Market Orientation and Innovation Capability, the Key to Export Success for Latin American SMEs

Many emerging-market enterprises have been able to internationalize rapidly thanks to growing levels of liberalization, privatization and globalization. The first step to trigger the internationalization process is usually exporting, since international activity is essential to support the growth of small and medium-sized enterprises (SMEs). In the context of emerging economies, SMEs stand out as employment generators, contributing up to 60% of total employment in emerging markets.

Unlike developed countries, emerging-market enterprises operate in settings that display limitations in their infrastructure and institutional support. Most of the enterprises in these markets are young SMEs that tend to lack financial, human and administrative resources.

Dynamic marketing capabilities

The situation of these SMEs has been studied within the conceptual framework of dynamic capabilities, which consists of unique resources or capabilities to drive strategies and support the continuous development of new operational capabilities. Dynamic marketing capabilities are an extension of the dynamic capabilities that help to discover market opportunities through the acquisition and integration of information and the adaptation of products and services to offer customers added value.

These capabilities are particularly important when an SME is expanding into foreign markets, and include market orientation and innovation capabilities:

1. Market orientation includes gathering information about customers and competitors, and disseminating it organization-wide for strategy development. This market orientation can be reactive or proactive. Reactive orientation allows companies to detect current needs expressed by customers, while proactive market orientation serves to detect future or latent customer needs. Market orientation is a marketing asset that helps to renew an enterprise's resources and capabilities by means of inter-functional coordination within the organization.
   
   For emerging-market enterprises, market orientation is one of the most important strategic factors to consider when entering foreign markets. Market-oriented enterprises can recognize and respond better to opportunities in international settings. In the particular case of exports, market orientation allows companies to adjust their marketing strategies to meet the preferences of consumers in other countries. Therefore, emerging-market SMEs need to adopt this orientation in order to cope with the increased competition and to create competitive advantages.
    
2. Innovation capability is particularly challenging in emerging markets. When enterprises manage to adapt to the unique needs of these types of economies, they can differentiate their products and create competitive advantages. In this context, innovation is considered a necessary requirement for value creation. Broadly speaking, innovation capability encompasses the different dimensions of innovation, such as new product development, innovativeness, and strategic and technological aspects. This capability can help emerging-market SMEs develop competitive advantages and launch their export activities. It also allows them to develop new ideas and change their products, processes and management systems to survive in the market environment.

To assess the impacts of market orientation and innovation capability on the export performance of Latin American SMEs, we wrote the research article “The role of market orientation and innovation capability in export performance of small- and medium-sized enterprises: a Latin American perspective”, together with Universidad de Valencia professors Marta Frasquet and Haydeé Calderón, and which was published in the journal Multinational Business Review.

Emerging markets: the situation in Latin America

Market orientation and innovation capability are well-studied concepts, hence, this research is classified as a quasi-replication study. In other words, this research replicates previous studies in order to provide information from a Latin American context, considering the specific example of Mexican SMEs.

This particular aspect is important, since Latin American markets show peculiar characteristics that influence institutional behaviors and distinguish them from other emerging markets. Although SMEs represent 99.5% of enterprises in Latin America, they tend to display high levels of informality and low productivity levels (OECD, 2019). Despite the fact that wages are below the OECD average in Latin American SMEs, this has not managed to offset their low productivity levels and inefficiencies. In addition, a lagging capital market hinders the growth and internationalization of Latin American SMEs owing to their dependence on internal funds. Another influencing factor is reliance on informal agreements and family relationships. All of these factors, together with marketing strategies that focus on competing with low prices and undifferentiated and low-quality products, make it difficult for Latin American SMEs to compete in international markets.

This study contributes to assessing robustness and generalizability by adapting the empirical setting to the specific context of SMEs in Mexico’s manufacturing sector. Therefore, the research strengthens the empirical credibility of the measured dynamic marketing capabilities that can be developed by Latin American SMEs to improve their export performance.

Differentiation instead of price competition

The results of the study based on the responses of 155 manufacturing SMEs led to three main conclusions:

1. Reactive market orientation has a direct impact: Reactive market orientation has a direct impact on the export performance of emerging-market SMEs in Latin America, but proactive market orientation does not.
2. Proactive market orientation influences innovation capabilities: Although proactive market orientation does not have a direct impact on export performance, the study confirmed an indirect effect through innovation capability. Reactive and proactive market orientation positively affect innovation capability. In turn, this factor improves export performance. According to the results of the SMEs studied, gaining insight into customers’ needs makes it possible to develop reputable, quality products that adapt particularly well to emerging market conditions and can be adapted for international marketing.
3. Innovation capability impacts exports: We considered innovation capability as a multidimensional construct and confirm that it has a direct and significant impact on the export performance of emerging-market SMEs. The SMEs studied displayed the capability to create competitive advantages through innovation at competitive prices compared to competitors from other countries, without having to sacrifice product functionality and characteristics.

In short, Latin American SMEs can benefit from the implementation of business intelligence systems that will serve to observe customers and competitors and translate the knowledge acquired into innovative products or processes. The dynamic marketing capabilities analyzed help Latin American SMEs create value through differentiated products rather than engaging into a fierce price competition.

The author is a Research Professor in the Department of Marketing and Business Intelligence at EGADE Business School.