Introduction
In any developed economy, the share of the business of small and medium enterprises (SME) in terms of volume and number is large. There are a large number of such businesses when compared to multinational corporations (MNC). In spite of much smaller numbers, MNC share comprises the next biggest share in terms of business. It is surprising that despite the existence of so many successful (and not so successful) SMEs, very few of them grow into multinational giants. This is seen from the fact that the number of MNC is not increasing in a great way. This paper is a study on why even successful SMEs often fail to transform themselves into large multinational corporations.
Discussion
SMEs are often considered to be an important component of a developed economy. “Small businesses are recognized as the backbone of the British economy, accounting for more than half of the UK’s turnover.” (Lukacs, p.5). But very few studies have been conducted as to why they grow enough to become labeled as MNCs. This lack of study has been corroborated by other researchers as well. “What kind of strategies do successful SMEs use to grow, and conversely, what constraints prevent growth? Unfortunately, little is available in the existing literature on SMEs business growth model.” (Li and Tan 2004, p.195-207). The study adds that most growth theories have been done with regard to MNCs.
Reasons for failure
A search for literature reveals that some theories and studies have been done on this topic. Some of the relevant thoughts and ideas are provided here.
It’s tough to become an MNC
Becoming an MNC is a slow and tough job that requires tenacity, resources, and vision. Besides the competition and the risk of operating in a new market, local companies and other MNCs operating there can be hostile towards a new entrant. This is very difficult for a company with relatively low resources (in terms of finance, technology, management expertise, etc) to handle. This prospect may cause small companies to think twice before venturing internationally.
Financing
Any organization needs adequate finance to expand internationally since it entails a lot of investment. Due to the diverse nature of SMEs, lending institutions need to allocate a lot of their resources when financing such firms especially to see whether the proposal is eligible. “These firms require high “touch”, which means labor-intensive monitoring and administrative costs, but loans to SMEs are rather small. From the view of banks, the extension and pricing of credit often involve information asymmetry and lack of adequate collateral.” (The SME Financing Group: Credit Financing for SMEs Constrains and Innovative Solutions. 2006, p.20). Banks would prefer to finance MNCs since the amounts involved would be large and hence more profitable to the bank. In other words, they can get more profit with the same effort, as compared to SMEs. The MNCs can also provide the necessary collateral if needed. But some forward-looking banks are realizing the profit potential of helping SMEs in their effort towards growth and entry into international markets. An example is given here. “Sanjeev Nanavati, Citi Malaysia’s Country Head, Markets and Banking, said SMEs were often under-served and that Citi bank planned to help them not only to prosper locally but to become regional and global players.” (Citi Expects 20 Pct Annual Growth Its SME Business. 2009).
Age of business
One interesting characteristic of high-growth firms is that they are relatively young when compared to failed, failing, or steady firms. A study of SMEs in the UK titled ‘SME Growth Trajectories’ shows that firms with the highest growth rate on average are only eight years old. Steady firms have been in existence for 17 years, and those that are declining have been in existence for 29 years (all average figures). Recovering firms have been in existence for around 24 years on average. (Bullock 2004, p.22). The initial enthusiasm is what helps young firms to grow fast. Firms that have not grown even after twenty years or so show declining and sometimes recovering (after declining) trends. It appears that firms have to keep up the initial momentum to turn into larger multinationals. Otherwise, an older firm will have to be an acquired one.
Acquisition by MNCs and other companies
Firms that are growing at a high rate can become MNCs if the momentum can be kept going. This makes them a target for acquisition. Once acquired, the previous owner will no longer have a controlling interest and the original intent of becoming an MNC is lost.
Lack of organized structure
Only around 50% of steady, declining, or recovering firms had a well-formulated management structure. On the other hand, nearly 70% of high-growth firms display the above characteristic.
Technology-based SMEs
An Australian study about technology-intensive SMEs has provided four further reasons of how such companies can be supported to grow further. The panel who presented the paper states that “Our work early last year identified four factors critical to the growth of Technology-Based SMEs.” (Miles and Adams 2005). The first reason they state is that technology-based companies need exports to stay competitive and grow. This indicates that most countries cannot provide the market for so many companies and the only solution is to look for overseas markets. This could well apply to other SMEs in the sense that expansion (whether locally or internationally) is essential for growth. The second reason provided is that SMEs need to concentrate on business innovation. Product differentiation, for example, can only be brought about through innovation and research. If such companies are unable to innovate, they will remain static in terms of growth. Lack of visionary and experienced management is the third reason. Experience and vision are part of growth and lack of them may not make the company capable of meeting the challenges of transformation into an MNC. The final reason is that capital available within a country should be used in assisting business units that belong to the country. This indicates that lack of capital is also a reason for the lack of growth for SMEs.
Manufacturing SMEs
Another report states that SMEs need more support from the government, a point that has been echoed in the above section. This report based on Malaysian SMEs state that the government focuses more on MNC. This lack of help results in the small and medium units in the country becoming technically backward. Hence technology in the manufacturing field is also essential for growth. Obtaining the latest technology is expensive and hence such small and medium units must be assisted in all possible ways to solve this problem. According to Penang Automation Cluster chairman Chuah Choon Bin, “The Government should assist the local SMEs in terms of skilled labor development and provide them with the opportunities to participate in technology collaboration programs with tertiary institutions and MNCs.” (Tan 2007). But this could clash with the fact that MNCs are scared that their smaller counterparts may become a major competitors and hence will attempt to take them over or stifle their growth.
Conclusion
It is seen that small and medium enterprises face a lot of hurdles, both internal and external concerning their ambitions. Older firms are seen as steady, declining, or recovering. It indicates that the will to grow diminishes as they and their management grow older. The management structure is also better organized in younger firms. The external factors include difficulty in obtaining finance (for international expansion), lack of governmental support, takeover threats from larger companies and multinational corporations.
Bibliography
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Citi Expects 20 Pct Annual Growth Its SME Business. (2009). [online]. Interprenet: Ministry of Entrepreneur and Cooperative Development. Web.
LI, Hui Hong JK., and TAN, Kim Hua. (2004). SMEs Business Growth Model: A Medium Big Effort. International Journal of Management and Enterprise Development, 1 (3), 195-207. [online]. Inderscience Publishers. Web.
LUKACS, Edit. The Economic Role of SMES in the World Economy, Especially in Europe: SMEs in the UK. [online]. University of Miskolc. P.5. 2009. Web.
MILES, David., and ADAMS, Martin. (2005). Presentation to the Prime Ministers Science, Engineering and Innovation Council. [online]. Growing Technology Based SMEs. Web.
TAN, David. (2007). SMEs Hope for Better Prospects. [online]. Media Center: Press Release. Web.
The SME Financing Group: Credit Financing for SMEs Constrains and Innovative Solutions. (2006). [online]. OECD Publishing. P.20. Web.