This research uses secondary data available from four scholarly journals from business professional on the effects of GFC on the operations of SMEs. The studies described used scientific methodologies to analyse data. The main sources of data were online surveys delivered and returned through e-mail communication. E-mails were sent to managers and other relevant professionals upon identification of SMEs from different databases. The empirical analyses adopted by the researchers passed the credibility test due to the multivariate regression models that were used to analyse collected data. Analytic tools employed included codification and data sorting by use of N’Vivo, multivariate analysis to explore the determinants of successful business during the recession period, and ANOVA to distinguish existing political differences and different domestic environments in the global market.
Results affirm that political influences play significant role in the success of the SMEs during the recession period. The demand and supply of trade credit was affected by banks' reluctance to give loans to SMEs due to their poor financial history. Different political landscapes and different local structural platforms affect the performance of SMEs in varying proportions. Sweden, which mainly relies on the international market, was mainly affected by the recession of the global economy if compared to France and the UK. Limitations of some studies relate to their focus on the effects of GFC at the expense of the Euro zone crisis. Moreover, some studies were recent (2012) even though by this time, the hardships faced by SMEs started to fade.
Key words: SMEs, GFC, economic recession, trade credit, demand and supply, government policies.
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The purpose of this critical analysis is to identify the problems faced by small and medium-sized enterprises in the wake of economic crisis that affected the global economy. The research critically examines secondary data presented in four main journals with regard to the topic of interest. The analysis will, therefore, identify the pertinent issues arising from the journals before making a conclusion about the common trends found in the four researches.
The journal by Wan & Riding (n. d.) is a response analysis of top administrative officials from a 12 APEC economies on policy effects on operations of small and medium-sized enterprises (SMEs). SMEs' legislative provisions have been in use before the GFC. The article also describes how the policies have been in existence, how they were expounded, and any other programme additions to respond to challenges of global financial crisis (GFC). Wan & Riding (n. d.) analyse SME policies and compare the outcomes with the Organisation for Economic Cooperation and Development (OECD) assessment criterion. The reason for the combined assessment monitoring system is to create an in-depth taxonomy that analyses government accounts on problems faced by SMEs. This analysis is critical as it identifies the gaps that exist and the possible resolutions to further challenges. Moreover, “In the OECD area, SMEs employ more than half of the labour force in the private sector. In the European Union, they account for over 99 % of all enterprises.” (OECD 2009, p.6).
On the other hand, Cowling, Liu & Ledger (2012) sampled empirical evidence from the United Kingdom in order to study how demand for external funding varied after the economy went into recession. Unlike the first research encompassing the global economies, this was a special case of how SMEs were affected in the UK. The study also focused on ease of access to external funding after the economy went into recession. Hedlund & Kverneland (1985) methodology was too general to classify the roles of SMEs. Hence, this limitation is minimised by the research.
Smallbone, Deakins, Battisti & Kitching (2012) studied responses of small businesses to the economic crisis in the UK and New Zealand. This empirical research is similar to the one of Cowling et al. (2012) in one aspect and different in the other. They both assess the case in the UK, while Smallbone et al. (2012) study is unique in the sense that it carried the same study in New Zealand. The comparison between the UK and New Zealand is revealing differences with respect to the extent of damage and timing of the economic recession. Similarity between the two cases is found in the structural composition of SMEs and access to trade credit.
Lastly, Barron, Hulten & Hudson (2010) study focused on cross-national differences in the manner in which SMEs responded to the effects of GFC. The study monitored political interventions and the impact they had on the performance of countries’ SMEs. The research was conducted in three European nations: the UK, France, and Sweden. Therefore, it added to the findings of Cowling et al. (2012) and Smallbone (2012) on the performances of SMEs in the UK. The difference that this study brought out were case scenarios in Sweden and France.
Critical Review of Data Collection Approaches
Journal 1: The Global Financial Crisis: Impacts on SMEs and Public Policy Responses
Wan & Riding (n. d.) used qualitative data to analyse the research topic and to answer research questions outlined in the journal. The authors used three types of qualitative data. They used responses to survey that was passed by the APEC Small Business Working Group. The survey sought for responses in three main sections: SMEs financial market for the period June 2005 to June 2008, the same results for the period from June 2008 to June 2009, and case scenarios. The survey questions were sent to 23 APEC member economies via the APEC SME working group (SMEWG). The responses were sent through e-mails from 11 states.
The second part of qualitative data was taken from the OECD 2009 report. The report was compiled from responses of 29 organisations and non-members. The OECD report collected financial data with a help of questionnaires that were sent to respondents. The compilation of the report was comprehensive but was not reflective of the real scenario. This is because it was complied in 2009, when full effect of the GFC was not yet felt. The final qualitative method of data collection was represented by two interviews that the scholars conducted with Industry Canada’s top policy analysts. The responses were critically analysed by a researcher, who then provided the feedback to the APEC survey.
Journal 2: Small Business Financing in the UK Before and During the Current Financial Crisis.
Cowling et al. (2012) sample data from the previous surveys to study the impact of economic recession on SMEs. They use pre-recession data from Annual Small Business Survey of 2007/2008. The survey from this source was important as the institution has been conducting annual surveys from 2003 2007/2008. 9362 SMEs those firms with less than 250 employees, Stamatovi%u0107a & Zaki%u0107b (2010) used stratified random sample method of selection across 13 UK regions. The sample was chosen from the main commercial sectors of the UK economy.
In another survey conducted by the Annual Small Business Survey and Business Barometer, the ‘matching’ technique of data sampling yielded 3506 SMEs. This figure is way below the initial dataset because some firms had grown and hence, did not meet the criterion of defining SMEs (below 250 employees). Data collected was divided into two parts: dependent variables and explanatory variables. Dependent variables in the study referred to the external financial assistance and its effects on demand and supply of funds to SMEs. Explanatory variables were non-fiscal issues that affect SMEs' operation.
Journal 3: Small Business Responses to a Major Economic Downturn: Empirical Perspectives from New Zealand and the United Kingdom.
Data was collected through the use of parallel and online surveys. The surveys sought to answer questions from two countries on the impact of 2008-2009 economic crisis on small business organisations. The study was conducted in London, where mail and on-line surveys generated 343 important responses between March and August 2009. The survey generated qualitative data from privately owned businesses with less than 250 employees. In NZ, the survey was part of the annual national survey conducted by NZ Centre for SMEs Research. The survey was a longitudinal research that used revolving panel. The APN Infomedia also gave information on small businesses. The 2009 survey got responses from a total of 1438 respondents 6 months after the initial survey.
Journal 4: The Financial Crisis and the Gathering of Political Intelligence: A Cross- Country Comparison of SMEs in France, Sweden and the UK.
The study by Barron et al. (2010) developed hypotheses from review of relevant literature. Based on the hypothesis, SME mangers in three countries were asked survey questions on the impact of political interventions during the GFC. Online questionnaires were distributed to managers through the e-mail. A total of 1995 managers received online questionnaires but 183 of them did not contribute to the analysis. This is because some of the e-mail addresses were incorrect, while other responses came as spam filters.
SMEs in France were chosen from a list of SMEs made by the ESC Rennes School of Business. Since the UK and Sweden lacked databases like the one in France, sources of identifying SMEs were business directories of the UK and Sweden’s chambers of commerce. Selection of SMEs was done manually and based on the availability of e-mail contacts provided in the directories.
Critical Reviews of Analytical Processes
Collected data was analysed with a helps of qualitative data analysis tools. The first step was the coding and data sorting with a help of N’Vivo. N’Vivo technique was also used to analyse and define patterns. All data was mapped against administrative policy responses to various challenges that SMEs faced and later it was defined how those problems related to GFC.
Data collected was analysed using two different methods: descriptive statistics and multivariate regression. Multivariate regression model was used to create econometrical demand and supply points during the recession. The technique analysed the variable data by naming the demand-side as SOUGHT and the supply-side as GOT. Dependent variables were either binary or static. Cowling et al. (2010) observe the essence of incorporating cost of lending: “Ideally, we would have liked to incorporate a cost of lending measure (loan interest rates) into our analysis, but the available Bank of England Trends in Lending time series, from which average lending margins are derived” (p.12). The limitation was that it never covered the entire sample period.
Descriptive statistics was used to analyse both dependent and independent variables through the use of sample validation criteria for 3348 SMEs and to determine the ease of access to finances during the recession. Most of the variables were dummies, which implied that the average of each dummy corresponded to the percentage of observations made when a variable was 1.
Multivariate analysis was used to explore determinants of successful business during the recession period. Just like in the study of Cowling et al. (2012), this method was based on binary logic regression model. This method was used to analyse strategic responses that firms in the UK and NZ were using to cope with their vulnerable position during the recession period. In addition, conceptual framework was used to compare and contrast the effects of economic recession on both NZ and UK firms.
This study used different analytical tools to synthesise data. To begin with, Barron et al. (2010) used Kolmogoron-Smirnov test to assess the opinions of managers about the assumption that distribution was normal. In addition, the Wilcoxon Signed-Rank test was used to determine perceived significance of domestic monitoring levels. It was also necessary to use ANOVA due to existing political differences and different domestic environments in three countries.
Presentation of Findings
Wan & Riding, (n. d.) found out that SMEs faced a number of problems. According to the responses, financial problems were experienced by most of SMEs. The respondents agreed that the GFC limited access to finance by SMEs. This was because in most economies suppliers of trade credit were insolvent and could not receive financial assistance to help the affected SMEs. SMEs have limited collateral and scanty credit history, hence, their requests for funding from the banks were turned down.
The study also found out that product market recession was brought about by the GFC. As a result, the demand for products of SMEs at the global market reduced. Economic recession also led to a decrease in fair value of assets. According to Wan & Riding (n. d.) “In part, this is because there has been a clear downturn in demand for goods and services since Q4-2008; for example, 44% of firms in New Zealand reported a drop in activity in Q4-2008” (p.1236). The other finding of the research was that SMEs faced liquidity problems because customers were likely to defer payments, while the suppliers were unwilling to sell for cash. In response to those problems, the research found out that governments had a responsibility to create working policies to help SMEs cope with the challenges. Government interventions, as identified by Wan & Riding (n. d.) included strengthening capital base, stimulating sales, cash flows, and working capital and making access to bank loans easy.
Results showed that there was a lack of adequate supply of finances to SMEs. According to Cowling et al. (2012) “An interesting feature of recessionary-time demand for finance is that businesses are more likely to seek external finances to compensate for the loss of revenues from sales” (p.13). This observation is in line with the pecking order theory that focuses on the tendency of business organisations to self-finance their investment before resorting to external funding from financial institutions (Madsen & Servais 1997).
Cowling et al. (2012) also found out that industry sector was an important determinant of the supply and demand of SMEs funding during pre-recession. The services sector was less likely to opt for loans, whereas manufacturing, transport, and communication firms were more likely to fail in their application for finance services (Johanson & Vahlne 1990). The study showed that lenders were more cautious to provide finances. Small businesses were 12 percent more likely to receive the finances they needed, while medium-sized business were 19 percent more likely.” (Cowling et al. 2012, p.13). Finally, growth potential of businesses was not a priority for lenders to consider when supplying trade credit.
In the result section, Smallbone et al. (2012) uses the data collected to study the effect of recession on SMEs in NZ and in the UK. By using a conceptual framework, the study gives a summary of the factors that influence SMEs by weighing them according to the size of a business and their distribution in both NZ and the UK. Based on survey results NZ experienced a shallower recession effect, which showed that the country was less likely to be affected by negative financial effects than the UK. UK firms had a unique problem as 64% of the firms reported negative effect of late payment. Moreover, “the only finance-related effect that was more pronounced for NZ small firms was negative cash at the bank, as firms deposited less than they were drawing: this might reflect the greater emphasis on overdrafts and short-term credit by NZ small firms.” (Smallbone et al. 2012, p.13).
Firms in NZ appeared more likely to be affected by non-fiscal effects such as the rising cost of energy, cost of supply, and transport, which were the major hindrances to proper functioning of SMEs. Non-finance issues affecting SMEs in NZ explained the existence of negative bank balances due to more pressure on cash flow when demand remained low. In both the UK and NZ, negative effects occurring during recession could be seen as business opportunities for SMEs. On the other hand, the positive effects reported by SMEs were the ease of staff recruitment and other motivational factors. The research found out that many firms were vulnerable to changing business environment because they did not have control over it. For instance, Pedersen & Petersen (1998) identified that resource base and extent of commitment determined the success of SMEs operations.
Findings of this study are varied. To begin with, the authors established that Sweden was most hit by the recession because SMEs had invested their time in political monitoring. France was least hit by the recession because SMEs in the country had invested less time in political monitoring. Secondly, the study found out that SMEs' managers were considerate of the political monitoring system in responding to financial and economic crises on domestic level. According to Barron et al. (2010), “Since the Swedish economy is highly dependent on the economic health of its international trading partners, it is probable that Swedish SMEs find it necessary to monitor political developments affecting those partners.” (p.360). SMEs in France and the UK perceived that local politicians had bigger influence on how they run their business than supranational organisations like the European Union (EU). Reliance on international market required direct and indirect processes to assess market viability (Romanelli & Tushman1994).
Managers in Sweden thought that policy decisions made in other countries had direct impact on the running of SMEs in the country. This was because “Globalization has made the economy of a nation more exposed to any unfavourable events or crisis since the market is becoming less segmented.” (Muhammad, Char, Yasoa & Hassan 2010, p.72). It, therefore, required internationalisation models like the Uppsala model suggested by March (1991). Even though the studies were informative, two of them were recent studies (2012) seeking to determine the effects of GFC on SMEs. The two studies did not incorporate the effects on the ongoing Euro zone crisis but assumed the effects were brought about by the GFC. The Euro zone crisis too could have contributed to the effects.
The challenges that SMEs faced during crisis affected the entire globe, but firms are now moving towards positive growth (The Economic Intelligent Unit 2010). The fact that most SMEs have survived the aftermath of GFC means that they can still sustain their growth (Julien 1996). In fact, the post-crisis economic environment will direct future growth of SMEs. Government policies during the time of the crisis affected the supply and demand for trade credit among SMEs. This was because financial institutions that could lend money adopted stricter fiscal requirements that could not be met by most of SMEs with their credit history. This called for government intervention. The fact that there were different structural formations of SMEs in various countries affirms that local administrative issues directly affected operations of SMEs. The case of Sweden showed that some economies were dependent on internationalisation of the market and thus the problems that appeared during the GFC had massive consequences for their performances.
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