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Students Zone - Answers to End of Chapter Questions

CHAPTER 12: SMALL BUSINESS AND EU POLICY

1. Using information from this chapter and other supporting material, consider why the SME sector is important for economic growth, job creation and export growth of the European Union.

Answer

During the 1970 - 1990 period it was realised that the SME sector was particularly important for many economies as a provider of employment. Whilst large firms were seen to be downsizing their workforces it was the SME sector that were creating jobs. The SME sector is also seen as important for innovation and is an underlying force in the growth performance of an economy. Tomorrow's large firms are today's SMEs. A large and growing SME sector is also seen as important for the export performances of economies. It may not be that SMEs are major exporters but an economy that embraces entrepreneurial activity is one that is likely to be competitive at all company size levels. As the chapter notes SMEs are often important behind knowledge creation, they increase the level of competition and thereby promote economic efficiency and they provide a greater diversity of firms and output.

2. SMEs often argue that they are constrained by labour market shortages and lack of finance. To what extent has the European Union successfully addressed these problems?

Answers

In the list of constraining factors facing SMEs the inability to raise finance and the lack of suitable skilled labour are two of the most frequently mentioned factors by both start-up and growth SMEs and those SMEs who are seeking to internationalise or have internationalised. Different nation states within the EU have attempted to address these problems in varying ways dependent upon whether their economies are more market focused or state controlled. The Joint Employment Report (2002) considered ways to improve entrepreneurship and attempted to address the issue of self-employment. Because of the growing status of SMEs within the EU, a range of other policy objectives in the area of social or environmental policy have had specific focus on the SME sector. For example, in the area of Environmental Policy, SMEs have been the main beneficiary of the Financial Instrument for the Environment (LIFE) programme. Energy policy that has attempted to introduce competition into the energy sector will also have lowered energy costs for SMEs. State aid provisions were altered so that SMEs can get more favourable treatment and EU Structural Funding has been re-focussed on SMEs.

In terms of direct policy measures the information provided on p364 of the text addresses some of the main points. It should also be noted that some national governments have attempted to help the financial constraints of their SME sectors by actually providing grants and loan guarantee schemes. Other governments have taken a more stand-off approach attempting to provide the correct conditions for private equity funds to prosper and these can on-lend money or guarantee finance to SMEs.

3. Outline the main arguments for and against the stages approach to internationalisation.

Answer

The stages approach to SME internationalisation suggests that to become active in overseas markets requires a company to progress through a number of stages. These are:

No regular export activity (sporadic exporting)
Exports via independent representatives
The establishment of own sales subsidiaries abroad
The setting up of production facilities abroad

The supporters of stage theory point to the work on psychic distance, learning curve effects and innovation-adoption cycle models.

Critics of the stage theory point to the fact that some stage models have a different number of stages, that SMEs may progress through some stages and stop or even miss out some stages altogether. Other SMEs might progress part of the way through the stages and then return to an earlier stage of internationalisation. Further critics have argued that the weakness of the stages approach is that there is a lack of theoretical under-pinning and a lack of clear boundaries between stages. Furthermore stage theory has some difficulty in dealing with “born global” SMEs.

4. For large organisations entry into international markets often occurs through merger and acquisition, exporting and joint ventures. Which of the above, if any, are the approaches more likely to be taken by SMEs entering international markets?

Answer

When large firms choose to enter a market they often possess large amounts of financial resources. They can therefore begin by exporting or can move directly to setting up a subsidiary on a Greenfield site or gain entry through the merger and acquisition of an existing foreign firm in their chosen external market. For some small firms capital constraints may reduce the ability of the SME to enter a market through the route of merger and acquisition. Exporting is a favoured entry route especially connected to work of sales representatives in overseas markets. Joint ventures are also a possibility. SMEs may be part of a supply chain of larger organisations and the internationalisation of the larger firm may lead to the SME pulled abroad as the larger firm wishes to keep its current suppliers.

5. To what extent do firm factors, such as the size of the organisation and the level of competition in markets, rather than personal factors such as the willingness to take risks or the entrepreneur’s experience of export markets, determine SME internationalisation?

Answer

There are a number of theoretical models that have been developed to explain small firm internationalisation. Some have argued that the size of the firm and the sector in which the firm operates are important determinants of internationalisation behaviour. In fact some of the arguments lie as to whether push or pull factor dominate the move into internationalisation by SMEs. For example the high level of competition in domestic markets or the high level of regulation and taxation may encourage SMEs to internationalise. A domestic market may be too small for an SME to achieve economies of scale; therefore, additional external markets are sought. Others argue that internationalisation can be better linked to the characteristics of the entrepreneur rather than the SME. Therefore, factors such as foreign language knowledge, export or internationalisation experience of the entrepreneur, whether the entrepreneur had previously worked in an organisation that had sold products in external markets or whether the entrepreneur had been educated or lived abroad are considered as more relevant to the internationalisation move. Other personal characteristics of the entrepreneur have also been suggested as playing their part in the internationalisation move, such as, the risk attitude of the entrepreneur and whether they are introverted or extroverted .

6. The Polish Linen Company employs 25 people and has traditionally undertaken the majority of its sales in Eastern European markets. Its manager is aware of the potential that EU enlargement might bring to the organisation. Produce a report for the Polish Linen Company outlining the opportunities and threats to the organisation following from EU enlargement.

Answer

The report for the Polish Linen Company should include the potential of market expansion into the EU15 as trade barriers are reduced. The cost competitiveness of the Polish Linen Company vis-à-vis similar companies within the EU15 may give the Polish company a price advantage. Set against this could be the possibility of increased competition in the Polish market from other EU companies that might have greater levels of productivity. Polish consumers when faced with now being able to buy Polish linen or other EU linen (which may have faced entry barriers into Poland) may choose the latter since they consider it a superior product. Some EU15 firms may consider that the Polish Linen Company might make a useful addition to their product range and may seek to merge or takeover the company. The entry of Poland to the EU has also seen a flux of Polish workers leaving Poland to work in other EU countries. This flow of workers might have implications of the Polish Linen Company in their attempt to retain and attract new employees. The impact then could be on increased wages that need to be paid to Polish Linen Company workers, thus reducing the companies cost competitiveness. The Polish Linen Company may have received state support and this may not be allowed under EU rules, moreover, financial markets in Poland may not be as well developed as in other countries leading to financial constraints for the Polish Linen Company. Finally, the Polish Linen Company may not be able to compete once trade barriers are removed since it cannot achieve the same economies of scale that other EU15 manufacturers have been able to build up.

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