Direct Exporting and Importing
Direct exporting and importing of goods and services are the best known forms for SMEs to access international markets, and often SMEs begin their international activities by importing of goods and/or services5. Export and import of goods are easy to comprehend – they are goods moving through the borders involving a change of ownership. This includes movements through customs warehouses and free zones.
Export and import of services are more complex. They are defined by the territorial presence of the supplier and the consumer at the time of the transaction. There are four modes of export and import of services6:
•Cross border supply: services are produced inone territory and supplied to clients in another territory;
•Consumption abroad: consumers of oneterritory go to another territory to purchaseservices;
•Commercial presence: a service supplier fromone territory sets up a commercial presence inanother territory to provide services; and
•Presence of natural persons: natural personsfrom one territory go to another territory toprovide services.
A study on European SMEs has shown that importing is more common than exporting, and that importing often triggers exporting by SMEs7.
Investment abroad covers both foreign direct investment (FDI) and foreign portfolio investment (FPI). FDI reflects the investment of an enterprise from one economy to an enterprise in another economy in a long-term relationship. It involves direct acquistition of a foreign firm, construction of a facility, and setting up of proper fixtures, machinery and equipments. FDI usually requires direct or indirect ownership of 10% or more voting power in the foreign enterprise and a significant degree of influence on its management. If the investing enterprise controls 100% ownership of the invested firm, such FDI could be called a wholly owned subsidiary.
FPI involves purchasing a share or a security of a foreign enterprise, which amounts to less than 10% equity of the invested enterprise, and hence no ensued voting power8. Compared with FDI, FPI offers greater liquidity should the SME investor choose to liquidate its investment or not to engage in the control and management of the invested enterprise. However, FPI requires the investor to have specialized knowledge in order to monitor the foreign financial markets and the performance of the portfolios abroad, which SMEs may find challenging and costly. Therefore, although FPI offers more flexibility than FDI, FPI is not very common in the internationalization activities of SMEs.