SMEs Entrepreneurship and Ethnic Distinctions - Assignment Example

INTRODUCTION: Global economy is yet to recover from the shock of economic downturn. According to recent estimates, the growth of the world’s economic output is anticipated to remain at three percent in 2014 with some improvement towards 3.3% in the year 2015 (United Nations, 2014). Importantly, these growth projections are subject to certain assumptions related to the monetary and fiscal policy exchange rate and oil prices etc (United Nations, 2014). Today, small and medium enterprises (SMEs) are the major source economic growth in the countries. According to International Finance Corporation, SMEs contribute to 90% of businesses in the world and accounts for approximately 50% of employment. Considering the global financial crisis, SMEs are the foundation of creating more jobs and economic growth, particularly in the developing countries. Hence, generating opportunities for SMEs is a major approach to encourage development and diminish poverty. Due to the global financial crisis, most of the emerging markets have constrained the right to use various financial services for SMEs. They are not given the complete access to financing as yet, however the liquidity is brought back to financial institutions, and lending activities are reported to be lower than before. Around 17 million SMEs in developing countries have not met the credit needs, which is the reason to broaden up the gap. This gap has reached in between $900 billion to $1.1 trillion in the developing markets. International Finance Corporation (IFC) has formulated the policies to foster the SMEs financing across the world, so that to encourage business support for such enterprises (International Corporate Finance). The obstacles in the development of SMEs and access to finance are due to the various ethnic groups positioned in country. The differences between diverse ethnic groups make it more challenging to set policies with reference to SMEs ethnic minority finance. This report has presented the thorough analysis of SMEs entrepreneurship and ethnic distinctions that hinders the policy making process to formulate financing for SMEs. ETHNIC MINORITY BUSINESS: An ethnic minority group is referred to as a business which comprises of owner and managers or large numbers of partners from a specific ethnic group that exists in minority. These are particular non-white people who start their own small business. There are five major ethnic minority communities who start up their small business to the greater extent, include Pakistani, Black Caribbean, Indian, Black African and Bangladesh (Fraser, 2006). Ethnic entrepreneurship is defined as the set of associations and interactions and defined patterns of connections among various people who share common national background or experiences of migration (Waldinger, Aldrich and Ward, 1990). SMEs ETHNIC ENTREPRENEURSHIP: Ethnic entrepreneurship is a set of connections and defined patterns of interactions among various people who share common national background or experiences of migration (Waldinger, Aldrich and Ward, 1990a). The ethnic group of entrepreneurs defines the concept of immigrated entrepreneurs from one country to another country to setup a complete business. There are number of barriers that come across to start up new business and discourage ethnic minorities to become entrepreneurs (Waldinger, Ward, Aldrich and Stanfield, 1990). Some particular barriers are: Access to financial services and other support services Difference in languages Limited marketing, management and business skills Excess concentration to support low entry threshold attitudes and activities where the diversification and breakouts in the markets are limited. In the early 1980s, developing small and medium enterprises among ethnic minorities had enhanced considerably in Europe. For instance, in Netherland the market for SMEs among ethnic minorities has boosted to the greater extent from 25000 in 1987 to 55,000 in 2000 and the contribution of these SMEs had reached to 10% rate of total work force. According to OECD migration Outlook 2009, now countries in European region have greater percentage of foreign born workers in self-employment rather than the native people. The boosting economy in Europe and in entire world has led to open the new opportunities for ethnic minority entrepreneurs. Since the worldwide population is expected to increase day by day, this has increased the sense of entrepreneurship among ethnic minorities group as well. Financing small and medium sized businesses that belong to different ethnic groups is the major problem. Today economies have limited the access of SMEs to finance by restricting the policies of entrepreneurship for ethnic minorities. According to numerous authors, migrant communities obtain the private credits at significantly higher rates; however, sometimes they use consumer credits for smaller loans which are reported at 7-15% interest (Bosswick, 2010). Financing the business for migrant ethnic groups proves to be the irrelevant factor, since they easily acquire credit from family and community network of the entrepreneurs. ETHICS MINORITY BUSINESSES AND ACCESS TO FINANCE: Researchers have argued major hypotheses with regards to the personal traits such as ethnicity and gender and its influence upon access and availability of finance. The literature has developed several researches which illustrate that ethnic minorities usually experience issues with regards to access the finance to initiate their own business specifically Bangladeshis and African Caribbean. Also owner or managers of ethnic minority goes in favour of co-ethnic informal sources of finance and personal savings (Carter, Ram, Trehan and Jones, 2013). The literature has showed contrary consequences of personal characteristic such as ethnicity, is the hindrance for owners who look for bank finance. It is concluded that there are certain factors in business, which hinder them to communicate their business strategies effectively and implement operations in an efficient manner. This is the reason banks consider these businesses as too risky. Therefore, it has been identified that few personal characteristics are indicative of greater risk, like young people who start up their business with no savings, no experience and no collateral, but yet these people do not believe in discrimination based on ethnicity. The above diagram shows that how ethnicity and gender of owner-manager characteristics can impact on the finance restrictions and create hurdles with regards to access the finance (Irwin and Scott, 2010). Developed Countries: With regards to developed countries, most of the countries are ethnically diverse nations. According to the national Audit Office in UK, the cost that UK economy will encounter from the failure of talent consumption of people from ethnic minority groups and these groups are accounted to £8 billion per year. In UK, there are number of different ethnic groups which comprises of Black Africans, Black Caribbean, and Pakistanis, Chinese, Indians, and white population. All these ethnic groups are backed by different cultures, religions, languages etc and thus this will increase the divergent experience of various ethnic groups in small businesses. The process of raising capital includes the complexities of demand and supply factors, which ultimately make the process difficult for small enterprises regardless of ethnicity. When SMEs draw their attention toward debt financing that is through bank loans, institutions use credit-scoring and secured lending methods to control the risk. This approach is explained as capital-based instead of income-based process while considering the financial and gearing assets in risk evaluation process (Dana, 2007). However, new regulations have been discussed under which micro-businesses would be exempted by Member States from diverse accounting rules. Policies and laws were established to overcome the problem of delayed payments of invoices. Such policies have increased the funding to €11.5 billion through the European Investment Bank and Fund in 2009 (Rath and Swagerman, 2011). Developing Countries: Small businesses in developing countries account for around 45% of total employment rate. This rate shows that small and medium enterprises in developing countries are the great source of creating jobs and enhancing prosperity. According to statistics, Small and Medium Enterprises accounts for approximately two-thirds of the employment, based on permanent and full time workforce in the poorest countries of the world. Due to high transaction cost, and greater risk, banks are increasingly reluctant to finance small and medium enterprises in the developing countries, which left unable to create new jobs that are needed in number of countries in Africa and South Asia. To ensure the economic growth in developing countries, it is mandatory to unblock commercial lending, permit small entrepreneurs from poor countries to strive in the arena of business. The Global SME Finance Initiative is the foundation to support DFID funds through the International Finance Corporation. UK has invested over £75 million to encourage the development of Small and Medium enterprises and will assist over 200,000 businesses in rising capital and developing millions of new jobs over the period of 2012-2019. This policy has also enforced that as a minimum quarter of loans will be provided to women entrepreneurs. This initiative has been implemented on small businesses in 15 of the poorest countries of South Asia and Africa. This approach minimizes the risk of lending to small and medium enterprises, develops commercial banks and financial institutions. Also, this initiative has helped the banks to adopt the technology to accurately assess the risks associated with lending activities. In addition, this approach will assist banking sector to expand commercial lending to small businesses with £5 billion and rise the opportunities for 35 commercial banks to start lending by reducing the transaction cost and improving product offers (GOV.UK, 2014). IMPORTANCE OF POLICY MAKING IN SMEs ETHNIC MINORITY FINANCE: Policy is a set of guideline that directs every conduct. The policy making is a set of activities that initiates with the identification of the problem for which the policy is to be designed and concludes with the set of directives for performing certain activities. In this aspect it can be regarded as science as it is required to address the most possible aspects that can have an impact on area for which it is being designed. On the other hand, policy making is an art as well as it is required to strike the right balance between contrasting views that is able to generate the wider interest of the stakeholders. Role of policy is widely emphasized in the systematic conduct of a business. For example, countries determine the monetary policy that directs the cost of doing business. Similarly, the regulatory authorities of a respective industry also determined policies to ensure the efforts are directed in unified direction; hence, producing fruitful results.  Role of policy is also critical for the fact as it enables the regulatory authorities in clearly identifying the deviating practices from the defined set of rules. As a matter of fact, the role of policy is emphasized in general, its role is more pronounced in the SMES ethnic minority finance for three core reasons. First, the SMEs are critical component of the any economy and therefore, defined pattern of business activities of SME can only produce the collective output for an economy that is also fruitful for the overall growth. Second, small businesses are already faced with the challenges of generating business finance due to multiple reason such as lack of resources to produce bankable feasibility, unavailability of track record on the basis of which it can raise funds and high risk associated with the SMEs. Therefore, defined pattern and policy for the funds generation is critical for directing small businesses to generate fund in a way that is less risky. For the purpose, various entrepreneurial finance systems have evolved such as angel financing etc; however, all these are also subject to policy for effective implementation. Finally, the financing for SMEs of ethnic minority has become increasingly critical with the advent of online era. SMEs have developed globally connected small businesses and unified direction is required to direct these businesses in the way that is beneficial for the collective interest of the involved parties and countries. Hence, policy for the ethnic minorities’ business finance within a country is also critical to collect the minorities contribution in an economy one single page and platform. GENERAL ISSUES REGARDING SMALL AND MEDIUM ENTERPRISES ETHNIC MINORITY FINANCE: Ram and Smallbone (2001) have recognized that finance problems are of core importance subjecting to ethnic minority businesses. Past researches have shown that ethnic minorities typically faced issues with access to finance in the start-up phase of business. Regardless of this, there face relatively more issues and obstacles as compared to white entrepreneurs. The different ethnic groups of particular business sectors can influence the overall operations like Bangladeshis and African Caribbean. According to the research of Ram and Smallbone (2001), businesses owned by Chinese have greater degree of access to finance as compared to businesses owned by white, however the ratio of African Caribbean Business is below than the ratio of white owners in terms of bank finance solely. Hence, the situation is balanced as the ethnic minority business groups are not disadvantaged with regards to start-up capital and other financial sources form banks, as according to research. Moreover the study reveals that ethnic minority businesses are more dependent upon financing through informal sources. Ethnic groups seek to borrow initial investment from their community and family which discriminate them on the basis of private resource endowment (Ram, Smallbone, Deakins and Jones, 2003). For example, Asian business groups’ business proposals are reviewed thoroughly when they ask for commercial finance. Further, Basu (1998) depicted that Asian minority groups are growing rapidly in business sectors but they do not depend on bank finance to expand or start-up their business. The research has proved that fast growing ethnic minority businesses need to take advance approaches rather than preferring informal support for workforce and finance. According to the Bank of England (1999), ethnic minority businesses are more like small businesses, but the difference in ethnic minority businesses is that they are sensitive at initial as well as growth phase. There are number of possible reasons that are faced by ethnic minority groups in starting up business which include risk aversion attitude of lenders, risk of failure, sector-wise concentration of ethnic minority businesses and improper business planning etc (Irwin and Scott, 2010). When policies are set in relation to small and medium enterprises ethnic minority finance, the major problems encountered by the policy makers are due to the differences in ethnic groups based on their culture, life style, beliefs, perceptions and family structure. Different ethnic groups have different priorities and perceptions about business expansion and development, which may conflict with others and thus lead to conflicting policies that cannot even imply international terms and regulations. For example, Asian ethnic groups reflect more risk averse personalities in terms of business as they are more dependent on personal savings, family wealth, community service and then they prefer bank finance to initiate or grow their business. Also, they believe on informal relationships and less paperwork at work, which is not supported by other ethnic groups as well as international finance policy. In addition, Asian ethnic groups have numerous ambitious ideas to start-up business but are not clearly presented which create ambiguity in the plan. In this regard, banks are reluctant to provide financial assistance to their potential customers who have poor written plan for business, and informal structure. Other international agencies and banks offer more formal regulations and bureaucracies to develop formal approach to meet business needs without discrimination (Dhaliwal). First generation of Asian groups is mostly influenced by unemployment and economic conditions, which are called push factors, and second generation of Asian ethnic group avail business opportunities by using skills like linguistic, socializing and cultural information etc to develop business in different countries, known as pull factors. Also women in this ethnic group are not given equal opportunities to start-up business and support by family and community, thus face hurdles to access business finance. Also they have low personal saving which results in affecting the credit ratings of ethnic minority businesses (Dhaliwal, 2002). This shows that policies which support Asian ethnic groups would conflict with other ethnic groups’ policies as their beliefs and terms are different from Asian community. On other hand, African Caribbean businesses prefer to finance their small businesses through national support agencies. Mostly, ACBs are lead by high professionals who tend to be more formal in business relations and bureaucratic. In this term, they are conflicting with Asian ethnic businesses as they do not prefer formal structure and more depend upon informal source of funding. Also Africa Caribbean community have shown the greater degree of communication gap between customers and financial institutions. In order to meet African ethnic group’s requirements, policies will be set regarding formal and bureaucratic structure. In this way, setting balanced policies that satisfy the international as well as country’s standards and also support the paradigms of different ethnic groups in the country is a challenging task (Fraser, 2006). ROLE OF INTERNATIONAL FINANCE CORPORATION TO FINANCE SMEs: IFC is an international finance forum supported by the World Bank, to maintain focus on SMEs development especially in developing markets. It encourages reforms and programs that support business sector development in the country, and also reduce barriers of excessive regulations and policies. In December 2011, IFC successfully finance SMEs by contributing $9.6 billion through financial intermediaries (Ayyagari, Beck and Demirguc-Kunt, 2007). Moreover, its trade finance accounted for $3.4 billion were contributed in SME transactions. Approximately 60% of IFC services benefited SMEs in different countries in 2011 (Ayyagari, Beck and Demirguc-Kunt, 2007). However, no any regulation has been formulated as yet, with regards to ethnic minority groups in business sector. This is due to high degree of confliction between different ethnic groups. CONCLUSION: There are many businesses which comprises of owners or greater numbers of partners from a specific ethnic group that exists in minority. Major ethnic minority communities, who start up their small business to the greater extent, include Pakistani, Black Caribbean, Indian, Black African and Bangladesh. As the population is increasing, the numbers of SMEs are also rising across the world, which lead to improve economic growth of the country. These ethnic groups make it difficult to construct a proper set of policies with regard to SME ethnic minority finance. When policies are set in relation to SMEs ethnic minority finance, the major problems encountered by the policy makers are due to the differences in ethnic groups based on their culture, life style, beliefs, perceptions and family structure. Different ethnic groups have different priorities and perceptions about business expansion and development, which may conflict with others and thus lead to conflicting policies that cannot even imply international terms and regulations. REFERENCES: Ayyagari, M., Beck, T., & Demirguc-Kunt, A. (2007). Small and medium enterprises across the globe. Small Business Economics, vol. 29, no 4. Pp. 415-434. Bank of England. (1999). The Financing of Ethnic Minority Firms, London: Bank of England. Basu, A. (1998). The Role of Institutional Support in Asian Entrepreneurial Expansion in Britain, Journal of Small Business and Enterprise Development, vol. 5, no 4. Pp. 317-326 Bosswick, W. (2010). Ethnic Entrepreneurship in Zürich, Switzerland. [online] Available at: http://www.efms.uni-bamberg.de/pdf/Zurich%20EE-33.pdf (Accessed 19 June 2014). Carter, S., Ram, M., Trehan, K., & Jones, T. (2013). Diversity and SMEs. Dana, L. P. (2007). Handbook of research on ethnic minority entrepreneurship: A co-evolutionary view on resource management. Edward Elgar Publishing. Dhaliwal, S. (2002). ‘Are Banks giving us a fair deal?’ Eastern eye, Issue 658, 11 October, P. 6. Dhaliwal, S. The Take-up of Business Support by Minority Ethnic SMEs: The Experience of the Asian, Korean and African-Caribbean Businesses in England. Available from http://epubs.surrey.ac.uk/178665/4/Korean.pdf [Accessed 17 June 2014] Fraser, S., 2006. Finance for Small and Medium-Sized Enterprises: Comparisons of Ethnic Minority and White Owned Businesses. DTI. GOV.UK, 2014. Helping developing countries' economies to grow. [online] Available at: https://www.gov.uk/government/policies/helping-developing-countries-economies-to-grow/supporting-pages/helping-people-in-developing-countries-access-financial-services (Accessed 19 June 2014). International Corporate Finance. IFC and Small and Medium Enterprises. [online] Available at: http://www.ifc.org/wps/wcm/connect/277d1680486a831abec2fff995bd23db/AM11IFC+IssueBrief_SME.pdf?MOD=AJPERES (Accessed 19 June 2014). Irwin, D., & Scott, J. M. (2010). Barriers faced by SMEs in raising bank finance. International Journal of Entrepreneurial Behaviour & Research, vol. 16, no 3. Pp. 245-259. Irwin, D., & Scott, J. M. (2010). Barriers faced by SMEs in raising bank finance. International Journal of Entrepreneurial Behaviour & Research, vol. 16, no 3. pp. 245-259. Ram, M. and Smallbone, D. (2001). Ethnic Minority Enterprise: Policy in Practice, SBS: Sheffield. Ram, M., Smallbone, D., Deakins, D. and Jones, T. (2003). Banking on ‘Break-out’: Finance and the Development of Ethnic Minority Businesses, Journal of Ethnic and Migration Studies, vol. 29, no 4. Pp. 663-681. Rath, J., & Swagerman, A. (2011). Promoting ethnic entrepreneurship in European cities. Publications Office of the European Union. United Nations (2014). World Economic Situation and Prospects 2014. [online] Available at: http://www.un.org/en/development/desa/policy/wesp/wesp_current/2014Chap1_en.pdf (accessed 19 June 2014) Waldinger, R., H. Aldrich and R. Ward, (1990), ‘Opportunities, group characteristics and strategies’, in R. Waldinger, H. Aldrich and R. Ward (eds), Ethnic Entrepreneurs: Immigrant Business in Industrial Societies, London: Sage, pp. 13–48. Waldinger, R., Ward, R., Aldrich, H. E., & Stanfield, J. H. (1990). Ethnic entrepreneurs: Immigrant business in industrial societies. University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship. Read More