Micro, Small and Medium Enterprises are better known by the acronym MSME. MSMEs are the backbone of many emerging economies, such as South America, India, and South-East Asia. Silently operating in different areas across industries, these companies have a crucial role to play in building a stronger and more self-reliant international digital sector in the global economy.
These small economic engines have a huge impact on a country’s GDP. MSMEs contribute a staggering 30% to an emerging country’s economy, on average, and around 45% of the manufacturing output.
New Definition of MSMEs For The International Market
The criteria for defining MSME enterprises was based on the MSMED Act, 2006. It was different for manufacturing and services units. It was also very low in terms of financial limits (i.e. Investment amount). Since then, the global economy has undergone significant changes.
Now, there is no difference between the manufacturing and service sectors. The government of several emerging countries such as India, Nigeria and Argentina, alongside the Association of Southeast Asian Nations (ASEAN) made a proposal to redefine MSMEs under the Micro, Small and Medium Enterprises Development (Amendment) Bill, from 2018, to classify them as ‘manufacturing or service-providing enterprises’.
Under this bill, the operations of MSMEs are now allowed to continue in a transparent, non-discriminatory, and objective manner. The new criterion is based on the investment amount and turnover of the enterprise. This allowed many new companies to have access to specific investment funds that were prohibitive before and resulted as a key factor in their growth.
Building strong market linkages strengthens trade and investment ties at local and international levels. It helps local markets cope with the needs of globalisation by boosting productivity, jobs, incomes, and standards of living. Within the same market, it brings enterprises together to reduce market risks, exchange knowledge, and eliminate unequal market power. Internationally, it helps local enterprises penetrate new markets and magnify national exports.
MSMEs require support to develop and scale, get access to markets and finance, overcome regulatory restrictions, lower operating expenses and widen their network. In particular, they lack the skills, systems, and qualifications required to grow and benefit from donor support programs. Women-owned enterprises, in particular, need further attention from investors and development agencies to grasp potential business opportunities. That is why the new investment funds to which these kinds of companies can access since the new MSMEs definition entered into force are crucial for their development.
MSMEs’ importance in emerging market economies
MSMEs are critical engines of growth in emerging markets. Small and medium enterprises (SMEs) account for 90 per cent of businesses globally. In developing countries specifically, the median gross domestic product (GDP) contribution of SMEs is 35 per cent, according to the WTO’s World Trade Report 2021. SMEs account for more than 50 per cent of employment around the world, including 70 per cent of formal jobs in emerging markets, according to the World Bank.
In short, MSMEs play a vital role in determining the growth trajectories of emerging markets, MSMEs in emerging markets are increasingly digitizing their operations to reduce costs, increase efficiency, and reach more customers, with important economic repercussions at the national and regional levels. For example, in Asia-Pacific, Cisco and IDC reported in 2021 that small and medium businesses that successfully digitize generate 50 per cent more sales and worker productivity.
Similarly, 45 per cent of SMEs surveyed in a 2021 Fedex survey in Latin America and the Caribbean said that investing in new technology is viewed as the number one solution to business challenges. However, evidence shows that structural challenges are inhibiting SME digitization in emerging markets. For example, the World Bank estimated in 2019 that a ten-percentage point increase in internet penetration in low- and middle-income economies would lead to a 1.12 increase in their economic growth.
This indicates that increased connectivity could further improve economic growth outcomes in emerging markets. Other structural challenges include digital literacy gaps – people not knowing how to use digital tools effectively in business settings – and inadequate access to finance for the requisite digital tools.
The potential impact of addressing such inhibiting factors is immense: for example, Cisco and IDC’s research estimates that Asia-Pacific’s GDP could grow by an additional USD2.6 trillion by 2024 if SMBs continue their digital transformation.
Going Global: The Rising Internationalisation of MSMEs
We have already talked about the advantage of “going global”, in this article. But here we’ll analyse how internationalisation affects small and medium-size organisations, specifically. Internationalisation gives rise to multiple challenges, of which attracting and retaining talent are among the toughest. For small and medium-size organisations, deciding to go international is a big step. Helped by digital transformation, which dramatically lowers the barriers to entry into new markets, more and more MSMEs are dipping their toes in international waters.
One of the most overlooked pitfalls when expanding overseas is the need to adapt your company’s culture and behaviour, and to be truly open to new ideas and approaches. It’s all about people.
Why Take an MSMEs’ Business Abroad?
Internationalisation has quickly become reality in many sectors and companies of all sizes are affected, regardless of their ownership structure. It is fair to say that even local, family-led companies are heavily affected by the internationalisation of today’s economy, as they grow to become true MSMEs. Being in those international markets logically generates additional revenue, strengthens brands that achieve greater visibility and diversifies risk.
The internationalisation process is essential for company survival and growth but is not a process to generate quick returns. These projects often require long periods of maturation: patience is key. Aside from attracting new customers, what are the challenges when attracting and retaining international or foreign talent? When considering entry into any new target market, whether it’s a new national market or a move abroad, it’s essential to know the target market inside out.
Business leaders who successfully transform their organisation from a national into an international player are generally characterised by their in-depth understanding of local customers, tastes and customs. They know how to tailor their products and services without losing the company’s identity and its overall brand positioning.
Only seasoned executives are able to find that balance between ensuring that local operations continue to perform well without being alienated by the company’s new direction and the excitement of global opportunities. Having that in-depth understanding and finding that balance not only requires adapting the product or service to the new target market; it’s also about ensuring that a company attracts the right local talent from the new market to further support its growth.
For MSMEs that started life as family businesses, this is a challenge for which they are often ill-prepared. They may find themselves in a situation where they lose momentum as they are unable to crack the code to adapt their employment offering to local needs and tastes.
Cracking this code often involves a better understanding of the culture and habits of the customer in the new market. It requires the company’s leadership to develop and fine-tune their personal skills in order to be a successful employer in this new (employment) market.
Which Skills Are Required By An Executive For Internationalisation?
Above all, the company-wide adoption of a culture of internationalisation is essential. Ensuring that a company’s leaders have a high level of cultural intelligence is crucial. It should be clear that the leadership team sees the strategy of internationalisation as a key priority. Actions speak louder than words. Therefore, a company’s actions should reflect the desire of the leadership team to move into this foreign market.
Additionally, the profile of those executives who have successfully led and implemented an internationalisation process is always characterised by a high degree of flexibility and willingness to adapt to the needs of each market.
They understand that potential customers in the new target market may be unaware of their reputation back home and that they can establish a similar reputation only by building the business from the ground up. This is done by creating trust and showing that they are in it for the long haul, by investing in the future and by being willing to build long-term relationships. Any action that could be regarded as a quick win could painfully hurt their reputation, slow down the company’s international growth or even result in a withdrawal from the new market.
How important is it to have a local presence?
Companies can overcome this by working with local partners and by quickly appointing a seasoned executive who knows the local market inside out, someone who believes in the company’s strategy and can identify with its values and vision.
Attracting such a local executive should not be delayed. As soon as the viability of internationalisation is established, an executive with an international, multicultural and multilingual profile should be sought.
Applying the best practice of hiring an executive leader early on in the internationalisation process will allow the company to smoothly transition from a national to an international organisation while helping to avoid cross-cultural misunderstandings.
- Transforming national Digital MSMEs into international businesses requires a comprehensive knowledge of target local markets.
- There is a critical balance to be struck between seizing new opportunities and satisfying the needs of existing markets.
- Cultural intelligence is a crucial leadership quality.
- The internationalisation process is essential for company survival and growth but is not a process to generate quick returns.