Barriers to internationalisation

internationalization

Barriers to internationalisation

For many companies, the step up from trading in the domestic market to trading in the international market is fraught with challenges and difficulties—sometimes daunting enough to stop that step being taken. When companies do take the plunge, they might encounter a range of barriers that could derail the planned trading approach. These barriers often apply commonly across all countries in Europe and beyond and can be particularly difficult for SMEs to surmount.

Some of these barriers are specific to healthcare, or to the healthcare markets in particular countries. SMEs often have little knowledge about these barriers and even with support from a range of business support agencies, enterprise agencies and other organisations, planned expansion into new markets can easily fail.

In general terms, all SMEs—both inside and outside of the healthcare market—have long reported common barriers to internationalisation. In 2009, an OECD report on this issue identified the following as the key barriers:

  • a shortage of working capital to finance exports;
  • inadequate knowledge of overseas markets;
  • an inability to find contacts or communicate with contacts in overseas markets;
  • lack of managerial time, skills and knowledge.

(OECD, 2009)

In the following section, you will find the comparative findings on the internationalisation impediments of the three regions involved in the SHINE project.

Finance, capital, investment, procurement and sales

Investment risks

Belgium

Perception of the risk that comes with investment is another barrier that deters SMEs from developing their export markets. The preparation of a new market calls for a substantial investment and the company’s products and processes must be developed long before any sales are possible—and before it is apparent that this new market will be useable and profitable for the exporting company.

Because of this risk, healthcare SMEs—both in West Flanders and in Belgium more generally—tend to develop their foreign markets in a linear fashion, one after the other, as developing four or five markets concurrently is likely to be too expensive for a small company. One example provided for the healthcare sector in Belgium is a company involved in providing logistical solutions for exporting to South Africa: the turnover they have in this market is only around 100,000 euro, meaning that after investment there is not much margin to be obtained, especially if adaptations are required.

Such companies have to balance the risk and level of investment against the potential revenue. It is suggested that if a company is not absolutely sure that the risk—or potential risk—is worth it, or is risk averse, then it is better for them not to start exporting to foreign countries. Selling in Europe has some level of protection and familiarity but exporting to countries further afield with very different cultures carries greater risk. Exporting to China, for example, comes with challenges not only in terms of the culture but also political instability and administrative infrastructure that are difficult to deal with.

Financial resources

Financial resources, or lack thereof, can also act as a barrier. Especially for smaller companies because they are lacking access to financial resources that would support them in exploring foreign markets—funds are needed to attend international trade fairs or even just to become more organised and geared up to develop an export process.

Nomenclature

The first questions SMEs ask include:

  • What is the structure and process of social security in the country they wish to export to?
  • What is paid for by the government and what is paid for by the patient?
  • What products or services are (at least) partially reimbursed by the government?

The list of medical aids, pharmaceutical products and services that medical professionals can use that will be partially reimbursed by the government or health administration is known as ‘nomenclature’. If a product or service is not on this list, it will have to be fully paid for by the patient—which is likely to deter some companies that may foresee their product will be too expensive for patients to pay for, regardless of how effective it is.

For example, in Belgium, the cost of cancer treatments is supported but the cost of diabetes treatments is not because it is not viewed as an important problem for the country. This information is very difficult to obtain, not just for SMEs but even for organisations like FIT (Flanders Investment & Trade), which does have networks developed in foreign countries. The difficulty is that they are covering all sectors, not just healthcare, so they do not have the capacity to develop a very deep understanding or knowledge in any one sector.

The Netherlands

Investment

A further challenge is trying to attract investment—particularly from venture capitalists. They are often interested in high-tech companies who are cutting edge and may not be interested in companies that have a good product but have been around for some years—which the majority of SMEs are likely to be. In the software sector, it is relatively easy to scale up rapidly, but that is not the case for other subsectors in healthcare.

Timing must also be considered because there is rarely a rapid time frame for investment and SMEs find it difficult to hold on whilst decisions are being made. This means that most SMEs will stay within their own region because they just cannot afford to grow, even if their value proposition would work somewhere else just as effectively.

The 'selling circle'

Another key barrier facing SMEs is the challenge of entering the 'selling circle' within a big organisation such as a hospital. The same applies if trying to sell to the NHS in the UK, even after a company's product or service has already been well validated in the Netherlands. For example, in one case, it took four years for an SME to even manage to talk to the NHS about a product that had already been validated in the Netherlands. And that is a very long time in the life of an SME.

Procurement systems

Procurement departments often have no idea about solutions that are provided by SMEs, or the improvements that they can bring about, because procurement departments are usually focused on the size of companies that approach them. This can be a huge barrier and cause a lot of frustration amongst SMEs who do not want to waste months of time while the relevant people in the healthcare provider organisation are identified and then persuaded to meet with the company. It is likely that a lot of innovations do not get picked up because of this, meaning they are only available to a limited number of people within a geographical area.

Payment and currency risks

Another problematic risk area for SMEs seeking to internationalise is payment and currency risk. This occurs when an SME begins to sell abroad into countries in which payment is an issue or there is a high level of corruption and the expected payments do not occur.

While large companies can weather this issue, it can be a huge problem for SMEs because they do not have the financial capacity to absorb long periods of non-payment. While profits may be high in countries which need new healthcare technologies, the payment risk is also high. An understanding of this issue is enough to deter some SMEs from seeking to internationalise.

Scotland

Proving the solution

Another barrier for healthcare SMEs is that they need to prove their solution in a relevant environment. The NHS is often the customer and engaging with the NHS is difficult. When the NHS does engage with a new product, it will often be on a pilot basis and moving from pilot to implementation in the NHS—even putting aside the difficulties of the NHS procurement process—is quite a challenge.

This is partly because there needs to be a clinical champion within the NHS to support the product or service and it is quite difficult for clinical people to find the time to commit to supporting products in this way. There are many clinicians who aren’t interested in a product unless it represents a 'quantum step' in improving patient health and clinicians who lack knowledge or understanding about savings to the NHS—although service managers might have a clearer picture.

A company that is aiming to internationalise will also face potentially huge barriers when trying to enter other markets if it hasn’t demonstrated that its product or service has been proven in a relevant environment. In the UK, that environment is most likely to be in the NHS.

Accessing funding

One of the challenges facing healthcare SMEs in relation to accessing funding is needing to decide which scheme is right for them. They need guidance because these schemes can be complicated. The local university in the Highlands, the University of the Highlands and Islands (UHI), is quite active in the European funding arena and can act as a facilitator for obtaining access to other organisations in Europe. However, it has not found it easy to engage with SMEs in terms of providing support.

Interreg funding, which is what UHI mostly deals with, is not structured for easy engagement with SMEs. It lasts for too long and SMEs are not allowed to lead the projects, meaning that if an SME comes up with an idea for a project, it cannot take it forward by itself under this programme. In the past, there was money from the European Regional Development Fund (ERDF) for businesses looking to fund equipment or for more general capital expenditure. This funding has always been competitive and is increasingly so in the current climate.

There are also state aid restrictions on a number of funding streams and programmes. While funding is often seen as a necessary facilitator for these SMEs, it is often not as accessible as people expect it to be and that can create another barrier.

Cost of energy

Businesses in the Highlands must contend with the high cost of energy in the region. The high cost of living can translate into difficulty attracting people to work at a business in a remote area. One example provided was that of an IT business located in a very remote area that was experiencing difficulty recruiting coding staff because quite often, people with the necessary skills are more attracted to city life, not to living in the remote countryside. These types of barriers are not always obvious, they often operate below the radar but can still prove a hindrance to growth and internationalisation.

Communication, contacts and culture

Belgium

Language and culture

Another barrier is that of language and culture—not just because some people may be speaking a language different to that of the SMEs employees, but also in relation to the terminology used. Cultural differences are also a potential barrier, between countries and sometimes within a company or between regions. For example, in Belgium, there are different cultures in business and differences in the desire to internationalise between the Flemish entrepreneurs and the Wallonian entrepreneurs. And the problem gets bigger the further away from the home country.

Contacts in foreign markets

International fact-finding missions can be costly in terms of finances and also personnel—especially for companies that have only three or four staff, none of whom is in marketing or sales. In fact, this is often the case for University spin-out companies—they have the personnel to design and develop a product but are very poor at selling it.

One possible response is that SMEs cluster together so that they can share a sales person. This is motivated by a lack of contacts in foreign markets—a common characteristic of SMEs; having a known person that can support their entry into the new market is an advantage. It is a big step to try and move into an export market without any support and without identified contacts. Because of this, many SMEs will defer decision-making about developing into export markets.

This lack of contacts and the difficulty in developing them if the company is not using any form of organisational support, is a common response from the experts’ interviews. They also point out that there is a lot of interest in finding out how to approach business people in other cultures. Flanders Investment & Trade (FIT) carry out an annual survey and the biggest problem identified in relation to internationalisation is ‘finding the right partner’. This is often because of the partners available, very few are seen as really competent.

This means sector-specific contacts in each country are really important. The key issue for SMEs is that they don’t have the resources to build big networks in foreign countries and governments might have a broad network but not a highly developed network. Choices must be made by all concerned about how much time and effort they can spend on one sector and the development of contacts. And these decisions have to be rational and take into account the resources available.

The Netherlands

Contacts in foreign markets

One of the main barriers for SMEs is the amount of time they have available to reach out to new markets and find new contacts. Most SMEs will choose to start slowly. One company from the Netherlands explained that a clinician was one of the founders of the business and the advantage of having a clinical contact was that they were able to access clinicians in other countries.

All SMEs really want to know is: does the market want their product? Are they willing to pay for it? And will it work in the foreign systems? If the answers can be established, it might be possible to identify a useful contact but getting the answers to these questions can be very difficult.

Identifying the right people in a new market is always a challenge. The right person needs to have sufficient experience to be able to support the company and it can be very difficult if the SME invests their time and money in the wrong person. SMEs do not have the resources to spend six months investigating an individual to find out if they are the right person, but things can end badly if they don't.

Specifically, finding local distributors, agents and trade partners can be very difficult. The Task Force Healthcare survey showed that 35% of respondents highlighted this as a barrier. It is well known that in certain countries, the risk of being duped is quite high and this can deter movement to these markets.

Culture

Culture in foreign countries, as well as in the home country, can be a substantial problem. Especially around an acceptance or understanding that SMEs can make a valuable contribution to healthcare provision, services and patient improvement. In the Task Force Health Care survey, 20% of businesses indicated that culture was a barrier to their internationalisation. In the healthcare industry, SMEs feel that they need to have been around for at least 20 years before the healthcare providers will allow them into their circle of suppliers.

Scotland

Contacts in foreign markets

The lack of relevant contacts in foreign markets is another barrier. SMEs find it very difficult to identify the most important people in other countries; people who might be interested in their product or service, or in some form of collaboration.

Distance

A specific barrier for businesses in the Highlands is the sheer distance involved. For many companies, this is not an issue because their product or service is internet based or a digital product. Even so, the distance between Lerwick in Shetland and London is the same distance as between London and Milan and the transport infrastructure is not very comprehensive, especially in the more remote areas, so physically moving products is not easy.

Knowledge and skills

Belgium

Lack of knowledge

The main barriers to internationalisation that have been identified are gaps in knowledge about a variety of aspects. Firstly, there is a general lack of knowledge of markets, especially those in other countries—not only those that are far away but also markets in nearby countries. Next, a lack of knowledge of how companies in other countries operate, in other words, what their corporate culture is like. While large companies may have subsidiaries in other countries, this is uncommon for SMEs and if they are not familiar with the different ways of doing business that characterise markets in other countries, they can find it very difficult to start this process.

Another area where knowledge is lacking is in regard to innovations happening within sectors or within markets more generally and about the opportunities that might be available for companies seeking to internationalise—some innovations being cross-sectoral in nature. Without this information, some companies are missing out on innovation opportunities.

A lack of knowledge about the structure of the market is also an important deterrent. For example, in the UK, people can visit Boots the Chemist and speak to a pharmacist for advice, obtain their prescription and buy over-the-counter medicines, and they can also buy a wide range of other products including food, beauty products and electrical items. In Belgium, a pharmacy operates similarly to a doctor, it only sells medication (that can be delivered up to five times a day because most of these businesses are very small). If a company is not aware of these differences, they would not know to contact the big pharmacy retailers if they have a product to sell into the UK—they also might not know about the highly complex structure of regulations that have to be observed if they wish to sell their products or services in the UK.

Most West Flanders or Belgian healthcare SMEs are too small to gather information on such barriers by themselves. Even though there are a number of companies that have products or services likely to be of interest to foreign markets, they see the knowledge and informational barriers as too difficult to overcome and don’t even try to go down the route to internationalisation.

Impact of Brexit

There is undoubtedly concern about Brexit and the impact that this will have on business. Companies are already exhibiting signs of concern and anxiety about what Brexit will mean, for example, in regard to customs rates. Change causes uncertainty and because it isn’t possible to obtain answers from anybody at the current time, the uncertainty grows and presents companies with a barrier to internationalisation. If they regard moving into international markets as an already difficult process, the addition of a large-scale change which has limited details at the current time can substantially reduce the company’s desire to move into other markets.

On the positive side, research has shown that companies that do manage to export to foreign countries are generally in stronger positions than those that only sell in their own home country. However, it is suggested that companies do not start with the difficult markets first. Instead, they should follow a progression, starting by exporting to neighbouring countries and then, having built up a level of skill and confidence, moving into the more challenging markets. This plan helps companies to streamline their structure and stimulate their growth, but it also requires companies to be much more flexible and face a lot of unknowns that they would avoid by staying in Belgium.

The Netherlands

Capacity

SMEs need to have sufficient capacity, i.e. they need to have enough manpower to deal with contracts abroad, as well as satisfying the customers in the home country—and that can be a difficult balance to achieve. It’s something that is easily achieved by large companies but not by SMEs; the accepted wisdom is that companies need to grow to a certain size to survive if they want to expand internationally.

The expectation by customers abroad is that the SME approaching them is a 'big player' because the healthcare sector and major healthcare providers are really only used to dealing with big companies.

Credibility

The issue of credibility is an associated barrier to that of culture. In the healthcare sector, people often only buy from companies they already know or from large companies that have an internationally recognised brand. For SMEs that are not known by potential customers, breaking through this barrier can be quite difficult.

The first potential customer in a new country will often ask which other businesses in their country are using an SMEs’ product or service—because nobody wants to be first. This can cause a significant barrier in relation to the time involved as SMEs do not have the time and money available to wait for these kinds of decisions to be discussed over a long period.

Scotland

Knowledge and information

Another substantial barrier to internationalisation is not having enough information about market dynamics or market opportunities, i.e. how does the foreign country operate? In the UK, there is a UK-centric, publicly funded healthcare system and in Scotland there is an integrated health and social care system. In other countries there may be a mix, it may be regionally driven, or a mix of private care providers and private health providers. A product might be developed for the NHS system that is also able to be adapted to suit a system based on healthcare organised through insurance providers.

Being able to understand the differences in these markets is vital. In the UK—and in Scotland specifically—it is difficult for healthcare SMEs, even those based in Scotland, to sell to the NHS because the procurement system of the NHS is renowned for being difficult to penetrate, especially for SMEs. This is despite a commitment by the Scottish Government and National Services Scotland—the arm of the NHS responsible for procurement—to try to include SMEs’ products and services more effectively into the procurement process.

A huge organisation like the NHS is going to be purchasing on a large scale and will want to assure itself that the financial position of the supplier is credible and robust—something that is easier for large companies to demonstrate. When SMEs are trying to internationalise, this becomes an issue of importance because possible customers in other countries will look to see if the product or service has been accepted by the NHS, which is generally viewed as an important measurement of product value.

Another problem is that many healthcare SMEs are simply not aware of the support services in their own country that can be accessed to aid their business, especially in relation to internationalisation. Some SMEs also pursue their internationalisation process by themselves and only access the support organisations if something goes wrong or if a relationship between the Scottish business and the foreign business breaks down for some reason.

Recruitment of staff

For healthcare SMEs in particular, the difficulty in recruiting individuals who have the skills required for internationalisation can prove to be a barrier. For example, it may be relatively easy to recruit somebody with technical skills to work in an SME, but it is much more challenging to find somebody who has technical skills and who also possesses sales expertise and experience. Because an SME is unlikely to have the financial resources to employ more than one person for the role, this issue can be difficult to overcome.

Regulation

Belgium

“Red tape” and customs

Red tape—especially in relation to customs—is another barrier that’s often mentioned. One of the experts we interviewed quoted from a 2015 UNIZO research survey of 400 Belgian exporting companies. This survey found that 34% of companies spent more than one hour working on customs formalities, i.e. preparing and assembling customs documentation.

The survey also asked whether these companies had any difficulties with their customs declarations at any borders and 38% of companies had had goods retained at a border as a result of customs concerns. 23% stated that they had spent more than €1000 a year because of extra costs generated by problems with customs, 24% had spent more than €100 and 10% more than €5000, on top of that, 31% needed at least half a day to solve these problems. The expert pointed out that it is not just the customs authorities that make mistakes, the SMEs might also suffer because their documentation is inaccurate.

Rules of detachment

SMEs lack knowledge about the rules of detachment and that creates another barrier. This relates to companies wishing to pursue small assignments in foreign countries for a duration of up to a year. In this situation, a company is required to have proof of having paid social-security payments in their home country and if this is not proven, the company can be fined thousands of euro, even if they have only been working in the foreign country for a few days.

The rules can be slightly different in each European country and this is an additional challenge for SMEs. There are also added complications if the foreign country’s sector regulations are also different, i.e. regulations relating to overtime, minimum wage, etc. Even small irregularities can cause problems if the SMEs are not aware of them. And if they need to engage lawyers to sort out any infractions, it can drastically increase the cost of lacking this knowledge.

Regulation

It is argued that it’s not sufficient to just have a high-quality product or service, it’s equally important to be responsive to the national regulation of the countries in which a company is aiming to develop its market. Products may have to be adapted to the regulations of an individual country, but every country has differences in its regulations and this means that a company may have to go through a number of adaptations. This is easier for SMEs than for larger companies because they have the ability to be flexible, but it still involves substantial time and resources.

On the positive side, if an SME is willing to invest the time required to get to know a market and the regulations that are specific to it thoroughly, and becomes the only one that is able to meet the regulatory requirements for a product or service that will be well received in that market, then it could have a very positive experience and outcome. However, it is stated that the healthcare sector has a level of regulation that is difficult for companies to understand and comply with. In fact, there are multiple levels of regulations about products, services and financing.

The Netherlands

“Red tape” and customs

Many companies have problems with customs and this causes major barriers. In its annual survey of the whole of the life sciences and healthcare sector in the Netherlands, Task Force Healthcare found that 44% of respondents identified export issues around customs as problematic. Specific issues were the bureaucracy, completion of paperwork and compliance with regulations. Businesses pointed out that the actual completion of all these requirements was not difficult, but the time that it took definitely hampered them in getting their products to customers.

Scotland

Regulation

Regulatory barriers can be problematic. Understanding regulations and aspects such as CE Marking is challenging. While healthcare SMEs can be quite quick to pick up on these issues in their home country, it can be much more difficult for them to find their way through the regulatory approval processes in other nations.

Perception of competition

Belgium

Perceptions of competition

Another barrier to consider is the perception of competition held by some of the owners or managers of healthcare SMEs. They might perceive selling to other markets as high risk. One useful example is of a Belgian company who were afraid to import a resource from another country even though it would have improved their product; they were concerned if they followed that path, they would cause their relationship with their local suppliers to be negatively affected. Often, it is just taking the first step that causes anxiety.

The Netherlands

The 'selling circle'

SMEs face the challenge of entering the 'selling circle' within a big organisation such as a hospital, and the same applies when they try to sell to the NHS in the UK, even if the company's product or service has already been well validated in the Netherlands. For example, one expert we interviewed knew of a case in which it had taken four years for an SME to manage to even talk to the NHS about a product that had already been validated in the Netherlands, and that is a very long time in the life of an SME.

Customer size

The size of a customer can also be a barrier because if a big customer is interested in an SMEs’ product or service, the size of the contract required by the customer may be so large that the SME will never be able to meet the requirements. For this reason, some businesses are dissuaded from seeking out possible contracts with large customers.

Alternatively, it might be that this customer becomes the only customer for the SME due to the size of the contract, which that can be a risky situation because putting all your eggs in one basket is a dangerous strategy. Also, scaling up production for such an eventuality means that you have to be able to grow very quickly as a company.