The Internationalization of a Small Firm - The Mechbadger Case

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ABSTRACT 
This dissertation deals with the question of the internationalization of the Italian and 
European SMEs with a focus on the micro and family-owned ones. The aim of the 
research is to answer the question about which internationalization strategies should be 
pursued by these firms. To do so, after a preliminary analysis of the different entry 
methods for the internationalization of firms, we perform a deep analysis of a start-up 
firm (Mechbadger) that needs to internationalize to make its business profitable. This 
analysis shows one characteristic in common with many Italian and European firms: it is 
an owner-run micro-LLC firm. We analyzed its target markets and financial capabilities 
to assess the feasibility in the short and long run of several internationalization strategies. 
These involve not only internationalization by exporting, but also by FDIs or offshoring 
for either the sales or the delocalization of the production. As main references we used 
the company’s business plan, market analyses and pre-feasibility studies. Furthermore, 
several information on the international strategies and markets were collected through the 
websites of international organizations (such as the WTO), academic papers and 
textbooks, and non-academic articles in online encyclopedias (Investopedia), geopolitics 
think-tanks (ISPI), or consulting companies (Ernst & Young). The research highlighted 
that is crucial for SMEs, and even micro firms (like Mechbadger), to internationalize 
through “aggressive” strategies, such as joint ventures and offshoring, for both the 
production and the sales of the products. For micro firms, FDIs are not the best choice 
because too complex and costly. More-in-depth studies would make clear if this is valid 
only for micro firms, like Mechbadger, or whether it may be valid also for larger SMEs.
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CHAPTER 1  
INTRODUCTION 
In the last decades international trade and capital flows increased. Firms are becoming 
day by day more and more involved in the international business and in complex 
strategies. Nowadays, even firms with extremely low turnover and few employees 
consider the possibility to internationalize with the most aggressive strategies, by 
evaluating transnational equity and non-equity partnerships and even greenfield FDIs.  
In the first chapter, I will analyse the different entry mode strategies for 
internationalization of firms and which factors are mainly analysed by firms for the choice 
of their internationalization strategy. I will show which are the main risks considered by 
firms for the choice of the country and the entry mode for internationalization. As firms’ 
internationalization involves not only the MNEs 
1
, but also the SMEs 
2
, I will focus on 
the peculiar characteristics of the internationalization of SMEs, which are key actors of 
the European and Italian industrial fabric. On the one hand, smaller firms struggle more 
than bigger ones to deal with the costs and the risks of the international projects. On the 
other hand, they must internationalize to maintain/make their businesses sustainable and 
profitable. The most important difficulties of the internationalization of SMEs are given 
by the lack of financial resources, the lack of experience in the international markets, and 
a risk-adverse mentality from the owners/managers. Due to these factors, many SMEs 
still internationalize exclusively by exporting their products. However, this model will 
not work anymore in the future and firms need to keep up with the present to survive. 
In the second chapter, I will analyse a real-world case: the Mechbadger start-up. This is 
an Italian micro firm in the mechanical field, where the (few) shareholders are also the 
managers of the firm. It is an example of innovative start-up that needs to internationalize 
to make its economic model sustainable. After the analysis of the firm’s products and 
technology,  I will report several market analyses for the sales of the Mechbadger products 
in the USA (the target market) and I will conduct a costs-revenues analysis for the firm’s 
products. The aim of this research is to underline which are the potentialities and the 
weaknesses of this business model with a traditional internationalization strategy. 
Subsequently, I will analyse the financial situation of the firm in 2022 and the forecasts 
                                                
1
 Multi-National Enterprises 
2
 Family-run or own-run Small and Medium Enterprises
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for the next years. This is necessary to provide an analysis of the current profitability and 
financial soundness of the firm, and then to analyse the financial capabilities/constraints 
for the potential internationalization projects.  
In the third chapter, I will show and compare all the possible internationalization 
strategies that the firm may pursue to gain additional profits, to diversify the target 
markets, and to improve efficiency in the production and sales. The analyses will propose 
some strategies that include the possibility to internationalize with projects that may 
involve up to three different continents (Asia, Europe, and North America), with complex 
strategies (such as joint ventures and FDIs). The different strategies for production and 
sales will be evaluated holistically to gain the maximum efficiency possible: the strategy 
will consider the projects of internationalization for both production and sales. The 
comparison of the different strategies will consider the potential profitability of each 
strategy, the risk-return trade off (due to several internationalization risks), the 
affordability (due to the financial constraints) of the internationalization projects, and the 
potential risks caused by unknown factors.
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CHAPTER 2  
INTERNATIONALIZATION STRATEGIES 
Globalization may be both an opportunity and a threat for firms. Firms often 
internationalize to gain additional profits or to ensure the profitability of their business 
model. Indeed, they may produce at lower costs than in their home country and sell the 
products abroad with additional revenues and profits.  
There are several strategies that a firm may pursue to internationalize. Some strategies fit 
better for the sales, others to reduce the costs of the production. Any company shall 
evaluate the gains and the risks from any internationalization project. The 
internationalization entry modes may be summarized in the following list, from the less 
risky / more simple way to internationalize a firm, to the riskier and more complex one: 
- Direct export 
- Licensing and franchising 
- Partnering and Strategic Alliance 
- Acquisition 
- Greenfield Venture (Mariadoss B., 2019; Agarwal, S., Ramaswami S., 1992) 
3
  
Firms choose their internationalization entry mode strategy considering several factors: 
- Ownership advantage of a firm 
- Location advantages of a market 
- Internalization advantages of integrating transactions 
4
 
The ownership advantage comprises the risks of the firm related to the size of the firm. 
Indeed, to internationalize financial capabilities are necessary: more for some strategies 
(such as FDIs), less for others (such as the direct export). Multinational experience is a 
sort of firm’s asset, even if it is not computed in the balance sheet. A third factor included 
under the “ownership advantage” is the firm’s capacity to produce differentiated products. 
Moreover, firms will prefer to enter in the more attractive markets: this is the so-called 
“location advantage”. Firms would opt for markets with high potential in terms of size 
and growth. Another factor that firms shall consider is the investment risk in a host 
country. It considers those risks related to the politics in the countries that may cause 
                                                
3
 Sometimes “acquisition” and “greenfield FDIs” are referred as the same entry mode strategy as “sole 
venture”. 
4
 Agarwal, S., Ramaswami S., 1992
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damages to the firm. This risk is often referred as the political risk (Allianz website). 
Finally, we consider the “internationalization advantage” or “contractual risk”: firms 
consider the trade-off between the benefits of low control modes and its disadvantages. 
On the one hand, low control strategies “allow [a] firm to benefit from scale economies 
of the marketplace, while not encountering the bureaucratic disadvantages that 
accompany integration”. On the other hand, “low control modes expose the firm to the 
consequences of external adverse events”. (Agarwal, S., Ramaswami S., 1992) 
 
2.1. How firms manage the risks of the internationalization 
Firms shall evaluate, manage and, when it is possible, reduce the risks from the 
internationalization projects to choose the right strategy for their business. 
Essentially, international risk may have three dimensions: 
- economic risk, that comprises the exchange rate risk and the country credit risk, 
- (geo)political risk, 
- other risks (structural risks, country’s debt management risks, commercial risks) 
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2.1.1. Exchange rate risk  
The exchange rate risk is relevant for any internationalization strategy. 
Even a mild depreciation may cause important loss for the firm. Other strategies are also 
exposed to the same risk (such as offshoring). It is possible to hedge the exchange rate 
risk by adequate financial instruments: derivatives. These, indeed, are mainly used by 
firms for hedging, rather than for speculation. 
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 The main instruments are currency 
forwards, currency futures, currency ETFs and currency options. 
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 Otherwise, a firm 
should not invest in a country with a different currency, or it should make deals only with 
its currency, but it reduces the firm’s opportunities in the international trade. 
Alternatively, a firm may produce and sell in the foreign market, but it requires FDIs, 
which are expensive and risky. Important geopolitical events sometimes may cause 
fluctuations in the exchange rates, as it happened with the outbreak of the Ukraine war. 
(Smith E., 2022) 
 
                                                
5
 Allianz website. 
6
 Geczy, Christopher, et al., 1997. 
7
 Picardo E., Khartit K., Kvilhaug S., 2022