SMEs in emerging markets – an overview

Citation

Eunni, R.V., Brush, C.G. and Kasuganti, R.R. (2007), "SMEs in emerging markets – an overview", International Journal of Emerging Markets, Vol. 2 No. 2. https://doi.org/10.1108/ijoem.2007.30102baa.002

SMEs in emerging markets – an overview

About the Guest Editors

Dr Rangamohan V. EunniEarned his PhD from Boston University and joined the Management Department at Youngstown State University in 2003. Previously he earned a Master of Science from the University of Bath located in the UK and a Master of Philosophy from the Jawaharlal Nehru University, located in India. Currently, Eunni teaches Strategic Management and Leadership (MBA and Undergraduate Capstone) and Strategic Issues Facing Multinational Enterprises. His research interests are strategic adaptation in high velocity environments, strategic decision making in public sector and Latin America and other emerging economies.

Dr Candida G. BrushAppointed full Professor and holder of the new President's Chair in Entrepreneurship. Professor Brush also will serve as the Director of the Babson PhD Program in Entrepreneurship and Division Chair for Entrepreneurship. A frequent adviser to the USA Small Business Administration Office of Advocacy on women's entrepreneurship, Professor Brush also was appointed to the Defense Advisory Committee on Women in the Services. She serves on the Board of Directors of Camp Starfish, a nonprofit organization sponsoring a camp for emotionally handicapped children. Prior to joining Babson, Professor Brush was an Associate Professor of Strategy and Policy, Founder of the Council for Women's Entrepreneurship and Leadership, and Research Director for the Entrepreneurial Management Institute at Boston University.

Dr Rammohan R. Kasuganti Professor and Chairperson in the Management Department of the Williamson College of Business Administration. He joined YSU in 1977 and currently teaches courses related to global business, strategic management and total quality management. Kasuganti received his DBA in 1976 from Kent State University. He has led numerous business study tours around the world including India, Brazil and Italy.

SMEs in emerging markets – an overview

Small and medium-sized enterprises (SMEs) play a pivotal role in the national economies of countries around the world. This is especially true of emerging markets, which term includes both the newly liberated countries of Eastern Europe that had embarked upon a policy of liberalization, macro-economic stabilization, and private enterprise since the collapse of communism in the 1990s as well as the rapidly growing countries in Asia, Latin America, Africa and the Middle East, which since the 1980s had embraced policies favoring economic liberalization and the adoption of a free-market system (Hoskisson et al., 2000; Arnold and Quelch, 1998). SMEs in emerging markets numerically account for an overwhelming proportion of all business firms, generate 40-50 percent of each country's GDP, and employ 70-85 percent of the total workforce in each economy (various published sources).

Entrepreneurial activity by owners/managers of SMEs impacts economic growth (van Stel et al., 2005) via introduction of innovative products and processes (Wong et al., 2005; Baumol, 2004; Acs and Audretsch, 2003), productivity gains due to increased competition (Nickell et al., 1997), and knowledge spillover effects (Acs and Varga, 2005; Audretsch and Keilbach, 2004). Exemplary evidence of these effects are to be found in the double-digit economic growth of the leading economies in Asia, new product introductions in Latin America and the enhanced productivity of the economies in Eastern Europe in the late 1990s and early 2000s. Recognizing the critical contributions that they make to national economies, SMEs in general have in recent years attracted considerable attention from scholars of entrepreneurship, strategy and international business. A majority of the studies to date, however, have focused on SMEs in industrialized countries presumably because of ready availability of reliable secondary data on these firms in the public domain and/or relative intractability of emerging markets for collecting primary data on small businesses. Additions to the body of knowledge on SMEs in emerging markets based on either kind of data are, therefore, invaluable as they fill an existing gap in the literature on entrepreneurship and understanding of small business strategies in emerging markets. This special issue focusing on SMEs in emerging markets is a modest attempt to bridge this gap. It is an effort to bring together scholars with first hand knowledge of the emerging markets to share their thoughts and insights on this important topic of interest to academics, practitioners and policy planners alike.

The genesis of this special issue could be traced back to a special forum on issues faced by SMEs in emerging markets organized at the Academy of International Business, Northeast USA chapter, Annual Meeting in Cleveland, Ohio in October 2005. The symposium brought together scholars with first hand knowledge of the emerging economies of Brazil, Mexico, Hungary, Bulgaria, Turkey, Korea and India to exchange ideas on common themes that could be discerned from the ongoing issues and challenges confronted by SMEs in their respective emerging markets. The attendees at this conference as well as others were called up on to make contributions to this special issue. Papers found relevant to the focus of this special issue were subjected to a rigorous process of double blind peer review and detailed feedback. Each paper was revised extensively by the author(s) to enhance its quality in light of the reviewer comments. The final result of this process is this collection of papers, which encompass a rich repertoire of topics relating to SMEs in emerging markets and employ a variety of data and methodological approaches to augment our understanding of this area of growing interest in international business.

The collection opens with an empirical study that investigates the interrelationships between supplier trust, asset specificity, and uncertainty reduction in the context of SMEs in Bulgaria. Based on a survey administered on a sample of SMEs in a medium-sized city in Bulgaria the distribution of which mirrors the country's industry structure of small businesses, Tatiana Manolova, Bojidar Gyoshev and Ivan Manev report significant positive relationships between interpersonal trust, asset specificity and uncertainty reduction in the interactions of SMEs with their suppliers. This finding is consistent with earlier studies that recognized the critical role that relational capital plays in mitigating the absence of a developed institutional infrastructure to regulate the conduct of economic exchanges in emerging economies. Apart from validating the instruments developed in the context of industrialized economies to measure these variables in emerging economies too, this study is a welcome addition to the relatively modest inventory of research on the economy of Bulgaria in general and of SMEs in that country in particular. More important, the findings of this study hold the potential for extrapolation to other transitional economies of Eastern Europe with similar institutional and market characteristics resulting from a shared legacy of the socialist path of development.

The second paper, by Jifeng Mu, Gang Peng, and Yi Tan, examines the key success factors of new product development in Chinese SMEs. In contrast to the considerable research on how new products are created in developed economies and in large enterprises, little is known about new product development by SMEs in emerging markets. In their effort to fill this void, Mu, Peng and Tan adopt a managerial perspective and conceptualize a three-stage model of new product development: idea generation and concept development, design and development, and commercialization. Using a survey developed from polling an expert panel, they find that Chinese SMEs do not regard financial return as the primary criterion in the idea-generation stage. Although the emphasis placed on the different key success factors might vary across the three stages, technological, marketing, commercial, and managerial factors continue to be important in all the stages. Thus, while in the idea generation phase, the newness of the technology or product and its market potential are deemed important, in the design and development stage reliability of technology, speedy access to market, first-mover advantage, and unique competitive advantage are considered critical. Finally, in the commercialization stage, there is a clear shift of focus from the technological and marketing factors to commercial and managerial factors. Commercial factors such as manufacturing flexibility, marketing channel plans, positive return on investment, and recognizable quantitative revenue, and managerial factors such as qualified marketing, management and product development teams, and effective incentive mechanisms, etc. gain in prominence. This fine-grained analysis of the influential factors in new product development not only offers insights into the innovation process of SMEs in China, but also provides a framework to explore similar processes elsewhere, including in other emerging markets, with instrumental implications for enhancing innovation productivity of SMEs.

The next paper in this collection, by Jorge Miguel Carrillo Rivera, is a comparative analysis of the creation and early development of SMEs in Brazil and Mexico using the data compiled in a 2002 Inter-American Development Bank (IDB) study, supplemented by various institutional reports and academic literature. Although SMEs are a vital part of the economies in Latin America, there is a serious paucity of research studies on SMEs in this region. This might be due to the lack of resources of SMEs to fund external consulting projects, low response rates to surveys of SMEs as compared to larger firms, and/or the lack of information systems highlighting the performance of the SME sector. While in Brazil the challenges faced by SMEs relate to ethnic diversity, harsh working conditions, and a highly uneven distribution of wealth, SMEs in Mexico encounter poverty, low GDP per capita, and trade liberalization resulting in adverse economic conditions. Both these emerging markets are characterized by low birth rates decreasing the available workforce and low wage rates, especially for the younger generation and women. Existence of an extensive informal sector is a bane to both economies. SMEs in both countries also face serious shortages of start-up capital. Based on these findings, it is suggested that future research agendas should focus on issues faced by SMEs in the growth, maturity, and mortality stages of their life cycle, and that governments and private institutions should partner with universities in order to find answers to the problems faced by SMEs in both Brazil and Mexico.

In the fourth paper, Patricia Todd and Rajshekhar (Raj) Javalgi assess the business environment for SMEs in India and underscore the importance of promoting entrepreneurship in order for Indian SMEs to achieve a competitive position in the global marketplace. Utilization of technology, especially in the information sector, is suggested as a way to enhance entrepreneurial activities by SMEs. In order to attain international development, it is argued that Indian SMEs need to address three groups of factors: country specific, industry-specific, and firm-specific factors. Country specific factors include the external environmental factors resulting from operating within a certain country such as the rate of unemployment, tax structure, and intellectual property protection laws. Industry specific challenges originate in the industry environment in which a firm operates, which could be exacerbated by government action such as the policy of economic liberalization and structural reforms introduced in India in the 1990s. Firm-specific challenges refer to capital constraints, training, and research and development accessibility.

The authors conclude that SMEs in India must adapt their business models to include information technology in order to insure their continued success and long-term viability. They argue that information technology would help mitigate the adverse impact of many of these challenges. By developing IT systems, SMEs ion India would be able to reduce costs and have quick and easy access to global communication networks. The Indian government has in recent years initiated several programs to support entrepreneurship and growth of SMEs. Since, these programs are still in their infancy, future research could possibly focus on the effectiveness of the government's programs and their impact on internationalizing the SMEs.

The final paper, a case study by Madhusudana Rao, traces the genesis and growth of an SME in the IT sector against the backdrop of far reaching changes in the information technology industry in the USA and the economy in India in the early 1990s. The case study offers fascinating insights into the role of entrepreneurial motivations, generalized and specific skills, and contextual factors resulting in the founding of a new venture. The relative contributions of the founder and changes in the external environment are juxtaposed in explaining the success of the entrepreneurial venture. Opportunity recognition, serendipitous instincts and deliberate strategies are delineated to amalgamate in the success of the IT start-up venture and its resilience through the dot com bust, with important lessons for prospective entrepreneurs.

In summary, the papers in this special issue taken together not only highlight the diversity of issues relating to SMEs in emerging markets, but also draw attention to the heterogeneity in the institutional and market environments of what are commonly clubbed together under the umbrella label emerging markets. While these countries no doubt share a commonality in introducing market reforms and erecting business-friendly market structures in recent years, variances arising from unique historical experiences, political legacies and cultural antecedents resulted in a diverse mosaic of regulatory and economic milieus that have a significant impact on the operation of SMEs. Frameworks and methodologies developed in the Western IB research tradition may therefore need to be carefully modified and adapted before they could be fruitfully applied to study the social reality in emerging markets.

Rangamohan V. Eunni, Candida G. Brush and Rammohan R. KasugantiGuest Editors