Importance of Finance in the SMEs that Needs to Be MNCs - Coursework Example

Importance of Finance in the SMEs that Needs to be MNCs By: Professor: Class: University: City: State: Date of submission: Importance of Finance in the SMEs that Needs to be MNCs Introduction The aim of the business is to make profit through offering products and services that meet the specific needs of the customers (Sokoto & Abdullahi, 2013, 128). However, with a continued change in the tastes and preferences of the customers, purchasing behavior, and increasing level of competition, most of the small and medium enterprises (SMEs) are experiencing challenges in satisfying the needs of the customers. Financial capability is one of the factors that constrains the growth and development of such businesses. Access to finances is the key to development of businesses. Without adequate financial base, there is limitation in investment and innovation, which in turn affects the ability of the SMEs to compete at international levels (Calciano, Fiordelisi & Scarano, 2015, 118). However, for the SMEs, the major obstruction for development into MNCs is the difficulty in accessing various financial opportunities that hinder growth. With increasing poor economic performance in many countries, MNCs continue to experience different challenges associated with loss and increment in the production cost. As a result, most SMEs that are considering investing in the international markets have adequate financial base to fulfill various needs of the market segments and remain competitive within the ever-diversifying global market. Even though the financial flows of the SMEs have increased over the year, it has remained subdued (European Commission, 2015). Most of the SMEs still perceive that access to finance is their most important problem. In addition, in the United Kingdom, important differences in the financial conditions between the SMEs and Member States continue to exist. Comparing various types of enterprises, the micro-enterprises, and many innovative businesses often consider their financing as the major problem. SMEs and Finances Most of the SMEs have limited financial base; as a result, most of their activities are constrained making it difficult to explore the international market. Countries differ significantly based on their financial intermediation models; thus, while considering investment in the international markets, the business needs a huge financial reservoir to survive the numerous economic challenges associated with operating in international markets (Eiteman, Stonehill, & Moffett, 2015). The diversity in the international markets is reflected in the relative significance played by different sources of fund through the companies and the level of development of various financial institutions to handle the financial needs of these businesses. Access to international sources of capital could allow the businesses to overcome numerous challenges associated with the local capital markets especially while considering investment in the emerging market. Some of the evidence of such come from the paradigm shifts within financial openness. Financial market liberalization has the capacity of reducing the cost of capital for the local firms that aims to invest in international markets since it increases the stock market valuations and are associated with investment boom witnessed in most MNCs (Ayadi & Centre for European Policy Studies, 2005, 122). In addition, access to international capital markets could as well affect the relative performance of various subsets of the firms within the economy that has the ability to access such markets. Through the analysis of the manner in the MNCs tend to capitalize their affiliates across the globe, most studies demonstrate that many international business affiliates seem to borrow internally for the costly external finance that stems from the adverse capital conditions (Organization for Economic Co-operation and Development, 2014, 107). In other studies, the results revealed that the affiliates of international businesses employ internal capital market in circumventing their capital controls in a way that is unlikely to be available within the local firms. Differential access to the international financial market play a significant role among the SMEs as it could assist in explaining the patterns of foreign direct investment (FDI). There is correlation between the inflow of the FDI and currency devaluation with the model in which imperfections of the capital market seem to limit the ability of the SMEs in accessing the external markets, therefore offering the foreign businesses the opportunity of taking advantage in bidding for the assets (Orser, Carrington & SME Financing Data Initiative, 2006, 127). The study in the frequency and terms of cross-border mergers and acquisitions subsequent to the crises of currency in UK presented evidence that the foreign markets seem to buy the assets when the local SMEs are liquidity constrained. SMEs and MNCs Growth In the past decades, the major concern has been the failures experienced by the SMEs in transforming themselves into MNCs to operate within the regional and international markets. Considering the relative rarity of the typical SMEs that make substantial growth, the management experts and states have been keen on discovering different ways in which these business growths can be encouraged (Wilson, 2012). Before focusing on the international markets, there are two important factors that the SMEs needs to consider: the market share within the local market and the capital base to enable it compete effectively and efficiently within international markets. Other factors of growth are also important: strategies for successful growth and constraints likely to prevent such growth. Unfortunately, there is little literature on the growth model of the SMEs. The currently used business strategies of growth employed by the SMEs were developed and tailored for the MNCs with finance being the major factor influencing the integration of these strategies (Brown & Lee, 2015). In the UK, motivating the growth of the SMEs is viewed as an important segment of the industrial policy. The emphasis of the SMEs is also associated with the implications of relocating some of the activities in the foreign countries, which require huge financial base for performing various activities such as rental or construction of different facilities, ensuring adequate compliance with various legal needs of the country, and paying for the employees based on the country’s minimum wage regulations. Most of the governments are encouraging their entrepreneurs to build their business empires to fill the vacuum left by the MNCs like business opportunities and unemployment (World Bank, 2015). With the current increasing population, the demand to accommodate many people within the shrinking job market has been on the rise; as a result, the governments are keen on offering financial subsides to the SMEs for growth and actualization of their objectives through various financial institutions. However, for the SMEs, the transformation process in the MNCs is complex, hostile, and difficult and goes beyond the financial needs as mostly envisioned by the SMEs (Desa, Foley,& Forbes, 2006). During the growth process, in most cases, some SMEs end up being acquired by or merged into other competitive large businesses. This is always the case for the SMEs that require adequate access to the public fund for the resources. Through listing the business within the stock exchange, the SMEs always fall as the victim of many MNCs, which they are ambitious to become since in most cases, the SMEs are perceived to have the direct threat on the MNCs and affects the growth of the MNCs (Conference Board of Canada, 2001, 78). Therefore, before considering accessing the loans or various financial services from the financial institutions, the SMEs have to thinks of different strategies of remaining competitive within the market and protecting themselves from the threats emerging from the MNCs. To counter such risks from the MNCs, the SMEs need to have a strong financial base to enable them grow big (Tie-jun & Jin, 2006, 138). In some studies undertaken on the emerging MNCs, the results revealed that failure was associated with the paralysis of the will. Moreover, good leadership and passion for learning are important factors that the SMEs needs to consider as well in developing clear mechanisms of becoming international market players. Finance as Factor for SMEs Growth and Development Internationalization of the businesses is increasingly becoming important to the competitiveness of the enterprises of all the sizes. In the modern business environment, SMEs that start with international strategy could move quickly to take advantage of the numerous cross-border activities that provide opportunities, which are not only important in ensuring proper financial base but also exchanging the knowledge and enhancing its capabilities (Heidrick, Canada, & SME Financing Data Initiative, 2002, 131). As a result, the SMEs strengthen their long-term competitiveness. Despite the trends that facilitate internationalization, numerous barriers are still in existence that originates from within or outside the firms. The external factors that impede the internationalization of the SMEs are administrative rules, nationally and internationally, burdens from the formal and informal barriers (Ali, 2013, 78). On the other hand, the internal barriers to the SMEs include cultural differences, inadequate skills and information, language barriers, insufficient network, and inadequate accessibility to the necessary finance. While focusing on the MNCs, the MNEs need to understand that successful international SMEs are often high-end value and sector that creates wealth such as improved technology (Li & Tan, 2004, 201). To support such businesses, the states need to include general policies for supporting high growth SMEs and venture capital. For the SMEs, international expansion is critical decisions that traditionally have smaller financial capacity, limited geographical scope, and domestic focus (Organization for Economic Co-operation and Development, 2012, 98). Even though some of the SMEs are born global, most of them lack adequate resources of internationalization, and from the traditional background, they have appeared to be reluctant in engaging the international business activities. Nonetheless, globalization, advancement in technologies, and improvement in the flow of information of the organizational structure have been able to facilitate the ability of the SMEs to internationalization and are reflected in the SMEs’ role within the international markets (Cook & Nixson, 2011). Besides the importing and exporting activities, the SMEs have been able to increase their engagement in the cross-border strategic alliances, acquisitions, mergers, and inter firm networking with aims of increasing their ability to compete effectively. To leverage on the financial deficit, the SMEs have been able to rely on the networks, partnerships, and clusters for provision of information accessibility, new technologies, and expertise (Straw & Glennie, 2012). Conclusion Many researchers have viewed the role of finance as a vital element in the development of the SMEs. Initial studies highlighted that the limitation in the accessibility of the financial resources available to the SMEs in comparison to the MNCs and consequence for their growth and development is the major factor affecting the performance of the SMEs. Typically, the SMEs experience higher costs of transactions compared to the MNCs especially in obtaining the credit. In many countries, including the UK, Insufficient funding has been made available to finance the working capital. In addition, other factors that have hampered the ability of the SMEs to raise enough funds are poor management and accounting practices. The asymmetries in the information and lending to the SMEs have restricted the financial flow to such businesses. However, despite such claim, empirical studies reveal that numerous SMEs fail to achieve their MNC objective due to several non-financial reasons. Interest in the role played by the SMEs in the development process remains in the forefront on the policy debates in most countries. Through the years, researchers have been able to identify the development approach in promoting the SMEs, which has its objective of creating an economically viable enterprise to stand on its own without any perpetual subsidy and offering positive contributing in the growth of the real income. References Ali, S. (2013). The Small and Medium Enterprises and Poverty in Pakistan: An Empirical Analysis. European Journal of Business and Economics, 8(2), 77-95. Ayadi, R., & Centre for European Policy Studies (Brussels, Belgium). (2005). The new Basel Capital Accord and SME financing: SMEs and the new rating culture. Brussels: CEPS. Brown, R., & Lee, N. (2015). Credit Where It’s Due? Access to Finance for High-Growth SMEs in the UK. Retrieved December 26, 2016, from http://www.st- andrews.ac.uk/business/rbf/workingpapers/RBF15_001.pdf Calciano, F. L., Fiordelisi, F., & Scarano, G. (2015). The restructuring of banks and financial systems in the Euro area and the financing of SMEs. Basingstone: Palgrave Macmillan. Conference Board of Canada. (2001). Decreasing Demand for SME Debt Financing? Debt Financing for SMEs at the End of the 20th Century. Ottawa: Author. Cook, P., & Nixson, F. (2011). Finance and Small and Medium-Sized Enterprise Development. Retrieved December 26, 2016, from http://www.gdrc.org/icm/micro/fin-sme.html Desa, M. A., Foley, C. F., & Forbes, K. J. (2006, August). Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations. Retrieved December 26, 2016, from http://www.people.hbs.edu/ffoley/dffshelters.pdf Eiteman, D., Stonehill, A., & Moffett, M. (2015). 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Determinants of Innovation Capability in Small and Medium Enterprises: an Empirical Analysis from China. 2006 IEEE International Engineering Management Conference, 4(3), 111-172. Wilson, K. (2012). Encouraging the Internationalization of the SMEs. Retrieved December 26, 2016, from http://www.gvpartners.com/web/pdf/Chapter_2_Wilson_FINAL.pdf World Bank. (2015, September 1). Small and Medium Enterprises (SMEs) Finance. Retrieved December 26, 2016, from http://www.worldbank.org/en/topic/financialsector/brief/smes-finance Read More