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SMALL BUSINESS IN SMALL ECONOMIES: CONSTRAINTS AND OPPORTUNITIES FOR GROWTHAuthor(s): Mahendra ReddySource: Social and Economic Studies, Vol. 56, No. 1/2, The Caribbean and Pacific in a NewWorld Order (March/June 2007), pp. 304-321Published by: Sir Arthur Lewis Institute of Social and Economic Studies, University of the WestIndiesStable URL: http://www.jstor.org/stable/27866505 .

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Social and Economic Studies 56:1&2 (2007): 304-321 ISSN: 0037-7651

SMALL BUSINESS IN SMALL ECONOMIES: CONSTRAINTS AND OPPORTUNITIES FOR

GROWTH

Mahendra Reddy

ABSTRACT

Small businesses are now increasingly being perceived as an important contributor to economic growth and development. They make significant contribution towards job creation and the provision of low cost goods and

services. The role of small business-is more critical in small states where

size, technology, capital and other resource constraints limit the

establishment of large business. In such states, small businesses have the

leading role in providing goods and services for the society. Fiji, for instance, has a large proportion of its population engaged in small and

micro-enterprise. Most of these small businesses, however, face a number

of problems that inhibit their entry into the industry or make their survival

difficult. How are these SMEs performing and what are the problems, if

any, that they are encountering? This study is conducted to examine how

small businesses have contributed towards rising household income and, to

identify the various problems that are plaguing these establishments. The

results from the study reveal that poor law and order/security, lack of

finance and appropriate skills are major impediments to small business

growth and development.

Over the last two decades, there have been a number of changes in

the way global business is conducted. Changes include the

liberalization of trade, expansion of regional economic integrations and advances in information communications. While these changes have taken place, the importance of small businesses still remains

an integral component of the overall economic activity (Leonidou 2004: 279-302).

Small businesses continue to be important contributors to

economic growth and development. They make a significant contribution towards job creation and the provision of low cost

goods and services. A large number of studies have confirmed that

most of the new jobs come from the small business industry



Small Business in Small Economies: 305

(Stanworth & Curran 1976: 95-110; Burns and Dewhurst 1996: 225;

Glancey 1998: 18-27). Their employment potential has attracted favourable responses from both sides of the political spectrum to the prospect of small business being the panacea to the woes of

ailing economies (Gray 2000: 24).

Although the small business sector represents a significant proportion of the global economy (Morrison and Ali 2003: 417-425), the role of small business is most critical in small developing economies where size, technology, capital and other resource

constraints limit the establishment of large businesses. In such

economies, the small business sector has the greatest role in

providing goods and services for the society. The small island states of the South Pacific have, since their

independence, relied on a large number of small businesses to

service their communities having small populations and inhabiting small islands. Fiji, one of the more developed of these small island

states, is no exception to this.

The 1996 census survey of Fiji revealed that 64% of its

population was engaged in small and micro-enterprise.

Recognizing the pivitol role SMEs play in the overall economy of

the state, the government, in 2002, established a National Centre for

Small and Micro-Enterprise to train youths in the establishment and

running of small businesses. Appendix 1 provides details of the

policy objectives. The initiative also began providing micro

financing for small business development. While this will arguably

encourage the entry of youths into SMEs, it is critical to ask if

existing business are operating smoothly and identify problems that are plaguing them. It is also important to determine what can

be done to ensure that they continue to play an important role in

employment creation and contribute positively towards Fiji's

growth and development. In light of these questions, this study is

conducted to identify some of the household-specific factors that

affect small business income and identify the various problems that

these businesses are facing.

Small Business Growth and Development: A Review

There exist a large number of studies on the importance of small business in the development of small economies. However, only a

small number of these studies focus on the constraints faced by



306 SOCIAL AND ECONOMIC STUDIES

small businesses. A study of SMEs in Nigeria by Mambula (2002: 58-65) listed four key factors that pose problems to SME growth. These are ? lack of finance, poor infrastructure, difficulty in getting machines and spare parts, and difficulty in getting raw materials.

Lack of finance is a common problem faced by small

businesses in developing countries. The growing evidence of this is

the establishment of micro-financing schemes with less stringent

requirements. The local environment is also an issue affecting the

performance of small businesses. North and Smallbone (1996: 151

167) argue that there are various aspects of local environments that

influence the development of SMEs. These include the size and nature of local market opportunities, the opportunities for the local

sourcing of inputs and subcontracting; the local transportation and

communications infrastructure. Lee, and Osteryoung (2000: 193

200) provide a summary of some of these factors classifying them into four categories, the marketing factor, technological factor,

government regulation factor and managerial ability factor. Details of these factors are provided in Appendix 2.

In his study, Mambula (2002: 58-65) also maintains that other institutions in the private sector must operate in a cohesive and

cooperative manner with the government to support SME growth. Premaratne (2001: 363-371) suggests that informal personal networks play an important role in the success of small businesses. He relates that since no single actor has all the resources required; they must be acquired from external sources such as suppliers, banks, government agencies, relatives and friends, either in the form of "bought" resources or "gratis" resources.

Small businesses also tend to get 'squeezed' due to

competition and this is more of a problem in the urban areas

(Keeble 1993: 54-78). The development of small businesses also depends on its

network linkages. Network linkages can provide extra resources that affect business growth in several ways. Firstly, they help to

mobilize resources quickly (Premaratne 2001: 363-371). Cromie, et.

al., (1994: 25-32.) argue that the greater the number of contracts available to small enterprise, the greater are the chances of

acquiring the information and other resources needed at minimal cost. Brown and Butler (1993: 101-116) argue that the types of information provided by networks are necessary not only for

identifying entrepreneurial opportunities that warrant founding a




Table 1: Small Business, Pro-Growth & Inhibiting Growth Factors

Nature of Factors Pro-Growth Factors' Inhibiting Factors

Intention

Ability

Opportunity

Demographic variables

Personal characteristics

Values and Beliefs

Educational level

Knowledge of different fields of business

Perception/actual of owner

managers competence Growth potential products, assets & premises

Legal format of business

Proactive learning through social, informal networks

Market conditions Access to finance

Public sector regulation

Labour market

Lack of ambition and vision

Anti-business "hobbyist"

approach

Quality of lifestyle protectionism Mature position in life-cycle

Constrained managerial

competencies Narrow skills base

Physical expansion/production limitation

Organizational structure results

in lack of time and resources

Weak power position within the

industry sector markets

High dependencies on externalities

Adverse financial and economic

conditions

Unhelpful local government

approach to business

development

Constraining government

regulation and communication

Source: Burke and Jarrat 2000:34; Maki and Pukkinen 2000: 35; Gray 2000: 24; Bridge et. al., 1998: 210; Morrison et. al. 1999: 185; Heffernan and Flood 2000: 128-136; Sherwood et. al. 2000., as cited in Morrison and Ali (2003: 417-425).

business, but also for ensuring the success of a business. Gibb (1993:

1-24) and Humphrey and Schmitz (1996: 1859-1877) maintain that

small enterprises can achieve the complementary skills and resources that are essential for competitiveness and survival in the

market through entrepreneurial networks.

Management strategies and planning are also critical for business growth and success Gaskill et. al., (1994: 21-35). Business and strategic planning is critical for family firm success (Brown 1995: 22; Knight 1993: 33-34; Jones 1982: 15-19; Ward 1988: 105-117) for growth (Astrachan and Kolenko 1994: 251-262; Poza 1989: 232;




Ward 1987: 135, 1997: 323-337) and for performance (Aram and

Cowen 1990: 76-81; Schwenk and Shrader 1993: 53-64). Past research on small business studies have also attempted to

distinguish between an entrepreneur and a small business owner.

Blatt (1988: 29) state:

Not every small business is entrepreneurial and not every entrepreneur runs a small business. Some small businesses are

run by entrepreneurs and some entrepreneurs run small

business; they are not mutually exclusive nor mutually inclusive categories.

Schumpeter (1912: 335) described the entrepreneur as one who

does things in innovative ways by finding: (1) new

products/services, (2) new methods of production, (3) new markets,

(4) new sources of supply or (5) new forms of organization. The

Schumpeter-type entrepreneur is also a creator of jobs and a highly innovative harnesser of technology which generates economic

growth and social change (Schumpeter 1934: 335; Barth 1963: 227, 1967: 661-667).

Methodology

Data on small businesses was collected from households on Fiji's main island, Viti Levu by using a structured questionnaire. The

primary data was collected in Suva, Nadi, Lautoka and Ba. Suva

and Lautoka are the only two cities in Fiji while Nadi and Ba are the

other two largest Towns in Fiji. They vary quite considerably in size, but together account for about approximately 70% of Fiji's

population. The study was limited to these three areas due to

financial and time constraints.

The survey was administered over a 9-week period in

November/December 2003 and January, 2004. A total of 300 small

businesses were interviewed out of which 240 questionnaires were

returned for analysis. The rest of the questionnaires were either

incomplete or data on key variables was missing due to refusal of

the business operator to co-operate. The survey was carried out

with the support of Undergraduate University students.

A wide range of business operators were interviewed and data

obtained. A summary profile of the respondents is provided in

Table 2. The mean age of the respondent was 40.4 years with an

average education level of 6.6 years of formal schooling. The sample




Table 2: Socio-Economic Profile of Respondents

Variable Index

Age 40.4

199 41 6.6

90.4

5

3.8

0.8

17.9

80.4

1.7

Gender: Male

Female

Education level

Marital status: Married

Single Divorced/Seperated Widowed

Fijian Indo-Fijian

Other

Ethnicity:

N-240

Source: Data obtained from the primary survey of the informal sector activities.

comprised of 17.9% indigenous Fijians and 80% Indo-Fijians. As

Fiji's population consists of 52% Fijians and 42% Indo-Fijians, the

sample distribution is not an indication of the overall ethnic

composition of the population but makes evident the fact that most

of the business are run by Indo-Fijians. The respondents were

mostly married and males. The gender bias again reflects the

dominant role of males as heads of businesses in small developing societies.

In this study, descriptive statistics will be used to examine the

data and derive answers to research questions. More rigorous econometric techniques will be utilised to find a quantitative

relationship between Business successes status and various socio

economic variables. Such quantitative relationship modelling would allow researchers to rigorously test and determine the

significance of firm specific factors. Furthermore, quantitative

modelling would allow decision-makers to measure the impact of

individual policy response on the direction and magnitude of

change on the independent variable. To do so, the following theoretical model is specified:

Where Y? = 1 if option is chosen, 0 if option is not chosen;

X? = vector of explanatory variables; and

6? = random error term.

Y? = a + ? X? + e?




Application of Ordinary Least Squares (OLS) techniques to

estimate the above model will result in inefficient estimates since

the error term is heteroscedastic. Moreover, the parameter estimates

will be inefficient (Goldberger 1964: 345; Pindyck and Rubinfeld

1983: 317). In addition, due to a non-normal error structure, classical

hypothesis tests such as the t-test are no longer appropriate (Shakya and Flinn 1985: 409-419). Given this problem, a commonly used

approach in the econometrics literature is to transform the original model using a cumulative probability function in such a way that

the predictions (P) will lie in the (0,1) interval for all X. A large number of studies exist in the literature which have utilised this

model to explain the probability of adoption or acceptance by decision makers (see Reddy et. al, 1999: 40-47, Masuo and Reddy 1997: 27-32 and Yanagida and Reddy 1997: 22-26). This type of

behavioural model accounts for a dichotomous dependent variable

such as adopting or not adopting a modern crop variety, decision to

open or not to open a bank account, or determining whether an

individual is in poverty or not. This study utilizes this concept and

adopts the Probit probability model (which utilizes the cumulative

normal probability function) for estimation. The Probit model can

be shown as follows:

Pi = F(Zi) = F(ot + ?Xi) = J e

Where P? =

probability that the event occurs; e = base of natural logarithm; s? = random variable with mean zero and unit variance.

The empirical model for this study can be written as follows:

SBS-STAT? =

?0 + ?i AGE? + ?2GENi + ?2ETHj + ?2LACTi + ?2EDUj +

?sSCAPi

SBS-STAT?= Measures the Business Success where, 0 = Income before was more than now, and 1 = Income now is more than before. The income is an arithmetic mean

for two years before engaging in the activity and two

years after engaging in the activity; AGE?

= Age of the head of the informal sector activity (in

years);



Small Business In Small Economies: 311

GEN? = Gender of the head of informal sector activity, 0 =

Female, 1 = Male x

ETHj =

Ethnicity of the respondent, O=lndo-Fijian,l= Fijian LACTj

= Length of activity measured in months;

EDUj = Education level of the respondent measured in terms

of no. of years of formal education; and,

SCAPj =

Startup Capital.

and where "i" refers to the "ith" respondent.

A priori, it is expected that education level variable may have a

positive sign indicating that education level positively affects the

probability of moving out of poverty. The age variable could have an effect in either direction. There is no prior study to confirm what is to be expected. Similarly there is no theory or prior study to

hypothesis which may indicate the expected sign of the ethnic variable. We may expect that the gender variable may have a

positive sign indicating that males have greater chances of doing well and thus moving out of poverty than females taking into account the obstacles females face in traditional and conservative societies like Fiji. The Length of activity variable is expected to have a positive sign indicating the contribution of experience on poverty alleviation. The number of family workers are also expected to have a positive effect as their input tends to save costs.

Results and Discussion

Employment, Income and Urban Drift

Basic descriptive statistics of the sample data reveal that small

business activity has had a major impact on raising employment and income for operators. The details of this impact are provided in

Table 3. The monthly income of operators has increased from $254 to $349 and a small business operation employs, on average, two

employees. The positive income difference implies that prior to

entering the small business activity, the income of the operator was

much lower. This could be explained when one notes that most of them have very low levels of formal education which limits their

ability to sell their labour at higher wage rates. This is a typical characteristic of a small developing country's labour market where

wage rates are strongly correlated with education and qualification.



? 12 SOCIAL AND ECONOMIC STUDIES

Running your own business, although not independent of the

education level variable, offers greater incomes.

Table 3: Location, Income and Employment Dimension of SME Operators

Variable Before Now

Place of Residence: Urban 8.7 12.5

Urban Squatter 3.3 30.8

Peri-Urban 24.2 4.6

Peri Urban Squatter 9.6 24.2

Rural 54.2 27.9

Income (F$/month) 254.4 348.8

Employment : No of persons 2.1

: Female 62%

: Child labour 9.5%

Note: Monthly income is arithmetic mean monthly income for two years before and

after/with the small business activity

The small business employment also has a gender dimension, in that, it employs more females. This is an important revelation in

contrast to the popular view that labour markets of small countries tend to be biased towards employing more males. However, it must

be noted that this is a characteristics of small business only. Another revelation from the study is that a small amount of child labour is also utilized in small business activity. However, these are children who work after school or during weekends. The small business

activity also plays a pivotal role in the increasing urban drift being encountered in Fiji. Most of the business operators prefer to stay closer to their activity and thus make the move to urban areas.

However, due to high cost of rentals, the rural dwellers tend to

reside in urban squatter areas.

The small business operations are not problem free. The

summary results from the primary survey to ascertain responses on

this are presented in Table 4. Lack of security is stated as a major threat. Insecure environment reduces operation hours, negatively affecting turn over and investor confidence. Lack of capital is

another factor that is an impediment to the growth and

development of small business. Most small businesses often do not

have the initial start-up capital to inject into the business. The financial sector also is quite biased towards more developed firms.

Micro-financing schemes can be quite helpful towards these




Table 4: Problems and Impediments to Growth and Development of Small Business

Problems 1 2 3 4 5

1. Lack of Security 62.0 0.6 2.8 6.1 4.2

2. Lack of Own Capital 12.3 15.0 6.3 14.9 16.8

3. Lack of Experience 14.9 27.7 20.3 8.8 14.7

4. Lack of finance knowledge 6.7 22.5 17.5 18.4 11.6

5. Political and macroeconomic

instability 1 9.2 12.6 12.3 16.8

6. High beaucracy and red tape 0 9.8 14.0 14.9 16.8

7. Others 3.1 15.0 26.6 24.6 18.9

enterprises. This, thus, affects the growth of small business. Another

factor affecting small business growth is experience or rather the

lack of it. Training and skills development workshops can play an

important role in eradicating this deficiency.

Household/Business Specific Factors Contributing to Small

Business Success

The data presented in Table 3 above indicates that on an average, the income of operators experienced a significant increase upon

entry into the small business arena. However, the income potential is simultaneously affected by a number of variables and their

individual effect can only be determined by an advanced analysis as

presented in the methodology section. Therefore, this section

provides the results of the Probit model, estimates of which are

presented in Table 5. These maximum likelihood estimates were

obtained by using the Shazam Econometrics computer package. The model has a reasonably good fit, an R2 of 22.8% implying that

22.8% of the variation in the dependent variable is explained by the

explanatory variables defined in the model. The density function

was utilized to convert the coefficients to slope. The signs of the

coefficients concur with the expectations. The age variable has a negative coefficient indicating that

aging has an effect on the individual's ability to raise income

through small business engagements. This variable, however, is

insignificant and does not allow any conclusive indications to be made. The other variable which also has an insignificant effect on

the likelihood of raising income from small business activity is




Table 5: Maximum Likelihood Estimates of the Probit Model

Variable Coefficient Slope

AGE -0.019 -0.066

GEN -0.298 -1.035

ETH -1.234* -4.285

LENGTH 0.004* 0.014

EDU 0.175* 0.608

Cap 0.0002* 0.001

Constant 0.305

F(?x) 0.288

McFadden R2 22.8%

N 231

Note: "*" denotes significance at 5% level.

gender. Although the variable has a negative sign implying that

female-headed small businesses have a higher likelihood of higher income, it is insignificant. The four variables whose coefficients are

highly significant are ethnicity, length of activity, education and the

start-up capital. The negative sign of the ethnicity variable

coefficient indicates that Indo-Fijian headed small businesses have a higher probability of having higher incomes. The slope estimate

indicates that an Indo-Fijian operator has the likelihood of having

higher income by 428.5%. The coefficient of the length of activity variable is positive and significant. This indicates that the longer the

activity length, the higher the possibility of having higher income.

The slope estimate of 0.014 shows that an increase in the activity duration by a month increases the likelihood of higher income by 1.4%. Therefore, this variable indirectly picks up the experience factor. The coefficient of the education variable has a positive sign indicating that formal education contributes positively to higher income potential in a small business operation. The slope estimate of 0.608 indicates that an increase in formal education by the length of a year, increases the likelihood of deriving higher income from small business activity to 60.8%. The initial capital endowment also

plays a significant positive role in generating higher income. A




dollar increase in capital endowment will increase the income

capacity by 0.1%.

Summary and Conclusion

This study examines the role of small business in small countries

and the manner in which it contributes towards employment creation and income generation. It also examines the challenges and

constraints faced by small business operators. The study concludes

that small business operations play an important role in

employment creation and income generation. However, there are a

number of factors that impede its growth and income potential. Three key factors that stand out are; (i) lack of security; (ii) lack of

capital, (iii) lack of skills/education.

Security is a key concern in most developing countries. It does not only affect a country's ability to attract foreign investors, but it also affects the country's capacity to retain domestic capital. Small businesses will be in a very difficult position to attract capital from financial intermediaries when such a climate exists. This is further reflected when the capital variable is also picked up as a variable that significantly affects small business activity. Whilst the establishment of micro-finance schemes will help, law and order and security are a necessity for long term sustainability of any business.

The study also reveals how experience in the business helps in its success. It is quite crucial for small businesses because most of the operators tend to have very low levels of formal education.

Therefore, to enable them to make a start in their venture, basic

training in the areas of sales, marketing and financial management would be of immense help in the management of their businesses. The study also reveals major differences in business success

amongst the two major ethnic groups in Fiji. To bridge this gap, the

training programmes must pay particular attention to ethnic Fijians if their success in small business ventures is to be improved.

Small businesses in small countries have an important role to

play in the country's social and economic progress. However, to be able to fully exploit the potential of small business to contribute in this regard, the various stakeholders ? the government, the

operators, financial institution and educational institutions ? must take heed of the problems that have been highlighted in the




discussions above and work towards eliminating them in order to create the right conditions which are imperative for the prosperity of small businesses.

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Appendices

Appendix 1: Policy Objectives and Performance Indicators of Fiji's Government's Small and Medium Enterprise Strategy

Policy Objective Key Performance Indicators

1 To mainstream SMEs in national development

2 To improve policies and

regulations for SMEs.

To improve co-ordination of SME

training/development activities

To improve business

support services/ infrastructure

To develop marketing for SMEs.

To develop SME sector data and statistics

* Annual national consultation/workshop on SME development beginning in 2003. *

Government resources allocated annually to SME sector.

*Annual awards for individual and group excellence in SMEs.

^Studies on Government and municipal policies and on laws/regulations that affect SMEs conducted by 2003. * User-friendly policies, laws and regulations that affect SMEs implemented by 2004. * Booklets on SME laws in English, Hindi and Fijian published and disseminated in 2004. * register of business training providers,

trainers and advisors produced by NCSMED by 2003. * NCSMED website established by 2003. *

Training of Trainers and refresher courses conducted on regular basis. * Greater coverage of SMEs in secondary school curriculum.

^Improved access to banking and credit facilities.

^Incentive scheme for large firms to develop SME suppliers set up by 2005. ^Service providers are assisted to access

technology to benefit clients. ^Publish SME establishment costs on a

regular basis.

^Quality and productivity issues addressed

by NCSMED and FNTC by 2003. * Research conducted on new markets and

opportunities regularly. * NCSMED to work with private sector

organizations. * Bureau of Statistics coverage of SME activities strengthened by 2004. *

Business Register and SME national

database on SME developed by 2003.

Source: Government of Fiji (2002:49-50).



Small Business In Small Economies: 321

Appendix 2: Factors affecting SME Growth and Development

Factors Description

Marketing Factors

Marketability The item's ability to attract demand at market when it is available to customer

Expected market share The share of item in the market against total market size

Availability of distribution/collection channel The item's competitiveness in terms of price at market

Distribution channel

Pricing concerns

Technological Factors

Availability of core

technology Availability of technical

Technology intensity

Availability of

production technology Working funds/capital

Profitability

Governmental/Regulation Factors

Governmental support

The extent to which the firm has attained its core technology

Availability of technicians for production manpower The extent to which the firm's core technology creates value-added

Capabilities to secure machine and facilities

Availability of funds for raw material, labour,

manufacturing expenses, etc.

Expected profitability from the business

Financial support of

government Environmental issues

Tax support

Whether the business is entitled to request regulatory support from the state or federal

government

Range of government's financial support to

start-up (interest rate, period of repayment, etc) Whether the business needs to consider judicial and/or social regulations on environment issues

Whether the business is entitled to request support in terms of taxes

Managerial ability Capability of fund Capability to raise operating funds

raising Capability of managing Capability to conduct various marketing marketing and activities and provide appropriate services to customer service customers

Capability of Capability to manage organization and human

organization resources,

management

Source: Lee, S. S and J. S. Osteryoung (2001)



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