What Affects New and Established Firms’ Expansion? Evidence from Small Firms in Russia

Research on financial constraints of very small firms is scarce because it is difficult to observe and measure their transactions. Previous studies on small enterprises in post-communist countries have focused either on the effect of financing constraints on business growth (Budina et al., 2000, Economics of Transition 8(2), 453–475; Bratkowski et al., 2000, Economics of Transition 8(1), 101–116) or on the effect of property rights (Johnson et al., 2002, American Economic Review 92(5), 1335–1357). This paper provides evidence on both. It turns out that financing constraints and property rights considerations affects investment in firms of different age differently. Younger firms face higher information costs and their expansion is more dependent on the availability of internal funds than is the expansion of older firms. This paper also finds that while the financial sector did not channel funds to the most successful businesses, there is evidence that loans were given to firms that had more transparent transactions. Results also indicate that the security of property rights does not influence investment in young firms, which is interpreted to mean that only the most efficient entrepreneurs entered the market. In older small firms, investment is negatively influenced by the index of security of property rights suggesting that these firms might have “secured” their property rights by bribes. Improvements in the security of property rights, therefore, would help more micro enterprises to be born as well as decrease transaction cost of established enterprises.      

Corporate diversification and CEO turnover in family businesses: self-entrenchment or risk reduction?

Our study investigates differences in CEO turnover between focused and diversified firms to determine whether diversification strategies are necessarily associated with governance efficiency in family businesses. We find that large family CEO firms are more likely to engage in corporate diversification than are small non-family CEO firms and their CEOs are seldom replaced. Large family CEO diversified firms also have lower turnover sensitivity relative to focused firms. The results imply that the CEOs of diversified firms have entrenched themselves, thereby increasing agency costs within family businesses. However, we fail to find diversification discounts in family businesses. It is interesting that CEOs tend to diversify their businesses in order to decrease firm risk. Founding families favor risk-reducing decisions in order to maintain family wealth and prestige; suggesting that family businesses are more interested in survival than growth. Although family businesses may benefit from risk reduction, a negative relationship between diversification level and CEO turnover is still evidence of poor corporate governance. Agency theory may not completely account for the adoption of diversification strategies in family businesses and corporate diversification may weaken the effectiveness of internal monitoring mechanisms.

Understanding the Challenges Facing the Food Manufacturing Industry

Abstract

The Northeast's share of US food processing activity has decreased significantly over the last three decades as many food processing firms have exited the region and located elsewhere, particularly in the South and the West. This decline has been most severe in New Jersey, the state that is frequently cited as having the most stringent business and regulatory climate in the nation. To investigate why food processors have found the New Jersey environment to be so unfriendly, this study organized focus groups of food processing industry executives, trade organizations and researchers. The findings suggest that the area of environmental and other regulation is the most problematic for food processors. Other areas of concern include, in order of importance, taxation and fiscal problems, economic barriers to development and expansion, high cost of doing business, education, training and labor concerns, communication and public relations, and transportation. Policy makers in New Jersey, and in other northeastern states facing similar food processing declines, interested in the retention and economic development of food processing firms need to be cognizant of the impediments currently constraining the industry. Industry-based public policy recommendations for enhancing the business climate for food processors are presented.     

The impact of the new protectionist stance in US trade policy on selected German companies in Mexico

ABSTRACT

Previous studies on the impact of the new protectionist stance of the United States have focused mainly on the imposition of the controversial border tax. This research advances the understanding of the possible impacts of the tightening of the rules of origin and the imposition of the most-favored nation tariffs on manufacturing companies. The findings show a negative impact from the protectionist measures on businesses by increasing costs per unit and decreasing the gross margin. The results suggest that those additional costs could be passed on to the final buyers, raising the price level by more than previously assumed.     

External Sector Adjustment

ABSTRACT

Since 1981 Malawi has been undergoing an extensive economic adjustment programme. A key aim has been to diversify and increase exports. This aim has met with little success. To understand why export businesses have failed to respond to exchange rate changes and other incentives we conducted an export business survey of 51 firms and interviewed government officials, private sector representatives, and IMF and World Bank staff. We found that structural rigidities, particularly infrastructure constraints, are so severe that the impact of exchange rate policies and other incentives on external sector adjustment is very limited. Increased policy attention should therefore be paid to these constraints if the adjustment programme is to succeed.     

Location Advantages,Firm Advantages,and Export Success in the Latin American Automotive Parts Industry

Abstract

This paper examines the influence of location advantages and firm-level advantages on the propensity of Latin American firms to export. An empirical test based on Latin American firms in the automobile parts industry suggests that firms in more competitive Latin American country environments are more likely to export than those in less competitive country environments. Also, older and larger firms are more likely to export than are younger and smaller firms, and businesses that are subsidiary companies are more likely to export than are independent companies. Implications for managers and policy makers are presented.     

Entrepreneurship and Risk Aversion

Evans and Jovanovic (1989, Journal of Political Economy 97(4), 808–827) find that wealth is an important determinant of business startups due to liquidity constraints. However, Cressy (2000, Economic Letters 66, 235–240) argues that if risk aversion is a negative function of wealth, Evans and Jovanovic’s empirical results could be spurious and the positive effect of wealth could be due to the omission of risk aversion in the regression equation. In other words, according to Cressy, one’s wealth does not have any effect on business startups once the degree of risk aversion is accounted for. This paper attempts to investigate the validity of Cressy’s conjecture. We empirically examine the effect of wealth on the transition into self-employment, while allowing for the effect of risk aversion. Our empirical findings show that Evans and Jovanovic’s (1989) results are robust, i.e., wealth has a positive effect on business startups even allowing for the confounding effects of risk aversion.     

New evidence in the pursuit of locating new businesses

Finding good, generalizable samples has long been an Achilles heel for those interested in entrepreneurship-related phenomena. Practitioners, policy makers, and researchers frequently desire to take the pulse of entrepreneurial activity but struggle in doing so. For example, Friedman (1995) reported that California overestimated job loss by 2.4 times because of failure to account for newer, more robust firms. With the goal of being able to better identify new businesses, this research addresses the following questions: (1) Which sample sources best identify new businesses? (2) Are the characteristics of a sample drawn from one source similar to those drawn from a different source? (3) How accurate are the different sample sources in the information they report? and (4) How practical and cost effective are the different sample sources?We pursued answers to these questions by examining the state sales tax file and comparing it with the previously examined sources of the state unemployment insurance file (ES202) and Dun & Bradstreet's Dun's Market Indicator file (DMI) (Birley 1984; Aldrich et al. 1989). The phonebook was also used to examine its overlap with the three primary sources. In making these comparisons, we evaluate generalizability issues, accuracy of founding date, cost, practicality, and other auxiliary information.Sales Tax FileOur findings suggest that the sales tax file is a rich source for identifying generalizable samples. The accuracy of the founding data was correct over 70% of the time, and it appears to identify businesses very early in the start-up phase. The data also are available in machine readable format, give some helpful auxiliary information, and the cost of obtaining the file was negligible. Another advantage of the sales tax file is its ability to identify new businesses that do not have visible on-street locations. Thus, the sales tax file appears to be a very credible source for identifying firms early in the start-up process.ES202 File, DMI File, and Phone BookOur study affirms earlier studies that found major limitations with both the ES202 and DMI files. More specifically, this study found that both sources have substantial limitations in identifying new start-up firms, and they both appear to be slow in removing firms from their records once they have moved or gone out of business. As for the phonebook, as it is only issued annually, it takes some time for new businesses to be listed in the directory. Furthermore, because so many of the new businesses identified by the sales tax file initially operate out of the entrepreneur's home (58% in our survey sample), the enumeration/phonebook method would miss many new businesses unless they had a business phone listing and a business sign on their residential property. Thus, we do not consider the enumeration/phonebook method to be very practical, nor the best method for identifying new firms.In sum, these findings give renewed hope in locating generalizable samples of new businesses. Although the sales tax file is not a perfect source, it represents a very attractive alternative for those interested in identifying entrepreneurial firms early in the start-up phase. These findings should assist practitioners, policy makers, and researchers in making better sample selections, which should lead to more accurate indicators of new business start-ups, fewer sample biases, and ultimately, to a better understanding of the determinants of new venture failure and success.     

The Impact of Perceived Ethical Culture of the Firm and Demographic Variables on Auditors’ Ethical Evaluation and Intention to Act Decisions

Studies into corporate social responsibility (CSR) in small and medium-sized enterprises (SMEs) have suggested that small businesses are different to the large companies on which CSR research usually focusses. Extending this argument, this article raises the question what differences in approaches to CSR there are within the SME category. Analysing the CSR strategy and performance of a medium-sized fashion retailer in the United Kingdom through manager interviews as well as customer and employee surveys, the article develops an analytical framework of CSR in small, medium and large firms. The argument is developed that medium-sized firms occupy a transition stage, where some CSR features that are reminiscent of small enterprises are still important but get overlaid with aspects that are more typical of large companies.     

Comparing the Impact of Credit Constraints on the Growth of SMEs in a Transition Country with an Established Market Economy

In this paper we compare the role of internal finance on the growth of firms between a leading transition country, Slovenia and an established market economy, Belgium. We find that firms in Slovenia are more sensitive to internal financing constraints than their Belgian counterparts. Furthermore, we find that de novo firms and firms with long term debt are most constrained and that micro and SMES can face great difficulties in accessing external sources of finance. Foreign firms, however, are able to raise external finance and consequently their growth is less reliant on the availability of internal finance. Our findings appear to indicate that although Slovenian firms are no longer recipients of soft budget constraints, the financial environment is not yet fully functional.      

Effectiveness of Export Support Programs: Impact on the Relational Capital and International Performance of Early Internationalizing Small Businesses

This article evaluates the impact of public export support programs on the internationalization of early internationalizing small businesses. We build and test a conceptual model of the link between export support services and early internationalizing firms’ relational capital and international performance in terms of both economic international performance and the number of foreign markets in which they are present. The results show that financial support is effective in enhancing firm performance only in terms of the number of foreign markets but not in terms of economic performance, that informational support is effective through its influence on relational capital, and that operational support is not. Our findings contrast with those of previous studies on firms that internationalize through stages and suggest that new export support services adapted to early internationalizing firms are needed.     

The ‘disguised’ foreign investor: Brands,trademarks and the British expatriate entrepreneur in Brazil

Abstract

This article examines the impact of the British expatriate entrepreneur, and his processes of knowledge transfer, on the industrialization and economic development of Brazil between 1875 and 1914. It focuses on the textiles industry, and combines original trademark data with conventional trade and investment statistics, and also case study analysis about firms and their entrepreneurs. It argues that British investment in Brazil was higher and had a deeper impact on economic development than considered by existing research, as expatriate entrepreneurs ‘disguised’ a substantial amount of foreign investments by acting as shareholders and top managers of newly established local businesses.     

Market access,supplier access,and Africa's manufactured exports: A firm level analysis

Abstract

In a large cross-country sample of manufacturing establishments drawn from 188 cities, average exports per establishments are smaller for African firms than for businesses in other regions. Based on the estimation of firm level exporting equations, we show that this is mainly because, on average, African firms face more adverse economic geography and operate in poorer institutional settings. One part of the effect of geography operates through Africa's lower ‘foreign market access’: African firms are located further away from wealthier or denser potential export markets. A second occurs through the region's lower ‘supplier access’: African firms face steeper input prices, partly because of their physical distance from cheaper foreign suppliers, and partly because domestic substitutes for importable inputs are more expensive. Africa's poorer institutions reduce its manufactured exports directly, as well as indirectly, by lowering foreign market access and supplier access. Both geography and institutions influence average firm level exports significantly more through their effect on the number of exporters than through their impact on how much each exporter sells onto foreign markets.     

Validating the innovation prowess framework for firms in emerging economies facing tight regulatory regimes: the case of Indian pharmaceutical firms

ABSTRACT

The purpose is to investigate the generalizability of an innovation prowess framework, developed for firms in developed countries, for firms in emerging economies facing tight regulatory regimes. Using a qualitative approach we investigate key informants in six firms, supported by secondary documents and the business press, as well as in-depth organizational observation within one organization. Academic evidence suggests there are four factors – one external (industry structure) and three internal (economic structure of the firm, organizational structure of the firm, and historical development of the firm) – that drive the innovation prowess of firms. While firms in developed economies take such factors as the norm, firms in developing countries face evolving norms and internal challenges to comply with tighter regulatory regimes; however, the research suggests that impact of these four factors appear to be similar to those faced by firms in developed countries. Our research contributes by seeking to broaden our understanding of innovation prowess in emerging country contexts. Innovation in these markets is generally less well understood, especially as they adapt to the tighter regulatory regimes required to compete in global markets (e.g. WTO).     

The impact of new firm formation on regional development in the Netherlands

This paper examines the relationship between new firm formation and regional employment change in The Netherlands. Using a new regional data base for the period 1988–2002, we examine the time lags involved in the relationship. We also investigate whether the relationship differs by sector and by degree of urbanization. We find that the maximum effect of new businesses on regional development is reached after about 6 years. Our results also suggest that the overall employment impact of new-firm start-ups is positive but that the immediate employment effects may be small in The Netherlands. Furthermore, we find that the employment impact of new firms is strongest in manufacturing industries and that the employment impact of new firms is stronger in areas with a higher degree of urbanization.

The Exercise and Acceptance of Power in an Industrial Channel Dyad

ABSTRACT

Purpose: Power is an adaptive process in which power exercised by one firm could be less than, equal to, or greater than that accepted by another over the course of different periods. This study incorporates previous research on power asymmetry to examine the process of power exercise and acceptance over three stages: power exploration, power balance and power idleness.

Design/methodology/approach: Semistructured interviews were conducted with 4 powerful suppliers (the source firms) and their distributors (the target firms) in different industries.

Findings: The exercise and acceptance of power are influenced by expected rewards and expected costs in the power exploration stage and are impacted by dependence and trust in the power idleness stage; in the stage of power balance, power exercise and acceptance will not be altered. Under power shortage, the source firm will attempt to use less power and/or to enhance the levels of power accepted by the target; under power surplus, the source firm will transform the surplus into company performance and/or personal interests.

Research limitations/implications: The findings deepen our understanding of how power is exercised and accepted in a channel dyad over time, and of how firms behave in dealing with power shortage and power surplus.

Practical implications: The findings also provide some guidance for practitioners, so that they may apply power more appropriately based on different power stages in marketing channels.

Originality/value: This study extends our knowledge on power evolution over three stages from both a power holder and an acceptor viewpoint.     

The Bankruptcy Prediction Power of New Entrants

Abstract

This study aims to determine if the number of new entrants provides a useful tool for forecasting the probability of a firm’s liquidation. We assess how the formation of new firms in a firm’s geographical location influences the likelihood of liquidation. Using a sample of 825 non-listed French industrial firms located in small cities, our estimates show that an increase in the number of new industrial firms in a firm’s location has a positive and significant impact on the probability of a firm being liquidated. The emergence of new firms seems to have stronger power in predicting bankruptcy than other financial variables such as leverage or the rate of exports.     

Service Orientation and Small Business Marketing

ABSTRACT

In an environment of ever increasing competition, small businesses are beginning to recognize that adopting a strong service orientation in their marketing efforts not only gives them a differential advantage, but is also fast becoming a prerequisite for their survival. This study introduces a classification scheme which identifies firms by their degrees of involvement in service orientation. This typology was validated in a nationwide survey of retail nurseries. The findings supported the hypotheses that a strong service orientation does have a dramatic impact on a business's marketing decisions. It is hoped that recognition of these distinctions will offer strategic insights for small business practitioners in making marketing and promotion decisions.     

Accounting Career Cycles

Abstract

This paper examines the career cycle of accountants in public firms in order to develop methods to extend intra-organizational careers and thus improve customer service. A model of the public accountant's career cycle is developed to facilitate this purpose and expose the effects internal CPA firm policies have on small business clients. Accounting firms are encouraged to revise existing career development patterns. Small businesses should consider implications of potential consultant career cycle policies on perceptions of engagement quality and costs.     

What do firms from transition economies want from their strategic alliance partners?

A financial system engaged in active transition from central planning to free market may be dubbed a transition economy. On today's global landscape, there are several important transition economies, all at various stages of transition and with differing degrees of success. Yet, much is not known about this important sector of the world economy. As outside enterprises seek alliances with firms from transition economies, it is important to know what these firms want from alliance partners. To learn more, we conducted a study interviewing managers of private firms from the two largest and most strategically important transition economies: China and Russia. We found that while Chinese and Russian firms often hope for some of the same things as their counterparts in mature economies as regards alliances, they are also interested in other things not normally associated with alliances: political influence, relief from paying bribes, and protection from extortion or even violence. Moreover, we discovered that because of differing institutional conditions in the two countries, Chinese firms are not always looking for the same things from alliances as are Russian firms—in spite of surface similarities between the two economies. Based on these findings, we provide guidelines for firms seeking alliance partners in transition economies, to assist them in determining if an alliance is right for them and planning accordingly.