BDO International Business Compass

International Location Index for the Medium-Sized Companies

International Investments by German Small and Medium-Sized Enterprises

In 2009, more than 99% of all German companies were small and medium-sized enterprises (SME).[1] They employ over 60% of the workforce and their share of overall turnover reached nearly 36%. Around 45% of the gross volume of investments and almost half of the gross value added by all companies came from the SME sector.[2] When it comes to international links of German enterprises, a below-average proportion of SMEs with 100 to 250 employees moved abroad. Although they make up 56% of companies relocating to other countries, they collectively represent 67% of all enterprises.[3] Eight out of ten businesses with more than 100 employees cited the reduction in labour costs and the entry into new markets as the main motives for relocating economic activities abroad. Lowering other costs was regarded almost as important. Fiscal stimuli and lighter regulation were significant motives for nearly half of the businesses, but also strategic guidance played an important role in the relocation.[4] In the past, non-European countries, with the exception of China and India, were less popular destinations for foreign ventures. Less than 20% of the relocation destinations were in North America and roughly 10% of economic activities moved to other Asian countries, Australia or Oceania. Less than 10% relocated to Latin America and destinations on the African continent were well below 10%.[5],[6] In general, companies aim to achieve five goals through overseas commitment: access to and development of new markets, cluster orientation, physical proximity to important customers ("following the customer"), reducing costs by moving and securing the input basis.[7] In the SME sector, additional factors that play a part in the decision for moving operations abroad are a trend towards internationalisation in the same industry, imitation of competitors, conquest of the home market by potential competitors, curiosity of the management, personal interest of the company owner, expansion plans or company growth and entrepreneurship.[8] 

The internationalisation of companies has many facets and many pros and cons. Internationalisation can be a dynamic process, but can also stagnate at a certain stage due to a lack of information or other stimuli. Different companies are subject to different influences to which they react in different ways. An enterprise may implement a variety of strategies, which also depend on the level of development of the host country.[9] In comparison to large corporations, SMEs may be hampered by structural disadvantages, such as shortages of finance, staff, management and experience, as well as immobility and organisational shortcomings that inhibit an internationalisation project.[10] Medium-sized enterprises have identified these factors as the most significant barriers to internationalisation: bureaucracy, management capacity and expertise, a lack of overseas collaborators and development of market entry strategies . But cultural barriers, financing and negotiating with foreign partners are also perceived as challenging obstacles.[11] Classic problems facing SME when relocating abroad include hidden direct and indirect costs, quality and personnel issues, loss of trust or knowledge, cultural problems, a high managerial burden and negative market development.[12] 

According to the survey results of the German SME barometer 2009, economic conditions on the domestic market may either have a stimulating or an inhibiting effect on a possible overseas engagement or on its expansion. However, the results also show that the diversity of German SMEs transfers into heterogeneous preferences of their overseas engagement. Such a decision is influenced by the sector, legal status, turnover or business size as well as the age profile of the entrepreneur or the company. Furthermore, a certain path dependency can be seen, i.e. businesses, which already generate at least 5% of their turnover abroad, do not necessarily see exiting the foreign market as a realistic option.[13]

1 Differentiating SMEs from large corporations is not always consistent. Unless indicated otherwise, all data refer to the differentiation of the German Federal Statistical Office (Statistisches Bundesamt), which is guided by the definition of the European Commission. Accordingly, the group of small and medium-sized enterprises includes all companies with up to 249 employees and sales of up to 50 million Euro (cf. Söllner (2011), 1088).

2 Cf. Statistisches Bundesamt (2012); also Söllner (2011), 1086.

3 Cf. Statistisches Bundesamt (2009), 18.

4 Cf. Statistisches Bundesamt (2009), 15-16.

5 Cf. Statistisches Bundesamt (2009), 16-17.

6 The survey was conducted in Germany with 20,000 companies of the non-financial business sector with a minimum of 100 employees (cf. Statistisches Bundesamt (2009), 15). Therefore, we have no information about the motives of businesses with fewer employees.

7 Cf. Lay et al. (2001), 34-39. These motives were identified on the basis of case studies of German companies overseas. Backes-Gellner/Huhn (2000), 184, lists a summary of internationalisation stimuli, so-called pull factors, and internationalisation pressures, so-called push factors. Gerum (2000), 276, lists reasons related to supply, production, sales and the environment. Neither of these compilations seem to be evidence-based.

8 Cf. Schulz (2005), 24-25.

9 Cf. Gelbrich (2011), 364-365.

10 cf. Keuper/Schunk/Luu (2011), 270-271; also Backes-Gellner/Huhn (2000), 186-187.

11 Cf. Gelbrich (2011), 356. These results are based on a 1999 survey. That suggests that empirical evidence is very sparse for SMEs in Germany (see also footnote 7).

12 Cf. Schulz (2005), 29-41.

13 Cf. Statistisches Bundesamt (2009), 31-35.