Chapter – 1

INTRODUCTION
Abstract

• Chapter examines:
• The central role played by SMEs in national economies around the world
• Creating employment and value added
• Current situation of SMEs in Europe particularly reference to Italy
• Contributions of SMEs to economic and social well-being

Cont . . .
Abstract

• Main aspects of the internationalization processes of SMEs

• Barriers that small companies face when dealing with the Chinese market
• Fallen of Chinese growth from double digit
• Entering in new normal phase for sustainable economic development
SMEs in the Global Arena: A Role
that Should Not Be Neglected
SMEs comprises of three distinct categories of enterprise
size:
• Micro
• Enterprises with less than 10 staff
• Annual turnover of less than 2 million Euros
• Balance sheet total less than 2 million Euros
• Small
• Enterprises with less than 50 employees
• Annual turnover of less than 10 million Euros
• Balance sheet total less than 10 million Euros
• Medium
• Enterprises which employ less than 250 staff
• Annual turnover of less than 50 million Euros
• Balance sheet total is less than 43 million Euros
SMEs in the Global Arena: A Role
that Should Not Be Neglected
Importance of SMEs
• SMEs account for over 95% of firms and 60–70% of
employment in overall economies
• SMEs make up 99.8% of all enterprises, 57.4% of
value added and 66.8% of employment in the non-
financial business sector (2015 Figures)
• Due to new technologies, global integration, and
local differentiation the potential contribution of
smaller firms has been enhanced
SMEs in the Global Arena: A Role
that Should Not Be Neglected
Challenges faced by SMEs
• Lack of proper financing
• Difficulties in exploiting technology
• Limited managerial capabilities
• Low productivity

SMEs need to upgrade their management skills and their ability to

gather knowledge and information to compete in the international
context
 SMEs in the Global Arena: A Role
that Should Not Be Neglected
Importance of SMEs in Italy
• SMEs are essential to the non-financial business economy
in Italy, as they generate almost 70% of value added and
80% of all jobs
• The SMEs’ shares of value added and employment are
10% points and 13% points higher than the EU averages
• More specifically, Italian micro-sized enterprises
accounted for 30% of value added and 47% of total
employment, far more than any other EU countries
 SMEs in the Global Arena: A Role
that Should Not Be Neglected
Comparison of Italy with EU in terms of SMEs
Italy EU
• No of enterprises 99.9% 99.8%
• Employments 79.3% 66.8%
• Value addition 68% 57.4%
 SMEs in the Global Arena: A Role
that Should Not Be Neglected
Trend of the main economic sectors of Italy in which SMEs are
involved
• Construction sector has experienced a strong decline in value
added and employment since 2008 (−34% and −30%)
• Manufacturing also suffered since beginning of the crisis (−5%)
• In the period 2009–2013, value added increased in medium-sized
enterprises, exceeding its pre-crisis levels, while small and micro-
sized enterprises showed a negative trend
• In the same period, in service sector value added increased by
21% and employment remained stable
• The internationalization results of the Italian SMEs were in line
with the EU average during the period 2008–2013
 China’s Economy and the Challenges
of the ‘New Normal’ Phase
• Since the reforms implemented by Deng Xiaoping in 1978, China was
moving from a closed and centrally planned system to a more market-
oriented one
• China has followed a gradualist path, resulting in efficiency gains that
have contributed to a more than tenfold increase in Gross Domestic
Product (GDP) in the last forty years.
• Reforms began with the: -
• Phase-out of collectivized agriculture
• Expanded to include the gradual liberalization of prices
• Fiscal decentralization
• Increased autonomy for state enterprises
• Growth of the private sector
• Development of stock markets
• Modern banking system
• Opening to foreign trade and investment
China’s Economy and the Challenges
of the ‘New Normal’ Phase
China economy growth profile
• China in 2016 stood as the largest economy in the world with 21.29
trillion US$, surpassing the USA in 2014
• China became the world’s largest exporter in 2010 (in 2016,
• Chinese exports reached 2.10 trillion US$)
• Largest trading country in 2013
• China has attracted a considerable share of the world FDI inflows in
the last few years. During the period 2005–2015, its FDI inflows
increased by 63 million US$ (+87.29%)
China’s Economy and the Challenges
of the ‘New Normal’ Phase
China’s innovation input and output
• R&D spending increased by 22% per year during the period 1998–
2013, reaching 190 billion US$ in 2013
• Innovation output, measured by the number of domestic applications
for invention patents, rose dramatically from 36,000 in 1998 to
825,000 in 2013, surpassing Japan and the USA in 2011
 China’s Economy and the Challenges
of the ‘New Normal’ Phase
China’s fastest-growing sectors in 2015
• Financial intermediation increased at (+13.29%)
• Wholesaling and retailing (+10.91%)
• Construction (+9.74%)
• Tertiary sector saw an increase of +3.7%
• Secondary sector +2.9%
• Primary sectors improved by +0.3%

Since 1978,
• Primary sector increased by 400.5%
• Secondary sector by 3,721.6%
• Tertiary sector by 3,164.7%
 China’s Economy and the Challenges
of the ‘New Normal’ Phase
Workforce distribution
• The official unemployment rate stood at 4.1%, even though inland regions
and
• rural areas showed worse results
• In 2015, the urban workforce represented 52.17% of the total, but the
rural workforce was just surpassed in 2014, mainly due to rural to urban
migrations.

Distribution of workforce among the primary, secondary and tertiary

sectors
• Number of primary sector workers decreased from 70.5% of the total
workforce in 1978 to 28.3% in 2015
• Number of secondary sector workers increased from 17.3% to 29.3%
• Number of tertiary sector workers increased from 12.2% to 42.4%
China’s Economy and the Challenges
of the ‘New Normal’ Phase
Challenges faced
• Strong inequalities among urban and rural incomes:
• Per-capita income of urban households increased by 8.2% in the period 2014–2015,
reaching 37,790.3 (about 4,902 US$) in 2015
• Per-capita income of rural households increased by 8.9% in the same period, with a
total amount of 10.772 (about 1,661 US$)
• The ratio between the two values, which is considered to be an important indicator of
distribution inequality, reached the level of 2.95 in 2015
• This ratio decreased by 0.28 in the period 2014–2015 due to the government policies
aimed at discouraging rural to urban migrations and the ongoing upgrading of
agricultural production processes.
• To grow strongly, but also sustainably, China needs to boost consumption
• At 46% of GDP, China’s national savings are 26% points higher than the global average,
and this is largely due to the household sector, with consumption correspondingly low
• This reduces the current welfare of Chinese citizens, fosters high levels of investment
which are unlikely to be absorbed efficiently, and, were investment to fall, would lead
to even larger current account surpluses, worsening global imbalances.
 China’s Economy and the Challenges
of the ‘New Normal’ Phase
Challenges faced
Similarly, increasing government spending on health, education, and pensions would increase
government consumption, but also private consumption by reducing households’ need to
save
• Increasing the progressivity of the tax system could finance higher social spending and
reduce income inequality, which is among the highest in the world
• China’s population reached 1.379 billion people in 2017, with an increase of 0.4% since
2016
• Since 1978, urban population has considerably increased at the expense of non-metropolitan and rural areas
• However, urban population finally eclipsed rural population in 2011, when it represented 51.27% of total
population
• In 2015, urban population reached 56.10% of total population
• Furthermore, increasing aging of the Chinese population, which was partially a result of the
one-child policy initiated by Deng Xiaoping in 1979
• Such policy, aimed at balancing the country’s strong demographic growth, also favored a serious gender
imbalance
• This situation led the government in 2004 to ban selective abortions of female fetuses
• Indeed, the male population accounted for 51.22% of total population in 2015
• It is estimated that this imbalance will rise until 2025–2030 to reach 20% then slowly decrease
 China’s Economy and the Challenges
of the ‘New Normal’ Phase
Some major concerns that characterize the Chinese labor market
• First, the low rate of workers’ regional mobility. More specifically,
companies in China can hire employees from the same area in which
they have built the manufacturing plant, while it is particularly hard
to hire personnel from other areas. This mechanism aims at
promoting government control over individual localization and
preventing rural to urban migrations
• Fewer mobility problems characterize skilled workers and managers
• Second, the average level of specialization and the low productivity
that typically characterize Chinese staff. This partly comes from the
traditional low levels of productivity required during the Maoist
period and partly from the low average level of education and
technical training
 China’s Economy and the Challenges
of the ‘New Normal’ Phase
Measures taken by the Government and companies
• The increased need to compete on the international scenario has pushed the
Chinese government and companies to invest heavily in education and training
• China has steadily increased its science, technology, and innovation investments for
decades
• In 2015, the gross domestic expenditures on research and development (R&D)
reached 2.07% of Chinese GDP
• The total amount of gross domestic expenditures on R&D was approximately 377
billion US$ in 2015, with an average annual growth rate of +12.9% during the period
2009–2014
• In 2014, China’ university and higher education gross enrollment rate reached 83.8%
• Similarly, China has set up several science and technology programs since it
launched reforms and began opening up to the outside world
• These programs have played a significant role in enhancing the country’s scientific
and technological strength, thus improving its competitiveness and supporting
economic and social development
China’s Economy and the Challenges
of the ‘New Normal’ Phase
Entering in new normal phase of growth
• Following three decades of an unprecedented high rate of economic
growth, China has entered into a ‘new normal’ phase of growth,
which highlights key transitions and shifts in policies: -
• From fast growth to sustainable growth
• From rural to urban
• From public to private sector
• From investment to consumption
• From manufacturing to services
China’s Economy and the Challenges
of the ‘New Normal’ Phase
Challenges faced after entering in new normal phase of growth
• Reducing the country’s high domestic savings rate and
correspondingly low domestic household consumption
• Servicing its high corporate debt burdens to maintain financial
stability
• Facilitating higher-wage job opportunities for the aspiring middle
class
• Including rural migrants and college graduates
• Maintaining competitiveness
• Dampening speculative investment in the real estate sector
• Reducing industrial overcapacity
• Raising productivity growth rates through the more efficient
allocation of capital
SMEs’ Internationalization and the Puzzle of
China’s Cultural Environment

About China Market

• Chinese market is huge, complicated, opaque, and hyper-
competitive, due to the presence of both low-cost locals and
multinational companies
• Several scholars suggested that operating in China is like looking
through a mirror
• What is considered usual or common in the West often has quite
opposite meanings in the Chinese logic, so that it is hard to
distinguish between reality and its mirror image
• Despite the success of several foreign investors, many foreign
companies have faced problems and suffered losses in China
• It is really hard for small businesses to break into the Chinese market
• SMEs face the same challenges as larger firms trying to enter China
but have far fewer resources
 SMEs’ Internationalization and the Puzzle of
China’s Cultural Environment
Management theory concept and some questions
• Management is a concept originated in Western societies
• To what extent did China borrow the theories and practices of management from
Western countries?
• What is the evolutionary path of management in China?
• Are there any Chinese management theories and practices to be considered?
• What are the main challenges foreign companies and SMEs must face in the
Chinese market?
• What are the managerial issues that they should consider?
• Are there any opportunities of development for foreign SMEs in China?
• Are they prepared enough to face the main challenges of the Chinese market?

• It is worthy to investigate these questions. The future of foreign companies’

management in China will probably be influenced by multiple factors. While there
are a number of aspects that are of major concern, such as: -
• The economic situation or the currency and financial risks
• Business culture and cultural differences for foreign companies doing business in China
SMEs’ Internationalization and the Puzzle of
China’s Cultural Environment
Work by Chinese scholars and their limitations
• In this context, in the last few years, some scholars have focused on the role
played by culture and cultural differences when dealing with business
challenges in China
• However, most of them used a wide-angle approach to analyze such issues,
focusing mainly on regional factors or just providing few clues about the Chinese
socio-cultural environment or just provided insight into the main characteristics
of the Chinese management style
• Although these works provided significant cross-cultural points of view into
management issues, they do not properly consider what happens when
culturally-different groups come together, interact, and communicate
• In fact, while cross-cultural approaches describe comparison and contrast
among different cultures, intercultural studies examine how the different
cultural backgrounds of people, companies, organizations affect their
interaction and communication strategies towards each other
• Other studies just provided brief and simplified guides of how to do business in
China without a strong approach to any managerial issues foreign companies
must face
SMEs’ Internationalization and the Puzzle of
China’s Cultural Environment
Work by Chinese scholars and their limitations
• Similarly, a large body of literature has explored the main issues affecting the
internationalization processes of SMEs in the last few years
• While being valuable contributions to the debate, providing a wide range of
perspectives, these studies lack an adequate consideration of some of the main
aspects that our analysis would like to deepen
• First, all these works downplay the role of intercultural communication and cultural
distance in influencing SMEs’ international strategies, processes, and practices. They
have a comprehensive approach to the subject the necessarily focuses on the main
challenges that SMEs face in international markets
• However, only few paragraphs or small hints are devoted to a discussion of cultural
distance issues
• Second, the macro perspective adopted by these publications fails to deepen the
main characteristics of specific markets
• Third, these works usually employ case studies techniques
• However, the collection and investigation of both quantitative and qualitative data is
believed to shed some light on the wide portfolio of value orientations that
characterizes national culture, of its innate internal ‘incoherence’, and of the various
contexts in which apparently dichotomous cultural values and behaviors are
manifested
 SMEs’ Internationalization and the Puzzle of
China’s Cultural Environment
Work by Chinese scholars and their limitations
• While most part of the literature has focused its attention on examining MNCs and their efforts to
enter the Chinese market, the challenges faced by SMEs have been neglected, even if there is a
growing interest in China in attracting foreign SMEs.
• Nonetheless, some scholars have analyzed SMEs’ processes and practices in China
• Howell (2012) examined the main issues that foreign SMEs must face when selling goods or services to the Chinese market
• Lind (2012) attempted to see how the paradoxes and contradictions engendered by contemporary Chinese society are being
managed by foreign SMEs
• Tian (2016) examined management practices in the People’s Republic of China and provided comparisons with practices in
Western countries with several case studies

• However, all these works provided just few hints about the role played by cultural issues in affecting
management strategies, processes, and practices in China, thus showing the need for further
empirical material to be published at this stage
• The book by Chee and West (2007) is a valuable contribution to the discussion. It provides useful
insights into the myths and challenges of doing business in China
• However, it uses a bird’s-eye view of cultural issues and how to deal with cultural differences. It
mainly focuses on the Hofstede’s categorization of culture, but it does not take into account other
fundamental interpretations. In addition, the book lacks a strong empirical foundation
SMEs’ Internationalization and the Puzzle of
China’s Cultural Environment
Work by Chinese scholars and their limitations
• The main aim of this study is to fill these gaps in the literature, by
providing a conceptual framework, as well as practical examples, of the
relationship between national culture, cultural distance, and managerial
issues in China
• Results shed light on what are the main cultural determinants that
should drive SMEs’ decisions when dealing with the Chinese market. By
showing the links between studies on culture and international
management with a rigorous mixed methods analysis, we explore how
academic discourses of cultural, ethnic, or national categorizations
traverse management issues of foreign SMEs in China
• The study offers a theoretical debate that goes across disciplines. It
engages with a growing body of literature on cultural differences
relevant to management, international business, sociology,
anthropology, and cultural studies
Q/A
Session
Queries

• Non-financial business
• FDI
• Financial intermediation
• Tertiary sector