Firm’s internationalization, along with the development globalization process, has become a key word for the past few decades and it will continue to be an important issue in managing companies and carrying out policies for years to come. Over the past few years multinational companies have led globalization, which has received special attention from those multinational companies as their major management strategy. Recently there is growing recognition that not only big corporate but also SME can benefit from globalization. However, different people understand the concept of firm’s internationalization differently since the concept of globalization and internationalization is rather abstract.
Generally, the Internalization of SME is assumed as a process where domestic-oriented SME advances into global export markets. Statistics also show that SME exporters competing on global markets have higher levels of growth and greater innovative capabilities compared to their domestic-oriented counterparts. That implies that export- based Internationalization is a way to keep SME on the growth path. SME Internalization is also regarded as a step to move production base into cheap labor countries through foreign direct investment. But under the current status of the international economy, integrating into the international division of labor through entering the global value chain (GVC) could be better explanation for what firm's Internationalization means. Thus, the concept of internationalization through GVC could be changed depending on whether the focus should be on: 1) arm’s length market transaction or 2) reaching out global market based on prolonged and complementary production network, in other words, the process of international division of labor.
When the concept is focused on integration in GVC, geographic factors in firm’s internationalization become less important compared with exporting and establishing production base overseas.
Even though a company, for example, produces and sells products in domestic market, it could position itself to be internationalized through division of labor with multinational firms doing business in domestic market. In fact, lack of human and physical resources makes it difficult for SME to tap into overseas markets and search for an overseas production base. Recently, many SMEs which moved their production bases to places with cheaper labor are facing difficulties due to changing business environment and soaring labor cost. Therefore, one of the ways for SME to become internationalized is to participate in global value chains and upgrade its role based on fostering its specific capability in technology and production.
Of course, advancing into global markets by participating in globalization and GVC in various forms is reported to be a basic and general way for SME to be internationalized. But until now internationalization has been assumed as an issue only related to big firms at the company level and cross border industrial cooperation at the policy level, and thus internationalization pursued by SME has largely been unnoticed even though SME internationalization has been carried out through the process of integration into international division of labor. The main reason seems to be that SME has passive views towards internationalization, which could be only determined not by SMEs themselves but by big corporate.
I recently had occasion to visit a medical equipment company which achieved success through active participation in GVC. A few years ago, the company developed disposable medicine dispensers and attempted to establish overseas export markets by itself, only to fail. Thus, instead of direct exporting, it started attracting equity stakes of companies overseas and made its way into global export markets by entering ?global value chain, and finally succeeded to become internationalized. A high degree of reliability is required for medical equipment, and therefore it is hard for an unknown SME to get access to global markets. After failing its attempt to advance abroad, the company turned its eye on oversea companies in the related field through information network in the medical equipment industry. It is, therefore now actively carrying out production diversification and enhancing the function of equipments under joint venture with overseas companies. It indicates that what matters is open and active mind towards international division of labor along with greater technology capability.
Companies with high technology capability can be highly likely internationalized but many companies never dream of being internationalization since they don’t think they are capable of acquiring technology capability. But the issue is not which one- between seizing an opportunity of going global and SME’s technology capability of utilizing such opportunity- is more important for SME to become internationalized. When they react upon each other, they come to create synergy effect through the process of cumulative causation. In particular, as the division of labor is deepened, more companies are engaging in production process, and as a result the flow of technology and market information through value chain becomes stronger. While the innovation of labor-intensive industries such as shoes, apparel, and furniture industry has traditionally driven by customer preference, that of heavy industries such as electric and electronic, and transportation have tended to be led by innovation in production technology. In the Internationalization of production, however, innovation is more inclined to be driven by user creativity, irrespective of an industry.
Company innovation is led by users as mentioned above, but building innovative capabilities that users need is determined by active attitudes of SME. Especially, GVC is based on a long term relationship to some extent but it accompanies competition since it restructures players based on technology, price, and market trend. Therefore, the internationalization of SME through participation in GVC has big impact on innovation capability.
Companies assume that internationalization is intensified, depending on company’s growth through gradual development process in the following order: direct export, indirect export, export through licensing and franchising, and establishment of overseas production bases. This approach undermines SME’s active participation in internationalization through division of labor. Of course, it could be desirable to pursue internationalization step by step, but more opportunities to go beyond typical internationalization process are being created through utilizing diversified inter/intra network, forming strategic alliance. In particular, a long term transaction relationship between cross border companies takes various forms of foreign investments such as equity investments, M&A, and brings about active mutual investment between companies in advanced countries. That means that international division of labor helps not only reduce production cost through relocating production lines in cheaper areas, but also diversify area for production activities such as production development, technology innovation and marketing into numerous areas and nations.
With increasing international division of labor in various ways of production activities as mentioned above, SME actively pursuing international division of labor finds it easier to intensify omni-directional internationalization than ever before. Under the current situation, internationalization of SME depends on how much value SME adds while expanding its role in the value chain, rather than simply integrating into GVC. All these depend on SME's thorough preparation and active participation.
Taking all these into consideration, we need a new perspective on FDI as an opportunity to strengthen the status of SME in GVC. Generally, a factor to be reckoned with in acquiring FDI was macroeconomic environment. Therefore improvement of cost elements such as macroeconomic labor market environment and wage, and of tax incentives came up with major strategies for acquiring FDI. Improvement in macroscopic elements is important, but we should pay more attention to policies on enhancing SME capability in participating in GVC, which helps SME generate synergy effects in managing potential overseas investment companies. FDI-inducing policies that are heavily dependent on only low wage and low cost in domestic market are self defeating, which could erode future possibility of attracting FDI.
In order to succeed policies in a long term, what matters is to strengthen local companies' capability of managing overseas companies, which could be the core of fostering SME's internationalization and innovative capability in the global value chain.