The growth of small scale businesses free essay sample

The dynamic role of small scale business in developing countries has long been recognized (Kayanula and Quartey, 2000). These small scale businesses can serve as engines through which the economic growth and employment objectives of developing countries can be achieved. However, for many years these rural enterprises have failed to grow beyond their micro enterprise nature and sometimes at best their small or medium size (Kayanula and Quartey, 2000). It is believed that private small scale businesses have significant and positive contribution to the growth and development of business sectors in the Ghanaian economy. Small scale businesses sometimes called small enterprises, a small scale enterprise is a business that employs a small number of workers and does not have a high volume of sales. Such enterprises are generally privately owned and operated sole proprietorships, corporations or partnerships. The legal definition of a small-scale enterprise varies by industry and country. This policy paper is based on a study carried out to determine the growth of small scale enterprises, which plays a critical role in entrepreneurship development. We will write a custom essay sample on The growth of small scale businesses or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page While large enterprises employ many individuals, small-scale enterprises employ few or no employee, in Ghana small scale businesses account for nearly half of the gross domestic product. Small-scale enterprises help stimulate local economies by providing local individuals with jobs, as well as products and services to community members. Moreover, such enterprises help diversify and grow their respective industries, as many women and minorities make significant contributions to the small business world. When there is a rise in small scale enterprises, countries may see reforms in basic rights. Small scale enterprises exist in almost every industry. They can range from mom and pop convenience stores to small manufacturing plants. Additional types of small-scale enterprises can include privately owned restaurants, law firms, inns, bakeries, architectural and engineering firms, dry cleaners and construction contractors. Despite the large contribution of small scale businesses in countries development and economic growth, their growth and development in developing countries were mainly inhibited by access of finance, poor managerial skills, and lack of training opportunities and high cost of inputs ‘Cook and Nixson, 2 (2000)’. Further studies conducted suggest that finance is the most important constraint for the small scale businesses (Green, kimuyu, Manus and Murinde, 2002). The small scale businesses have very limited access to financial services from formal financial institutions to meet their working and investment needs However, the generation of self-employment in the small enterprises requires investment in working capital, at low levels of income, the accumulation of such capital may be difficult. Under such circumstances, loans can help the poor to accumulate capital and investment in employment generating activities â€Å"Hossain (1988)†. According to Grade (1984), loans enable the individual’s member or enterprises to enjoy the benefit of economies of scale and new technology. Availability of credit to small business and low income households could greatly enhance their economic strength and eventually break the vicious circle of low income, low saving, low investment and low income. Most Small scale businesses provide subsistence living and they keep in the vicious circle of not being able to grow because the small profits they make are easily wiped out by family needs like school fees, sickness, introduction and wedding ceremonies. There is, therefore, the need to transform micro enterprises activities into small and medium enterprises so that they can grow and provide jobs for others. Technology has an important role to play in transforming small scale business activities. In order to acquire technology, the small scale businesses usually need to get credit. However, their access to this from banks is limited because of lack of collateral. Their main source would therefore be from micro finance institution (MFI) schemes which have flexible collateral policies. The main objective of this study is to assess the contributions of small scale businesses by micro finance institutions and the indicators used to measure growth, considering their management skills such as a. planning b. communication c. human resource management, d. their entrepreneurial innovations, e. the business strategic plans and issues of trust and challenges needs to  be examined. This topic seems very interesting in divers’ ways which provides various alternatives in transacting business such as; first, the study will contribute to the body of knowledge on the contributions towards the growth of small scale businesses, taking into consideration the true cost incurred, apart from interest cost. Second, this study is intended to shed light on the relationship between microfinance services and the growth of small scale businesses, particularly with the focus on their livelihoods for both planners and policy makers in government, agencies and NGOs. This will help them to come out with substantive possible alternative policy interventions which might help to address problems and challenges which small scale businesses face. Third, this study will reveal the impact of microfinance services on the growth of small scale businesses for use in short term and long term interventions especially in the fight against poverty. In order to better understand the conditions that indicate when a small scale business is growing or ready to grow additional indicators concerning the business plans, communication, human resources management and issues of trust needs to be examined. A study of this nature is equally very important because it is going to enlighten the government and the public on the role of micro finance and its contributions towards the growth of small scale business sector. Definitions The SSB nomenclature is used to mean small scale business. It is sometimes referred to as small and micro enterprises (SMEs). The SSBs cover non-farm economic activities mainly manufacturing, commerce and services such as the small scale mining URT (2003). According to kessy and Urio (2006), SSBs can be defined as a productive activity either to produce or distribute goods and or services, mostly undertaken in the informal sector. The Tanzanian government defines SMEs according to sector, employment size, and capital investment in machinery. A micro enterprise is one with fewer than five employees, a small enterprise with 5-49 employees, a medium enterprise with 50-99 employees and a large enterprise with more than 100 employees. As Storey (1994) stated, there are three key distinguishing features between large and small businesses. Firstly, the greater external uncertainty of the environment in which the small business operates and the greater internal consistency of its motivations and actions. Secondly, they have a different role in innovation, small businesses are able to produce something marginally different, in terms of product or service; this differs from the standardized product or service provided by large businesses. A third area of distinction between small and large business is the greater likelihood of evolution and change in the smaller firm, small firms which become large undergo a number of stage changes. Small scale rural and urban businesses have been one of the major areas of concern to many policy makers in an attempt to accelerate the rate of growth in low income countries. These enterprises have been recognized as the engines through which the growth objectives of developing countries can be achieved. They are potential sources of employment and income breeders in many developing countries. It is argued that increases in employment Small and Medium Business is not always associated with increases in productivity. Nevertheless, the important role performed by these enterprises cannot be overlooked. Small firms have advantages over their large scale competitors. They are able to adapt more easily to market conditions given their broadly skilled technologies. However, narrowing the analysis down to developing countries raises the following puzzle: Do small scale business have a dynamic economic role? Due to their flexible nature, SSBs are able to withstand adverse economic conditions. They are more labour intensive than larger firms and therefore, have lower capital costs associated with job creation. SSEs perform useful roles in ensuring income stability, growth and employment. Since SSBs are labour intensive, they are more likely to succeed in smaller urban centers and rural areas, where they can contribute to the more even distribution of economic activity in a society and can help to slow the flow of migration to large cities. Because of their regional dispersion and their labour intensity, the argument goes; small scale production units can promote a more equitable distribution of income than large firms. They also improve the efficiency of domestic markets and make productive use of scarce resources, thus, facilitating long term economic growth. Constraints: Despite the wide ranging economic reforms instituted, SMEs face a variety of constraints owing to the difficulty of absorbing large fixed costs, the absence of economies of scale and scope in key factors of production and the higher unit costs of providing services to other firms. Most of these SMEs do not survive their second birthday because of certain constraints. These constraints include lack of capital, human resource challenges, market-based challenges, unfavorable legal, regulatory conditions and weak institutional regimes (Kayanula and Quartey, 2000). However, the URT MSEs policy recognizes that SSBs are confronted with unique problems including heavy costs of compliance resulting from their size. Other constraints include insufficient working premises and limited access to finance, Business Development Services, namely services related to entrepreneurship, business training, marketing, technology development and information are undeveloped and not readily available. SMEs lack information as well as appreciation from such services and can hardly afford to pay the services. As the result, operators of the sector have rather low skills. Institutions and associations supporting SMEs are weak, fragmented and uncoordinated partly due to lack of clear guidance and policy for the development of the sector (URT, 2003). Access to finance remained a dominant constraint to small scale enterprises in developing countries. (Aryeetey, Baah, Duggleby. 1994) reported that 38% of the SSBs surveyed mention credit as a constraint, in the case at Malawi. This stems from the fact that SMEs have limited access to capital markets, locally and internationally, in part because of the perception of higher risk, informational barriers, and the higher costs of intermediation for smaller firms. As a result, SMEs often cannot obtain long-term finance in the form of debt and equity. Financial problem of most MSEs arise due to poor financial management; existence of information irregularity and bank credit rationing. Ogawa and Suzuki (2000) pointed out that bank do not want to offer loans to MSEs because the nature of loans required is too small and those banks find it more expensive to offer such loans. Commercials banks, which were traditionally looked upon as powerful catalyst of economic development through mobilization and the provision of credit to profitable ventures do not offer credit to the rural poor or small business. Stringent lending policies and collateral requirements, cumbersome procedures and their perception of small business and the rural poor as risky, often leads to exclusion Indicators and contributions of growth: There is different range of indicators of growth of SMEs. This study will use income of the SSBs, Accumulation of business assets, revenue and employment through MFI as indicator of growth for the enterprises and also indicators such as innovation, communication, planning, human resource management and business trust. Therefore in recognizing the contribution of SSBs in countries, the Microfinance Policy which aims at enabling low income earners to access financial services was developed. Microfinance institutions (MFI’s) provide a broad range of services including deposits, loans, payment services, money transfer and insurance to the poor or low-income households and their enterprises. The introduction of MFI’s is seen as the best alternative source of financial services for low income earners and their MSEs as a means to raise their income, hence reducing their poverty level and contributing in country economy (Kessy and Urio, 2006). Along this line the service of microfinance institution to majority who are low income earners have given them a number of possibilities including managing scarce household and enterprises resources more efficiently, protection against financial risks by taking advantages of investment opportunities and gaining economic returns. Micro finance enables clients to keep, expand and increase their incomes, as well as to accrue assets, reducing their weakness to income and expenditure shocks. By definition micro finance is described as the provision of appropriate financial services to significant numbers of low income, economically active people with an end objective to alleviate poverty. Micro Finance is recognized as an effective tool to fight poverty by providing financial services to those who do not have access to or are neglected by the commercial banks and financial institutions. Financial services provided by the Micro Finance Institutions (MFIs) may include one or any combination of savings, credit, insurance, pension or retirement and payment services. Microfinance is also frequently combined with the provision of social and business development services, such as literacy training, education on health issues, management or accounting. The main features of a microfinance institution which differentiate it from other commercial institutions, are such that, it is a substitute for formal credit, generally requires no collateral, have simple procedures and less documentation, easy and flexible repayment schemes, financial assistance of members of group in case of emergency, most deprived segments of population are efficiently targeted and last but not least, is groups interaction. According to Mosley (1999), microfinance makes a considerable contribution to the reduction of poverty through its impact on income and also has a positive impact on asset level. But the mechanism through which poverty reduction works varies between institutions. Generally, institutions that give, on average, smaller loans reduce poverty much more by lifting borrowers above the poverty line, whilst institutions giving larger loans reduce it much more by expanding the demand for labour amongst poor people. MFI services have impact not only on the SMEs growth but also on the owners and community at large, therefore the conceptual framework developed reflect the outcome of SSBs growth at household level this is due to the assumption that increase on growth of result into an increase of SSBs owner’s wealth and overall standard of living since the profit obtain from SMEs activities enable the SMEs owners to meet his/her living expenditure, hence create a possibility of trickledown effect. Nichols (2004) used a case study approach to investigate the impact of microfinance upon the lives of the poor in the rural China and found that the participation of poor in MFI program had led to positive impact in their life. Their income have increased, spending on educational and health have increased hence improved their standard of living and also women have benefited out of this program. There were visible sign of higher wealth level within the village. Also to assess the direct and indirect cost that SMEs incur when accessing the microfinance service, Chijoriga and Cassimon (1999) poited out that transaction costs comprises cost involved in finding a lender, mismatch costs and risk premium, all these transactions increase the gross cost of credit for the borrower. High transaction cost limit SSBs effective utilization of the services received, hence limit SSBs and household growth. Transaction cost approach to the theory of the firm was created by Ronald Coase (1937) in his article The Problem of Social Cost In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed. More succinctly transaction costs are search and information costs, bargaining and decision costs, and policing and enforcement costs The growing rate of unemployment poses a challenge not only to individuals but also to the government. At the individual level, the establishment of business enterprises particularly SMEs has been a resort to gainful employment. In order for SSBs to overcome the several constraints that they face and grow into large corporate entities; they must also be very innovative. Innovation is referred to as the use of improved products, processes, services, technologies or ideas accepted by markets, governments, and society (Christensen, 2002). Innovation is not the same as invention. Innovation refers to the use of a new ideas or methods, whereas invention refers more directly to the creation of the idea or method itself (Davila, Epstein and Shelton. 2006). SSBs need not create a new method but adopting the new methods to make it beneficial to their specific operations. Innovation has been identified as a driver of organizations and nations (Schumpeter, 1911) as it leads to entrepreneurship and hence economic prosperity. Essentially, innovation is holistic. It covers a range of issues necessary to provide value to customers and a good return to the organization. Buckler (1997) defines innovation as â€Å"an environment, a culture, almost spiritual force, that exists in a company† that drives value creation. Innovation cannot be touched, heard, tasted or seen but it can be felt within an organization. It is possibly best described as an all surrounding attitude that allows businesses to see beyond the present and create the future. During professionalization, management systems focusing on planning organization, development and control are developed (Flamholtz, 1990). The formation place an emphasis on organizational planning which may include the number of employees in the business. Planning is one of the most important functions of managers or sole proprietors. Instead of hopping for the best and making corrective changes each time difficulties are experienced, all aspect of production, selling and other activities of small scale businesses are determined ahead so that unforeseen circumstances are reduced to minimum. Planning in this context involves determining the direction of the business by establishing objectives and by designing and implementing strategies necessary to achieve the objectives of small scale businesses. While formal planning may not be  prevalent in small scale businesses, evidence was found that in order to successfully expand the workforce of small scale businesses, planning for growth must be carefully done. Also another indicator of interest as small scale businesses grows or expand their workforce is the importance of communication. Communication with customers, suppliers, competitors and the workforce should be focused at ensuring their understanding towards the alignment of the goals of the business. Effective communication is an intrinsic form of motivation. A clear, simple and timely transmission of information secures and maintains the interest of both internal and external factors of the business. Consistent with these findings, (Howard 2001) found that communication of the business plans through meetings demonstrated a positive, significant correlation with growth of business profit. Trust is an issue that has not been widely studied in relation to growth in small scale businesses. However, trust has been found to have a significant, positive correlation with business profits (Howard, 2001). Small scale business owners and managers in small businesses need to be able to trust their suppliers, customers and employees. If they do not develop some level of trust in their employees they may find themselves attempting to complete task jobs themselves. This can lead to an underutilization of employees, as well as contributing to the burnout of small scale business owners and managers. While not widely studied, since trust has demonstrated a significant relationship with organizational profit, it should be more closely examined to determine it relationship on the growth of small scale business. Lastly, as small scale businesses expand its workforce, it is reasonable to expect that the organization will experience some problems of a human resource management nature. This could be the reason that small scale businesses formalize their human resource policies and record keeping as they grow, since many small scale businesses do not have an employee dedicated to human resource management issues, as their owners may be addressing human resource management issues’ on their own as needed. In an exploratory study by Howard (2001), a wide variety of human resource problems were identified by owners and employees of small scale businesses. Most notably, staffing problems and appropriate salaries were noted. While many other problems were identified, staffing and compensation are functional areas of human resource management that will influence successful growth of small scale businesses. In conclusion, Based on a critical analysis and discussion by the group, it was evidence that, SSBs play an important role in the social economic development of the country. The sector contributes towards economic growth, employment creation, poverty reduction and development of an industrial base. They are important for raising efficiency of a country owing to their flexibility and low production costs. They act as breeding grounds for entrepreneurship innovation and invention hence a pool for employment. MSEs must therefore be nurtured to grow beyond social level. Based on the analysis of this paper, it was found that MFIs play a major role in credit provision to the MSEs, and this credit has contributed a major part in the growth of the business in terms of asset base, level of stocks, services and the number of employees the business can sustain. It also indicated that the credit services in businesses which do not show increased profitability, changes in stock levels and services are used to sustain the business and avoid possible collapse. Some suggestions and recommendations from this study is that the policy makers should address the main problems that medium and small enterprises encounter in accessing credit, by creating an enabling policy environment through simplifying and harmonizing licensing requirements, reduction of taxes and enhance access to relevant information through seminars and workshops. The government through the central bank should develop appropriate standards which recognize the special nature of micro finance institutions and strengthen them through integrating their operations in the main stream banking sector. The central bank should also make it a requirement for banks to have a separate micro finance credit line of service to take care of the needs of the SSBs. Empirical evidence shows that dynamic and growing small scale businesses can contribute to the achievement of a wide range of development objectives, including: the attainment of income distribution and poverty reduction, creation of employment, savings mobilization and production of goods and services that meet the basic needs of the poor. A major barrier to rapid development of the small scale enterprises is a shortage to both debt and equity financing. Accessing finance has been identified as a key element for small scale enterprises to succeed in their drive to build productive  capacity, to compete, to create jobs and contribute to poverty alleviation in developing countries. Small scale enterprises as a risk because of poor guarantees and lack of information about their ability to repay loans without finance, small scale enterprises cannot acquire or absorb new technologies. Although the banking sector is the largest and most important source of external financing for small scale enterprises, by and large, it is believed to be under serving the needs of this sector. Small scale enterprises alternatively draw financing from a variety of sources. Small firms rely proportionally more on MFIs and the informal sector (money lender) as a result of their inability to produce the collateral needed by the commercial banks. The various challenges faced by small scale enterprises can be solved through the effective utilization of the terms and policies of the MFIs. Also planning as the best indicator for small scale businesses to direct and forecast their activities successfully.