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Small And Medium Enterprises In The Third World


Lessons of the past tell us that a financial crisis is rarely a short-lived isolated event, but more a series of traumas that merge together. In August 2009, a crisis had begun with worries about sub-prime mortgage lending; resulting in a credit crunch as liquidity dried up; causing central banks to interfere on a massive scale. Collapsing banks had forced the governments to offer financial aid to bailout the struggling financial institutions.

In the years 2004 – 2006, interest rates in the US had risen to 5.35%; a 4.35% increase, causing a hold back in the US housing market. Homeowners began to fail to pay their mortgages, especially owners whom when interest rates were low, they were barely able to make the payments. Sub-prime loans’ (a loan given to poor credit history clients with much higher interest rates) failure to pay rates rose to record levels. The financial system was affected by the impact of these payment failures, where banks and investors were offered to buy the mortgaged property as a repayment method. (BBC NEWS – BUSINESS)

The current credit crisis was linked by most analysts to the sub-prime mortgage business, in which to show a strong lending history, US banks gave poor credit history clients loans at a high risk. Sub-prime mortgages, bonds, assets and other loans were bundled into portfolios called Collateralised Debt Obligations (CDOs) and sold to global investors. Rising interest rates and falling prices of houses, lead to a high number of people who cannot repay their mortgages, causing investors to suffer losses, and making them reluctant to take on more CDOs. (See Figure 1) (BBC NEWS – BUSINESS)

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Figure - Source BBC News 2009

Credit rating agencies (an agency that evaluates risk on issued securities, which reflects its credit quality) where trusted commentators on credit risks of companies, shares and bonds. Based on the current financial market performance, these agencies turned to be flawed and dangerous to the global financial systems, because of conflict of interest (their job, what incentives them to rate) governance of the organisation and the rating organisations themselves (employee experience). (Financial Times, Tim Stone,March 2008) “... the treasury committee grilled representatives of the three largest credit rating agency ...” ( Financial Times, November 17 2008)

The credit markets froze as banks became hesitant to lend to each other, not knowing how many bad loans the opposing side (other banks) has and is trying to sell them. (See figure 2) The impact of the sub-prime mortgage crisis is quickly shown to have implications beyond the United States. Losses were felt by investment banks as far afield as Australia. Firms cancel sales of bonds worth billions of dollars, citing market conditions. (BBC NEWS – BUSINESS)

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Figure - BBC News 2009

In year 2008, FTSE 100 declined by 16.5% but was still a better performer than the other main European indices based on the fact that London is homeland to eight mining and companies at a time when natural resources prices are rapidly rising. The Irish exchange has dropped by 46.1%. The big emerging stock markets of China and India have fallen back as foreign investors have fled from their markets - Shanghai has dropped 35.1% over the past year. As for the strong performance of the Middle Eastern markets, this was referred to the high oil and gas prices. (BBC NEWS – BUSINESS)

On the 9 of Aug 2007, the European Central Bank and the US Federal Reserve injected $90bn into jittery financial markets. (Larry Elliott, The Guardian, Credit crisis: How it all began). To reinforce the money market the US Federal Bank and the European Central Bank, provided funds on more favourable terms for the banks to borrow. Additionally, in an effort to encourage lending, interest rates were also cut. But, this short-term help does not solve the liquidity crisis / availability of cash for banks, as banks still remain cautious about lending to other banks. The generated lack of credit, in banks, companies and individuals, threatens the market with recession, job losses, bankruptcies, repossessions and a rise in living costs. (BBC NEWS – BUSINESS)

Based on the mentioned above and due to the current financial circumstances, a surrogate had to commence to help in recovering from the recession. Since the trust of the investors in major banking centres is not going to come back easily (Financial Times, Tim Stone, March 2008) and major investing corporations had suffered losses, the role of Small and medium enterprises (SMEs in further text) is emphasized on as a tool of generating some liquidity in the market, by offering innovative ideas translated into services or products, based on markets needs in an efficient and effective way, to keep it within the consumer interests (price paid and benefits gained). This paper will discuss the effect of SMEs in the economy and the financial markets, in a time the world is facing a global recession, asses how they operate under the financial limitations and constraints and investigate why SMEs are less important within the third world. (Countries that remained non-aligned with either NATO or the Soviet Union) (See figure 3)

Figure - Third world countries, Source Google Images

Literature Review

SMEs are considered to be the engine of economic growth and employment. One of the primary means through which SMEs are expected to accomplish this task is, by developing and commercializing innovations. Innovation may be even more important for SMEs than for large firms (Fritz, 1989). Sweeney, 1983, believe that SMEs use product innovations as a mean to becoming competitive to a higher extent than their large counterparts. In this paper innovation means, a new or significantly improved product (good or service) introduced to the market as well as new or significantly improved process introduced within the enterprise. Because of the importance of the SME sector in creating economic growth, both developed and developing countries are very interested in finding ways to stimulate SMEs in realizing innovations.

Economic theory has highlighted the important role of innovation and investments for the growth of regions and countries. Innovation and investments that enable businesses to be ‘blazing new trails’ are crucial for business success while, without innovation, automatic decline is inevitable (Schumpeter, 1951 J. Schumpeter, Imperialism, Social Classes, Meridian Books, New York (1951).Schumpeter, 1951). Most published research studies, which deal with determining factors significant for SME innovation, come from developed economies. As noted in Hadjimanolis (1999) “The study of innovation, including the obstacles to its successful implementation, while relatively well researched in the industrialized countries is rather neglected in less-developed countries”. As Hadjimanolis, 1999 A. Hadjimanolis, Barriers to innovation for SMEs in a small less developed country (Cyprus), Technovation 19 (1999), pp. 561–570. Article | (82 K) | View Record in Scopus | Cited By in Scopus (27)Hadjimanolis (1999) points out “While firms in less-developed countries, in the recent past, were operating within a relatively protected environment, they must now face the global forces of competition. The globalization of the markets requires the adaptation of firms in order to survive.”

The existence and operation of SMEs are of vital importance for the European economy. This is due to two reasons. First, micro enterprises (firms with less than 10 employees) and all SMEs (firms from 1 to 250 employees) account for 92% and for more than 99%, respectively, of all businesses in Europe (European Commission, 2003 European Commission, 2003. SMEs in Europe 2003. Observatory of European SMEs, 2003/7.European Commission, 2003). Second, SMEs create an entrepreneurial economy as opposed to a managed economy and contribute to increased knowledge, competition and variety (Audretsch and Thurik, 2001, and European Commission, 2003)

The Commission of the European Union has recognized the importance of SMEs to the competitiveness of the European economy and the need to support innovation among SMEs. Thus, the Commission launched the Competitiveness and Innovation Framework Programme (CIP) that runs from 2007 to 2013 and is divided into three operational programmes.

In such a diverse economy, SMEs are considered to be at different stages of development, the offered contribution to the economies will vary, as well as the adopted policies established to encourage their development in these economies.(Charles Harvie & Boon- Chye Lee, 2002.) As mentioned by Charles Harvie & BoonChye Lee, SMEs played a vital role in East Asia economies ranging from creating employment, exporting opportunities and generating liquidity.

Stimulating innovation in SME’s is important (Sonja Radas, Ljiljana Bozic 2009) as to keep the economy stable and strong. As Bruque & Mayano (2007) mentioned, that SME have a strong influence on the country’s economy through its ability to innovate which is the main reason behind the economic growth.

Financial constraints emerge as the prime barrier to innovation in many recent business surveys carried out among European firms. The Observatory of European SMEs most recent survey (Flash Eurobarometer, 2007) revealed that almost 37% of SMEs do not report any turnover from innovative products. The managers of these businesses argue that problematic access to finance, scarcity of skilled labour, and expensive human resources are three of the top four barriers to innovation, the fourth being inadequate market demand. In the same survey, 90% of innovative firms state that a part of their overall investments is channelled into innovation, 47% dedicate up to 10% of their overall investments to innovation, while big innovation investors (investments in innovation accounting for more than 51% of total investments) were 14% of total innovative businesses. The empirical evidence presented above suggests that firstly, innovative activity (product or process) demands investments, and secondly, innovative and non-innovative firms alike find access to financial resources to be an important barrier to innovation.

Sonja Radas, Ljiljana Bozic, (2009) states that it’s hard to resolve which variables influence innovation in SME’s because the behaviour of the SME is dependent on its industry and geographical location.

Economic theory has highlighted the important role of innovation and investments for the growth of regions and countries. Innovation and investments that enable businesses to be ‘blazing new trails’ are crucial for business success while, without innovation, automatic decline is inevitable (Schumpeter, 1951). For an individual firm’s performance, product innovation is considered to be among the dynamic capabilities of a firm, since it can either strengthen the firms’ competencies by allowing the firm to exploit its capacities, or it can be used by the firm to explore new fields which currently are outside its capabilities (Malerba and Orsenigo, 1993 F. Malerba and L. Orsenigo, Technological regimes and firm behaviour, Industrial and Corporate Change 2 (1993), pp. 74–89.Malerba and Orsenigo, 1993 and Teece and Pisano, 1994). Investment in fixed capital, on the other hand, expands a firm’s capacity and strengthens its position against rivalries (Dixit and Pindyck, 1994). Apparently, both investment and innovation thus contribute to firms’ performance.

Smolny (2003) argues that there are complementarities between innovations and capital investments, without assuming a causal relation. For example, a new product requires a new production process and a new production process allows the production of a new good. Thus, he argues, “the probability to implement an innovation depends positively on the amount of investment and the amount of investment depends positively on the implementation of innovations”. Smolny (2003) findings show that “firms that implemented a product innovation only, invested even less than firms that did not innovate”.

Research Question:

Reading the literature review, (which was carried out using the terms “Innovation” and “SMEs” in the field of business and finance, using the available e-resources within Kingston University), SMEs impact on generating strong economies are supported by many analysts and economists, and is adopted by the developed and underdeveloped countries. Although SMEs reliability was tested by implementing its philosophy in more than one country and proved to be a success, third world countries are still reluctant to adopt their philosophy. This raises the following question: Why do third world countries resist the adaptation of SMEs, even though it was proved to be a success?



Starting off with the main research question, the researcher must define the research strategy applied to this study. Following that, a description of data collection methods and analysis, shall be given and justified. A research paradigm; is a philosophical framework that guides how a scientific research, should be conducted. (Collis & Hussey, 2009 p.55). As pointed out by Collis & Hussey, (2009) the importance of the methodology lies in fulfilling the philosophical assumptions of the paradigm used for the study.

The methodology used in this research, is a case study, which is used to obtain in-depth knowledge about the subject. (Collis & Hussey 2009 p.82) Lee & Ling (2008 p.200) define this methodology as a detailed analysis of a single case study, which allows the exploration of complex research questions in a rich environment with contextual variables. (Schell 1992 p. 2)Yin (2009), mentions that case studies, are generally used to answer research questions beginning with How, Why, while focusing on the current events. Denscombe (2007) said that case studies are usually associated with qualitative research and facilitates the discovery of information rather than theory testing. As pointed out by Collis and Hussey (2009), different types of case studies can be categorized into Descriptive, Exploratory, Illustrative or Experimental.

The researching methods concentrated in order to undertake this dissertation will be through two different methods of data collection. The fist method will be the literature based case study. Case study is as defined by researcher Robert K. Yin as “research method as an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used” (Yin, 1984, p. 23). The second method which will be used is the semi-structured interview with the managers of leading companies within the third world (The Hashemite Kingdom of Jordan). The reason behind why this interview technique is adopted is that semi-structured interview provides sufficient flexibility in approaching diverse respondents while covering the fundamental area of the data collection. The qualitative research provides more comprehensive and wide-ranging information to be obtained even though there are some negative aspects of qualitative research hence qualitative research is a primary expression for analytical and logical methodologies. All these forms of research will be explained in detail below.

The Methodology Process

In this paper, there will be two different forms of data collection. The first form will be literature based case study, which will bring together the literature regarding key notions explored within the study. The case study in this paper will contain discussion and explanations, gathered from secondary data collected from other related reports, journals and financial documents, of the reasons behind the refusal of the third world economies (The Hashemite Kingdom of Jordan), although it was a success in other economies (United Kingdom) (European Commission, 2003), to the concept of utilizing SMEs for the purpose of reviving from rescission and serving a solution to generate the economical growth.

The second form will be semi-structured interviews with Managers of leading companies within the third world (The Hashemite Kingdom of Jordan), that will help in assessing and understanding the alleged constraints believed to act as a barrier from utilizing SMEs in the economies. The use of qualitative interviews (semi-structured) is going to be necessary, because according to Saunders (2007), Denscombe (2007) if the objective of the study is to understand reasons behind why certain decisions are made, understand opinions, it’s necessary to conduct qualitative interview. Saunders (2007), states that semi-structured interviews are useful, because they allow the researcher to probe the participant; which will lead to better understanding of the subject at matter and result in better findings. The data generated from the semi-structured interviews will be compared and assessed with the available literature. Throughout the project, the search for literature review will keep on going, as the evolvement is continuous with relation to the explored subject.

Qualitative research is a fundamental term for investigative and analytical methodologies. The analytical objectives of the qualitative research methods are to describe variations, relationships and the individual experiences (Bryman and Bell, 2007). Qualitative research emphasizes the significance of looking at variables in the settings they are found in, because of the importance of interaction between the variables. Detailed data is collected through the use of open ended questions that help in acquiring direct quotations from the interview. As stated by Jacob in 1988 an integral part of the investigation is the interviewer. As mentioned by Smith 1983, this differs from quantitative research in which to provide information about relations, comparisons and predictions, data gathering attempts are dominated by objective methods.

The qualitative research provides more detailed and comprehensive information to be gained as it contains open-ended questions which will provide the researcher to gain further information and using slanted information and participant observation to describe the context will provide wider understanding of the entire situation. However on the other hand qualitative research also has drawbacks as it is extremely difficult to prevent or identify biased information thus the prejudice of the investigation can lead to difficulties in instituting the consistency and validity of the information.

Literature based case study

From the available literature and updates in the economies and financial markets, the case study will be gathering as much data permitted within the time constraints, to allow the processing of reliable information, which could be used as a platform for other studies within the same scope. Using a case study enables the researcher to take a look at the greater picture in a certain phenomenon or series of events. (Gummesson, E., 1991) Case studies can be useful in capturing the evolving and immanent properties of life in organizations and the flow of organizational activity, especially where it is changing very fast (Hartley, J., 1994).

Semi Structured Interviews:

The semi-structured interviews will be the tool the researcher is going to use, in order to be able to assess the managerial knowledge about utilizing the SMEs, advantages and opportunities offered from adopting the SMEs, limitations facing the SMEs. This method will allow the researcher to gain more knowledge about the research topic, since his involvement will be required. It will also help the researcher on critically evaluating the response of the interviewee and enable him from measuring the degree of understanding of the interviewee to the questions asked.

Limitation with the methodology:

The cultural differences and the different perceptions between organizations and economies might be an obstacle in the face of the researcher, when related to gathering reliable information. Reliable information might not be distributed or given, based on fear of losing competitive edge in the market or in believe of a sabotage attempt. Time limitations, could also be an issue, when trying to gather and analyze data, the process might be time consuming due to controllable and uncontrollable factors.

These limitations, would affect the reliability of the paper, so as a solution, limitations faced within the process of gathering the data will be recorded, with its circumstances, to enable further researches in the same topic to overcome them.

Proposed time line

Word Count: 2880

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