SMEs are important
generators of employment in developing countries
(Omar, 2007). They do this by encouraging
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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
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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
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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
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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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