An Analysis of Factors Leading to Failure of Small Businesses in The Amur Region - Dissertation Example

?LITERATURE REVIEW Small Enterprise in the Russian Context Small businesses are highly regarded as important drivers of a country’s economy. This is the reason why many governments, in their economic policies, encourage small-scale entrepreneurship. Russia is not an exception. In its policymaking, there is an emphasis on this area, particularly given the fact that the country is experiencing some transition brought about by the political upheavals of the 1990s. The Organization for Economic Co-operation and Development (OECD) has published a report in this aspect, explaining how small businesses play a crucial part in the Russian attempts at creating dynamic, new and small firms out of the fragments of the old enterprises in order to restructure the economy and promote growth and productivity. This publication is important in outlining the background of the Russian policies for small businesses as well as the current business landscape in the country. For instance, there is the discourse devoted on how the business and entrepreneurship climate are currently difficult as demonstrated by the small number of small firms, the low levels of fixed capital investment as well as the capital flight that supposedly exceeded an estimated $15 billion annually. (p. 73) With this OECD (2002) report, several general factors are clearly identified that led to the successes and failures of small enterprises in Russia. In investigating the Amur experience, the corpus of literature of the regional business landscape is essential in depicting the dynamics of setting up and running businesses from policy standpoint as well as from cases of entrepreneurial outcomes. A World Bank research group argued that local government policies are crucial in the growth of small enterprises and that the “regional data on small enterprises per thousand residents is considered an adequate proxy for local government support for small businesses.” (De Melo, Ofer and World Bank 1999, p10) Several regional cases were identified, compared and assessed. The outcome is an extensive investigation on policy differences, policy reforms, among other economic and political variables that were effectively linked to business performances. Extensive discussion of universal policy areas that cover small-sized businesses are also available in the publication, OECD Studies on SMEs and Entrepreneurship High-Growth Enterprises: What Governments Can Do to Make a Difference. Specific indicators on entrepreneurship that have been derived by OECD from qualitative information on laws and regulations, among other related sources could be adopted by this study at it provided clear roadmap in effectively surveying national and local administrations. These indicators and the methodologies employed to identify them are contained in the OECD’s report called Measuring Innovation (2010). More recent research covering Vladimir Putin’s regime include Ganske’s (2008) book on Russia’s political economy. This work cited the economic reforms that are currently in place as well as several important factors that make small firms fail such as adverse local regulations (licensing, certification, tax inspections, fire inspections and sanitary inspections) and tax policies. (p16) This latter point was further expounded by Sakwa (2004), who argued that although Putin sought to tackle the bureaucratization of the economic landscape and that so far only two large cities have demonstrated some semblance of business dynamism, Moscow and St. Petersburg. (p. 206) Fish (2005) devoted much of his work on documenting the challenges of the effect of bureaucracy on small businesses. The research done by Dana et al. is an excellent resource on current business statistics in Russia since it contains critical examination of the data, particularly the numbers, which according to the authors tend to be inflated. One of the reasons given for this argument is that small business owners often “force onto de facto employees the status of individual entrepreneurs for tax purposes.” (p547) The implication of this claim for this study is important because it suggests a research model that does not rely too much on the government-issued statistics and the need to investigate based on anecdotal evidences. The forecast of the Business Information Agency, as depicted in the table below demonstrates the unfortunate trend for small businesses in the Amur Region from 2001 to 2010 (see Table 1). Table 1: Small Business Forecast (Source: BIA, p47) The trend appears to be dismal as the number of small enterprises dwindled in the past years. The same can also be said in other areas that characterize the region’s business landscape, such as the financial, retail, service, investment, income and foreign trade forecasts. The impact of the deteriorating economic landscape is best reflected in the recent outmigration trend that happen in the Amur region. Information on this pattern is comprehensively tackled by BIA as well as by McColl (2005), who explained that the region has experienced a steady migration outflow to European Russia. (p31) Shaw (1999) delved more onto specifics, noting that “the withdrawal of many government subsidies, rising transportation tariffs, the reduction of the military presence, the closure of some economic activities” have resulted in the catastrophic outmigration patterns. (p158) Reddaway (2005) in his investigation of the current local statistics based on the state register reported several important information with regards to small enterprise, particularly on the annual surveys conducted by the state per region, are sufficiently covered. More importantly, however, was the author’s analysis of the growth in small business sector between 1997 and 2002, which he attributed to two factors: new business activity and the legalization of preexisting informal activity. (p248) Out of these findings he was able to report the challenges that the researchers would face when investigating small businesses and their failures. An issue that he was able to clearly identify was that respondents often rank highly the problems that are identified by businesses everywhere, which could be not representative of their own circumstance. (p248) With this factor, he reinforced the previously held notion that state-released data can be unreliable at times, stressing that “as a rule, national statistics do not supply data on the conditions influencing firm creation and survival, so researchers have to collect their own.” (p248) Research Framework This study would work around the conceptual framework that is based on several models and concepts found in the existing literature on the subject. It is illustrated in the following diagram: Fig. 1: Conceptual Framework External Factor: Governmental Policies (economic, infrastructure, social support etc.) It is important to note that small businesses are driven by government support, the availability of resources, labor, supply and demand, among other related economic variables. Rondinelli and Cheema (2003) argued that the growth of small enterprises are highly dependent on the national economic growth and on government policies “that create an environment conducive to private enterprise development.” (p44) With the way things are going for Amur’s small enterprises, are more likely failing in some or all of the following reforms: fiscal and monetary policies; investment incentives; efficient market mechanisms and competitive practices; pricing policies for basic commodities and services; wage policies and merit reward systems; programs that encourage domestic market expansion; increase in consumer purchasing power and income; efficient and fair procurement policies, among others. (Rondinelli and Cheema, p44) These had been the recommendations of various economic experts decades ago especially for transitioning countries. Bulloch (1988), for example, has underscored that public policy is the most important element in order for small businesses to succeed – that governments must pursue those that address shortage of labor, increase in prices, restrict supply and demand and those that create new forms of regulation and red tape. (p6) Another important aspect on the external barriers to small business failure in Amur is the limited evidence with regards to the lack or sufficiency of capital available to them. This is important because previous research underscore the relationship between the availability of capital to the improvement of business success, particularly in the areas of performance, output, human resource development and overall profitability. (Gatewood et al. 2004; Lakwo 2007; and Ojo 2009) With this in mind, this study will investigate whether microfinancing is adequate in Russia and the result could lead to the identification of several recommendations for improvement. The extant literature that compiles quantitative barriers to entrepreneurship in Russia could also prove to be invaluable in this area. There are those that were demonstrated by Hibou (2004), Rutkowski and Scarpetta (2005), and the recent OECD (2009) economic survey of the Russian Federation, which declared, why there is a need for administrative reform now. (p140) These barriers of the Russian experience could further be cross-referenced with several other studies undertaken by the OECD (2010) on small-scale entrepreneurship. For instance, there was the OECD’s studies on small and medium enterprises, which not only contained specific themes such as barriers to small-scale entrepreneurship but also the methodologies that were utilized in order to investigate, assess and evaluate performances. Specific cases were listed by Tassiopoulos’ (2009), whose work on the profile of Russian entrepreneurs as well as the state’s policies governing small enterprises are peppered with anecdotal evidences such as the depiction the Russian small-scale businessman as “an educated man, often with an engineering or technical background.” (p430) A similar study was undertaken by Nelson and Kuzes (1995). However, it focused on economic reforms that have been introduced since the fall of the Soviet Union. An interesting contribution of this work is the outlining of several variables that affect policymaking on small-scale business in the country. The identification of the economic and political variables as the main facilitators for successes and failures in business is particularly interesting and helpful. It is in this regard that the authors were able to posit the Western influence on the kind of reform that Russian authorities have implemented that could possibly affect the current business landscape positively. (p. 114) The withdrawal or the late implementation of reform and state support will aggravate the internal factors that will be outlined in the succeeding section. When the state fails to offer support both in policies and actual support mechanisms, business owners, on their own, would never acquire the kind of maturity that enable organizations to succeed in business. (p223) This argument is best understood within the context of the model posited by Churchill and Lewis (1983), who explained that business is a five stage process: 1) existence, 2) survival, 3) success, 4) take-off, 5) resource maturity. The public and private sector partnership is crucial in each of the five stages. Entrepreneurs must recognize this just so they could take advantage of the opportunities that are being provided by the state. Internal Factors Butler emphasized that small business owners often lack the experience of starting and managing their small organizations especially in terms of direct personal and financial involvements along with their associated risks. Many studies have already demonstrated this fact. Van Auken, Gaskill and Kao (1985), for instance, stated that experience has a positive relation with the growth of a small firm in its early stages of existence, arguing that the entrepreneur’s experience allows him to successfully obtain support and assistance from bankers, venture capitalists, suppliers, cosultants and consumers. (p46) Pride, Hughes and Kapoor (2008) also highlighted how inexperience could lead to failure because small entrepreneurs fail to address capital, management and planning tasks, arguing that the lengthy start-up phase could not afford a cash-flow obstacle that could often lead to others. (p188) They cited the case of why small start-up Internet firms failed – that once they failed to meet their financial backers’ expectations, they are denied a second wave of investment funds to continue being profitable firms. (p188) Undoubtedly, inexperience can lead to mismanagement. When money, time, personnel and inventory are not managed effectively, the business will fail. (p188) Inexperience can also cover ignorance of the economic laws and failure to analyze markets and act on competition. According to Awe (2006), there is a need to constantly innovate in order to achieve competitive advantage: competitors create new technologies, products and services that require an entrepreneur to improve on his business in order to acquire, satisfy and maintain customers. (p192) With no experience and perhaps coupled with the lack of the innovative qualities of seasoned entrepreneurs, a new business owner is always at a risk being led to market irrelevance.. There are many studies that have investigated the characteristics and experiences of self-employed individuals and how they are related to business success. For example, Kumar cited 21 important skills and personality traits that are shared by many successful entrepreneurs, which include risk-taking, independence, the ability to explore opportunity, flexibility, and creativity, among others. (p40-41) There is also Wee, Lim and Lee’s (1994) paradigm for entrepreneurial study that can guide this research in understanding several factors that lead to the small business failure (see Fig. 2). Concept of Entrepreneurship Model (Wee, Lim and Lee, p43) This model, according to its creators, explains entrepreneurship from a general to specific viewpoints: say, managerial behavior can be investigated in its specific areas such as leadership, interpersonal skills, organizational capability, human-resource management, problem-solving, etc. (p42-43) This strategy supposedly can explain entrepreneurial behavior that partly determines business failure and success. Hopefully, the result, in addition, with the external indicators outlined previously can depict a more comprehensive analysis of the issue being tackled by this study. Based on this entrepreneurial model, I hypothesize that experience, personal traits and skills are crucial for small-scale entrepreneurs to succeed because they facilitate and magnify the effects of opportunities provided by external factors such as financing, training support, and market-driven opportunities. In addition they also cultivate a healthy attitude towards risks. This hypothesis is supported by Shane’s Entrepreneurship Theory, which argued how an individual’s capacity to identify and take advantage of opportunities provided by external factors is not enough. Instead, there is a need to improve on an entrepreneur’s capacity to access and process information and act on them in terms of risk. He explained this excellently in his “information asymmetry” concept, which according to him allows entrepreneurs to recognize opportunities by knowing things about the opportunities as well as a systematic method in exploiting them, which an ordinary entrepreneur do not know. (p165) This aspect to the entrepreneurship theory is very important because it addresses the issue of generality. The element of “information” and the ability to access and make use of them can enable Russian entrepreneurs to navigate the risks that are unique to their own experience. The opportunities and risks are created by factors that are distinct in Russia or in the Amur region, but not knowing about this reality could lead businessmen to fail. Some scholars explained this in the concept called cognitive complexity. Vermeulen and Curseu, for instance, stressed that the integration of information and use of it in the decision making process indicates the richness of the representation that has been developed by the entrepreneur about a particular decision situation. (p162) No matter how this is called, this concept underscores how personal traits and skills can lead to business failure. All in all, the body of literature revealed that failure in small businesses can result from both external and internal factors. Opportunities or the lack of them are results of the governmental efforts and the external environment. Now, according to the extant literature, it is up to the entrepreneurs to identify these opportunities and surpass the challenges. Furthermore, entrepreneurs differ in the way they run their businesses and that their skills and capabilities determine the degree in which they will succeed. However, existing negative projections of Amur’s small business sector, underscore a troubling trend – that the external factors may have a bigger role to play in the consistently dwindling number of small businesses in the region. This study will attempt to investigate this further. References Awe, S 2006, The entrepreneur's information sourcebook: charting the path to small business success, Libraries Unlimited, Westport, CT. 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