Growing economic prosperity and the trend toward the globalization of trade in services means that the service sector will become much more important. The trend toward globalized trade in services is reflected by statistics indicating that by the mid-1980s about 40% of the world stock of foreign direct investment and 50% of annual investment flows were in services. These figures show an increase of nearly ten percentage points from statistics in the mid-1970s. 3 This implies that the service and manufacturing sectors will create a major source of employment for a vast pool of labor in the future.
In both LDC and transnational economies, market entry by SMEs has been hindered by at least two barriers. One barrier is the dominant position held by government--linked businesses in many service industries. SMEs have to compete against statutory boards of government enterprises that have enjoyed the privilege of government subsidies and easy access to government credit. In the case of mainland China, the government runs most international trade companies with the exception of those run by foreign investors.
Another barrier to SME market entry is the increasing domination of key service industries by TNCs. The increasing internationalization of services has been driven by a wide variety of forces. There is a growing demand for overseas services. This is caused by factors such as the internationalization of the advertising industry and the increasingly limited growth opportunities in home country service markets.
This means that both new and existing SME service ventures will find themselves under increasing competitive pressure. This is not necessarily a threat but rather an opportunity for SME service ventures, since global economies and business integration create both expanding markets and multinational competition.
This analysis suggests that SMEs with limited resources will have to seek unique and varied ways of meeting competition. Among the major competitive advantages of SMEs is their entrepreneurship and innovation in terms of products, marketing and business processes. There is no standard form of innovation. Whereas U.S. firms have been successful in making break-throughs using innovative production technology, Japanese firms tended to make continuous, incremental improvements in their product design and the technologies of marketing innovation.
One example of this marketing innovation is the strategy of market differentiation by SMEs. Market differentiation techniques include the creation of new subtypes of old products, quality differentiation to satisfy potential customers for certain products, new delivery processes, the creation of new market segments in new locations and providing extended hours of service.
The effectiveness of subcontracting strategies is based on the fact that subcontracting produce mutual benefits for both SMEs and the large corporations with which they subcontract. For this reason, subcontracting has