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SME Perspective

Future research directions for collective entrepreneurship in developing countries

Vanessa Ratten

International Journal of Entrepreneurship and Small Business, 2014, Vol.22, No2



Introduction    SMEs: Role and Challenges    Fostering Collaborative Entrepreneurship    Conclusions


2 Literature review

SMEs are important generators of employment in developing countries (Omar, 2007). They do this by encouraging entrepreneurial skills that adapt to changing market conditions. By being flexible they help developing countries keep pace with altering consumer needs. This helps with diversifying economic activities that lead to entrepreneurs creating businesses aimed at increasing a countries trade position (Szabo, 1996). In order to create jobs and be
competitive in the global marketplace, it is important to encourage entrepreneurship in SMEs. Entrepreneurship in developing countries includes a variety of different forms from starting a new business to advancing current business processes within the market segment.

In Africa, SMEs have been found to alleviate poverty by generating income and economic growth that impacts development goals (Falkena et al., 2010). This income is important for many SMEs as it is sometimes difficult to obtain credit because of the lack of commercial banks in developing countries. This can lead to SMEs having a hard time accessing equity that is needed to create jobs and invest in business development. As the survival rate of SMEs beyond a year is low some financial institutions are reluctant to lend to new businesses (Whincop, 2001). Some financial institutions prefer to fund government projects to the detriment of SMEs who need equity financing. Governments in developing countries have responded to this problem by creating investment and small business centres to help develop a business environment that has access to finance, lending of equipment and right to use to office or factory space (Ratten et al., 2007).

The general lack of finance available to SMEs in some developing countries is party based on the inefficient infrastructure and policies in the country. Asset acquisition is required by SMEs to purchase materials and market their services. The ability of SMEs to conduct business is hampered in developing countries that lack access to international markets because of regulatory issues (Gockel and Akoena, 2002). The lack of support services in developing countries can hamper SMEs efforts to motivate managers as there is competition from larger international multinational companies (Gockel and Akoena,2002). This can lead to a skills gap amongst SMEs who need managerial know-how to access key markets. The information asymmetries in SMEs make it harder for them to take risks in marketing their products and services that may be based on lack of knowledge about international conditions (Malhotra et al., 2006). This may lead to information distortion about suppliers and demands for key services.

SMEs are particularly vulnerable in having a lack of knowledge about market changes and can cause short term failures in the business. In addition, SMEs may have inconsistent financial accounting statements that lead to international financial institutions unsure about their monetary situation (Teal, 2002). There may be discrepancies in financial statements between different countries because of the lack of information about what needs to be reported in their accounts. As creating financial statements can be labour intensive some SMEs in developing countries may not be able to spend the time in developing these key documents needed for funding.

Other obstacles for SMEs in developing countries include poor geographic locations making it hard to export products, corruption and regulatory conditions (Okpara and Wynn, 2007). These difficulties may be due to the rate of government state run businesses that affected the ideological values people place on running a business. These values also include the belief of hard work and personal responsibility in running a business (Shane, 2003). Often individuals in developing countries have a lower level of education that is linked to lower levels of entrepreneurship (Schultz, 1982). This is based on the assumption that education is needed to manage a business and deal with commercial market opportunities.

Developing countries that were previously state controlled that shift to a democratic based government model may have difficulty in persuading individuals to invest money in businesses. In addition, there are start-up barriers for entrepreneurs in developing countries due to financial and non-financial restrictions (Babo, 2005). Financial restrictions include the lack of monetary funding and high fees for registering a business. Non-financial restrictions include filing complex documents in areas that have a high level of illiterate workers and available office space to set up business premises.




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Introduction    SMEs: Role and Challenges    Fostering Collaborative Entrepreneurship    Conclusions