Why Small and Medium-Sized Companies Are Turning to Foreign Markets
German small and medium-sized companies are increasingly turning their attention to international markets. According to our latest survey, just under 54 percent of the companies surveyed are active abroad — about 10 percentage points more than in the spring of 2024. A key reason for this is the ongoing weakness of the German domestic market, says Jörg Hessel, Head of Corporate Clients in Baden-Württemberg. “Companies are carefully assessing where investments will pay off best in the coming years. Increasingly, the decision is leaning toward foreign markets.” In this interview, Hessel explains how SMEs are approaching their international expansion, which markets are coming into focus, and what financing options are available.
How do small and medium-sized businesses expand abroad?
Hessel: That depends heavily on the size and capabilities of the respective company. Large SMEs and corporations often already have international structures in place. They continue to expand their existing network and invest globally according to the “local-for-local” principle—that is, with the goal of producing and operating as close as possible to their respective sales markets. For smaller SMEs, such a step is too big to take all at once. They often proceed in stages. The initial entry, for example, is made through a sales partner in the target market. If business develops positively, the company establishes its own sales or service branches. In the next step, on-site assembly and eventually production may be added. Companies with the necessary financial resources can also accelerate their international expansion through acquisitions abroad. Many SMEs are already exploring such options and have prepared corresponding plans.
Which foreign markets are currently of particular interest to German SMEs?
Hessel: We’re observing that the Asian market is currently particularly attractive for German companies. The business environment and growth opportunities there are exceptionally good. For many smaller SMEs that haven’t yet established any significant international business, however, making the direct move to Asia is a very big step. They’re first looking at closer European markets where energy is inexpensive and labor costs are low. These include, for example, Poland, Hungary, and Spain. North African countries are also becoming more interesting. Investments in infrastructure there can open up new opportunities for German companies. When it comes to the U.S., however, we see a mixed picture among our clients. Some companies are increasingly focusing on the American market. Others shy away from doing business there due to the erratic policies of the U.S. government.
How do small and medium-sized enterprises finance their expansion abroad?
Hessel: The appropriate financing depends on several factors: the size of the company, the capital requirements, the planned use of the capital, and, of course, the respective target country. Traditional financing instruments include bilateral financing, syndicated loans, and promissory note loans. In foreign trade, risk hedging also plays a central role. This includes, for example, letters of credit and currency risk hedging. For direct investments in the target country, local subsidies can also play a role. For banks, the increasing internationalization of their corporate clients therefore means that they must also support companies in their respective foreign markets. This includes on-site consulting and the ability to provide local financing.Simply put: The bank must be able to open the door for its customers as they expand abroad. By contrast, government support programs often play a secondary role in financing international business. KfW can co-finance expansion under certain conditions. Overall, however, there are only a few support programs that are particularly suitable for larger small and medium-sized enterprises.
