Barriers to Service-sector SME Internationalization in the EU Business Environment

The service sector in the global world is constantly growing: in Europe, they account currently approximately for 70 per cent of the total economy. Yet service internationalization is rather a new phenomenon: services have been traditionally seen as local entities, which also explains why research on service internationalization has properly begun only few decades ago. Even though the Single European Market allows free service movement between Member States, services do not move as actively as desired: approximately only one fifth of services are involved in cross-border trade. Therefore, the main purpose of this thesis is to analyze the barriers to service-sector SME internationalization in the EU business environment. To address the research purpose, the internationalization of service-sector SMEs in the EU area is first described and thereafter, the barriers to service-sector SME internationalization in the European context are mapped and analyzed from intra- and extra-firm perspectives. In order to understand the topic area and the phenomenon, a short glance is first taken into Europe as a business environment for service industries: the market characteristics and benefits of the common free trade area for service industries are described. Also earlier literature on service internationalization and barriers to international service trade are discussed. Due to low previous research activity on barriers specifically to international service trade, the discussion is improved by presenting general findings of barriers to SME internationalization. This research is conducted with qualitative methods: there is only a limited amount of previous research and qualitative methods provide a way of gathering in-depth information and reaching understanding from respondents’ perspectives. The evidence presented in the study was collected through six semi-structured interviews with six different small or medium sized international service firm representatives that all had the first-hand knowledge regarding their company’s process of delivering services from home market to other European countries. The results of the study provide a detailed description and analysis of intra- and extra-firm barriers to service-sector SME internationalization in the context of EU and indicate that in general, internal firm-specific barriers have a greater impact in determining firm’s possibilities to be engaged in cross-border service trade – external barriers played a smaller role. What might explain these results is that first of all, the study has full focus on service firms of smaller size and internal barriers tend to be particularly effective to SMEs as their resources, skills and capabilities are often limited, which limits internationalization possibilities. Second, the results may indicate that EU’s internal market and the free trade concept function quite well from service firms’ perspective, and the low service movement rate may be rather caused by firm’s own competences and resource-related difficulties than directly by flaws in the market. The results complete earlier literature and provide new and more detailed knowledge of barriers to cross-border service trade in the context of Europe. They also indicate that service internationalization should be observed separately from internationalization of traditional manufacturing firms due to unique service-specific characteristics. The findings of this study are particularly beneficial for small or medium sized service firm managers as it provides knowledge of delivering services across borders in Europe and of barriers that relate to that process.