full-time staff, relying on an online network of 12,000 freelance designers. To date, it has produced about 50 off-road vehicles, and plans to produce another 1,500. Its combination of open-source design and distributed manufacturing allows this mid-sized firm to compete with automotive giants burdened with large fixed costs.

A LOOK AHEAD: CONSTRUCTIVE DISRUPTION

Examples such as Local Motors show how new technologies that benefit SMEs also disrupt established business models across a range of industries. In manufacturing, a shift to flexible manpower and online intellectual property is calling into question the old fixed-plant business model, which requires mass manufacturing to benefit from economies of scale. 

Moreover, highly automated production—for example, the use of robots—will eventually erode the cost advantage of basing production in low-wage countries, as labour becomes less important to costs, says Erik Brynjolfsson, a professor of management at the MIT Sloan School of Management and director of the MIT Initiative on the Digital Economy. This will allow mid-sized firms to shift production away from low-wage countries and into target markets abroad, or indeed back to their home markets to facilitate close monitoring of quality and product design.

Rossignol, the French ski equipment maker with 2015 sales of €243m, provides an example of ‘backshoring’—moving previously offshored production back to the home market—as the cost advantage of offshoring was eroded. The company said in 2010 that was moving production back to France that it had off-shored to Taiwan three years earlier. Its aim, it said, was to produce better researched products and react more quickly to changes in the ski equipment market. Modern manufacturing technology has helped to protect the company’s price-competitiveness despite its return to a higher-wage manufacturing base. 

Non-manufacturing industries also provide examples of business-model disruption driven by new technologies, which in turn opens new opportunities for SMEs to challenge established giants. In financial services, small players are building new markets in developing countries by offering basic, mobile-based banking services to previously under-served populations. An example is bKash, a mobile banking platform in Bangladesh. It launched in 2011 and had 11m accounts two years later. In retailing, small web-based shopping platforms such as Konga and Jumia in Nigeria are challenging the predominance of companies like US-based amazon.com, and have seen rapid growth in their customer bases as well. Jumia was launched by a German e-commerce investor, Rocket Internet, in 2012. It is losing money, but its sales have surged to US$150m a year.

Across manufacturing and service industries, then, technology is not just enabling leaps in efficiency. It is changing the very way that some sectors operate. For mid-sized firms, this opens the door to explosive growth, if they are able to spot and exploit new market niches, and use new technologies to leverage their success.

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