ABSTRACT
Objective: The purpose of this article is to understand the barriers faced by small and medium-sized enterprises in their path to internationalization. The intention of this paper is to provide an overview about the barriers faced by SMEs in their path to internationalization and discuss in detail different approaches taken by SMEs to overcome these barriers.
Research Design & Methods: This article is a literature review on the barriers faced by SMEs in internationalization and new approaches in this domain based on Leonidou's (1995, 1998, 2004) model of export barrier classification.
Findings: Modern approaches by SMEs are effective in handling most of the traditional challenges posed in internationalization. Firms have evolved in handling internal barriers by finding dynamic solutions from within. SMEs need support from governmental and policy makers to overcome external barriers.
Implications & Recommendations: Indications on the work to be done in overcoming certain barriers which impede the internationalization of SMEs are more in the context of external barriers.
Contribution & Value Added: The originality of this work is in creating a framework of barriers and finding solutions to some of the identified barriers
Article type: original literature review
Keywords: internationalisation; international business; export barriers; export Keywords: obstacles; small and medium-sized enterprises (SMEs)
JEL codes: D21; F23; L10; L60
Received: 1 February 2015 Revised: 15 April 2015 Accepted: 5 May 2015
INTRODUCTION
Internationalization and the processes involved have many different dimensions, horizons, perspectives and levels. As it is an ongoing process, it is not possible to provide a universal definition for it (Wach, 2014b, p. 13). Growth by international diversification is observed as an increasing trend among small and medium- sized enterprises (SMEs) in international markets (Oviatt & McDougall, 1994; 1999; Lu & Beamish, 2001, p. 565). The firm-level internationalization is explained as the expansion of business operations in geographic locations that are new to the organization (Matanda, 2012, p. 510). Using the network approach, internationalization can be defined as a cumulative process in which, an international firm's objective is achieved, international relationships between firms are continuously established, maintained, developed, broken and dissolved (Ruzzier, Hisrich & Antoncic, 2006, p. 478). During the internationalization process, firms are able to exploit their existing potential to new business opportunities in external markets (Köksal & Özgül, 2010; Matanda, 2012, p. 510). This is especially important from the international entrepreneurship approach (Wach & Whermann, 2014). Closeness to foreign markets, reduced growth possibilities in domestic markets, economic expectations, underutilized production capacity and opportunities to diversify and enter new markets are the key motivators for SMEs to go international (Sullivan & Bauerschmidt, 1990; Ahmed et al., 2006, p. 661). Due to internationalization, firms must adopt business strategies that balance both domestic and international requirements through transfer of innovation and learning (Bartlett & Ghoshal, 1987; Klein & Wöcke, 2009; Matanda, 2012, p. 510).
Lee et al., in their research in 2006, concluded that internationalization increases the probability of survival of SMEs and it can also help them overcome difficulties in domestic markets by escaping competition with larger players. By engaging in internationalization, firms are able to reduce volatility in their businesses because of international diversification i.e. conducting business in a variety of countries rather than in a single country (Meredith, 1984; Ahmed et al., 2006, p. 661). From the perspective of the economy of a country, internationalization helps in creating new jobs, serves as a source of foreign exchange, helps in technological advancement, improves both the economy and standard of living in the host country (Leonidou et al., 2007; Arteaga-Ortiz et al., 2010, p. 396).
The intention of this paper is to provide an overview about the barriers faced by SMEs in their path to internationalization and discuss in detail different approaches taken by SMEs to overcome these barriers. Therefore, the purpose of this article is to understand the barriers faced by small and medium-sized enterprises in their path to internationalization.
MATERIAL AND METHODS
It is evident from prior research that internationalization is the path forward for SMEs long term survival and profitability. Still many firms view them with scepticism. There are many obstacle or barriers identified that act as deterrents for SMEs in their path to internationalization. Some of these barriers are identified to exist within the firm and some attributed to the external environment. There are several studies dedicated to identifying and mitigating barriers to internationalization.
The literature review (used as the main research technique) provides a brief overview about internationalization barriers with exporting being the simple and prime form of internationalization (entry mode). Leonidou's (2004) classification of export barriers is used (in this paper) as the basic classification model. Critical evaluations of the barriers are described along with new trends seen as to how SMEs mitigate them.
LITERATURE REVIEW AND THEORY DEVELOPMENT
In the initial stages of internationalization firms do not have sufficient knowledge on the markets and their players. Businesses tend to choose a relatively simple form of market presence in the form of exports (as entry mode). Later on, with acquired knowledge, firms tend to take a much more complex form of internationalization like a branch or a subsidiary. Nowadays, this approach might not be applicable for large companies as they have access to various kinds of needed information and resources (Reid, 1981; Gubik & Karajz, 2014, pp. 50-51). Exporting does not require large capital investments, less financial and commercial risk than direct investment forms of internationalization. Yet many SMEs, especially the ones in developing countries, do not consider exporting as an option (Lages & Montgomery, 2004; Agndal & Chetty, 2007; Al-Hyari et al., 2012, p.189).
Wach describes that the path chosen for internationalization depends on both internal and external factors and they can be classified as (i) exporting modes like indirect, direct and cooperative export, (ii) contractual modes like contract manufacturing, assembly operations and licensing and (iii) investment modes like foreign branch, joint venture subsidiary and wholly owned subsidiary (Wach, 2014c, p. 23).
Relaxation of governmental policies, integration of world economy and continuous advancement in technology will facilitate further internationalization of SMEs (Lu & Beamish, 2001, p. 565). Enjoying the benefits of internationalization is not free from obstacles. These may be internal organizational weakness, strategic business flaws, home country problems and target market problems (Korth, 1991; Onkvisit & Shaw, 1988; Leonidou, 2004, p. 280). There is a huge amount of literature focused on exporting modes, contractual modes (such as licensing or franchising) and investment modes (FDI). Among SMEs, exporting continues to be the major form of Internationalization (Eusebio et al., 2007; Westhead, 2008; Al-Hyar et al., 2012, p. 19).
Many of these obstacles are responsible for smaller firms to view exporting with doubt and refuse to enter such markets, new exporters tending to withdraw and seasoned exporters struggling with diminished performance and their survival threatened in International markets (Leonidou & Katsikeas, 1996; Miesenböck, 1988; Leonidou, 2004, p. 280). Leonidou, in his study in 2004, described that all issues that curtail a firm's progress to initiate, develop and sustain business opportunities in external markets are considered as obstacles. Based on his approach, Leonidou classified obstacles faced by a firm as internal and external ones (Figure 1). All causes associated with the firm's internal structure are internal obstacles and all those issues that are outside the firm are considered external. Internal obstacles include informational, functional, financial and marketing barriers while external barriers include procedural, governmental, task and environmental barriers.
Al-Hyari et al., (2012, p. 194) modified Leonidou's (2004) model and explained SME's export performance and correlated them to the internal and external barriers. He proposed that there exists a cause and effect relationship between export barriers and export performance and those are negatively correlated, i.e. export barriers cause a dip in SMEs export performance. Additionally this study established a high similarity between the export barriers faced by both developed and developing countries especially in the manufacturing industry suggesting that developing nations could learn from their counterparts in the developed nations.
Uner et al., (2013) extended Leonidou's model (2004) of barrier classification in conjunction with Cavusgil's (1980) firm classification. Along with the five classifications namely non-exporting firms, pre-exporters, experimental involvement firms, active involvement firms and committed involvement firms, born global firms were added as the sixth classification. Based on the empirical data from 2159 Turkish firms, Uner et al., (2013) concluded that the export barriers have not significantly varied from the 1970s and 1980s. On comparing their analysis from Turkey with studies by Shaw & Darroch (2004) from New Zealand, Pinho and Martins, (2010) from Portugal, Suarez-Ortega (2003) from Spain, Uner et al., (2013) established that barriers faced by SMEs can be country specific (Table 1).
It was also found that non-exporting firms perceived informational barriers as critical deterrent, pre-export firms; experimental involvement firms and born global firms consider procedural barriers as the major obstacle (Uner et al., 2013, p. 811).
Firms face export barriers at every stage of internationalization starting from the pre-involvement stages to the more advanced stages (Bilkey & Tesar, 1977; Cavusgil & Nevin, 1980; Leonidou, 1995, pp. 31-32). For example, companies in the pre-export stage would be worried about identifying export market opportunities, the ones in the initial stage would be worried about increasing market presence, and the firms in the advanced stages would be worried about establishing a long term working relationship with the customer (Leonidou, 1995, p. 32).
Understanding export barriers has become important in today's environment. They contribute significantly to a firm's business environment. They also provide attractive benefits in global business due to their growing importance in industrialized countries. In the literature we can find a lot of different classifications of export barriers by SMEs (Table 2), nevertheless the most popular classification was introduced by Leonidou (2004) (cited 369 articles, Google Scholars; 68 citations, Web of Science).
Internal Barriers
Leonidou (2004) classifies the internal barriers as informational, functional and marketing related barriers (Figure 1).
Informational Barriers
Winter, in his study in 1987, indicates that of all the resources required by SMEs for successful entry into international markets, the most important and difficult to obtain is information and knowledge about the target market that would provide the SMEs with competitive advantage (Liesch & Knight, 1999, p. 385). A firm that has the right amount of information faces less uncertainty than other firms with lesser degree of knowledge (Liesch & Knight, 1999). The Uppsala model explains internationalization as gradual steps of incremental knowledge accumulation. The first original model introduced by Johanson and Vahlne (1977), deals about the internal capabilities and incremental steps taken by firms, the revised models by the same authors (Johanson & Vahlne, 2009) gives a network view with focus on external environment of the internationalizing firm (Yenera et al., 2014, p. 4). The third (Schweizer, Vahlne & Johanson, 2010) and the fourth revision (Vahlne & Ivarson, 2014) of the original model are also based on a learning process, however prepared from different perspectives (Wach, 2014c, p. 17).
According to Johanson and Wiedersheim-Paul (1975) having the right amount of information (knowledge) is a primary requirement to enter foreign markets successfully by resource constrained SMEs. The Uppsala model explains internationalization as a gradual development processes that takes place in stages with the accumulation of information and knowledge at every stage. In the initial stages, the firm develops in the domestic market and does not venture out because of lack of knowledge about foreign markets and operations. As the firm's knowledge grows, so does its internationalization, in incremental steps. According to this model, there are four stages of internationalization, namely: (i) no regular export activities, (ii) export via representative in the foreign markets, (iii) sales subsidiary in the foreign market, (iv) production / manufacturing in the foreign market.
In the first stage, the firm has no information about the foreign market (knowledge) and hence no presence in the foreign market. In the second stage, by selling through a sales representative the firm has not still made any significant resource commitment. In the third stage, there is a controlled information flow and the fourth stage is when the resource commitment is made. This stage is reached when the firm has accumulated significant amount of knowledge about the foreign market. Johanson and Vahlne (1977, p. 26) emphasize that market knowledge leads to resource commitment decisions with the end result being market commitment.
Innovation-related models (as a sub-group of various stages models) explain internationalization of SMEs as stage wise innovation of the firm. Different authors distinguish different stages involved in the innovation of the firm and they are determined on export to sales ratio (Yenera et al., 2014). When a firm has enough information that could be converted to actionable knowledge, the firm has reached the stage for internationalization (Wach, 2014d). At this juncture, the firm can start the process of internationalization (Liesch & Knight, 1999, p. 386).
Contrary to the stage-wise development model in which knowledge acquisition is a slow and gradual process, international new ventures (INV) based on the international entrepreneurship model are able to exploit prior knowledge, networks and quick acquisition of knowledge to expand quickly and internationalize (Coviello & Munro, 1995; Oviatt & McDougall, 1994; 2005; Casillas et al., 2014). Such firms from the onset establish sales footprints in several international markets. This new trend of rapid internationalization has led to several new internationalization concepts that can be explained under INVs, born globals, born-again globals, global startups, born regionals and international entrepreneurs (Knight et al., 2004; Madsen & Servais, 1997; Oviatt & McDougall, 1994; 1995; Sleuwaegen & Onkelinx, 2014; Wach & Wehrmann, 2014). Born globals, are firms that do not go through the stages of internationalization, but have an instant presence as an international player. A born global firm is an organization that views the world as its marketplace and not just an addition to the existing domestic market (Wach, 2014b).
Wach (2012 quoted in Wach & Wherman, 2014, p. 11) researched five streams of internationalization (namely 1. Stage models, 2. Research based view, 3. Network approach, 4. Business strategy approach and 5. International entrepreneurship) and provided a more holistic approach SMEs take rather than individual models.
Functional Barriers
Human resources, production related issues and finance are the main functional barriers with a firm that act as barriers to exporting (Vozikis & Mescon, 1985; Leonidou, 2004, p. 287). International experiences of managers are an irreplaceable resource that results in specific know-how and is difficult for the competitors to copy. International exposure of the manger depends on the time spent abroad, living, working and travelling experiences make the manager acquire and maintain knowledge about international activities (Athanassiou & Nigh, 2000; Ruzzier et al., 2007, p. 17). Travelling helps learn foreign business practices and opportunities (Leonidou et al., 1998; Reid, 1981; Ruzzier et al., 2007, p. 17). The study on the impact that a firm's management team has on internationalization is explained under the research of upper echelons where awareness is created by the joint effort of the management team and not only the CEO (Chandler & Hanks, 1994; Feeser & Willard, 1990; Mintzberg, 1988 quoted in Reuber & Fischer, 1997, p. 809).
To overcome the functional problems, there is also an increasing trend in the formation of strategic alliance or any formal or at least informal networks formation in internationalizing among entrepreneurial firms (Beamish, 1999; Lu & Beamish, 2001). Inkpen and Tsang (2007), from a resource-based perspective, define a strategic alliance as a long term agreement between two or more firma at a strategic level where they together improve their performance level by sharing resources and risks (Zhao, 2014, p. 887). Previous researches have pointed out many benefits to alliance formation such as reduction in transaction costs, increased market access, and shared risks, resources, access to information (Kogut, 1988; Mowery, Oxley & Silverman, 1996; Gulati, Nohria & Zaheer, 2000; Lu & Beamish, 2001, p. 570). Strategic alliances help overcome obstacles and help SMEs reduce their mistakes and help in acquiring market knowledge at a faster pace. They also help the SMEs overcome deficiencies in resource and capabilities (Lu & Beamish, 2001, p. 570).
The International Entrepreneurship model (IE) focuses on the role of the entrepreneur as the key factor in the internationalization of SMEs (Wach & Wehrmann 2014, p. 13) thus emphasizing that the human factor plays a major role instead of the planning factor. IE defines internationalization as a combination of innovative, pro-active and risk taking behavior that crosses the national boundaries of the host country with the intention of adding value to the organization (Oviatt & McDougall, 2000; Wach & Wehrmann, 2014, pp. 13-14).
Based on mediated relationships model (Figure 2) two behaviors by management teams can be explained. The first behavior is explained by Eisenhardt and Schoonhoven (1996) that experienced top management teams, because of their ability to attract and engage partners, form strategic alliances based on prior international experience (Reuber & Fischer, 1997, p. 810). The second behavior explains the influence internationally experienced managers have in realizing international sales after the startup of the firm (Reuber & Fischer, 1997, p. 810).
Marketing Barriers
Previous research on marketing contributions to SMEs internationalization (Jones & Coviello, 2005; McDougall & Oviatt, 2000) explains that the key success factor for new ventures to successfully compete in the global marketplace is the possibility to identify and exploit new market opportunities internationally (Ren et al., 2014). A study by Kubícková et al., (2014, p. 323) on the Czech SMEs on the basis of survey among 341 SME respondents found out that a majority of SMEs engage in internationalization because of demand of their products in international markets, enlargement of the customer product portfolio, reduced domestic demand, sales pressure and highly competitive domestic market. It was also seen in the same study that Austrian firms engage in internationalization driven by similar factors such as higher sales price in the foreign market or low competition (Kubícková et al., 2014, p. 327).
According to Namiki (1988) based on the results from Porter (1980), SMEs adapt four types of competitive strategies. They are (i) market differentiation, (ii) segmentation differentiation, (iii) innovation differentiation and (iv) product service. Market differentiation means marked difference from the existing players in the market and it depends on product competitive pricing, brand development control over distribution channels, advertising and marketing techniques based innovation. The ability of the firm to provide unique and customized solution to customers is called segment differentiation. Innovation differentiation is explained as the ability to provide new and superior products and product service is the quality of the product and service provided to the customer (Namiki, 1988; Julien & Ramangalahy, 2003, p. 230).
External Barriers
The external barriers (Figure 1) can be classified as external procedural, governmental, task, and environmental barriers (Leonidou, 2004, p. 281).
Procedural Barriers
Procedural barriers are the operational challenges faced by firms and it includes unfamiliar techniques and/or procedures, communication barriers and slow collection of payments in the market abroad (Leonidou, 2004, p. 292). According to some studies, export procedural related barriers can be classified into controllable and uncontrollable barriers. Controllable barriers be learnt to control with time and experience as they are routine tasks and can be overcome by managerial experience. Non controllable barriers on the other hand are issues that have to be handled on a case to case basis (Ramaswami & Yang, 1990, p. 190). It is possible to overcome most of these barriers by taking the support of consulting firms that can provide the required support to overcome the operational barriers (Ramaswami & Yang, 1990, p. 192).
Governmental Barriers
Governmental barriers refer to the supportive or unsupportive attitude of the government to exporters. These refer to two pertaining issues, (i) limited assistance and incentives to existing and potential supporters and (ii) restrictive role of the regulatory framework on export practices (Leonidou, 2004, pp. 292-293). In some countries, like the USA, the governmental assistance programs to export are supported by the individual state governments and as many American SMEs struggle to export their products to overseas markets (Singer, 1990 quoted in Wilkinson & Brouthers, 2006, p. 234).
Some studies on export promotion programs (EPP) have provided mixed results with some studies showing a positive correlation between promotional programs and firms export performance (Cavusgil & Jacob, 1987; Pointon, 1978; Wilkinson & Brouthers, 2006, p. 237). Genctuerk and Kotabe (2001) in their study of 162 firms found that government export assistance contributed to export success. Promotional activities can be beneficial to firms based on certain conditions as to what activities are under taken and how willing the firms participate (Wilkinson & Brouthers, 2006, p. 238). Hogan et al., (1991) pointed out that export promotion agencies (EPA) are not effective in functioning in developing countries. The reasons were that developing countries lacked strong leadership, while experiencing limited funding, bureaucratic and high influence of the government (Lederman et al., 2010). Keesing et al., (1991, pp. 1-2) found out that export promotion activities in developing countries supported by public officials have always delivered unsatisfactory practical information, assistance and support in expanding manufactured export products. They provide the following reasons for the failure of export promotional programs.
1. The history of import substitution has contributed to deep rooted attitudes and motivation against exports.
2. Export assistance programs do not help the firms to overcome their production problems and adapt supply capabilities to the target market requirements.
3. Organizations that provide the funding and advice on export assistance have often lacked the will and determination to deliver positive results.
4. Marketing of manufactured goods through support and assistance has often had problems with the single public service supplier. Especially in developing countries such delivery mechanisms have been proved to be ineffective.
Task Barriers
Customer requirements vary worldwide due a variety of reasons such as topography, climatic conditions, economy of the country, taste, habits and all these lead to different product requirements. To accommodate all these changes, firms will need to spend considerable amount of time and money (Leonidou, 2004, pp. 292-293). Global competition has reduced the life cycle of products, and businesses can no longer have country or region specific products. Firms need to develop products for global application that would help them overcome their competition. Developing such products with shorter lead times would help in sustaining competitive advantage over their rivals (Baumol, Nelson & Wolff, 1994; Levin, Klevorick, Nelson & Winter, 1987; Kotabe & Murray, 2004, p. 7). To overcome such obstacles the adaptation of the products or promotional messages can be applied as well as different kinds of strategic behaviors such as polycentric, regiocentric or geocentric strategies (Wach & Wojciechowski, 2014).
External Environmental Barriers
External environmental (or exogenous) barriers include issues associated with economic, political-legal and socio-cultural environment (Wach, 2015) of the external market in which the firm is operating in (Leonidou, 2004, p. 294). Wach (2014c, pp. 18-19) states that business external environment can be investigated from a local to a truly global level, and what is more "taking into consideration different aspects from the basic four elements of PEST taxonomy (though 5 elements of SLEPT or 6 elements of PESTLE - V.N.) to seven basic elements of PLESCET categorization". Environmental barriers influence the behavior of SMEs to a large extent as they lack the knowledge to deal with them or best circumvent them (Neupert et al., 2006; Kahiya et al., 2014, p. 336). Most of these barriers are created by competing firms in the new market, currency fluctuations, supply and demand fluctuations etc. Due to the emergence of multinational companies many of the traditional differences are have been reduced (Buzzell & Quelch, 1988 quoted in Ramaswami & Yang, 1990, p. 190). Still, these reasons call for or at least justify some actions by government and policy makers to provide support to SMEs (Neupert et al., 2006; Kahiya et al., 2014, p. 336).
CONCLUSIONS
It is evident that the barriers faced by SMEs in their path to internationalization are multifold and multidimensional (Table 2). There is no concrete solution to these barriers as research has shown that there are many barriers that can be generalized, but still many remain specific to regions and local market situations.
The findings of the summary suggest that to counter certain barriers, SMEs have reinvented themselves with some innovative approach especially in the case of internal barriers. Based on a literature review as well as its study and critique, the following conclusions can be drawn:
1. To overcome the knowledge barriers, SMEs have started to rapidly acquire knowledge and instantly go global as in the case of INVs, born globals. This is a paradigm shift from the traditional knowledge acquiring models like stages models (e.g. Uppasla model) and innovation-related models.
2. To overcome resource constraints, SMEs use the management team's international experience to arrive at decisions and not necessarily depend on the CEOs knowledge. Also, the formation of strategic alliance formation considerably reduces the resource constraints.
3. To overcome marketing and task barriers, SMEs need to develop products based on global requirement that would help in standardizing production processes and reduce adaptation costs. Formation of strategic alliances would also help to bring down distribution and logistics cost.
4. Procedural barriers can be partly overcome by managerial experience and partly with the help of consulting firms.
5. To overcome both governmental and external environmental barriers, SMEs would need both support and guidance from the governmental organizations and policy makers. Also, active participation by SMEs in promotional programs seems to be necessary.
As with every study, this effort has its limitations as analysis of every possible export barrier is exhaustive and there remain numerous barriers that are region and country specific. Such extensive research is outside the scope of this paper.
The study has established that SMEs have found new ways to counter export barriers. The effectiveness of such approaches needs to be evaluated as it can set a new trend in tackling export barriers. Also the conditions that help such approaches need to be verified, as it may become a part of export assistance programs. With respect to export barriers, it is essential that research in this direction continues to proceed until a unified theory on export barriers and their mitigation is reached. Further, this study is based mainly on Leonidou's (2004) model of barrier classification. There are many such classification models and researchers in the past have failed to come up with a common understanding of the export barriers. Also, the conclusions drawn need to be validated with statistical evidence.
Suggested citation:
Narayanan, V. (2015). Export Barriers for Small and Medium-sized Enterprises: A Literature Review based on Leonidou's Model. Entrepreneurial Business and Economics Review, 3(2), 105-123. doi: 10.15678/EBER.2015.030208
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Author
Vijay Narayanan
Head of Production Technology and Head of Plant Quality by Hella India Lighting, Derabassi, India. Previously worked for Freudenberg Sealing Technology GmbH, Hoerbiger Group (Germany) and Ford India Pvt Ltd. Educational qualifications include Bachelor in Mechanical Engineering from the University of Madras (India) and Master in Mechanical Engineering from the University of Duisburg - Essen (Germany). Currently, PhD Student at the Faculty of Economics and International Relations at the Cracow University of Economics (Poland).
Correspondence to:
Mr. Vijay Narayanan
PhD Student at the Faculty of Economics and International Relations
Cracow University of Economics
e-mail: [email protected]
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Published by the Centre for Strategic and International Entrepreneurship - Krakow, Poland
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Abstract
The purpose of this article is to understand the barriers faced by small and medium-sized enterprises in their path to internationalization. The intention of this paper is to provide an overview about the barriers faced by SMEs in their path to internationalization and discuss in detail different approaches taken by SMEs to overcome these barriers. This article is a literature review on the barriers faced by SMEs in internationalization and new approaches in this domain based on Leonidou's (1995, 1998, 2004) model of export barrier classification. Modern approaches by SMEs are effective in handling most of the traditional challenges posed in internationalization. Indications on the work to be done in overcoming certain barriers which impede the internationalization of SMEs are more in the context of external barriers. The originality of this work is in creating a framework of barriers and finding solutions to some of the identified barriers
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