Challenges Faced by Small and Medium Enterprises in Developed Countries - Coursework Example

Table of Content 0 Executive summary …...……………………………………………………………............02 1 Introduction…………………………………………………………………………............02 2 Review of Literature………………………………………………………………..............03 1.3 Challenges faced by Small and Medium Enterprises in Developed Countries…………07 1.4 Risk faced by UK small and medium enterprises and solution to alleviate it…………..08 1.5 Conclusion…………………………………………………………………………………..09 1.6 Limitations and Recommendations………………………………………………………..10 References………………………………………………………………………..13 Small and Medium Enterprises (SME) Executive Summary Small and medium enterprises are the backbone of any economy. SME’s are an essential key element of this dynamic world. Small and medium enterprises are one of the foremost and leading sources for the development of economic growth. These are the best source to bring the employment in the country. Small and medium enterprises are participating a lot in international trade. Such businesses are more focused on exporting their product and service at international level that’s what enhancing economic growth of the country as well. Small and medium enterprises of developed countries are more exposed to risk as compare to developing countries. SME’s are the fastest emerging business segment in many countries. The exporters of small enterprises are expanding faster at international level and hence contributing a lot in the country’s economic health. Developed country like United Kingdom has around 90% of its investment in small and medium enterprises according to United Kingdom statistical report. So they are more concerned for promoting such businesses. This study will illustrate the challenges faced by small and medium enterprise in developed countries especially with respect to United Kingdom and solution to alleviate it. 1.1 Introduction: Small and medium enterprises are the backbone of any economy. SME’s are an essential key element of this dynamic world. Small and medium enterprises are one of the foremost and leading sources for the development of economic growth. These enterprises are the best source to bring the employment in the country According to the statistical report of small enterprises, it is acknowledged that around 600,000 new enterprises enter in the business world yearly, 10% of it fails within two years of its operations. This failure is due to many issues for instance, finances are required time to time for bearing expenses and running operations of the business. Accurate information is required to decrease the capital cost. Innovation cannot be properly facilitate without the supervision of research and development centre, but all that need heavy finances which cannot be achieved without the proper assistance and support of government. Nonprofit organizations are the one other than government which has the capability to give financial support to such enterprises (Vishny et al, 1999, pp. 737). Small and medium enterprises are participating a lot in international trade. Such businesses are more focused on exporting their product and service by international level that’s what enhancing economic growth of the country as well (Nakos, 2008, pp. 23-47). Small and medium enterprises are efficiently contributing in the country’s export therefore such enterprises are more exposed to export related barriers. Policy makers, business educators and business managers should identify those obstacles and find out proper solution to alleviate such obstacles (Neupert et al, 2006, pp. 535-545). 1.2 The Review of Literature: Innovation is a key element of success for every business whether large scale business’s or small businesses. It is an essential driver to accelerate economic growth. Launching of new product and services, enhancing and ensuring product quality and offering low prices all are contributing its part in innovation. In a rising competitive world market innovation is one of the major elements to secure a practicable competitive position in the global market. According to study it has suggested that with some exemptions, innovative small and medium enterprises have better economic and financial position as compare to non-innovative firms (Carmona, 2012, pp. 2463-2467). Innovation has identified as an essential driver of economic growth (Reenen, 2002, pp 24-27). In the current economic situation a business need to maintain its innovation capabilities, man power, organizational investment, intellectual capabilities, human resources, etc. The countries that have constantly upper hand on innovation tend to get more economic development. Small and medium enterprises are participating a lot in international trade. Such businesses are more focused on exporting their product and service at international level that’s what enhancing economic growth of the country as well (Neupert et al, 2006, pp. 535-545). There are many programs and a huge network that is supporting small enterprise in the developed countries including the United Kingdom. The organization for Economic Cooperation and Development (OECD) is one of them. Its objective is to stimulate small and medium enterprise by all means to maintain its profitability and growth. OECD provides funds, professional guidance, different ways to hedge or diversify risk that is expose to small and medium enterprises. In short, their aim is to provide all necessary assistance to such enterprises in order to make them more productive and more achievable (Peck et al, 2006, pp. 307-319). According to Organization for Economic Cooperation and Development, the top three barriers OECD deal with includes, financial barriers at the top, it provides long term exports credit and short term export credit. Long term exports credits are for more than two years and short term export credits are for less than two years. Export Credits Guarantee Department offers insurance to exporters in case of default payment made by foreign purchaser. Guarantees assure loans provided by the banks to assist the stipulation of finances to foreign consumer of UK products and services. Another barrier which OECD tackles with includes informational and contact barriers. With respect to UK trade and investment projects, it gives extensive range of supportive programs, including the Overseas Market Introduction Service (OMIS) and the Passport to Export program. It facilitates SME exporters as well. It copes up with managerial barriers. It established some institution which gives formal training of six months to its clients Small and medium enterprises are also known as micro businesses. Here the number of employees can range from 10 to 250. According to a survey repot of Unites Kingdom 2012, it is concluded that the United Kingdom has its own 99.2% shares in small and medium enterprises. That’s why they are more concern about the development of micro businesses. United Kingdom has specific quota in their budget for SME’s. Government of the United Kingdom has taken certain measures to accelerate micro enterprises. Some of these measures are stated below: Increase the innovation in small and medium enterprises through proper research and development centers. Give them relaxation on the issue regarding intellectual property. Developed successful implementation of Export Credits Guarantee Scheme’s to promote the growth and profitability of Small and medium enterprises. It is difficult to finance small businesses as compare to large scale businesses. Large scale business can finance their business by offering securities in the capital market, but there is no such foundation provided to small scale enterprises. Therefore government should encourage small enterprises by providing those loans on low interest rate. This is an effective way to accelerate economic growth of a country. Minimizes the law and order enforcement or other regulatory burdens for establishing or starting up new micro business. With respect to competitive advantages and role of small and medium enterprises, this study found combinations of opinions. According to literature it has observed that the competitive advantages in larger enterprises have focused more as compare to small and medium enterprises. Government and other policy making institutions should develop certain strategies for SME’s to compete in the global market. Traditional model of competitive advantage cannot be applicable for micro businesses (Donnell et al, 2002, pp. 205-223). Researchers should develop an appropriate competitive business model for the development of small enterprises. There are many studies exist which do not support the importance of small and medium enterprises e.g. small enterprises do not have the tendency to contribute in economic development of the country (Mc Gown, 1999, 99. 35-47). In recent years small and medium enterprises has taken step into the business world. Privatization is also new for them. Exporting their product and services at international level is not that easy for them especially when the market is full of big giants that are competing already. Therefore small enterprises should comprehend all the factors regarding exporting at international level. The characteristic of managerial and firm has an impact on export performance. On the basis of hypothesis this study concluded that firm that has more qualified managers tends to have better export performance. Managers that have foreign experience and have command our foreign languages can enhance export performance. Firms that have innovative products to exports all the time has better export performance as compare to those firms that export the same product from decades. Firms that have trade related knowledge and actively participate in such activities may also have better performance. Firm that is new in the business market could not perform as better as the firm that is operating from many years. Nature of the business and in fact, the product and services they are offering matters a lot. Before getting into international trade the business need to investigate the demand for that product and services in the host country ( McMahon, 2001, pp. 152-164). With respect to managerial characteristic this study concludes that education, experience and foreign languages have strong impact on international trade. With respect to firm characteristic it is stated that innovative product and services and having trade knowledge has positive effect on international trade (Nakos et al, 2012, pp. 23-47). Age of the firm, nature of business, exporting experience, annual sales and numbers of employees, these are the factors that play an essential role in the success of international trade. Exporting is the primary step to enter in international trade. Exporting offers small and medium enterprises, speedy entrance into global markets, but some capital investment is mandatory. It is a superior opportunity to get valuable understanding regarding international trade. Various economic benefits can be achievable by exporting. Exporting is positively associated with financial performance of small and medium enterprises. 1.3 Challenges faced by Small and Medium Enterprises in Developed Countries: It is a difficult task for the small and medium enterprises to trade internationally mainly with limited resources. Small and medium enterprises contribute in the export of the country worldwide (Fletcher, 2004, pp. 289-305). Small and medium enterprises are the fastest emerging business segment in many countries. The exporters of small enterprises are expanding faster at international level and hence contributing a lot in the country’s economic health (Arinaitwe, 2006, pp. 167-178). Obstructions facing by the exporter of SME’s in developing countries are quite rare as compare to the exporters working in developed countries. There are internal and external export barriers. Internal blockades are associated with the organizational resources, capabilities and approach toward international trade whereas external barriers are associated with the foreign rules and regulation, tariffs, customs, documentation processes, exchange rates of the host country etc. Internal barriers are further classified into three main barriers that are informational, functional are marketing related issues that are prevailing within the organization. External barriers are further categorized into economical, political, and environmental obstacles (Leonidou, 2004, pp. 229-304). Exporters of small and medium enterprises in transitional economies faced challenges related to logistics and product quality enhancement whereas exporters of small and medium enterprises in developed economies faced business associated troubles and country differences (Neupert, 2006, pp. 535-545). Small and medium enterprises play its vital role in the exports and economic growth of the country (Fletcher, 2004, pp. 289-305). Therefore, small and medium enterprises cannot be ignored. Common hurdles that occur in exporting are lack of investment, limitations of foreign regulatory authorities, insufficient comprehension of overseas trade practices, deficiency and unfamiliarity of foreign market contracts (Bilkey, 1978, pp. 33-46). Barriers regarding exporting in small and medium enterprises are lack of management skills, limited resources, language problem, cultural dissimilarity and telepathic distances (Farrell, 1998, pp. 13-33). International diversification is a triumphant approach for achieving economic development. Newly Small enterprises in international trade mainly face the problem of liability. This problem can be overcome by increasing the foreign direct investment because it is directly and positively related to the performance. Another problem faced by small and medium enterprises is scarce resources. This problem can be resolved by merger or coalition. Small and medium enterprises have three basic partnership choices. Partnership can be established with the overseas firm. It can be merging with the firms of residence country or with the firms of any third country. All these merging types can help SME firms to overcome lack of monetary and tangible resources easily (Lu, 2001, pp. 565-586). 1.4 Risk faced by UK small and medium enterprises and solutions to alleviate it: By reviewing literature, researcher has concluded certain risks that are associated with small and medium enterprise operating in developed countries especially in the United Kingdom. Making and receiving payment in multiple currencies is standard practice in international trade. Payment in multiple currencies sometimes exposed to exchange rate risk. The one of the biggest challenges facing by small and medium enterprises of the United Kingdom is fluctuation in exchange rate. National SME firms when enters from their domestic market to international market are exposed to such type of risk. This problem should be overcome with the guidance of finance and economic analysts. The most effective way to manage exchange risk is to go for currency hedging process, or they can enter in the forward contract at the time of agreement. Another risk faced by the SME’s is the lack of finances needed for investment. This is one of the big hurdles to achieve growth. Government should provide funds and loans on low interest rate to investors in order to boost their business performance because facilitating small business performance indirectly enhancing country economic growth. Cultural difference is faced by many local firms at the time of international trade. Before trading, firm should research about the cultural differences of the country that is accepted for export. Language is yet another barrier for the business that is involved in international trade. Any misunderstanding due to language or logistic barrier can cause major loss. So this problem can be solved by hiring a professional translator of that specific country. International credit risk is the major concern for the business that is intended to export internationally. A firm needs to check the credit worthiness through credit reference agencies of the foreign firm before going into any export contract because this is the only way to minimize the default risk up to some extent. It is better to ensure that the foreign customer will pay you on determined time, in their local currency and through a proper channel i.e. banks. This is an essential requirement for executing error free transaction between the exporter and the importer. United Kingdom is offering an opportunity to its customers. They can open multi currency account whenever it is needed for international trade. Another major concern is to deal with legal issues in case of default. Government ought to take corrective actions to help their small and medium enterprises in case the foreign company default payment. 1.5 Conclusion: By reviewing literature review it is concluded that small and medium enterprise of developed countries are more exposed to risk as compare to developing countries. Developed country like United Kingdom has around 90% of its investment in small and medium enterprises according to the United Kingdom statistical report therefore they are more concerned for promoting such businesses. Many foreign individuals come to United Kingdom and establish small businesses which contribute a lot in the gross national income of United Kingdom. Increasing in gross national income is good for economic growth of the country. Small and medium enterprise of any developed country is exposing to exchange rate risk, financing risk, cultural differences and general business risk. These risks are associated with international trade. Therefore companies may face it while involving in international trade or exporting. Small and medium enterprises are contributing a lot in the economic health of a country in terms of export, gross domestic product GDP etc. Exports have impact on country’s balance of payment. If exports are greater than import then it means the economy is flourishing. It is also concluded that firm and managerial factors of small and medium enterprises have an impact on export performance of the country, therefore managerial and firm factors need to be considered for achieving better economic performance. 1.6 Limitations and Recommendations: Government of the United Kingdom should make standard policies for the development of small and medium enterprise. Business managers, policy makers, business educators, and the most essentially business researchers should develop effective and comprehensive business model to beat up the barriers that came across for small enterprises during international trade. Managers for dealing the export section of small and medium enterprises ought to be well qualified, trained and experienced in the same field. Government should take corrective measure when foreign traders default and properly cooperate with the small and medium enterprises to resolve the issue. Finances and debt should be offering at low lending rate to investors in order to boost up economic growth. Relaxation should be given in tariffs, customs and above all strict and lengthy documentation procedures. International trade should be encouraged because it’s a better way to establish a place in business market. Small and medium enterprises need to maintain export product quality with time to time innovation. According to literature, it has observed that small businesses in the United Kingdom are more expose to general business risk, so related regulatory authorities should work over it. Country difference is another big problem in the United Kingdom. It is around 31% in the region so it should be resolved. Deficiency of financial resources can be overcome by merging or participating with local operating firms, or with the firm that are operating in host country or with the firm that operate in third country. Operating a successful international trade entails knowledge to administer distant by means of various casual and formal contractual business associations, acquiring acquaintance with diverse business regulations, civilizations, traditions, logistics, and establishing suitable resolution for all the markets and industry in which the firm operates. Incapability to make contact with potential customers operating in the host country. Excessive transportation costs act as a barrier for small and medium enterprises in exporting. So all the above limitations can better be sort out in order to achieve better economic performance through small and medium enterprises. References 1. Arinaitwe, S. 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