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Sources of finance are available for small to medium systems

The advantages claimed for SMEs are various, including: More generally the development of SMEs is seen as accelerating the achievement of wider economic and socio-economic objectives, including poverty alleviation. Staley and Morse 1965, p. This approach emphasises the importance of efficiency in new SMEs. Small producers must be encouraged to adopt new methods, move into new lines of production and in the longer-run, wherever feasible, they should be encouraged to become medium- or even large-scale producers.

Correspondingly, there has been growing interest in whether this model has or can be replicated in developing countries Schmitz, 1989; Pederson, 1994; Schmitz and Musyck, 1994; Schmitz, 1995. Insufficient funding has been made available to finance working capital Peel and Wilson, 1996. This paper discusses some of the issues raised by previous research and points to newer areas that can fruitfully be researched.

Interesting issues are raised by the effects of reforms on both the demand and supply of finance. An attempt is made in the concluding section to identify the kinds of testable hypotheses that emerge from the body of theory and to discuss their implications in the context of low income countries. The Appendix discusses the proposals for the directions of the current research programme and provides an outline of proposed fieldwork activities for the next year.

First, the bulk of research has predominantly been undertaken in the context of US and UK firms and has sometimes entailed comparisons with other European economies Storey, 1995.

As such, the theoretical work has assumed an institutional setting and made assumptions about the policy environment that is relevant to these economies. With respect to the macroeconomic environment the sources of finance are available for small to medium systems has involved: With respect to internal factors, attention has concentrated on the choice of investment; employment; firm level performance and productivity; capital structure and the ownership and incentive structures for management.

It is also the case that the major proportion of sources of finance are available for small to medium systems work has been empirical rather than theoretical and it is reasonable to conclude that relatively little is known about the behaviour of entrepreneurs in low income countries relative to those operating in higher income countries. Staley and Morse 1965 examined the stages small firms pass through as an economy grows. They postulated several reasons why small firms in low income countries initially grow rapidly before their share in total industrial activity begins to decline.

Rapid growth of small firms could be explained where: But as Anderson 1982 pointed out these propositions had not been quantitatively tested by the early 1980s. Earlier researchers were also preoccupied with investigating the extent to which small firms form the foundation for larger firm growth. Considerable effort has been expended on attempting to gather consistent and measurable information about small firms. First, a considerable amount of time has been spent on gathering baseline information on small firms.

This has involved identifying universes and constructing samples; devising methods to deal with delinquent returns and editing the results in a consistent manner.

Second, information collected tends to be more qualitative than quantitative because of the poor record keeping and lack of cross referencing sources through formal channels that can be used to confirm the reliability of surveyed data.

This tends to limit their use in statistical analysis. Third, surveys are more often conducted on an ad hoc basis at a point in time. Few compare different points in time and fewer still have attempted to use the same database for follow-up work. As a result time series work on the small scale sector is relatively scarce. The preoccupation with gathering baseline data and the restricted nature of the data that have eventually been collected has resulted in a preponderance of studies that have attempted to describe and report on the characteristics and features of the small scale sector rather than test theoretical propositions about relationships and the expected behaviour of the small firm sector.

In contrast to the earlier work, a distinctive feature of the current spate of empirical work undertaken in low income countries rests with its concentration on attempting to identify the constraints facing the development of the small scale sector Levy, 1993.

Most surveys have sought to capture the range of factors that inhibit the growth and development of small firms.

  • Moreover, nearly half of the approved investment portfolios at the Ghana Investment Centre targeted low-technology, natural-resource based products, indicating, as Boeh-Ocansey highlights, a lack of confidence in high-quality production;
  • As interest rates rise funds available will be diverted out of the informal sector to the formal sector;
  • Interpretation is complicated because of the qualitative nature of the surveys and to the fact that enquiries have almost exclusively been directed at firms that exist rather than following the histories of those that have eventually failed;
  • First, the bulk of research has predominantly been undertaken in the context of US and UK firms and has sometimes entailed comparisons with other European economies Storey, 1995.

A large proportion of this information has been collected from smaller firms through questionnaires asking owners and managers to give their views on either the kind of constraint they face, whether it be related to such factors as access to finance, poor managerial skills and lack of training opportunities and the high cost of inputs, or on the severity of the constraints, often ranking them on an ordinal scale.

Few studies have concentrated on a particular constraint, so that finance has most often been identified as a inhibiting factor as part of a larger investigation into a wider range of variables.

The results in terms of the significance of financing acting as a constraint to development are mixed and it is difficult to draw firm conclusions about the subject.

Interpretation is complicated because of the qualitative nature of the surveys and to the fact that enquiries have almost exclusively been directed at firms that exist rather than following the histories of those that have eventually failed.

In summary, it cannot be denied that a considerable amount is known about the behaviour of smaller firms in a range of areas relating to growth, efficiency, management, investment and employment. A smaller proportion of this work is theoretical in nature. The dilemma facing researchers is how to maximise the use of existing surveys and forgo the need for newer enquiries which may waste resources and time by duplicating or replicating existing sources of information.

5 ways to help finance SMEs

In part, this can best be explained by the preoccupation with gathering original data that in some way has crowded out initiatives to apply the data to test theories. Alternatively, it may simply reflect data inadequacies once they had been collected. Whatever the reasons, it is apparent that work in relation to low income countries, where these data problems most evidently exist, has lacked the formalised hypothesis, data collection and testing approaches widely adopted in other branches of industrial studies.

Empirical evidence in support of these claims is briefly examined in this section in relation to the array of economic and financial reforms that have been implemented in low income countries during the past decade and a half. The evidence reviewed is found in a growing but relatively small number of studies that directly attempt to measure the impact of economic liberalisation and structural adjustment on the small scale industrial sector Liedholm, 1990; Koppel, 1991; Steel and Webster, 1992; Boeh-Ocansey, 1994; Dawson, 1993, 1994; Steel, 1993, 1994; Vachani, 1994; Zake, 1994; Helmsing and Kolstee, 1993; World Bank, 1995.

Studies broadly fall into three categories: The former set of studies tends to rely on economic data drawn from official statistics such as supplied by the monetary authorities and census bureau for establishment level data. Finally, policy studies are generally broader in focus, reviewing the existing policy framework and providing prescriptions, often based upon what has appeared to work elsewhere. This brief review concentrates on the first category of studies that have attempted to evaluate the efforts of specific policy packages.

Agricultural Price Liberalisation Agricultural price liberalisation is expected to contribute to raising farm incomes in situations where government-controlled prices previously led to low farmer remuneration.

It is argued that policies that kept agricultural prices at the farm gate at a low level provided little incentive for farmers to expand their output.

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In combination with unfavourable exchange rates, this had the effect of stifling agricultural-based export production. Price liberalisation and the lessening of controls over price setting and procurement are expected to improve rural incomes and lead to an increase in demand for non-agricultural products. In assessing the effects of agricultural price liberalisation on the small scale sector, the impact of devaluation in increasing the cost of agricultural inputs is often left out of the equation.

Studies show that such increases in the cost of imported machinery and fertilisers frequently offset any advantage achieved through price liberalisation. Increased costs have prohibited the use of fertiliser by some Gambian and Nigerian farmers resulting in decreased production levels and reduced farm incomes.

Fertiliser costs in Nigeria rose 700 per cent between 1983 and 1990, increasing the cost of food production, increasing prices and reducing rural incomes Dawson, 1994. The reduction in incomes has meant that many could no longer purchase new goods, but instead relied on repairs to existing commodities.

Concerns with both access to inputs, tools and machinery and with markets and demand are also shown to be significant in Botswana, Lesotho, Malawi and Zimbabwe Mead, 1994. In an attempt to reduce parastatal deficits, structural adjustment policies in Zimbabwe have also lead to falling real producer prices since the end of the 1980s.

Closure of rural-depots and food security stock sell-outs have contributed to the problem Pederson, 1994. Low agricultural prices, combined with increasing consumer prices attributed to devaluation and drought, have led to contracting low income and rural consumer markets.

Information asymmetries

More positive results from agricultural liberalisation come from Ghana and Tanzania. In these countries the numbers of agricultural retail and processing firms have increased considerably following price liberalisation and the removal of parastatal monopolies. In Tanzania, where controls had previously been somewhat stricter, the benefits were particularly evident.

A more open policy towards direct foreign investment will encourage greater use of sub-contracting arrangements involving smaller firms and provide learning opportunities for locally employed workers to become local entrepreneurs World Investment Report, 1994.

The adjustment of overvalued exchange rates is likely to improve prospects for developing the export potential of local labour intensive activities. Trade liberalisation and currency devaluation measures have had mixed results. As Dawson 1994 highlights, increases in import costs of raw materials and inputs in Nigeria have averaged 515 per cent between the late 1980s and early 1990s. This has resulted in a shift in demand from imported products to good-quality locally produced goods in the middle and upper range of the market.

Likewise, the Ghanaian exchange rate which depreciated from 2. Those producing non-traditional items, in direct competition with imported products such as freezers, water coolers and drums, were found to be particularly successful. Those concentrating on innovative processing of raw materials and recycled products also appear to have benefited. Increased access to imports and new components has also allowed small-scale industries to diversify product lines, increase output and improve quality.

Evidence of similar benefits being derived from increased access to better quality imports has also been recorded by Kessous and Lessard 1993 in Mali. In the case of Senegal, the impact of trade-liberalisation on large-scale over-protected industries was severe.

In contrast, small-scale industries adapted product lines to meet new market niches Steel, 1993. Successful new product lines, including oil presses and expellers, water pumps and storage tanks and drill presses, have also been adopted in Tanzania Bagachwa, 1993. Similarly, through skill and institutional development, small-scale sources of finance are available for small to medium systems producers in Sri Lanka increased quality and became more export-orientated in response to the trade liberalisation programme which commenced in 1977 Steel, 1993.

  • In combination with unfavourable exchange rates, this had the effect of stifling agricultural-based export production;
  • In general, the majority are successful in getting a loan application approved.

Zimbabwe has also opted to phase their trade liberalisation process, with initial focus concentrating on capital goods and intermediate inputs to allow for adjustment in consumer industries, although in this case the implications for small-scale producers are less clear. Instead for them benefits gained through the removal of barriers which previously restricted access to imports have been offset by the rising and prohibitive cost of imports, created by currency devaluations.

Since the price of tools and equipment in Zaria increased by 1075 per cent, few have purchased imported power driven machinery since 1986.

Costs of replacement parts also became prohibitive.

  1. With respect to internal factors, attention has concentrated on the choice of investment; employment; firm level performance and productivity; capital structure and the ownership and incentive structures for management.
  2. Price liberalisation and the lessening of controls over price setting and procurement are expected to improve rural incomes and lead to an increase in demand for non-agricultural products.
  3. Since the price of tools and equipment in Zaria increased by 1075 per cent, few have purchased imported power driven machinery since 1986.

The move away from more technological-intensive production towards a labour-intensive operation may also result, in part, from vastly reduced real wages and increasing interest rates. Increasing costs of imported raw materials have also led to increased competition for, and costs of, local raw materials and recycled products in Sources of finance are available for small to medium systems Dawson, 1994.

As a consequence, prices for these items went up as demand increased. The prices for scrap aluminium have increased by 500 per cent, steel by 1000 per cent and plastic by 700 per cent between 1986 and 1993. Likewise, as new export commodities such as timber, leather and scrap metal are encouraged, the supply for the local market is adversely affected. Evidence exists of lower quality goods and increased prices for goods catering to the local market.

In some cases, trade liberalisation appears to have led to increased competition from imports which local producers have been unable to match. This has been the situation regarding the importation of mass-produced, low-cost, high-quality products against which locally produced, labour-intensive products have had difficulty in competing.

Moreover, in specific sectors, import competition was seen to be more significant, with 21 per cent of metal producers predominantly in agricultural machinery and 29 per cent of soap and cosmetics producers viewing imports as a major source of competition. Other studies of the experience of structural adjustment in Ghana have cited the significance of increased import competition Boeh-Ocansey, 1995.

After trade liberalisation, Singaporean vegetable oil and Dutch soyabean oil were found to be or superior quality and cheaper than locally-produced brands; likewise imported alcoholic drinks were cheaper than a traditional unrefined local beverage. Trends in Tanzania were similar, with imported second-hand clothing, plastic sandals and soap having a particularly adverse impact on local producers Dawson, 1993.

In Tanzania local standard nuts and bolts have almost entirely been displaced by imports Dawson, 1993. In turn, the lack of export earnings constrains the purchase of imported inputs.

Small- and medium-sized enterprises

The removal of subsidies, protection and long-term support to parastatals is seen to assist this process. In turn, these are expected to increase skills training, and encourage technological improvement and increased production. Factors such as a lack of management, technological skills, basic technology and insufficient finance are seen to be significant, particularly where multinational firms are able to offer considerable benefits to small-scale sub-contractors who are able to offer technology-intensive quality products.