Small Business Environment in Developed and Developing Nations - Case Study Example

Running Head: ABBREVIATED OF YOUR CHOICE (all caps) and Section # of Small business is something that people have struggled to define for quite some time now, there is no single, consistent definition for what a small business is because of the varying and relative nature of ‘small’, what might be small in the shipping industry might not be small in the handicrafts industry hence the need for a definition that can adopt to the changing scenario is there. There have been two researches or two efforts to come up with such definitions in the past and before moving on, some light would be shed on these efforts and the outcome of their efforts because it is imperative that one has a clear understanding of what a small business is before delving into the problems of a small business sector. The Bolton commission in 1971 tried to give a concrete definition of what a small business is and they came up with two perspectives one is based on economics and the other one is based on statistics. From the economic perspective, the Bolton commission defined a small business as one which has a low market share and is run by owners and has no clearly defined management structure where as on the statistical side the definition of small varied according to sectors and each sector had a different criteria on which it would be judged. The second effort to define what a small business is was carried out by the European Commission, the European Commission defined small businesses using only one variable, employees that a business had. They stated that a business would be a micro enterprise if it had 0-9 employees, a small enterprise if it had 10-99 employees and a medium one if it had 100-499 employees. This definition laid down by the European Commission is the most widely used definition now but it is not a universal definition, economist and other people concerned with small business still take sector wise factors into account to define what business might be defined as small in that particular sector. Overview of Small Business Small businesses are an important source of income for all people around the globe, they are a very important part of any economy despite their small size they can do wonders for economies that they exist in, they create jobs, earn important foreign exchange revenue in some cases and are all the more important because they involve the larger chunk of the masses, i.e. the middle and the lower income families, they are a very effective source of reduction of poverty levels and that is why more and more emphasis is increasingly being laid on developing small business sectors all around the world. Many government led schemes are favoring the development of these businesses because of their effectiveness in reducing poverty levels, especially in the third world countries where billions of people live below the poverty line. The problems that these businesses face are many and they are growing by the minute as instability grows all around the world and in the environment that these small firms operate. Some of the problems that these businesses face are corruption, lack of managerial experience and knowledge, lack of capital, lack of knowledge of basic laws and rights and poor infrastructure facilities. Small Business Environment in Developed and Developing Nations In developing nations it is relatively easier to start and sustain a small business because they are stable economic environments, there is lesser corruption, and there is access to law enforcing agencies and courts and because of the superb infrastructure that exists within the developed world. In Europe alone small businesses account for almost 95% of all the businesses and are a source of employment to almost 50% of the labor force in Europe (Storey, 1994.). These small businesses in the developed world are supported very actively by the governments of their respective home countries, they are provided easy loan facilities so that they can start and sustain their businesses, they are provided platforms by the government for marketing their products in the international market, they are provided with the opportunity to take up managerial courses so that they can polish their managerial skills and apply them to their businesses for better results. Small businesses, may seem to be less glamorous in nature and highly non attractive but there is no doubt about the fact that they are the back bone for any country’s economy, because if small businesses are not set up then job creation would be very low and that is a severe cause of concern in the United States 99% of all businesses employee less than 500 employees (US Department of State, 2010). Small Business Environment in Zimbabwe The environment within any country for setting up a small business is judged according to the World Banks guide lines, the general criteria for assessing the environment within any country is judged relative to the regional averages of set up time and the steps that are required to set up a small business, the regional average for Zimbabwe is 63 days where as country specific time frame to set up a small business in Zimbabwe is 96 days and it requires 10 steps (Thandazile, 2007) which is also considered to be very high. There should be lesser steps involved and the time frame should be as small as possible, there are several ways that governments could ensure this for example by setting up one window operation facilities in several departments, this would ensure lesser steps involved and would decrease the time frame radically but corruption and red-tapism are problems that governments and small entrepreneurs face in such countries and effective measures have to be taken to ensure that such problems do not surface but these measures have to be taken on a macro level. Some of the other factors that are considered as a hindrance in setting up of these small businesses in Zimbabwe are discussed below. Political Environment The political environment in Zimbabwe is not up to the mark to say the least, political rivalry amongst the major political figures of the country has devastated the country and has been a source of political turmoil for many a years now. Violence as a result has destroyed the economy as well as the image of the country and that leads to many problems for small businesses. Though the government has tried to set up a policy for small businesses and has tried to support the small businesses the frail nature of its political environment has proven to be a dampening factor in all the efforts that have been under taken by the government. Political stability is a must for small businesses to survive, anywhere in the world. Legal and Regulatory Environment There is low access to law enforcing agencies in Zimbabwe and the regulatory environment is frail as well, this can be judged from the following information, in Zimbabwe it usually takes 2 years to file for bankruptcy and the costs are sky high where as the returns are considerably low, there is little or no respect for intellectual property rights, trademarks and patents. It is very difficult for a small business to survive in such a legal and regulatory environment because small businesses need a strong legal environment to protect them, many small businesses are not set up because of this very reason and as a result Zimbabwe loses out on its potential and the economy takes a severe blow. Economic Environment One of the most major problems that small businesses or businesses in general face in Zimbabwe is the hyper inflation that has plagued the economy for several years now, hyper inflation adds to uncertainty and as a result adds to the costs of doing business. Another economic factor that is a limiting factor for the growth of small business in Zimbabwe is the lack of finance and startup capital, this is majorly due to the lack of inter action between the financial institutions and small business owners and also because of a strong and clear policy by the government in this regards, all of this adds up to a dire situation. Another factor is the high interest rates that are prevalent in the economy, when inflation was above 150% the costs of financing were more than 100% (kapil). Zimbabwe also faces a 70% unemployment rate which shows that it is in dire need of small businesses to be set up but the environment at the moment is not conducive for them to survive. Task Environment Workers in the Zimbabwean economy are not paid up to the standard and hence there are problems with the workers unions and the businesses that are set up, the reasons for the underpayment of the employees is largely due to the high costs that the businesses already face and employee costs are the most easily controllable costs that is why most employees in the economy are under paid. People also lack managerial skills and that is a hindrance in setting up small businesses and also managing people, there is a severe need for a government program to train people in management. Though Zimbabwe has a very high literacy rate of 90% but it lacks behind in business education which is relevant to the sector of small business. Conclusion There are many problems that Zimbabwe faces currently but one of the most major problems that it faces currently is the political instability and it would have to rid itself of this problem as soon as possible for small businesses to survive and for the economy to regain any momentum. People would also have to take some initiatives with regards to the environment related to the small business environment, they can set up training programs for themselves or the community where they can give training in management and vocational training so that others can benefit from them, at the same time government needs to take similar initiatives. The poverty rate in Zimbabwe is immense and the only solution for reducing such poverty levels is the use and enhancement of small businesses in the economy so that it can give a jump start to the economy and spur it on. But it is imperative that every stake holder understands that it is going to take some time and things cannot be turned around over night, signs of improvement are beginning to set in and the chances of the environment and situation improving in the near future is immense if this situation continues and the political environment continues to improve. Recommendations A committee be set up that assesses the current situation of small businesses in the economy, so that the government closely understand the problems that the businesses are facing right now. Credit facilities being made available to small businesses so that more and more small businesses are set up in the economy, this could be done through increasing the interaction of financial institutions and small business owners, another initiative in this regard could be setting up of a bank that looks after small businesses and gives out soft loans for startup capital and cash flow problems. Another initiative that can be taken in this regards is the development of a forum that markets the products that are developed by small business firms in the local as well as the international markets, so that firms have an incentive to work harder and they would not have to worry about the marketing aspect. Universities should be set up with international alliances so that they can give a better business education and are able to educate the population on management. An organization can be set up to help the small businesses in the general problems that they face with regards to setting up and running small businesses. Entrepreneurs should be encouraged at all levels so that small businesses are promoted within the economy in an effective and efficient manner. As stated above, it has to be kept in mind that all these things would take time and cannot happen overtime, there is a great amount of patience required, things are brightening up and would soon be better if things continue to improve. References E. Mayo (1995). The Role of the National Small Business Advisory Group in Small-scale Enterprises in Zimbabwe. IDRC. T. S. Mpofu (2007). Entrepreneurship and Leadership. B. Raftopolous. Current politics in Zimbabwe: confronting the crisis, in D. Harld-Barry, Zimbabwe: the past is the future, Harare, Weaver Press, 2004. Aleksandr Shkolnikov. (2009). The Social Costs of Political Mistakes. Retrieved on Apr 5th 2010 from http://www.cipe.org/blog/?p=1618 G. Phiri. (2005). Zimbabwe: Economic Crisis Batters Small Business. Retrieved on Apr 5th 2010 from http://www.afrika.no/Detailed/6957.html USAID. (2010) Economic Growth Program Summary. Retrieved on Apr 5th from http://www.usaid.gov/zw/economic_growth.html US Department of State. ((2010). Small Business in the US. Retrieved on Apr 4th 2010 from http://economics.about.com/od/smallbigbusiness/a/us_business.htm Strauss D. (2008) The Small Business Bible: Everything you need to know succeed Maps of India. Small Business in India. Retrieved on Apr 5th from http://business.mapsofindia.com/india-business/small-business.html Eric Tyson (2008) Small Business For Dummies. SMEDA. (2010) State of SMEs in Pakistan. Retrieved on Apr 4th 2010 from http://www.smeda.org.pk/main.php?id=34 Read More