The Financing of Small Businesses in Saudi Arabia - Essay Example

Taking into account your dissertation project, develop a research proposal and discuss your conceptual framework, research strategy and methodology in details – The financing of small businesses in Saudi Arabia 1. Conceptual Framework 1a. Background The development of globalization in markets around the world led to the differentiation of the criteria of competitiveness in all business activities. Firms operating in various industrial sectors have to allocate funds in order to improve their position in the market; in this context it has been proved that firms of different size have not the same chances to allocate the funds required for the establishment of their strategies. Moreover, differences have been identified between the measures taken by governments in developed and developing countries regarding the limitation of inequalities in the support offered to entrepreneurs worldwide; the form and the level of governmental support to business activities has been also found to be related with the size of the firm involved – a fact that can offer the chance to foreign firms to enter the market – domestic firms that are already well developed are also likely to increase their power (Keren et al., 2002, 17). It seems that the financing of small firms can be a challenging effort in most markets internationally. Of course, the personal involvement of the entrepreneur – owner of small firm – in the relevant effort could increase the chances for success – however, a positive outcome cannot be guaranteed. Various factors, like the local culture and ethics and the position/ strength of the national economy, seem to influence the effectiveness of the particular initiatives. The above issue is highlighted in the study of Busenitz et al (2001). The above study refers to the effectiveness of strategies of small firms in China; it has been proved that ‘younger business owners with a higher need for achievement, greater commitment, and perceived limitations in physical facilities were more likely to expand’ (Busenitz et al., 2001, 12). From a different point of view, it is supported that ‘differences in environmental conditions in different country markets, in terms, for example, of market size and growth, rate of technological change, or barriers to entry, may also lead to differences in strategy’ (Douglas et al., 1989, 440). The view of Douglas et al. (1989) highlights the potential involvement of a series of factors in the development of business activities – in accordance with this view, the local culture can affect business plans – almost at the same level with the size of the firm. However, this view could be possibly related with specific countries – those with a strong and complex cultural framework, like in the case of China. Indeed, in western countries where culture and traditions are not likely to have a decisive role in the development of business activities, different factors seem to influence the effectiveness of business initiatives. More specifically, in a research developed in small and medium size firms in Germany it was proved that ‘small- and medium-sized firms are unable to participate in fairs or trade shows overseas, partly due to financial and partly due to other factors summarized under the heading of "lack of know-how"’ (Dichtl et al., 1990, 29). In other words, the effectiveness of small firms’ strategic plans can be depended on a series of factors – in accordance with the local culture, social principles and ethics and the common trade practices as developed in each particular country. The financing of small firms – as a tool for the development of their activities – is also depended on a series of factors. These factors could be summarized as follows: a) position of small firms in the national economy – level of their participation in the development of business activities across the country, b) support of government to the small firms, c) level of competition – threat by foreign enterprises, d) turbulences in the local and the international market – the latter can affect the national economy and therefore lead to pressures on small firms, e.g. increased taxation, limitation of profitability and so on and e) the level of participation of the private sector in the financing of the activities of small firms. Current study focuses on the examination of all aspects of financing of small firms in Saudi Arabia. In the literature it is noted that the concentration/ limitation of industrial activities in the specific country prohibits entrepreneurs from involving in various business projects. More specifically, because the local economy is heavily based on oil (Agmon et al., 1994, 2) it is difficult for other entrepreneurial sectors to be developed. On the other hand, significant efforts seems to be made by the government of the country towards the increase of financial support of small businesses (AbuAmara et al., 1999, 47); however, the effectiveness of these plans can be doubted – no specific benefits seem to have been achieved through the application of these plans up today. The level of financing of these firms across the country is limited since there are no effective initiatives by the state – the private sector – referring to individual investors, both locals and foreigners - seems also to avoid involving in the financing of small firms. Seeking for international expansion – as suggested by Moore (2008, 449) seems to be the most effective solution for the small firms in Saudi Arabia in order to gather the funds necessary for their survival. Literature Review In order to understand the potentials for financing of small firms in Saudi Arabia it would be necessary to identify the business environment in which these firms operate; the development of commerce in Saudi Arabia has been closely related with the income from oil; in the past, this income has been significant supporting the expansion of business and governmental projects across the country; however, from 2000s onwards the oil incomes have been reduced leading to the gradual limitation of business activities in Saudi Arabia. Firms of all sizes – including the small businesses – were also affected by these changes in the country’s business environment. This phenomenon is highlighted in the study of Al-Arjani (2002). The decline of the profits from oil showed the dependency of the national economy on oil and its derivative; it also made clear that the existed macroeconomic environment was not stable enough in order to absorb the relevant turbulences; as a result, the limitation in the profits from oil affected the development of business initiatives – mostly through the reduce of funds available for the realization of various business projects (Warnock et al., 2008). The specific issue is also highlighted in the study of Agarwal et al. (2004) where it is made clear that ‘equity market development favors firms equity financing over debt financing, while banking sector development favors debt financing over equity financing, as one would expect’ (Agarwal et al., 2004, 57); therefore, the level of development of Saudi Arabia economy would directly affect the financing potentials of all firms operating across the country. The importance of the market conditions for the development of business projects is also highlighted in the study of Smith et al. (2009); the above study focuses on the economies of emerging markets but it can be also used in also to understand the relationship between the economic environment and the firms’ financing potentials; in accordance with Smith et al. (2009, 223) ‘the composition of capital inflows to emerging market economies tends to follow a predictable dynamic pattern across the business cycle’; in this context, the financing of firms of various sizes within a specific market could be predicted taking into consideration the capital inflows to the specific market. However, the limitation of business financing in Saudi Arabia is not related only with the local macroeconomic problems; the global financial crisis of 2007 onwards has been a significant factor towards the limitation of funding of business projects in Saudi Arabia – as in all countries worldwide (Pistor, 2009, 552). In the literature, the size of firms has been found to be important regarding their financing potentials; the research of Beck et al. (2008) led to conclusion that ‘larger firms more easily expand external financing when they are constrained than small firms’ (Beck et al., 2008, 467). The size of firms seems to be critical for the analysis of their strategic decisions; for this reason, Wu et al. (2007) note that ‘equity financing is important in financing growth but its special features in small business have not been well addressed in the finance or entrepreneurship literature’ (Wu et al., 2007, 875); it is rather the fact that the financing of small business is more difficult than that of large firms that have led theorists and researchers internationally to focus on the financing problems of large firms rather those of small firms. However, the financing framework of small firms has been analyzed in certain studies; one of these is that of Vos et al. (2007); the above researchers examined the financing initiatives of SMEs owners and came to the conclusion that ‘SME owners are less likely to seek or use external financing’ (Vos et al., 2007, 2648). On the other hand, it seems that there is an advantage of the large firms towards the small firms in regard to the financing changes; this advantage is highlighted in the study of Beck et al. (2006) where it is made clear that ‘larger, and foreign-owned firms report less financing obstacles’ (Beck et al., 2006, 932); However, the role of SMEs in the development of local economies cannot be denied; in the study of Cull et al. (2006) it is noted that small firms ‘can help to mobilize significant new resources for economic development’ (Cull et al., 2006, 3017); for this reason, the firms of small size should be financially supported through appropriate customized funding projects. From another point of view, Colombo et al. (2005) notes that firms that are funded only by their owners may reach a high level of development – even similar with large firms that are highly supported by external funds. However, the potentials for future growth seem to be higher to the firms that receive external funding. More specifically, the research of Colombo et al. (2005) led to the conclusion that ‘bank debt-financed firms are not larger than firms created only through founders personal savings, while firms that received external private equity financing have greater start-up size’ (Colombo et al., 2005, 243); this means that if a government wishes to support the development of small firms in the long term then it needs to provide to these firms adequate financial support; the arrangement of bank-supported financing schemes for the small firms would be another strategy available to the governors in countries where the specific mode of entrepreneurship is promoted. The size of firms is not the only criterion for the success of business initiatives – including the effort to locate the funds necessary for the establishment or the expansion of a particular firm; the leadership style is also of crucial importance for the effective strategic management of firms – of all sizes. This issue is highlighted in the study of Schwienbacher (2007) where it is noted that ‘specific entrepreneurial characteristics may ultimately affect the shape of firms as they may pursue different strategies to achieve similar goals’ (Schwienbacher, 2007, 753). At the next level, it is noted that ‘a firm’s demographic characteristics such as age, turnover, industry, and type of legal ownership’ (Soufani, 2002, 239) can affect the performance of this firm’s strategic decisions – including the financing ones. At this point, it would be necessary to identify the type of financing that is most appropriate for the small firms in Saudi Arabia; factoring would be a potential financing mode for small firms in the specific country; in accordance with Klapper (2006) ‘factoring is larger in countries with greater economic development and growth and developed credit information bureaus’ (Klapper, 2006, 3111); in other words, factoring could be used as a financing scheme for small firms in Saudi Arabia but only under the terms that appropriate support would exist for the development of this scheme’s various parts. Another type of financing, the bank loans would be proposed to small firms owners across Saudi Arabia; in the study of Bosse (2009) it is noted that ‘bank loans are a common source of financing for small firms’ (Bosse, 2009, 183); however, it is made clear that the local government need to provide the necessary support to the small firms that decide to use the specific financing scheme making sure that the relevant agreements will be fair for both parties. 1b. Aims and Objectives This study is developed in order to offer clear answers to the following issue: which is the current level of financial support offered to small businesses in Saudi Arabia. A series of additional issues are also going to be addressed – as being related with the study’s main issue as stated above. In this context, the following questions are going to be answered through this study: a) which is the current position of small businesses in Saudi Arabia market, b) which are the challenges that small businesses in Saudi Arabia have to face, c) which are the main supporters of these businesses in Saudi Arabia, d) which methods could be used by the owners of small businesses in Saudi Arabia in order to gather the funds necessary for the development of their business activities, e) which are the advantages and disadvantages of the methods currently used for the financing of small businesses in Saudi Arabia, f) which is the role of the state in the financing of small businesses in Saudi Arabia, g) is there any participation of foreign investors in the financing of small businesses in the particular country and h) which are the prospects for the financing of small businesses in Saudi Arabia in the future – are there any chances of further development of the businesses of this size? 1c. Importance of the study This study can be characterized as quite important mostly because it offers valuable information on a sector of Saudi Arabia economy that has not been adequately examined and evaluated up today. Despite the fact that various aspects of the specific country’s economy are presented in studies developed internationally, still the reference to the study’s main issue – financing of small businesses in Saudi Arabia – is quite limited. At this point it should be noted that the specific business sector has been found to have a significant importance for the stabilization of the Saudi Arabia economy; for this reason, the examination and the analysis of issues referring to the particular sector is considered to be valuable – helping to the development of assumptions on the prospects of the country’s economy in the future. Furthermore, through the empirical research – survey – developed for this study it will be possible to identify the problems related with the specific sector – referring to the challenges that the entrepreneurs in this sector have to face on a daily basis. In this way, it will be easier for the local authorities to develop appropriate plans for the support of businesses operating in the particular sector. 1d. Criteria of effectiveness of the study The effectiveness of the study is based on the following criteria: a) the time issue – an effort will be made so that all resources used for this study to be as recent as possible reflecting the current aspects of the study’s main issue, b) research methods – the combination of three different approaches for the research over the study’s main issue is considered as a factor that ensures the credibility of the results produced, c) research sample – individuals with different type of participation in small businesses have been chosen as a sample of the survey conducted for this study – this fact further support the credibility of the results produced, d) evaluation of findings – the results of the empirical research – survey – will be analysed using the views of the literature but also the statistics released by governmental organizations and non-governmental institutions – the assumptions made on the study’s main issue are expected to be adequately justified. 2. Research Strategy The research developed for current study could be divided into three different approaches – as analysed in the sections that follow. The simultaneous use of three research methods is expected to increase the credibility of the results produced. It should be noted that minor alterations on these three methods may occur during the development of the study in case that this initiative is considered as necessary – under the influence of changes in the current market conditions or other factors that could possibly influence the development or the credibility of the study. 2a. Research on published statistical data The statistical data released by governmental and non-governmental organizations will be used for this study – at the level that the relevant material is considered as valuable for the examination and the analysis of the study’s main issue and its sub-issues – as presented in section 1b above. The choice of the statistical data chosen for this study will be based on the following two criteria: a) their relevance with the issues under examination and b) their date of publication/ reference, i.e. data that were released recently but refer to the previous decade are not considered to offer valuable information on the study’s issues. 2b. Research on literature Existing literature will be examined in order to identify the views and the pieces of information that are valuable for the development of this study. Three criteria will be used when choosing the literature that will be employed in this study: a) the relevance of each study with the issues under examination, b) the justification of the views/ facts presented – i.e. it will be examined whether the justification of these views/ facts is effective and adequate or not and c) the time of publication of each specific work/ study. 2b. Questionnaire The third method used in the context of the research developed for this study will be the survey. In fact, two different questionnaires will be employed in current study. More specifically, a questionnaire will be distributed among the employees of different levels in small businesses in Saudi Arabia. Another questionnaire will be distributed among the owners of small businesses across the country. The views of the participants will be evaluated using the literature and the statistical data – also employed in the research as explained in the previous sections. 3. Methodology – Analysis of empirical research 3.1 Research methodology overview The research developed for the needs of this study is divided into three different parts – see section 2 above. One of these approaches – the empirical research – needs to be particularly analysed in order to understand its value towards the examination of the study’s issues. Emphasis is given on the range of sample used as well as on the methods employed for the evaluation of the findings – in the context explained in the sections that follow. As explained above, two different questionnaires will be designed for this study; one of them will be distributed to the owners of small businesses in Saudi Arabia and the other one will be sent to employees of these firms – both questionnaires will be distributed through the Internet – e-mail – in order to minimize the time required for gathering the relevant data. Each questionnaire is expected to have 10 questions; each question will be followed by three potential answers – the participants will be asked to choose the one that best suit to their perceptions. A time limit of 5 days will be given to the participants for the return of the questionnaire – again by e-mail. The whole procedure is expected to take 15 days – 2 days for developing and distributing the questionnaire – 5 days to gather the completed questionnaires and 8 days to examine and evaluate the findings. 3.2 Characteristics of participants There will be no differentiation of the participants regarding their age or gender. Employees in small firms in Saudi Arabia will be asked to participate in the study with no limitation. Of course, their characteristics – age, gender, years of working in the particular position, will be taken into consideration when evaluating their views. For the owners of small businesses there will be equal chance to participate in the survey – again no limitation on criteria like gender or age will exist. 3.3 Analysis and evaluation of data The findings of the research – developed in the context described above – will be analysed and evaluated using both the literature and the statistical data released on the issues under discussion. The specific task will become easier by developing each phase of the evaluation separately: a) at a first stage the findings of the survey will be categorized, b) the main points in literature and statistical data will be highlighted and c) the comparative discussion over the results produced by each research approach can proceed with no delay. The above procedure may be slightly differentiated in accordance with the progress of the study, the level of participation, the availability of information on the issues under discussion and the rate of retrieval of the material required for the development of the study. References/ Bibliography Aaboen, L., Lindelof, P., Koch, C., 2006. Corporate governance and performance of small high-tech firms in Sweden. Technovation, Volume 26, Issue 8, pp. 955-968 AbuAmara, Y., Garner, D. (1999) Accounting services, the Islamic Middle East, and the Global economy. Greenwood Publishing Group Agarwal, S., Mohtadi, H., 2004. Financial markets and the financing choice of firms: Evidence from developing countries. Global Finance Journal, Volume 15, Issue 1, pp. 57-70 Al-Arjani, A., 2002. Type and size of project influences on number of bidders for maintenance and operation projects in Saudi Arabia. International Journal of Project Management, Volume 20, Issue 4, pp. 279-287 Agmon, T., Drobnick, R. (1994) Small firms in global competition. Oxford University Press US Beck, T., Kunt, A., 2008. Financing patterns around the world: Are small firms different? Journal of Financial Economics, Volume 89, Issue 3, pp. 467-487 Beck, T., Kunt, A., Laeven, L., 2006. The determinants of financing obstacles. Journal of International Money and Finance, Volume 25, Issue 6, pp. 932-952 Bosse, D., 2009. Bundling governance mechanisms to efficiently organize small firm loans. Journal of Business Venturing, Volume 24, Issue 2, pp. 183-195 Busenitz, L.W., Lau, C.M. (2001). Growth Intentions of Entrepreneurs in a Transitional Economy: The Peoples Republic of China. Entrepreneurship: Theory and Practice, 26(1), 5-20 Calof, J.L. (1993). The Impact of Size on Internationalization. Journal of Small Business Management, 31(4), 60-69 Cassar, G., 2004. The financing of business start-ups. Journal of Business Venturing, Volume 19, Issue 2, pp. 261-283 Colombo, M., Grilli, L., 2005. Start-up size: The role of external financing. Economics Letters, Volume 88, Issue 2, pp. 243-250 Cull, R., Davis, L., Lamoreaux, N., 2006. Historical financing of small- and medium-size enterprises. Journal of Banking & Finance, Volume 30, Issue 11, pp.3017-3042 Dichtl, E., Koeglmayr, H.G., Mueller, S. (1990). International Orientation as a Precondition for Export Success. Journal of International Business Studies, 21(1), 23-31 Douglas, S.P, Rhee, D.K. (1989). Examining generic competitive strategy types in U.S. and European markets. Journal of International Business Studies, 20(3), 437-453 Glass. G.V. (Ed.) (1976) Evaluation studies: Review Annual. Vol.1. London: Sage Keren, M., Ofer, G. (2002). The Role of FDI in Trade and Financial Services in Transition: What Distinguishes Transition Economies from Developing Economies? Comparative Economic Studies, 44(1), 15-42 Klapper, L., 2006. The role of factoring for financing small and medium enterprises Journal of Banking & Finance, Volume 30, Issue 11, pp. 3111-3130 Moore, C. (2008) Managing small business: an entrepreneurial emphasis. Cengage Learning EMEA Patton, M.Q. (1981) Creative Evaluation. Beverly Hills: Sage Publications Pistor, K., 2009. Global network finance: Institutional innovation in the global financial market place. Journal of Comparative Economics, Volume 37, Issue 4, pp. 552-567 Smith, K., Valderrama, D., 2009. The composition of capital inflows when emerging market firms face financing constraints. Journal of Development Economics, Volume 89, Issue 2, pp. 223-234 Soufani, K., 2002, On the determinants of factoring as a financing choice: evidence from the UK. Journal of Economics and Business, Volume 54, Issue 2, pp. 239-252 Schwienbacher, A., 2007. A theoretical analysis of optimal financing strategies for different types of capital-constrained entrepreneurs. Journal of Business Venturing, Volume 22, Issue 6, pp. 753-781 Vos, E., Yeh, A., Carter, S., Tagg, S., 2007. The happy story of small business financing. Journal of Banking & Finance, Volume 31, Issue 9, pp. 2648-2672 Warnock, V., Warnock, F., 2008. Markets and housing finance. Journal of Housing Economics, Volume 17, Issue 3, pp. 239-251 Wu, Z., Chua, J., Chrisman, J., 2007. Effects of family ownership and management on small business equity financing. Journal of Business Venturing, Volume 22, Issue 6, pp. 875-895 Questionnaire A. Employers 1. Which is the current position of your business in terms of the funds available for the realization of various organizational plans? a. Good b. Rather satisfactory c. Bad 2. Which is the level of financing that your business currently need? a. High b. Low c. A financing of 10% of operational costs would be required 3. Which is the financial support offered to your business by investors the last 3 years? a. No financing received b. Rather satisfactory c. High 4. Is there any plan for your firm’s financing currently in progress? a. Yes b. No c. Discussions are made 5. Are the measures required for the development of your firm’s profitability difficult to be implemented? a. Yes b. No c. It is a personal view/ not particularly difficult 6. Would you be willing to seek for financing through an appropriately customized governmental scheme? a. Yes b. No c. Under certain terms 7. Which could be your firm’s financial status in case that the state would support your business projects? a. Very good b. A few operational problems would be resolved c. Prospects would exist for future growth 8. Which could be the role of the state in the financing of your business? a. Decisive b. Not important c. It depends on the level of support 9. Would you decide to give part of your business share in order to allocate the funds required for the development of the business plans? a. Yes b. No c. Under certain terms 10. Which would be your decision in case that your business would not be financially supported? Referring to the 5 years that follow. a. Continue b. Stop the business activities c. Seek for alternative plans B. Employees 1. Which is the current position of your firm in terms of the funds available for the realization of various organizational plans? a. Good b. Rather satisfactory c. Bad 2. Which is the level of financing that your firm currently need? a. High b. Low c. A financing of 10% of operational costs would be required 3. Which is the financial support offered to your business by investors the last 3 years? a. No financing received b. Rather satisfactory c. High 4. Is there any plan for your firm’s financing currently in progress? a. Yes b. No c. Discussions are made 5. Are the measures required for the development of your firm’s profitability difficult to be implemented? a. Yes b. No c. It is a personal view/ not particularly difficult 6. Would your employer be willing to seek for financing through an appropriately customized governmental scheme? Please give your personal view. a. Yes b. No c. Under certain terms 7. Which could be your firm’s financial status in case that the state would support business projects of your employer? a. Very good b. A few operational problems would be resolved c. Prospects would exist for future growth 8. Which could be the role of the state in the financing of your firm? a. Decisive b. Not important c. It depends on the level of support 9. Would your employer decide to give part of his business share in order to allocate the funds required for the development of the business plans? a. Yes b. No c. Under certain terms 10. Would you continue working for your current employer in case that his business would not be financially supported within the next 5 years? The question refers to the case that this support is necessary for the continuation of business activities. a. Yes b. No c. Under certain terms Read More