Innovation In Small And Medium Enterprises Commerce Essay

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Small and medium enterprises (SME's) are regarded as the best type of businesses that can exist, as they are more agile than large enterprises which make them able to respond faster to change, also they provide a decent rate of employment and revenue with respect to their size, moreover as they are not large they cannot dominate the market which makes them co-exist and thrive in a competition based market which is healthy to the SME's as well as to the consumers as it allow these businesses to focus on the concept of innovation. Innovation is a term derived from the Latin word "innovare", which mainly stands for doing things in a new way, with emphasis more on taking action rather than the conceiving of the idea. The European commission define a small business as a business that has less than 50 employees and turnover, balance sheet of 10 million euro. They also regard medium enterprises as businesses with less than 50 employees and have turnover and balance sheet of 50 million euro and 43 million euro respectively. SME's are very beneficial for developed countries and certainly for developing ones, and in this paper the problems facing SME's and their solutions will be discussed. (Kacker 2005:2)


Small and medium enterprises face many challenges in every country, these challenges varies according to the culture of that country and its development level, however most small and medium enterprises face these problems. The first major problem as referred to by Rammer et al. (2006) is the "financial bottleneck" and it mainly revolves around the idea that many small and medium businesses, abandon many projects in late development phases because of the financial constraints, these financial constraints arise from the fact that as the capital of banks increases their willingness to invest in small and medium businesses decrease as shown in a study conducted in the united states, that commercial banks with less than $100,000,000 capital provided small and medium enterprise with 96.7% of their loans; while for those over $50,000,000,000 it was 16.9%., making the small and medium businesses lose a part of their finance. The financial constraints might also arise as a side effect of the high cost of innovation, as innovation requires a great amount of time and effort before a business can use it to generate profits. Another problem under the financial bottleneck is the high overhead cost for small and medium businesses specially labour cost as Tiwari, Rajnish and Buse, Stephan(2007) states "SMEs usually operate under high overhead costs, such as labour costs" which makes it clear that most of the small and medium businesses are operating within a low profit margin that makes them unable to compete with external low cost producers from emerging economies from Asia and eastern Europe, china could be regarded as a good example of threats facing small and medium businesses. (Ramer et al 2006, Tiwari and Buse 2007)

Another major problem identified by Tiwari, Rajnish and Buse, Stephan (2007) is the lack of "know how", which including everything from the limit knowledge in the managing of the innovation process to the shortage of qualified personnel. Corsi, Carlo and Akhunov, Ali regard this problem as the lack of "entrepreneurial culture, innovation culture and management skill", the commission of the European communities in their report (CSE[95]-2087) regard the lack of entrepreneurial culture as the main reason behind the problems facing small and medium size enterprises, as now the problem is not to start up more small innovative business but rather to make these businesses thrive in a rapidly changing community, also the entrepreneurial culture is very important for emerging and transitional economies. As there is no point in starting a small or medium size innovative business that will probably go bankrupt after 6 months. The shortage of qualified personnel is regarded as an important problem because most managers of small and medium businesses lack the experience and training that allow them to successfully manage a company, Baldwin et al. (1997) further explain that most of the successful entrants have managers with strong management skills, also that 56% of business that fail in Canada are because

"Management of these firms did not have sufficient general knowledge to coordinate activities involving financing, marketing, and operations, nor did it have sufficient specific knowledge within these areas."(Baldwin et al 1997:24)

Baldwin et al also emphasised that the manager's lack of ability plays less role in failure than lack of knowledge. (Baldwin et al 1997)

Another problem mentioned by Corsi and Akhunov (1997) is gender discrimination as people tend to underestimate women, which might make women trying to start a business face more problems and bureaucratic routines than men because at every point along the way women will meet some people who do not believe in women's capabilities in starting and managing a business so they will throw obstacles along each woman's way. This idea about women cannot start and manage a business is wrong and need to be changed as reports by the organisation for economic co-operation and development (women entrepreneurs 1997) show that women are willing more than men to take the risk of starting their own business. (Corsi and Akhnuov 1997)


For the solution of the first problem the financial bottleneck Ma, Wang and Gui (2010) stated that it could be solved by "Establishing SME's Diversified Financing System" which will mainly fund the SME's allowing them to grow, by handling their loans, subdues and cost of research and development. Ma, Wang and Gui also stated that many banks need adjustment in their loans policy allowing a higher percentage of their loans for SME's rather than providing most of their loans to large corporation, also refining the taxation policy in many countries to allow SME's to operate as they usually have low margin of profit with respect to cost. (Ma et al 2010)

As for the second problem concerned with experience, qualification and knowledge, they can be solved by providing proper education courses on how to start and manage businesses that could be provided during graduate education or post graduate education, also in these courses real life case studies should be provided about how small and medium size businesses respond to different changes and how management react toward different dilemmas that might face any new business, and what measures can management take to allow the business to grow and thrive from a start-up micro business till the end of the enterprise chain as a large enterprise.

The Third problem concerned with gender discrimination, Corsi and Akhunov state that it can only be solved by removing restrictions that might create these discriminatory actions, and allow women equal opportunity as men with regard to education, access to information and consulting services, also allow women with access to market and mentoring program, mainly equalising the exposure to knowledge of women with men. (Corsi and Akhunov 1997)


To sum up, SME's face many problems, since they start as a thought till their implementations and from there onward, as their problem is not only in the start-up of the business but rather in its survival, hence most of the problems that face SME's can be solved if different stakeholders came together trying to unify their effort in order to allow such enterprises to be born to light, as it is takes more than one bank, one government or an organization to allow the existence of such enterprises, it takes all banks, governments and countries around the world to actually establish these kind of businesses, as SME's will not only benefit their owners but the community as a whole, which is a treat all countries are in dire need for.