On Lending to Small Firms

Lending to small firms is difficult because of the problems of information asymmetry. Innovative ways to address these problems have the potential to increase credit availability to these firms. The papers in this section provide a discussion of two different innovations in small business financing: increased usage of credit scoring technology and the introduction of microfinance lending institutions. Though these two approaches make use of different technologies, they provide a valuable picture of how lending to small firms is evolving over time.     

Small Firms as International Players

In this paper, using aggregate data from the U.S Bureau of Economic Analysis, the author explores the strategies small U.S.-based foreign investing firms follow in their international activities. The aggregate study supports the findings of an earlier study of a few small firms with international activities. These firms have a lower-than-expected tendency to form minority-owned affiliates abroad. An analysis of the industries in which these small foreign investing firms operate supports the notion that these firms follow specific strategies uncovered in the small-scale study. Finally, the paper ties the findings to alliance strategies of small firms.     

Alliance Strategies of Small Firms

The paper concludes that small firms follow one of two alliance strategies. When the firms are small relative to their rivals and to their market, they tend to use alliances to gain economies of scale and scope; when they are large in relative terms, they avoid alliances. This behavior is consistent with alliance usage by large firms. The paper also analyzes the sources of profit for a small firm that uses a "constellation" of allies to compete in a scale-intensive industry. Its profits depend on a combination of the group-based advantages generated by the constellation, and the share of these profits that the firm can appropriate from the group. Small firms face particular hazards in this regard when their bargaining power within their constellation is weak. The paper illustrates these arguments with data froma small survey, with case studies from the computer industry, and with a simple mathematical model.     

Forecast Rationality in Small Firms*

A large sample of small firms was longitudinally surveyed to investigate the rationality of revenue forecasts made within such firms. The analysis helps to address the dearth of research investigating owner/managers' forecasts of growth in firms and their degree of accuracy. Contrary to conventional expectations, the results do not support the contention that forecasts made by the managers of small firms are optimistic. Although systematic overestimation was not found, managers did tend to make forecasts that were generally too extreme, and tended to overextrapolate previous growth. These results are consistent with propositions that overconfidence biases and representative heuristics influence the revenue forecasts made in small firms.     

Planning Behavior Variables in Small Firms

Much of the empirical data that identifies the incidence of planning in small firms and the variables associated with that planning is based on small samples subject to geographic and industry constraints. The intent of this article is to partially overcome those limitations by testing relationships using results from a large Australian-wide, multiple-period sample. For each of three years, the frequency with which firms maintained documented business plans was determined and tested for associations with a range of traditional "business structure" demographic variables and a group of "management structure" variables. Results support expectations that size, volume, training, intention to change operations, and the major decision-maker's education are positively associated with business planning. Results also indicate that a significant number of firms change planning behavior states over time.     

New and Small Firms in Expanding Markets

The recent expansion of markets and increased standardization has not, as might be expected, been associated with an expansion of the role of larger firms. Recent data on new and small firms has indicated a substantial and expanding role for new and small firms in the global economy. There appear to be substantial differences between sectors, as competitive advantage is some is achieved through aggregation (upsizing) and in others thorough disaggregation (downsizing) of the productive process. New data is providing new knowledge on the role of firm size and age on economic growth. The advanced economices of the future will not be dominated by old, large firms.     

Why Small Firms Export: Another Look

This article examines what factors motivate small firms to export. Specifically, this study looks at firms with 200 or fewer employees, dividing the sample into two groups: firms with 25 or fewer employees and firms with more than 25 employees. The results suggest that firms with 25 or fewer employees export for two main reasons: the firm has a unique product, and it has a technological advantage over competitors. Firms with more than 25 employees export for the above two reasons, plus two additional reasons: to achieve economies of scale and to avoid losing out on foreign opportunities. Due to the limitations of the size and scope of this research, future research should include additional SIC categories as well as firms outside California.     

Transmission of Risk-Averse Behavior in Small Firms

Small-sized firms are typically more entrepreneurial and engage in more innovation and risk-taking behavior. For that reason they are considered the engines of future economic growth. One policy for stimulating such activity is to provide government contracts for small firms. However, such contracts as typically written result in increased risk-averse behavior on the part of small firms out of a desire by government officials to shift the risk to the firms. This, in turn results in a reduced level of innovative and entrepreneurial activity. To eliminate the disincentive to engage in innovation and entrepreneurial activity, government needs to bear the risk associated with such contracts. One possible solution, given the natural risk aversion of elected officials, is to engage in a portfolio approach to small firm contracts by which the government can diversify away some of the risk.     

Determinants of Technical Efficiency in Small Firms

There is evidence that small firms are less productive than larger ones. This phenomenon could be explained by several factors. In this paper, using plant survey data and non-parametric deterministic frontier methodology, we explore what factors can explain the observed differences in technical efficiency. In the case of Chilean manufacturing firms, we found that efficiency is positively associated with the experience of workers, modernization of physical capital and innovation in products. In contrast, other variables such as outward orientation, owner education and participation in some public programs do not affect the efficiency of the firms.     

Small Firms and Economic Transformation in Bulgaria

The pace of transition to a market economy has been slower in Bulgaria than in some other east European countries in the 1990s. Output levels in the state owned sector, which has not yet been subject to mass privatisation, have fallen sharply and there has been a dramatic increase in unemployment. There has however also been a rapid growth in the number of small firms, and the ability of this sector to generate new jobs will be an important component of labour market dynamics in the future. Some of the main characteristics of this emergent sector are identified on the basis of a sample survey of nearly 400 small Bulgarian firms, covering competitiveness, entrepreneurship, innovation, networking, labour relations and business performance of the small firms. Key features of a subset of small firms with an orientation towards employment growth are identified.     

The Internationalization of Small and Medium-Sized Firms

This paper contributes to the existing research by integrating the notions of organizational learning and entrepreneurial orientation into the body of international entrepreneurship. Our primary framework combines learning theory and the new venture theory of internationalization to study the extent to which small and medium-sized companies engage in international activities. We found that the firms’ international learning effort and entrepreneurial orientation are positively associated with internationalization intent whereas domestic learning effort is negatively related with internationalization intent. Overall, our results suggest (1) that intensive knowledge renewal and exploitation regarding foreign markets and the internationalization process itself may increase internationalization by affecting the perceptions of opportunities offered by further international expansion, and (2) that firms with an entrepreneurial mindset may be more likely to develop a long-term, substantial presence in the international arena, compared to firms that are more reactive or conservative.     

Perceived Environmental Uncertainty and Innovation in Small Firms

Employing data, from a recent survey of Scottish and Northern English Small- and Medium-sized Enterprises (SMEs), the current paper provides new evidence of the extent to which perceptions of environmental uncertainty (dynamism, complexity and hostility), along a number of dimensions, discriminate between small firms engaged in various levels of product innovation. Drawing, broadly, upon an extended version of the classic Miles and Snow schema, novel innovators appear to be marked by perceptions of uncertainty in market and technological environments, but by perceptions of a relatively certain or benign competitive environment. Moreover, the paper observes some dissimilarities between manufacturing and service firms. For instance, higher levels of innovation in manufacturing firms are associated with higher perceptions of supplier uncertainty, whilst, higher levels of innovation in service firms are associated with higher perceptions of human resource uncertainty.     

Manufacturing Site Location Preferences of Small Agribusiness Firms

This study examined the perceived importance of site location characteristics identified in a 1999 survey of 198 small Tennessee agribusinesses. Responding firms ranked proximity to buyers/customers, labor, and raw materials above other factors. However, the relative importance of all factors varied by industry subsector. For example, compared to food processing firms, textile milling and lumber/wood products firms perceived community incentives as less important. Projected firm growth and current location also affected the perceived importance of site location factors. The diversity of perceived factor importance across agribusiness subsectors supports the idea that incentives and promotion of site location factors to attract small agribusiness may need to be tailored to meet specific firms' needs.     

Internationalisation of Firms from Small Open Transition Economies

Abstract

The aim of this study is to determine the joint impact of intra-firm factors and inward foreign relationships on the status and stage of the outward internationalisation process of firms from small open transition economies. These factors and connections include firm's production capacity, experiential knowledge, psychic distance to target markets, inward international involvement (including foreign ownership and supply relations), and spillover effects. According to the empirical evidence, the inward internationalisation of Estonian manufacturers has considerably facilitated their export intensity.     

On Investing in the Equity of Small Firms

This comment provides a brief discussion of the roles of different investors in small business firms. It then evaluates the contribution made in papers by in this issue by Robinson and Cottrell on informal investors in Alberta, Canada, and by Pintado, Pérez de Lema, and Van Auken on venture capital investment in Spain.     

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.      

Financial Analysis of Palestinian Industry Including Small Scale Firms

The study aims to explore the financial aspects of the Palestinian industry, and to investigate productivity and efficiency of small scale industry compared with large scale firms. In order to help policy makers in industrial planning in the new emerged Palestinian state. A special instrument has been used to collect the financial and quantitative data for the related manufacturing firms from a random sample of 215 Palestinian firms. The one way analysis of variance test was used to examine whether the mean scores differ significantly among scale sizes of the Palestinian industry concerning the selected performance measures. In addition, the Scheffe test was used as a post hoc comparison way to identify which scale size firms' performance differs than the other two scale sizes.The research revealed that small scale firms in Palestinian industry have higher labor productivity values than large scale firms, while large scale firms accomplished higher net profit margin compared to small scale industry. Creating an additional job in large scale Palestinian industry needs less cost than creating a job in small scale industry, and large scale firms have better opportunity in getting external financing than small firms.     

Small Firms in High Tech – A European Analysis

Small Business Economics - The purpose of this paper is to provide insights into the diffusion process of a new technology referred to as microsystem technology. Specific aspects of the diffusion...