Description
In this particular detailed information related to entrepreneurship and management of small and medium enterprises.
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ENTREPRENEURSHIP AND MANAGEMENT
OF SMALL AND MEDIUM ENTERPRISES
IMPROVEMENT OF SMES ENVIRONMENTAL SUPPORT PLANNING BASED ON NEW STRUCTURE OF SUPPORT
DETERMINATION .................................................................................................................................................634
Zoran Rakidevid, Jasmina Omerbegovid-Bijelovid, Gordana Lazid-Rašovid
ENTREPRENEURSHIP AS MARKET VALORIZED CREATIVE POTENTIAL ...................................................................643
Dragan Gruevski, Mirjana Cvetkovska
FINANCING ENTREPRENEURSHIP IN TIMES OF CRISIS – CASE OF SERBIA ............................................................652
Svetislav Paunovid, Maja Paunovid
MANAGEMENT PRACTICE, SUCCESS AND/OR GOOD PERFORMANCE OF SMALL BUSINESSES .............................659
Slobodan Marid, Bojan Lekovid
SMALL AND MEDIUM SIZED ENTERPRISES OWNER PROBLEMS AND INFLUENCE FACTORS..................................665
Siniša Arsid, Marko Mihid
Miloš Arsid
ENTREPRENEURIAL TEAM IN NEW VENTURE CREATION: THE KEY CHALLENGES FOR MANAGEMENT ..................671
Verica Babid, Jelena Erid, Jelena Nikolid
SMEs INNOVATION AND GROWTH IN EU ............................................................................................................679
Elena Nikolova, Marija Gogova Samonikov
634
IMPROVEMENT OF SMES ENVIRONMENTAL SUPPORT PLANNING
BASED ON NEW STRUCTURE OF SUPPORT DETERMINATION
Zoran Raki?evi?
1
, Jasmina Omerbegovi?-Bijelovi?
2
, Gordana Lazi?-Rašovi?
3
1
Faculty of Organizational Sciences, [email protected]
2
Faculty of Organizational Sciences, [email protected]
3
Regional Center for Development of SMEs and Entrepreneurship “Belgrade“, [email protected]
Abstract: The subject of this paper was prompted by the importance of Suitable Structure of Support (SSS)
determination, as one of the support actions that the environment provides to the SME sector – in the case of
SMEs in Serbia. (Support can be viewed as a type of service, with a significant share of material resources in
that service, i.e. in a specific form of support. Therefore, Structure of Support (SS) is the primary issue in this
paper. If support is viewed as a service, it is also important to follow the process of providing that service). It
is recognized that structure support planning is the root of successful support to the SME sector, so the
subject of this paper is the improvement of the SMEs structure support planning process based on new
structure determination (which, therefore, contributes to the suitability of structure support). Problem: Weak
effect of the environment support to SMEs (not only in Serbia) at the beginning of the 21st century is the
problem whose solution this paper is dedicated to. The conducted survey has identified the cause of the
problem: the environment provides Low Suitability of Structure Support in relation to SMEs’ support needs.
Therefore, the ways of structure support planning and, consequently, an inappropriate process of planning
and providing support has been recognized as a real problem of insufficient effectiveness of support
provided to SMEs. The need for the improvement of the existing SMEs support planning process, as well as
the need for innovation in the way support structure is determined, have been identified. Idea: (H0): If the
planning of structure support that the environment provides to the SME sector achieves higher suitability with
the structure envisaged by the owners/management of SMEs, better results of that support are achieved
(and also higher SMEs’ business performance). Of course, such structured support should and can be
incorporated into support plans and, thus, support could be more effective and "supported" SMEs more
successful. The presented idea has been tested in the case of providing support to the SME sector in Serbia.
The intention is to show that the SMEs structure support can be improved (made more suitable for the one
needed, or at least for the one that the owners/managers of SMEs want), and that this leads to the
improvement of the planning and the overall management of providing support to SMEs, as well as of SMEs’
successfulness. Purpose: This paper is intended for those who are planning and/or providing support to the
SME sector. They are proposed to improve the "Structure of Support” performance (especially the "Suitability
of Structure Support” indicator). This would, as an innovation, improve the process (as well as the system) of
planning and the overall management of providing support and make it more effective. Result of the
survey/Contribution of the paper: Based on the "Research on the conditions, needs and problems of
SMEs and entrepreneurs" (conducted in 2010 and 2011), it is shown that better results are achieved by
those who apply the here proposed method of designing structure support while planning support for the
SME sector. This conclusion is derived from the observation that SMEs support is more effective if it is more
in accordance with the objective needs of SMEs, or at least with the ones desired by the owners/managers
of SMEs. Therefore, the conclusion is that the first step should be to determine the required/desired SMEs
structure of support from the environment, and then to plan other support characteristics (such as details on
types of support, scopes, periods, methods of delivery, etc.). It is concluded that the new way of designing
structure of support and the proposed planning process of providing support leads to the improvement of the
SMEs environmental support, which should be "kept permanently open" for improvement.
Keywords: Small and Medium Enterprises (SME), Support for SMEs, Structure of SMEs support, Suitability
of SMEs support, Planning the environmental support for SMEs.
1. INTRODUCTION
Subject of the paper is in the scientific field of Entrepreneurship and SME management. It refers to the
improvement of the planning of SMEs? support system (more specifically: the process of planning the
Structure of Support - SS). Identification of the actors involved in the support system should be the first step
in defining of the suitable SMEs? support. There are two types of actors: the actors who are demanding for
support (small and medium enterprises and entrepreneurs - SMEs) and the actors who are providing the
support (government and its institutions, international institutions and other organizations that provide
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support). The actors who are demanding for support (SMEs) have their needs and form their own
expectations (rarely: requirements) for support (which is usually done by the managers/owners of SMEs, but
the help of experts would be more reliable). It is shown in practice that the actors who are providing the
support are actually trying to help the SMEs. The problem occurs because the SMEs? support that these
organizations design is usually independent from the actual needs of the SME sector (but is designed
according to their own competence/interest), so the delivered support is not suitable enough with the
needs/requirements of SMEs. Support usually doesn?t have the suitable structure and other performances.
The authors of the paper provide an answer to the research question: Does the support whose structure is
more suitable with the one expected by the managers/owners of SMEs (related to solving problems and
satisfying the needs of SMEs) achieve better effects (that have an impact on the overall business of SMEs)?
The authors give an answer to the research question in accordance to analysis of the data collected by the
Survey
1
.
After reminding of the: a) Basic concepts of SMEs, their characteristics, problems and needs and b) SMEs?
environment that provide support to the SME sector through the structure, institutions and resources of
support (in case of Serbia), it is proceeded to the idea of improvement of the planning SMEs? support (so that
SS is in accordance with the desired one). The concept of planning support, presented in this paper, can
contribute to higher suitability of the SS with the one required, resulting in increased performance of
providing support.
2. SMALL AND MEDIUM ENTERPRISES
Small and medium enterprises - SMEs is the phrase used for special type of enterprises that are becoming
very important in the last decades of the 20th century. SMEs are recognized as: the engine of national
economies? growth; the biggest potential of (self-) employment; the new job generator; companies that have
great influence in the national, regional and local development (as a "tool" for prevention of the migration of
people from some passive geographical areas) and as companies that obtained international character
(because of their business in the global market). SMEs are a key source of national economies? growth
(Spicer & Sadler-Smith, 2006, p. 134). SMEs are determined – using the criteria defined by the European
Commission – as companies with up to 250 employees, whose annual turnover does not exceed 50 million
[€] and/or whose total capital does not exceed 43 million [€] (The New SME definition, p. 5).
SMEs, as the largest category of companies (99.8 [%] of total enterprises in the EU and Serbia are SMEs)
have many common features, despite the diversity and specificity of each of them. Attention of this paper is
drawn to only one relevant characteristic: shortage of SMEs? resources. That characteristic of SMEs is the
main constraint. It reflects to the other characteristics of SMEs: a) Integration of ownership and management;
b) SMEs? small capacity; c) Specialized (niche) market; d) Lack of standard use, etc.
According to Barney (1991, p. 106), the necessary condition for developing competitive advantage and
reaching company?s strategic goal is the availability of resources. He notes that sustainable competitive
advantages of a company come from its resources that are valuable, irreplaceable and difficult to imitate.
Due to the limitation of SMEs? resource potential, it is obvious that SMEs need extra help.
Shortage of financial resources (as a universal resource) is one of the most commonly used justification
2
for
the problems and failures of SMEs. SMEs? owners have difficulties with finance because they invest their
personal savings and assets and the funds borrowed from family and friends into their business (Irwin, 1998,
p. 162). Based on the characteristics of SMEs (in particular - on the basis of modest resource capacities) and
the problems they face, it can be concluded that the SME sector needs the help and support. SMEs?
environment is a potential source of help and support.
SMEs? environment is an important factor, viewed from the aspect of SMEs? support that is explored in this
paper. The business environment is the business potential and resource of SMEs (Lazic-Rašovi? &
Omerbegovi?-Bijelovi?, 2006, p. 5). According to Porter (1990, r. 73) "root of companies? competitiveness is
in the nature of their business environment". Actors of SMEs? business environment are its stakeholders:
customers, suppliers, competitors, banks and investors, educational and research institutions, the
1
"Survey of conditions, needs and problems of SMEs and entrepreneurs", organized by the Regional Center for
Development of SMEs and Entrepreneurship - Belgrade, conducted in 2010 – 2011, on a sample of 310 SMEs in Serbia
(from cities: Belgrade, Kragujevac, Vranje, Jagodina, Aran?elovac and Sombor).
2
Research conducted in 2006 – 2008, during the preparation of a doctoral dissertation: "The contribution to application
research of contemporary metamanagerial tools in small and medium enterprises with unbalancelly developed
resources" (2008), M.Sc. Brankica Ljami?-Ivanovi? (under supervision of prof. dr J. Omerbegovi?-Bijelovi?), showed that
the most important resource for the success of SMEs is the owner?s competence.
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government and its institutions, local communities, environmentally oriented organizations, media,
organizations and agencies that provide support to the SME sector (Omerbegovi?-Bijelovi?, 2006, p. 5).
SMEs can benefit and receive help and support from its stakeholders (whether in money or in other
resources - material resources, knowledge, information, etc.). The rule is that each stakeholder has an
interest to observe (and also to help and support) the existence and development of a specific SME.
The state that the SME sector needs help and that it expects the environmental support is justified by the
analyzed data from the Survey - which shows that every SME from the sample had at least one problem in
its business. The average number of problems per SME was 3.87 [problem/SME]. (Some of the main
problems in the survey were: Shortage of financial resources (86.4 [%] of respondents), Lack of business
ISO standard certifications (92.7 [%]), Inability of doing business on the international market (86 [%]),
Inadequate legislation (34.3 [%]), Lack of information about the market trends and situation (29 [%]), Lack of
trained personnel (12.5 [%]).)
In the Survey, SMEs were also asked about the types of support which they believe would assist in
overcoming their problems. Survey has shown that every company in the sample reported at least one
missing/desirable form of support. The average number was 2.88 [types of support/SME]. (Some of the most
demanded forms of support are: Easy access to financial resources (82.9 [%] of respondents), Help in the
promotion (54.8 [%]), Procurement of the missing equipment or replacement of the existing equipment (41.6
[%]), Professional support through training, consulting and mentoring (40.5 [%]). Therefore, based on the
presented data, it can be concluded that the SMEs have a strong need for help and support from the
environment.
3. SMEs SUPPORT
Term of SMEs support refers to any form of financial or non-financial help to SMEs that is provided from the
environment (by other individuals, companies, institutions, state or some supra-system). The sources of
various forms of SMEs support can be: Supply chain participants (customers, suppliers), banks, agencies
(accountants, lawyers and consultants), business associations, government organizations, media, family,
friends and others. Bennett and Robson (1999, p. 161) explain how buyers and suppliers can be a good
source of information and help: a) Customers of a company may provide a good signal of product?s market
success; b) Suppliers are the sources of information about new technologies, opportunities and chances for
innovation and cost reduction.
Usage of external support is strongly associated with successful business growth (Bennett & Robson, 1999,
p. 155). Chrisman and McMullan (2004) have shown that small businesses that use the support services of
public agencies have a higher rate of survival and growth than the firms that do not use these types of
services. Therefore, the conclusion is that support is very important and that, consequently, the improvement
of the environmental support can help the SME sector more effectively.
According to the basic categories of resources, the help/support that can be provided to SMEs is divided into
two main types: financial and non-financial support.
Financial support – money is the key resource of this type of SMEs support. More precisely, it refers to the
financial help of various institutions and organizations to start new business (start-up loans) or to improve the
business of existing SMEs (loans to finance current operations). In many cases, money that is given to
support SMEs is not a help itself, but a resource for the achievement of specific objectives, so it must be
spent on planned activities. (For example, the support institutions provide funds to SMEs for: purchase
equipment, employee trainings, export activities and innovation of products/ services/ processes/
management).
Financial resource, as a form of support, is necessary for the development of new business ventures. Patzelt
and Shepherd (2009, p. 322) claim that entrepreneurs can achieve their strategic goals only if they have
sufficient funds and available sources of funds.
Non-financial support refers to support that does not include money as a resource of support. It is some
kind of service: consulting, mentoring, training and seminars in various educational fields (e.g. legal aspects
of operations, business planning, marketing, finance, human resource management, change management,
innovation), intended for "managers" of SMEs (owners, entrepreneurs and managers). The main objectives
of non-financial support are knowledge and competence improvement of the SMEs? owners, management
and employees. The non-financial form of support may also include: the transfer of technology, help with
business networking (entrance into clusters and other associations), contribution to the SMEs? reputation and
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promotion, reduced administrative barriers and increase of tax incentives, but also a platform for business
development - such as business incubators and technology parks.
Non-financial support includes provision of resources and activities combination. The most important are: a)
Technology transfer is very important for the development of the enterprises in many countries, so support
measures for this process are created (such as: Technology Transfer Agencies and Technology Transfer
Offices); b) Entrepreneurial networking - an important form of non-financial support, which refers to the
formal and informal links of entrepreneurs and SMEs with other individuals and organizations, through which
they do economic transactions. Those networks can provide access to important knowledge and improve the
visibility and reputation of a new business ventures. Support creators use them for placing numerous support
program this type of support (entrepreneurial networking) for numerous support program (e.g. for formation
of clusters); c) Knowledge - a very important resource for the development of every company and one of the
most important sources of competitive advantage (Spicer & Sadler-Smith, 2006, p.133). According to the
Knowledge based theory, it is a basic asset/resource for any company. All other resources depend on it
(Chirico, 2008, p. 434). There are three very important types of knowledge: 1 - knowledge about
management and development of existing business or newly established company; 2 - knowledge about
processes of products and services development and production; 3 - knowledge about market, where the
new company will operate; d) Removal or reduction of administrative barriers allow entrepreneurs to focus on
daily operations and finding new business opportunities in their environment (because high levels of
bureaucracy and administrative barriers have a negative impact on new business ventures development,
according to Patzelt & Shepherd, 2009, p. 326); e) Tax incentives - they can be an excellent form of support,
so the governments of many European countries provide large number of them (e.g. reduction of tax rates
and respite in tax payment).
The existing forms of support which are provided to SMEs in Serbia are presented in Table 1. It is obtained
by research on forms of support intended for SMEs in Serbia (Support for Success, 2012).
Table 1: Institutions and type of support for the SME sector in Serbia
Institution Support intended for: Type of support
Ministry of Economy and
Regional Development
Fast growing SMEs
(“gazelles”)
The funds for financing activities
for encouragement of SMEs? competitiveness.
SMEs
The funds for financing activities for strengthening of SMEs?
innovativeness.
Free services provided by the regional development agencies
(consulting, training, promotion).
National Employment
Service
Potential
Entrepreneurs
Subsidies for self-employment.
Mentoring and specialized training for entrepreneurs who have
received subsidies for self-employment.
SMEs
Subsidies for new job creation.
Subsidies for employment of persons with disabilities.
Professional practice - financial subsidies for training of
unemployed persons without work experience.
National Agency for
Regional Development
Potential
Entrepreneurs
Non-financial and financial support to the business starters who
are returning to their cities (underdeveloped municipalities).
SMEs
Support programs for co-financing (up to 50 [%]) of project
costs for the development of SMEs? competitiveness.
Mentoring for start-ups and existing SMEs.
SME clusters
Support programs for co-financing innovative project activities
(up to 50 [%])
SME/Entrepreneurs
European Network of Entrepreneurship Program: Information
about conditions for entering into the EU market, export
opportunities, new technologies, potential partners, etc.
Innovation fund SMEs
Program of early development of start-up and spin-off
companies
that have the technological innovation with potential of creating
new intellectual property.
Serbia Investment and
Export Promotion
Agency
SMEs
Grants for financing export activities and the international
promotion.
Export Credit and
Insurance
SMEs
Short-term loans for financing export activities.
Guarantees issuance
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Agency of the Republic of
Serbia
Receivables insurance
Factoring (assignment of receivables)
SME/Entrepreneurs Consulting for potential exporters.
Development fund SME/Entrepreneurs
Loans for arts and old crafts.
Credit support for beginners (newly established SMEs and
entrepreneurs, women entrepreneurship).
Guarantees for SMEs? and entrepreneurs? loans.
Short-term loans for encouragement of competitiveness and
liquidity, investment loans
Low interest loans for development of SMEs/entrepreneurs
in underdeveloped regions
National Bank of Serbia SMEs
European Investment Bank, the Government of Italy and the
European Agency for Reconstruction loans for SMEs
The Intellectual Property
Office of the Republic of
Serbia
SMEs
SMEs? intellectual property diagnostics
Education of SMEs about intellectual property
Therefore, the Structure of SMEs Support (SS), as a set of individual environmental support components that
are designed for solving SMEs? problems has next characteristics:
? Type of support - complex characteristic that indicates on: its form, nature of resources that are
provided to SMEs, specific purpose;
? Volume of support - the number of different support types that are integrated into the SS that is
provided to SMEs. If the SS, consists of several types, the volume of support is higher;
? The intensity of support - characteristic that involves introduction of indicators (and measuring unit
of the indicator expression intensity) which may be: period of providing support, financial value of
support, number of participants who provide support to SMEs (mentors, consultants, listeners).
Intensity of one support type refers to the amount of certain type of resource that is used in the
implementation of a specific form of support;
? Process of providing support - an essential part of the structure of environmental support
(because processes "justified" structure). It also refers to the cost, time and risk that are appearing in
support;
? Support recipient satisfaction – refers to the level of SMEs? managers/owners satisfaction with
received support. It can be measured as a level of fulfillment of expectations for support;
? Support provider satisfaction – an indicator of fulfillment of their intentions and expectations;
? The quality of support – measure of fulfillment of the SMEs? support expectations (and also of the
involved stakeholders expectations), which is usually expressed as the effectiveness and efficiency
of SMEs support. The authors of this paper suggest that the quality of support can be determined
through the other two characteristics: Suitability of support and Successfulness of support;
? Suitability of support - it can be defined as an indicator of compatibility of support provided to
SMEs with the SMEs? problems recognized by competent individuals or organizations (experts,
SMEs? owners/managers, specialized consulting organizations). According to Chrisman & McMullan
(2004, p. 231) support should be conceptualized and organized so that, in terms of its structure, it
corresponds to the particular problems and requirements/expectations of SMEs. They are drawing
attention to the suitability of support: "It is preferable that advisors (who provide support to SMEs)
rely on the ideas that are given by the owners/managers of SMEs, than to rely on prefabricated
solutions to the SMEs? problems", because "the SMEs? owners/managers expect support that is
suitable with their needs, that are numerous and that vary according to the activities, firm?s sectors,
firm?s development phase and also according to the ambitions from the owner/manager "(Audet,
Berger-Douce & St-Jean, 2007, p . 30);
? Successfulness of support – it refers to the effect of support on the problem solving and SMEs?
performance indicators. It can be measured by different (direct or indirect) indicators: the degree to
which problems in the company are solved, i.e. the effects on company performance (an increase of:
revenue, profit, number of employees, market share, etc). Possibility of measuring the
successfulness of support through the integral objective function, that will satisfy more stakeholders
at the same time, is particularly interesting;
The main hypothesis of this paper refers to the connection of support suitability with the support
successfulness (and therefore SMEs? successfulness): If the planning of SS that environment provides to the
SME sector achieve higher suitability (SSS - as a performance indicator of SS) with the structure expected
639
by the owners/management of SMEs, better results of that support are achieved (and also higher SMEs?
business performance).
For the purpose of proving the main hypothesis, 310 SMEs were surveyed. Two different things were
analyzed - SMEs? requests for support (requests for solving problems that are identified by the SMEs?
managers/owners), on one side, and the specific forms of support (that are provided to SMEs), on the one
side. The level of agreement between the support SMEs are looking for and the support that is provided to
SMEs is recorded as a variable - suitability of support. That variable could take integer value of how many
times used SMEs support is suitable with the requirements of the manager/owner. An indicator/variable
"Direct growth of total SMEs revenues", expressed in [%], was used for support success measuring.
Correlation analysis of these two variables gave the following result: Pearson Correlation ? (suitability;
increase in revenue) = 0.422 was statistically significant (sig = 0.002). The obtained coefficient of correlation
is in the category of medium correlation. Dependence between suitability and successfulness of support
(precisely, in this paper it refers to one successfulness indicator: direct increase of revenue as a result of the
environmental support to SMEs) can be established on the basis of that correlation. (The authors believe that
the reason why the relationship between two variables is not stronger (? > 0.5), is in the answer to the
question "Are the owners/managers of SMEs competent enough to identify what is the problem of their
SMEs?".
Since the statistical test confirmed a statistically significant relationship, it can be concluded that the
hypothesis is true, i.e. that if support achieve higher suitability of structures (SS) with the structure expected
by the SMEs? managers/owners, the better SMEs? business score will be achieved.
(The next conclusion is that if more competent experts define SMEs? needs, the more suitable structure of
support will be given. That will lead to even higher improvement of planning/plans of support to SMEs).
Based on this conclusion, the suggestion for improvement of the planning support process (and also the
whole support system) should be defined by including the innovated ways of defining and designing structure
of SMEs support. This can help the improvement of SMEs support and the success of their business.
4. IMPROVING THE PLANNING SUPPORT PROCESS TO SMEs
The purpose of planning model, that is proposed in this paper, is to help in directing always limited resources
to the forms or activities of SMEs support that is "most promising", i.e. support that will have the biggest
positive effect on the success of SME sector and, consequently, on the economy and quality of life. The
initial hypothesis is defined to indicate that there is regularity in the designing of SMEs structure of support.
Stakeholders are advised how to improve the system of SMEs support and how to participate in it.
Support planning is part of a more complex process which occurs in the support management system.
Therefore, the complex management process of providing SMEs support can be presented in two phases
(Omerbegovi?-Bijelovi? J. et al., 2010, p. 141 and p. 245):
F1. Planning – creation of plans for SMEs support where the highest goal(s) are decomposed into:
a) hierarchically-organized (and time-synchronized) goals? tree-structure, and b) A set of appropriate actions
(up to the level of work assignments for the direct objects of work transformation) for achievement of the
planning goals, c) Resource defined by type and quantity (planned activities should be implemented over
them) s and d) Specifying of the ways for providing resources to SMEs support;
F2. Execution of providing support plans, where other three classical phases of management could be found:
a) Organization for plans execution - where the decomposed goals and other elements of plans (like:
information about planned activities and the authority for managing necessary quantity of planned resources
for planned activities perform) are assigned to individuals or groups (organizational units); b) Realizations of
SMEs support plans where the availability of necessary recourses is provided through purchasing and
supplying (at the each relevant (work) place and at all planned horizons). It this phase planned resources
are used to obtain the output - planned support (with planned quality, planned costs, in planned moment,
with optimized values of output characteristics, for planned users); c) Controlling the execution of support
plans through all goals and tasks, time horizons, management objects (resources, processes, functions) and
indicators of the quality/ success of business operations, through the stages: 1) Identification of conditions of
SMEs support management entity, 2) Determination of deviations between the real condition and planned
values, 3a) Discovering of the deviations causes in parallel with, 3b) Operative removal of achieving goals
obstacles and 4) recording of experience and recommendation for next cycle of management improvement.
SMEs support planning system in Serbia (as an illustration for possible of SMEs structure of support
innovation and as an improvement object for planning process of the motioned support) is concretized with
“The Development Strategy of Competitive and Innovative Small and Medium Sized Enterprises for the
640
period 2008-2013”. The strategy is adapted every five years, and it includes the defined aims for SMEs
support. More precisely, it is a strategic plan that is defined by the Serbian Government, which includes the
aims that should be achieved by the government institutions and organizations through their activities in the
planned period. The Strategy is document for SMEs policy development. That document defines the main
priorities (goals) and ways (actions) for their realization in planned period. The main goal of Strategy is to
develop Serbian entrepreneurial economy based on knowledge and innovation. It needs to create a strong,
competitive and export-oriented SME sector and to significantly contribute the improvement of life standards
in Serbia. The general goal of the Strategy is further decomposed into the five most important objectives –
“pillars”:
? Promotion and support to entrepreneurship and the development of new enterprises
? Human resources for competitive SME sector
? Financing and taxation of SMEs
? Competitive advantages of SMEs in export markets
? Legal, institutional and business environment for SMEs
For the purposes of meeting the defined five "pillars" or the main aims of the Strategy, the particularly
activities are defined. Therefore, the strategy was defined according to the “top-down” principle - from the
main goal at the state level towards specific objectives and activities designed for the SME sector.
Authors of this paper think that another complementary approach (a "bottom-up" approach that is based on
concrete problems and needs of SME sector) is missing in defining Strategy. Based on the hypothesis
conceptualized and proven dependence between the results of provided support (the success of SMEs) and
its suitability with the problems and needs of SMEs, the authors present the concept (proposed
methodology) to improve the planning of support system (as part of SMEs management support system), so
that each individual support, meets demands and needs of SME in the best way. Additional contribution of
this concept would be a better definition of support strategy for SME sector.
Support planning process should be initiated with "call for help" - that the owners/ managers of SMEs send to
the particular SME support institution. However, in many cases, owners/managers of SMEs are not able to
identify when they have problem, what is the problem and even does the problem really exist in their
company. SMEs? owners/managers are also not informed well enough about the capabilities of many support
institutions. Therefore, the support institutions often encourage SMEs? support demands with a numerous
proactive programs and activities. It can be said that the institutions start the planning process for SME
support. So, the beginning of the SMEs support planning process can have two sources of "impulses":
Particular SMEs or institutions that provide support to them).
During the designing of SMEs support planning process, next things must be taken into considerations:
? Structure of support that is provided to the SME, which is in accordance to their problems and need.
This element of support planning can include all important aspects of support (type, scope, intensity,
quality, suitability and desired successfulness);
? Resources required for realization of support (money, people, knowledge, information, time, etc.).
where care should be taken about their availability in different time-planning period;
? Time period in which the support is implemented. It must be in accordance with the SMEs support
needs in the observed period, and with the resource availability of organization that provides support;
? Institution or organization that has task to implement support, because the organizations that
planned support to SME, are often not the ones that implement support.
SMEs support planning process (stages S1-S9) cannot be regarded as isolated, but in the context of integral
planning, and also in entire support management process (or at least on the level of operational
management - in stage S7). Therefore SMEs support planning process can be conducted through the
following stages:
S1) Investigate the problem of SMEs – i.e. do an accurate diagnosis of the SMEs? condition, problems and
needs. It is necessary to define the SMEs? problems, because incorrectly defined problems can lead to
inefficiency of the whole support system). Therefore, this phase is crucial for the further support planning and
support realization process;
S2) Define the goal that will be achieved through the support. Well-defined SMEs? problems (in previous
stage), may determine the purpose and goals of providing support to SMEs. While considering the goals the
expectations of many stakeholders should be take into consideration;
S3) Define suitable structure of support which meets goal identified in stage 2. At this stage, with respect
to the support suitability, structure of support that is intended to SMEs is precisely defined;
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S4) Define the necessary resources by types and quantities and specify the dynamics of resource needs
(which may be the major constraint to achieve support goals) for implementation of support. The goal is to
make the greatest support effect with rational use of always limited resources;
S5) Define the support intensity in accordance to the SMEs? needs and support providers resource
constraints;
S6) Define indicators for monitoring the support results – while support planning, the indicators that will
monitor the achievement of planned support and successfulness of realized support forms are also defined.
Those measurable indicators could be: a) degree of plan achievement, b) degree of resources utilization, c)
degree of support needs satisfaction and g) degree of particularly stakeholders? satisfaction;
S7) Implement the support – according to strict classification it is not included in the planning stage
because it is a realization phase. However one part of realization stage (transformation, i.e. direct providing
support activities), cannot be separated from operational preparation of support planning, and even less from
the operational preparation of providing support. They are so close that they are not even separate from the
operational management of SMEs support activities realization. Information about validity of the applied
planning process, and ideas for SMEs support planning process improvement come from this stage;
S8) Analyze the performance indicators of the provided support structure. Indicators for measuring
success of planning and support providing are analyzed after the execution of support. If the results meet
expectations, it can be concluded that the support was successful and that the plan achieved the goal.
According to Omerbegovi?-Bijelovi? et al. (2010, p. 151) "measure or degree of planning objectives
fulfillment is the quality of planning. It can be defined as: effectiveness - an indicator that measure the
achievement of planning purpose and efficiency - as the ratio between the benefits and cost of planning
process"), Otherwise, it is necessary to work on further improvement of the planning system of SMEs
support (primarily, here observed structure of support);
S9) Define further actions – SMEs support planning process usually does not end after the successful or
unsuccessful completion of the planning and plans executing cycle,. New cycles of providing support are
defined and planned towards a further SMEs problem solving and improvement of their success. Continual
improvement activities of the system for monitoring SMEs? needs, problem solving and successfulness, are
defined through the following: measurement, analysis of the results, determining deviations, further planning
of improvement and implementation of SMEs support activities. After one cycle of improvement, next cycles
should be repeated.
An important characteristic of the SMEs support planning system is the structure of that system, in addition
to the process of providing support. Organizational structure for SMEs support planning objectives
achievement is defined in accordance to the decomposition of those objectives. Theoretically, that process
goes through: 1) Delegation of (planning) goal?s components to individuals and/or to organizational entities of
the complex SMEs support planning system (i.e. assignment of specific goals to groups and individuals) 2)
Allocation of authorizations for: a) use of necessary resources to achieve assigned planning goals and b)
initiating and managing the activities of planning goals. Although the organization of planning is just one
phase of SMEs support planning management, it is necessary to consider the time horizon, and to
synchronize the organization ("activities assignment") with that aspect of planning (and the entire
management) SMEs support. However, this topic will further be discussed in another paper.
5. CONCLUSION
Providing support to SMEs is a serious social and professional task. The role of science is to make decisions
in this area be based on the facts. The result of the survey of the relationship between the suitability of SMEs
structure support (SSS) and the effects of providing that support (in case of SMEs support in the Republic of
Serbia) is presented in this paper. It was found that the effect of the support depends on its suitability with
and the actual needs for environmental support (at least as the owners/managers of SMEs saw those
needs). It is shown that the success in providing support to SMEs (including the SMEs? business success) is
higher if the provided support is more suitable with the one needed.
Based on the proven hypothesis and the innovated way of SMEs structure of support (SS) designing, the
authors made an improved concept of SMEs support planning process. Through this new concept, the
authors want to direct the institutions and organizations that provide support to SMEs towards the real needs
of practice – that during the process of SS planning and providing support they have to consider the real
needs and problems of SMEs, in order to achieve greater success.
The concept of SMEs support planning has many benefits. It can serve as a guide to:
? Small and medium enterprises – for better planning of their own support needs and learning about
the available support forms from their environment;
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? Government and its institutions – for better understanding of the SMEs? problems and their needs for
support (with the aim of defining more adequate forms of support provided/coordinated by the
Government of RS);
? Institutions and organizations that provide support to SMEs - for better planning of: support,
necessary resources and support activities.
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2008-2013, Ministry of Economy and Regional Development, Republic of Serbia,
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on 30.04.2012)
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European Commision; Publications office.
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ENTREPRENEURSHIP AS MARKET VALORIZED CREATIVE POTENTIAL
Dragan Gruevski
1
; Mirjana Cvetkovska
2
1
University “St. Kliment Ohridski” – Bitola, Faculty of Administration and Information Systems Management,
[email protected]
2
Project Coordinator, Foundation for Small and Medium-Sized Enterprises Development,
[email protected]
Abstract: The transition period of the society has left us richer for certain immediate experiences that will not
remain without influence on future generations. The transition from the old paradigm (socialist society) to the
new one (entrepreneurial society), is an uncertain and a long-lasting process, merely due to its radicalism.
Thus, this study aims at determining the quantity of entrepreneurial resources for those who manage and
operate organizations, institutions, and companies in the Republic of Macedonia, through determining the
extent of some of their personal characteristics that are considered part of the profile of any successful
entrepreneur. Inventive and creative potential, reliability, attitude toward change, attitude toward risk-taking
are the personal traits, in which we are interested in terms of management of human resources. It is said that
they broadly represent, but not fully cover the entrepreneurial personality. The research comprises a sample
of 132 respondents from different levels and activities in the Republic of Macedonia and the conclusions
have been reached according to their results on the TTS test by Eugene Rodsep, the test for determining
confidence, the MI 1 test for measuring the attitude toward changes, and the questionnaire assessing the
level and attitude toward risk-taking. The results of the research have shown that the managers in the
Republic of Macedonia possess, more or less, the tested characteristics, but they are very unevenly
distributed among individuals. In conclusion, this research aims to help managers of different organizations
to become aware of their “entrepreneurial spirit”, to help HR managers and the state authorities to develop it
and give directions for further development of entrepreneurship.
Keywords: Entrepreneurship, entrepreneur?s profile, inventive- creative potential.
1. INTRODUCTION
The period of transition of the society has left us richer for certain immediate experiences that will not remain
without influence on future generations. The transition from the old paradigm (socialistic society) into the new
one (entrepreneurial society), is uncertain and long lasting process, by the mere fact of its radicalism.
Collectivism, averaging, closeness, redistributive ethic, rigidity, maintaining of certain social justice, require to
be replaced with the values of the modern times. Market economy, pluralism of ideas and opportunities,
private initiative, entrepreneurship promotion, etc., are the clear objectives that we have targeted. From here,
the context of all contemporary developments, as much it seems hard to understand and accept, represents
confrontation of the individual with reality and often means certain discontinuity of living. Thus, on the one
hand, a process of rejection of the negative baggage occurs from the past, which is a measure of
convergence towards the new. And on the other hand, it becomes more clearly that this change requires
time - but not empty and unorganized, but filled with thought-out steps that will mean success. Hence, it is
understandable that the period in which we live is a challenge to professional profiles of different facets of
human activity. All of them from their own aspect are trying to observe and explore the entrepreneurship.
2. THEORETICAL FRAMEWORK AND DEFINITION OF THE KEY VARIABLES
Inventiveness and entrepreneurship are part of the key concepts, determinants of the development of any
society. They can be understood if presented as interconnected elements, characteristic for those individuals
who make change. Entrepreneurs are basically innovators, and innovation is the core of entrepreneurship.
Hence, the determination of entrepreneurship inevitably will lead by setting the remaining terms, which
constitute its essence. We start with innovation.
Innovation is a process of creating something new and as a phenomenon is a key determinant of the
development of any society. Certain need that appears in a certain area of the human life can become a
problem, inevitably requires adequate innovation (content, product, service).
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“The term innovation under the proposed definition of the OECD include transforming an idea into a market
product or service, new or improved production or distribution process, i.e. new way of social service.”
(Petkovski, ?. & Sulejmani, N., 2001:11)
“The innovativeness would mean:
? Renewal or expansion of the assortment of products and services, as well as, connecting the markets;
? Establishing new ways of production, supply and distribution;
? Introduction of changes in management, organization of work, working conditions and skills of the
workforce.” (Kralev,?., 2001:32)
Previous determinations of the innovation put the emphasis on the outcome of the process. In another
words, they focus on the consequences of it, while listing to what the innovativeness has led and where it is
needed. However, we think that for practical reasons that would function in a certain meaningful treatment of
the field of innovativeness fostering and development, in the determination of this term it is necessary to
include some other more fundamental determinants (processes, capabilities, features) that will allow more
accurate and bigger understanding of the innovativeness. Explaining the scheme of “the process of creative
problem solving” by defining the characteristics of the person who does it - creatively solve certain problem,
is the essence of the innovativeness, which, as was told, is the core of the entrepreneurship. (Figure 1)
How to?
Why?
Situation
Elements
Experience
Capabilities
“Armor”
Personality
Motivation
“curiosity”
Flexibility
Reorganization
Functionality
Sensitivity
Self-confidence
Prejudice
Referent frame
Proactive
Inventiveness
inventiveness
Figure 1: Process of creative problem solving (Gruevski, D., 2010: 119)
Hence, the phenomenon of creativity is not reduced only to a divergent production of ideas, but the process
of creative problem solving fully and very concretely explains the essence which may have practical
implications. As the professor Lj. Madzhar says: “In fact, the entrepreneurship by definition is capability and
current practice of solving completely new, very nonstandard problems on which from the previous
experience can be drawn only poor or no lessons.” (www.yurope.com / Republic, Sources of
entrepreneurship in transformed Serbia, pg.1)
Thus, is started from some emerging unmet needs, which by themselves represent a particular problem
whose solving through a creative process answers the following questions: “why”, “what” and “how to”, in a
certain constellation of structural elements of a particular creative person, acting in suitable conditions, leads
to innovation that he or someone else, the market, may valorize. In fact, entrepreneurship is only applied
and market valorized innovativeness - creativity.
Actually, if we recall the development of scientific thought and aspects that were crucial in explaining the
concept of entrepreneurship, given in the review made by professor Petkovski, we will get to the following:
“the risk taking”, as the main determinant of the entrepreneurs: ”the 'entrepreneur is one who takes risk,
unlike the person who provides the capital.”; “development carriers”, not only about “risk carriers”: “the
entrepreneur is an innovator and instigator of growth.”; “The entrepreneur has the ability for creation and
situation assessment.”; “The entrepreneur takes initiative, organizes social and economic mechanisms and
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assumes the risk of losses in the activity that he realizes.”; “The entrepreneur is one who sees the
opportunity for gaining a profit.” etc. At the end we will come to the determination which is most acceptable
and understanding to us – the explanation of Peter Drucker, who emphasizes “the economic valorization of
creativity”, as crucial: “Entrepreneurship is based on recognition of the opportunities for innovation and their
fastest market and economic evaluation.” (Petkovski, ?. & Jankulovska, P., 2001)
Of course, what is not completely clear is the answer to the question whether the process of creativity and
the process of its economic valorization is identical and is present as personal category in the same person
to call him entrepreneur or it is about two processes - one of generating creative ideas that later someone
else manages until their economic valorization? Or, we can speak about the entrepreneur only when the two
abilities (creating and management until the economic valorization of the creation), are clearly expressed?
Thereby, the answers to this question are probably already given by some authors. Yet according to us, they
are not clearly defined. For example, according to Ljubomir Madzhar: “Entrepreneurship is very
heterogeneous and complex mixture of ingenuity, the ability to predict or even presentiment about future
events, the ability to accept unusual and unconventional ideas, courage, persistence and other natural gifts,
and on the other hand it is the result of some favorable ambient conditions largely related to factors and
constellations that reduce the uncertainty.” (www.yurope.com / Republic, Sources of entrepreneurship in
transformed Serbia, pg.1)
On the other hand, indeed there are many ambiguities and misconceptions regarding the determination of
the essence of the matter, which have negative practical implications for the attempts to systematically
encourage and develop, reminds professor Vlajko Petkovic, who summarizing the various definitions and
understandings of entrepreneurship talks about misconceptions about the term:
First delusion: Entrepreneurship is not just forming a new company, but also introducing a new activity,
creating a new product or service. Entrepreneurial may be even those enterprises established in the past
century, if in their work are introducing major innovations which are of general importance and interest.
Second delusion: Relating of entrepreneurship to small commercial ventures. The large firms, even the
largest state enterprises, may be entrepreneurial. It is about making something new, unknown or not used in
the practice.
Third delusion: Refers to the ownership of the entrepreneur. The entrepreneurship can be developed in all
enterprises regardless of their ownership status.
Fourth delusion: It refers to the relating of entrepreneurship only to commercial enterprises. The
entrepreneurship also exists in the non-profit activities (science, education, health, information, etc.).
(www.ekof.bg.ac.yu / Economic chronicles, Entrepreneurship and entrepreneurs, pg. 1-2)
Besides the economic and social aspects in defining of the entrepreneurship, retention to the characteristics
of personality and behavior of typical entrepreneurs would mean special approach and contribution. Through
the literature can found lists of characteristics of individual entrepreneurs (profiles). They highlight various
characteristics among which dominate the following: high level of motive for achievement, small fear of
failure; strongly expressed sense of self-control and self-criticism; capability of dealing with uncertain
situations, great confidence, optimism, determination - commitment, great energy, emphasized individualism,
etc.
This, it can be said that for the entrepreneurial person is characteristic a certain set of manifesto and
recognizable behavior, which would amount to: orientation to goals setting, commitment to those goals,
persistence in their achievement; constantly decision making, calculated risk, acceptance of responsibility,
innovativeness.
Quite understandably, besides defining of the concept, the next crucial question that arises and which is of
special interest for each country refers to the possibility of a systematic approach to any organized attempt to
encourage the development of entrepreneurial consciousness and culture.
Namely, if we know that the development of entrepreneurship is an essential factor for acceleration of the
economy and rapid development of every country, every state must to encourage its development with
various measures. The factors - determinants that affect the development of entrepreneurship, various
authors divided into: “objective - subjective, internal - external, personal factors of the environment. Some
have divided them into: economic, psychological, sociological, legal, information, technical - technological.”
(Ibid, pg. 1-2)
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According to Professor V.Petkovic, it is more useful to elaborate the basic conditions for development of
entrepreneurship, which are exhausted by the existence of a) Free market; b) State deregulation in the
economy; c) Innovative culture, climate, tradition. Also other authors listed factors, activities that can be
placed in the previously mentioned, conditions.
“There are various forms of state aid for development of entrepreneurship. These include: providing legal
certainty to entrepreneurs, infrastructure and above all, stability of the economic system and democracy.
Also, one of the forms of state aid is the promotion of entrepreneurship and stimulating of young talents to
pursue a career in small business, the establishment of institutes and special forums, which should
contribute to removing barriers that hinder the development of entrepreneurship. Particularly, the state
should help in creating of a stable and reliable framework for managing.” (Ibid, pg. 4)
“It is necessary first to create conditions for competition in the economy, which represents the most favorable
climate for entrepreneurship development. That would mean building a market infrastructure, institutional and
public infrastructure, which includes primarily agencies and funds for development of entrepreneurship and
running a stable economic policy.” (Ibid, pg. 5)
On the other hand, the professor Lj. Madzhar lists the as well the international sanctions and the economic
blockade, as appropriate mechanisms and environment for entrepreneurship development. Of course, not
forgetting this phenomenon to be named as “often mistakenly targeted and exploited entrepreneurial energy
and resources”, characteristic for him is that he does not believe in the possibility of systematic development
of entrepreneurship through the forms of any formal education: “Unlike the management in the business and
other organizations, the entrepreneurship is not a factor that would thoughtfully and meaningfully grew
through learning and educational activities, least through some formal education, where courses in the area
of entrepreneurship would have a central place.” (www.yurope.com / Republic, Sources of entrepreneurship
in transformed Serbia, pg.4)
Of course, this attitude is extremely questionable and calls into question concepts and theories of education
and socialization. And precisely this dilemma opens the question that we have set as a problem. Namely,
who is an entrepreneur, those who are creative, or those who successfully and quickly manages a creative
idea to its economic valorization, or both? It seems interesting because both of them through education and
socialization processes surely can be systematically developed and encouraged.
3. PROBLEM – SUBJECT FRAMEWORK OF THE RESEARCH
The fact that all proposed activities, concepts, strategies, methods of development of entrepreneurship are
based on the assumption of the existence of individuals with their personal characteristics apart from others
and who can properly use such opportunities given and constructed, leads to the question of personality of
the entrepreneur and the possibilities for systematic action in the direction of fostering, encouraging and
developing certain abilities, traits, values, attitudes and beliefs from their early age through the education
system and families.
Because, the inventiveness, creativity is defined as the core of entrepreneurship, for which we said that it is
nothing else than “applied creativity found its market valuation”, we think that nurturing, encouraging and
maintaining the inventive-creative potential through thoughtful treatment represents a form of support and
development of entrepreneurship. On the other hand, also the confidence of the person, as characteristic of
the image for himself, the “self concept”, over which can be directly acted and it can be shaped through the
process of socialization and by imitation and which is mentioned as characteristic of the entrepreneurs,
represents a point of interest in this study.
The support and attitude toward change is another important dimension which is different for entrepreneurs
(initiators, leaders, innovators, non-conformists, flexible) and the others that hinder, and prevent the
development, and that is the goal of this research. Hence, it is focused on: determining the extent and
certain diagnosis of the inventive-creative potential, reliability, attitude to change and the attitude toward risk
taking of those who successfully manage, operate with organizations, institutions, companies in Republic of
Macedonia and for who exist indicators of their entrepreneurial trait, with the main goals:
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? To verify which of the personal traits that make “the entrepreneur profile” given in the literature are
present in individuals who manage their own business or manage with other organizations in Republic
of Macedonia;
? To set the foundation for building of an experimental model - system for encouraging and developing of
the inventive-creative entrepreneurial potential in children and adolescents of school and adolescent
age;
? To test the use value and validity of some psychometric instruments and procedures used in this
research.
4. METHODOLOGY OF THE RESEARCH PROCEDURE AND INSTRUMENTS
In terms of methodology, the research can be placed in the group of preliminary researches with the main
objective to verify, determine the level, to diagnose the situation and as such it is part of a wider activity
towards trying to establish a system to encourage and develop entrepreneurial awareness and culture where
the values obtained will be useful for certain profiling of the local entrepreneurs as the basis for future
recommendations and analysis.
In the research was used the test procedure by using validated instruments such as: the TTS test of Eugene
Rodsep (test for determining the confidence), the MI 1 test for measuring the attitude toward the changes,
and the questionnaire referring the level and attitude toward risk taking.
The test for measuring the attitude towards creativity – TTS is authorship of Eugene Rodsep and it has
been already used in research on creativity in Republic of Macedonia. It is quite extensive with 50 offered
attitudes and a few words that are chosen through several alternatives. The processing and scoring is made
according to a key on the given scale of creativity: from 21 to 14 / uncreative, from 15 to 29 / under average
creative, from 30 to 55 / average creative, from 56 to 84 / above average creative, from 85 to 109 / highly
creative , from 110 to 140 / extremely highly creative.
The test for measuring the confidence CC/C is adapted to the needs of some researchers in Macedonia
(K.Petkovski, 2001). Its metric features are not fully tested on our soil. It contains list of given statements with
which the respondent may agree or not, the test is easy to check and evaluate by elaborated key. It provides
rough indicators on the extent of one's confidence – non confidence on the confidence scale: from 0 to 15 /
unconfident, from 16 to 24 / confident, from 25 and more / very confident.
The test for measuring the reaction towards change - MI-1 (RTCI) is proposed as a simple and fast tool for
identifying the degree of acceptance / repulsion towards change (Smilevski, C., 2000: pg. 529). It contains 30
words referring the change. The preference of certain words that are most often associated with some
changes, allows using prepared key and scoring system, to calculate the certain score which then is seen on
a scale of acceptance of change: 40 and over / strong support, from 20 to 30 / moderate support; from 10 to -
10 / subjection to change, from -20 to -30 / moderate resistance to change; of -40 and less / strong
resistance to change.
The attitude towards risk taking recognized through direct response to the question “To what extent do
you take risk?” on a scale from 1-7, where the rounded answer no. 1 means: “I often take risks by exceeding
the positions that are previously defined, set out, agreed”. And the other extreme under no.7 means: “I
almost never take risks by not going beyond what I had previously scheduled, planned, conceived”.
5. DYNAMIC AND STREAM OF THE RESEARCH
As previously mentioned, the study is focused on sizing the entrepreneurial resource of those who manage,
operate with organizations, institutions in the Southwest region in the Republic of Macedonia (municipalities
of Bitola, Prilep, Demir Hisar, Krusevo, Resen), through determining the extent of some of their personal
characteristics that are considered part of the profile of every successful entrepreneur. Hence, the sample
consists of 132 managers, owners of private companies and a number of heads of public sector
organizations. The choice has been made based on several criteria: a) persons who started and run their
own business (in any area); b) persons who applied and participated in the realization of projects connected
with the promotion and development of entrepreneurship; c) people who were / are customers of business
start - up centers or other development foundations, associations, NGOs working in the area.
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Given the nature of the research, the type of research procedures, the usual closure of the business world
for the researchers - especially with this type of research, the field work of the research was done on several
occasions and it is mainly done in part of the free sessions at several training, seminars, in whose realization
we participated. Hence, the overall process of collecting data, with certain interruptions, lasted several
months in 2010 and 2011.
6. RESULTS FROM THE RESEARCH
This research focuses on sizing the entrepreneurial resource for those who represent certain example of
successful individuals who manage, through determining the levels of their inventive - creative and
confidence dimension, as well as the attitude towards risk taking and acceptance of change.
After the conducted research, the results obtained are presented qualitatively and quantitatively, and is used
a statistical methodology for concluding by calculating the indicators of the descriptive statistics (measures of
central tendency and measures of variability and dispersion) (Table 1). These indicators clearly show the
extent to which each of the examined entrepreneurial characteristics is present among managers from
private and public sector in Macedonia, which actually is the aim of the study.
After processing of the results a ranking of the respondents was made, separately for each test and for all
tests together, collecting the achieved scores for each respondent. The results indicate that there are certain
variations in the range of respondents on different tests. Given the deviations in the scores we consider that
they are significant and show that very few (about 15% of the total number of respondents) are those who
achieved high scores on all tests. In others there is variation in matter that on some tests they achieved
extremely high, and on others - extremely low scores.
Table 1 Descriptive statistics’ indicators of the examined variables
TTS SS/S MI 1 Risk
Measures of central tendency
? - Arithmetic mean 60.64 15.13 17.42 4.09
?? – Median 60.00 15.00 20.00 4.00
?? – Mode 59.00 17.00 30.00 6.00
Measures of variability and dispersion
Min. – Minimum 29.00 5.00 - 30.00 1.00
Max. – Maximum 95.00 24.00 50.00 7.00
Range 66.00 19.00 80.00 6.00
?
2
- Empirical dispersion
122.03 16.04 381.10 3.43
? - Standard deviation 11.05 4.00 19.52 1.85
Kv – Coefficient of variation 18.22 26.47 112.04 45.25
Ka – Coefficient of asymmetry 0.41 - 0.09 - 0.34 - 0.11
n – Sample size 132 132 132 132
From table 1 is obvious that when speaking of the first variable - the attitude towards creativity (TTS) the
largest part of the respondents fall into the category of “creative above average” (? = 60.64). It is confirmed
by the graph (figure 2) in which 64% of respondents fall into this category. The relatively high value of
standard deviation, however, is a sign that the scores of the most respondents are different i.e. have major
deviations from the arithmetic mean value.
In the results for the variable - confidence (CC / C) the average score achieved ? = 15.13 indicates that
most respondents are on the limit between "unconfident” and "confident". Most respondents, 53%, were
unconfident. As for variability and dispersion can be said that exists pretty high variability, especially
considering the values of standard deviation, variance and the empirical coefficient of variation.
As for the reaction towards change (MI 1), the average achieved score ? = 17.42 indicates "moderate
support for change" as characteristic of most respondents. Majority of the - 46% have that attitude towards
change. From the range of sores it is evident that with respect to this variable there are big differences from
“strong support”, to “strong resistance” to change, confirmed by the fairly high value of standard deviation.
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70
53%
62
47%
Confidence
Unconfi
dent
The indicators for the fourth investigated variable - the attitude towards risk taking - indicate that the most
respondents have average willingness to take risk (? = 4.09) on a scale from 1 - 7. Here, respondents are
fairly divided by “often taking risk” to “not taking risk at all”, for which speak the indicators of variability.
All this is concisely presented in the following graphs:
Figure 2 Distribution of “Creativity Figure 3 Distribution of “Confidence”
Figure 4 Distribution of “Reaction towards change” Figure 5 Distribution of “Attitude towards risk taking”
7. CONCLUSION
Given the fact that in Republic of Macedonia do not exist similar researches aimed at determining the levels
of these delicate personal parameters, our discussion will remain focused on the indications of some authors
from which indirectly can be drawn certain conclusions.
In addition, although it was not subject of this research, however lacking in other studies related to other
parameters that we measured, we intentionally focus on the exploration of "the achievement motive" realized
in our country. We say intentionally because:
? It is a subject that is of scientific interest since the time of socialism and offers certain comparison;
? It is known that it is a gained motive which is subjected to development and change;
? It is a key of the entrepreneurial profile and
? Its structure includes the attitude towards risk taking and towards change which are variables of our
interest. (McClelland according N.Rot, 1987).
Namely, the research conducted in the former Yugoslavia pointed to its low level, compared with levels in the
population of developed countries. (Havelka & Lazarevic, 1981) and (Nikolovski, 1991). But its more recent
measurements suggest that living in the transition has not remained without influence on the socialization of
new generations. Specifically, it is claimed that it has an upward growth and tend to be equalized with the
same levels set in the same population of the Western countries. (Donevska, 2010)
1
1%
43
32%
84
64%
4
3%
Creativity
Under
average
creative
Average
creative
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Hence, it appears that the issue regarding the risk taking, based on our results, as it was expected, the
propensity to take risk is average - ? = 4.09.
Finally, we can conclude that:
? The results indicate that it is necessary every eventual strategy for encouragement and development
of the entrepreneurial potential to contain adequate, adjusted contents and activities which will be
implemented under the supervision and guidance of specially selected and trained individuals -
synergists, mentors, especially in the structure of values and attitudes (attitude towards change and
risk taking). Even more, given the model and structure of the human capital in which, among other,
are distinguished the values for which the famous author and researcher in this field M.Rokic spoke
as for "cognitive represent of the connotative." (according Kolevski, N. & Kotevska, M., 1992: 331)
? There are individual cases in the group of respondents who possess personal characteristics
regarding all investigated parameters, which can be considered as positive role models that might try
to establish certain future cooperation, and the modeling system to encourage and development of
the inventive - creative and entrepreneurial potential in our environment.
? By registering of the relatively high score in the attitude towards creativity, in Republic of Macedonia
is reinforced the conviction that entrepreneurship is nothing but "market valorized creativity" and is
easily explainable with some contemporary concepts and models of the relationship of creativity with
other variables (Renzuli) .
Taking into consideration the opinions of the authors Petkovic and Madzar, regarding the definition of the
concept and its differential separation from something it is not, which is summarized in the text as "delusions
about the concept " we consider that the criteria" successful business " and even more "wealthy boss" often
used in the context of determining the level, development, directions, tendencies, etc. of the
entrepreneurship, are not fully appropriate in situations when is needed to identify or distinguish models of
people - entrepreneurs. Of course, this is due to the existence of many other intervening variables that is
obviously difficult controllable in an attempt to define "success, wealth," and ways of getting them. Hence, we
believe that our attempt: the models of successful entrepreneurs with who in the future we would like to
cooperate, on the way of fostering and development of the entrepreneurial awareness and culture, to choose
the group of those who meet a certain level of characteristics described throughout the literature is entirely
justified and appropriate. Of course, the variables emphasized in this research are one of the key in that
profile.
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652
FINANCING ENTREPRENEURSHIP IN TIMES OF CRISIS
– CASE OF SERBIA
Svetislav Paunovi?
1
, Maja Paunovi?
2
1
BBA - Faculty of Banking, Insurance and Finance, Belgrade, Serbia, [email protected]
2
Faculty of Management, Sremski Karlovci, Serbia, [email protected]
Abstract: The paper elaborates on the current situation in the field of financing entrepreneurial venture in
Serbia in times of crisis. The global financial crisis significantly hit the SME sector in Serbia, reduced the
liquidity and solvency of the enterprises, reduced the amount of available funding and loans for SMEs,
increased the cost of capital and generally made existing financing problems even more difficult. The number
of registered enterprises and entrepreneurs is constantly dropping, while the number of those ceasing to
work has been going up since 2008. In times of crisis, SMEs are more vulnerable, since it is very difficult for
them to downsize. Also, their weak financial structure is heavily dependent on external financing.
Financing entrepreneurial ventures became one of the key challenges entrepreneurs are facing today and
one of the major barriers to the rapid development of SMEs. Therefore, this paper aims to give an overview
of available instruments of financing in Serbia, as well as to emphasize missing options. Regarding debt
financing, since costs of credits and banking services in general are relatively high, SMEs are not profitable
enough to be able to afford significant levels of debt financing at the existing interest rates in Serbia.
Collateral requirements are still high, the procedures for obtaining guarantees and loan approval are too
long, and loan amounts limited. Loans, although available, are not accessible to SMEs. Equity financing is in
the initial stage of development. Venture capital companies are generally focused on large companies, while
the segment of informal investors (business angels), who can substitute bank financing or venture capital
at the early stage of a firm’s life cycle in particular, is the missing piece of the puzzle. Serbian entrepreneurs
are not quite familiar with the advantages and disadvantages of equity financing, and more training and
education are necessary in order to introduce this kind of financing. Investment readiness programs could be
an excellent opportunity to clarify business angels` expectations and entrepreneurs` perception of investors`
requirements. Confronted with this gap and realizing that the existing market failure inhibits the provision of
appropriate financing for SMEs, the Serbian government plays a very active role in providing subsidized
loans and grants.
The analysis was mainly based on existing surveys conducted by Serbian and international institutions. The
problems were analyzed from different perspectives using available statistics and we tried to provide relevant
inputs of value to Serbian SME policy makers, entrepreneurs, banks and potential investors. The
development of new financial instruments, especially in times of crisis, in order to support innovative SMEs
and provide access to equity-based investments, has been envisaged as the priority of SME policy in Serbia.
It is neccessary to develop regulatory and funding mechanisms for encouraging formal and informal venture
capital investments in SMEs.
Keywords: entrepreneur, SME, bank, debt financing, equity financing
1. THE LATEST DEVELOPMENTS IN SME SECTOR IN SERBIA
Since 2000 significant progress has been made in creating an institutional and legislative framework for
business development in Serbia. The SME sector became the most efficient segment of the Serbian
economy and the key generator of income and employment. In terms of SME developments, Serbia has
managed to catch up with other countries in transition.
Table 1: Key development indicators of the SME sector in Serbia
SME sector Share of SME sector
2009 2010 2009 2010
No. of enterprises 314.827 318.540 99,8 99,8
No. of employees 872.540 814.585 66,7 66,4
Turnover (mil. RSD) 4.380.545 4.677.933 67,8 65,3
GVA (mil. RSD) 778.108 817.417 57,1 55,9
Export (mil. RSD) 275.378 339.845 50,5 46,4
Import (mil. RSD) 627.147 680.549 60,9 54,3
Investments (mil. RSD) 259.796 ... 52,6 ...
Source: MoERD,NARD: Report on SMEs and entrepreneurship development (2011), adapted by autors
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Number of SMEs and number of employees generally has the positive trends in the period 2006-2009. It is
worth mentioning that the number of new jobs created in the SME sector in the period 2005 – 2008 was
higher than the number of jobs lost due to the restructuring of large enterprises (MoERD, RDB, RASMEE,
2009). In 2010 the SMEE sector accounted for more than 99% of total number of enterprises, 66.4% of the
employment, 65.3% of the total turnover and 55.6% of the gross added value of Serbian economy
(MoERD,NARD, 2011). Micro business entities - entrepreneurs and micro enterprises account for the highest
share in the number of SME sector entities, whereas small and medium-sized enterprises are dominant
according to number of employees, total turnover and GVA, total export and import.
Decrease of foreign and national demand and investments had a negative impact on the business
operations and the overall entrepreneurial climate. Slower development dynamics of the SMEE sector in
2009 and 2010, made the development problems of the sector more visible. The structure of SMEE, due to
dominant share of micro enterprises and entrepreneurs and insufficient number of medium-sized enterprises
(which are the key drivers in all developed countries), is unfavorable in a longer period of time and reflects
pretty slow transition of micro into small and especially small into medium-sized enterprises. Secondly,
prevailing position of low-tech industries is evident within the manufacturing sector (64% of all SMEs, 59% of
total number of employees and 55% of GVA were realized in low-tech industries) while, medium-high-
technology industries and high-technology industries encompass only 10% of all SMEs, 17% of number of
employees and generate 21% of GVA.
Table 2: Indicators of SME sector in manufacturing industry in 2010 by technological structure (%)
Industries
No. of
enterprises
No. of
persons
employed
Turnover GVA Export Import
Manufacturing industry – SMEs 100,0 100,0 100,0 100,0 100,0 100,0
Low tech industries 63,6 59,0 55,6 54,4 54,6 40,6
Medium-low-tech industries 26,4 24,1 23,5 25,3 24,8 24,9
Medium-high-tech industries 6,6 12,8 13,2 14,1 15,8 17,6
High-tech industries 3,4 4,1 7,7 6,3 4,8 16,8
Source: MoERD,NARD: Report on SMEs and entrepreneurship development (2011), adapted by autors
Relatively low level of competitiveness is crucial problem of SMEE sector in Serbia which generates
significant trade deficit. Low level of production and financial capacities produced increased investment
dependency of this sector on the external sources of financing. Preliminary results from the Business
Environment and Enterprise Performance Survey (EBRD, 2008) clearly showed increased reliance of SMEs
in Serbia on bank borrowing as compared to the findings of the same survey run in 2005. Bank loans are the
most important external source of financing SMEs (40%), whereas significantly less important sources are
loans from friends, relatives or partners, leasing, government funds, foreign loans, guarantees and donors?
support.
2. IMPACT OF FINANCIAL CRISIS ON SME SECTOR
At the present time, SMEs have been especially hard hit by the global crisis. These firms are more
vulnerable now for many reasons: not only has the traditional challenge of accessing finance continued to
apply, but new, particularly supply-side, difficulties are currently apparent (OECD Centre for
Entrepreneurship, SMEs and Local Development, 2009). There is the evidence that since 2008 SMEs in
Serbia are being constantly faced with a clear decline in demand for goods and services. In this context, it is
very difficult for micro and small enterprises as well as entrepreneurs, which are the dominant segment of
SME sector, to downsize business operations as they are already small. Two related factors were of special
importance for the SME sector: increased payment delays (which produced the decrease in liquidity) and
increased insolvency and bankruptcy rates (due to weaker financial structure, lower or no credit rating and
inability of SMEs to obtain short-term financing).
The number of registered enterprises and entrepreneurs has been constantly dropping, and the number of
business entities ceasing to work has been going up since 2008. The ratio of established and closed
enterprises, has been declining every year indicating less newly established enterprises compared to
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number of closed enterprises. In this context, constant negative trends can be found in decrease of birth
rates and increase of death rates of enterprises.
Table 3: Established/closed ratio and birth rate vs. death rate
Established/closed ratio Total
enterprises sole traders Birth rate Death rate
2006 7,5 1,7 22,3 10,6
2007 5,9 1,5 20,7 12,1
2008 3,7 1,3 18,0 13,2
2009 2,8 1,1 15,7 12,7
2010 1,0 0,9 14,2 14,9
Source: MoERD,NARD: Report on SMEs and entrepreneurship development (2011), adapted by autors
According to Survey of small and medium-sized enterprises and entrepreneurs (Republic Statistical Office,
2011), 60% of respondents are coping with challenges of the current economic crisis, among which there is
a small number of enterprises that do not feel the effect of the crisis (14%). There are 21% of respondents
faced with decisions on dismissal of employees, and as much as 19% of them are faced with uncertain
perspective in terms of further survival. Share of surveyed enterprises that feel stronger impact of the
economic crises was reduced compared to the findings of the surveys in the previous years (40% compared
to 51% in 2010, and 48% in 2009). Most of enterprises in 2011 intend to continue working with the increased
(44%) or the same scope of business activities (48%) in the following three years. Negative outcome was
considered by 8% of respondents, where 4% is related to reducing business activities, 3% to closing the
business and 1% to transferring the business to somebody else.
Table 4: Orientation and plans of SMEs in times of crisis
Business
expansion
The same
workload
Reduced
workload
Closing the
business
Transfer
business to
others
Micro 32,2% 55,6% 6,1% 4,7% 1,5%
Small 45,9% 47,2% 3,8% 2,0% 1,1%
Medium 58,7% 37,6% 2,4% 0,9% 0,5%
Entrepreneurs 29,1% 59,1% 4,6% 5,3% 2,0%
Total SME 43,6% 48,5% 3,8% 2,9% 1,2%
Source: MoERD,NARD: Report on SMEs and entrepreneurship development (2011)
In the similar survey conducted in 2006, there was much more enthusiasm among entrepreneurs: 66% of
respondents intended to expand their business, and 26% planned to keep the existing level.
Governments generally responded on financial crisis by three types of measures aimed at: supporting sales
and preventing depletion of SMEs’ working capital, enhancing SME’s access to liquidity and helping SMEs to
maintain their investment level (OECD Centre for Entrepreneurship, SMEs and Local Development, 2009).
Serbian Ministry of Economy and Regional Development in 2009 initiated the scheme and put in place anti-
crisis packages, through the Serbian Development Fund in cooperation with the commercial banks, which
enables subsidized loans for businesses covering investments, liquidity maintenance, financing of long-term
working capital, export activities and financial leasing.
3. FINANCING ENTREPRENEURSHIP IN SERBIA
3.1 Debt financing
SME sector has become an important segment of interest of banking sector and an increasingly attractive
customer group although the banks in Serbia have been traditionally cautious with lending to SMEs due to
high risks associated with the sector. Consisting of 33 banks with network of 2.432 organizational units at the
end of 2011, the banking sector in Serbia provides the range of both standardized as well as specially
tailored banking products/services. Banks became more aware of the importance of the SME sector in
Serbia and majority of them have separate departments dealing with SMEs. In this context, banks that are a
part of international banking groups have changed the terms of access, the risk analysis and risk
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management practices for SMEs. Concerning banks` operational management, the small enterprises
became the part of retail lending while the medium enterprises became the part of corporate lending. The
existence of financial infrastructure, such as credit Bureau of the Banking Association and the Solvency
Centre in the NBS, have been of major importance to allow introduction of modern credit risk appraisal
techniques.
Serbian banking system operates under very strict and tight legislations and regulations. Although the bank
lending conditions have significantly tightened, growth rate of credit potential of banking sector in Serbia had
increasing trend in 2008 and 2009, but slower than in the period 2005-2007, indicating the direct impact of
financial crisis. Deposit potential had a negative growth only in 2008 as a direct consequence of the first
wave of financial crisis.
Table 5: Indicators of banking sector in Serbia
2005 2006 2007 2008 2009
Number of banks 40 37 35 34 34
Growth rates of credit potential (in %) 40.0 26.2 38.7 21.4 7.2
Growth rate of deposit potential (in %) 35.2 52.2 45.4 -2.7 14.2
Source: NBS and ECB, 2010
From the bank?s perspective, profit potential from SME lending is high, but some obstacles, basically policy
related, were identified (http://siteresources.worldbank.org). The most serious obstacle is the legal and
contractual environment (including weak protection of creditors and property rights, problems with contract
and collateral enforcement, judiciary inefficiency and slow and costly bankruptcy procedures). Banks in
Serbia are trying to deal with these inefficiencies by demanding high levels of collateral for practically all
types of credit products. Macroeconomic factors related to regulations were also recognized as obstacle to
SME finance. Due to very tight monetary policy implemented by National Bank of Serbia and high cost of
compliance, the cost of credit and of banking services generally in Serbia has significantly increased. It is
widely recognized that SMEs are not profitable enough to be able to afford significant level of debt financing
at the existing interest rates in Serbia. In the field of bank?s policy, they frequently try to avoid providing loans
to certain types of SMEs particularly start ups and very young firms without track records that typically lack
sufficient collateral, or firms whose activities offer the possibility of high returns but at a substantial risk of
loss (OECD, 2006). In this context, loans although available are not accessible for SMEs in Serbia.
On the other side, SMEs? perspectives elaborated in the Survey on current situation, problems, and needs of
the SMEE (MoERD, RASMEE, SSO, 2009), conducted on a sample of 3,000 enterprises, provided insight
into the existing situation and problems encountered by the SMEE sector. Entrepreneurs found very limited
possibilities and poor assortment of sources of finance on the domestic financial market. Commercial banks?
offer is still not stimulatory enough and unreachable for the majority of SMEs. High interest rates are the
main problem regarding loan arrangements of small enterprises, banking costs as well as collateral required
are still high, the procedures of obtaining guarantees and approving loans are complicated and too long, and
loan amounts limited. Serbian Business Registration Agency and the Serbian Development Fund have a fully
operative system for the registration of movable assets allowing firms to use movable assets as collateral in
their efforts to access bank finance. Additionally, it should be emphasized that some opportunities for
reduction of collateral requirements through credit guarantee schemes exist in Serbia. The Serbian
Guarantee Fund and Vojvodina Guarantee Fund issue guarantees for SMEs, entrepreneurs, start-ups and
agricultural producers. Export credit and Insurance Agency is focused on export oriented sectors and
provides credit guarantee schemes. There is an idea that credit guarantee schemes should be privately
managed in order to achieve efficient allocation of resources through the incentive schemes.
3.2 Government intervention
Due to existing market failure that inhibits the provision of appropriate financing suitable for the SMEs,
Serbian government still plays an important role in supporting the SME sector. There is a number of
government-sponsored programs aiming to stimulate the SME development. Existing financial infrastructure
at the national level that directly or indirectly provides financial support to SMEs and entrepreneurs from
government sources consists of several institutions.
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Table 6: Government support
Institution Types of support
1. Ministry of Economy and
Regional Development
? Subsidies for quality certification, cluster development,
entrepreneurship development and innovations
? Subsidies within Program for stimulating investment in innovations in
Serbian companies
? Loans for development of enterprises and entrepreneurship in under
developed municipalities
? Loans for improvement of the quality of tourist products in SMEs
? Low interest rate loans for start–ups
2. Ministry of Science and
Technological
Development
? Subsidies for innovation projects
3. Ministry of Agriculture ? Financial support to entrepreneurs and NGOs in the field of
agriculture for developing safety and quality systems for agro
products in 2009 as well as for providing consultancy work.
4. Development Fund of
Serbia
? Low interest rate loans in order to facilitate SME start up and
development (including investments in new programs/innovations,
reconstruction and modernizing, and in working capital)
5. Development Fund of
Vojvodina
? Long term and short term loans for SME development and export
finance
6. Guarantee Fund of the
Republic of Serbia
? Approves and guarantees for company loans parts approved by the
banks and other financial institutions. Guarantee Fund approves
30% and the banks 70% of the loan.
7. Guarantee Fund of
Vojvodina
? Issuance of guarantees to banks as the collateral of regular bank
loans repayment by individual farmers, private entrepreneurs, small
and medium enterprises
8. National Agency for
Regional Development
(former Republic Agency
for SME Development)
? Low interest rate loans for start-ups (as implementing institution
within the government program)
? Subsidies for quality certification, entrepreneurship development and
innovations (as implementing institution within the government
program)
9. Export Credit and
Insurance Agency of
Serbia (AOFI)
? Short –term financing, export credit insurance, factoring, foreign
buyer financing, refinancing of a foreign buyer via commercial bank
and financing from other sources.
10. Serbia Investment and
Export Promotion Agency
(SIEPA)
? Subsidies for the participation of Serbian companies at international
fairs, creation of business linkages as well as organization of trade
missions for the foreign companies interested in doing business with
Serbian companies
11. National Employment
Service (NES).
? Subsidies for job creation – mostly for the ones listed in the NES`s
database as unemployed and other incentives for job creation.
As far as state-funded credits are concerned, the Development Fund of the Republic of Serbia is the
principal channel, providing (subsidized) financing for different programs related to economic, regional and
SME development, increasing competitiveness and related activities. This Fund has a number of credit
products including: Long term credits up to five years at an annual interest rate of one per cent, funded by
the Ministry of Economy and Regional Development; Short-term credits (6 months), with annual interest rate
of 3.5% from Fund own resources; Long-term credits of up to five years at 4.5% annual interest and with a
grace period of one year; Credits for financing development of production trades (craftwork) and services –
entrepreneurial credits (4 years) with 1-year grace period and annual interest rate of 1-3%.
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Banks were very positive about the need for the Government to take an active role in trying to facilitate
lending to SMEs (http://siteresources.worldbank.org). Although the subsidized programs have provided
interest rates that were significantly smaller than that of banks, when asked to evaluate the Government-
sponsored credit programs, banks responded that the programs have little or no real impact on the market or
the SME development. One explanation for such an opinion can be that the total volume of funding available
from the government-sponsored sources is actually rather small to affect the market rates, which is partially
true. More importantly, there is no reliable impact assessment of the incentives to SMEs put in place by
Serbian government. It should be the very clear indicator of efficiency of SME policy in the context of
financing entrepreneurship. Therefore, it is necessary to design clear monitoring processes for all
government-sponsored programs aiming to finance and stimulate the SME development.
3.3. External equity financing – the missing piece of the puzzle
Financial markets in Serbia are generaly underdeveloped and there are limits for SMEs to use other financial
instruments coming from the capital market and corresponding financial organizations. The Law on
Investment Funds (2006) was a first step towards allowing the establishment of private equity funds in
Serbia. The OECD report “Progress in the Implementation of the European Charter for Small Enterprises in the
Western Balkans: 2009 SME Policy Index” (2009) states that several private equity funds are operating in
Serbia. But, these funds confine their investments to the acquisitions of stakes in larger Serbian enterprises.
Existing Law on Investment Fund does not impact substantially on innovative SMEs nor venture capital
companies investing in them.
Despite the importance of innovative SMEs, having in mind that they represent higher risk than traditional
SMEs or large firms, they face particular problems when attempting to access traditional bank loans. On the
other hand, SMEs are also disadvantaged having in mind that investors (who provide risk capital in return for
the equity share in the company), are generally focused on large companies. Financing innovative SMEs is
additionally complicated by the fact that these firms require different financing at different stages of their
development.
Business angels can be a substitute for bank financing or venture capital which can be difficult to attract
at the early stage of a company?s life. In contrast to bank finance, venture capital companies and business
angels do not seek scheduled repayment, but for a minority stake in the share capital of a company in return
for cash. Business angel, as private investor who brings not only capital but also experience and know-how
in company management at the early stage, is generally interested in the high-risk and high-reward business
opportunities that the venture creation offered. Business angel tends to operate on a smaller scale than
formal venture capital companies and probably concentrates more on start-ups than in expanding
enterprises. For these reasons venture capital companies and business angels are usually regarded as
separate categories.
Although, there is no formal representative association of business angels in Serbia, in the end of 2009, the
first informal network of business angels was established in Serbia, called “Serbian Business Angels
Network” (SBAN). SBAN provides an opportunity for entrepreneurs, through the web portal that serves as a
type of matchmaking platform, to place their business ideas and to search for potential investors. Investors,
business angels, members of the network, can see all the projects and browse through projects according to
their field of interest or value of capital needed as investment. SBAN also allows the investors a potential
joint investment. It is of vital importance for entrepreneurs in Serbia, through attending trainings,
conferences, workshops and lectures, to improve knowledge on designing business plans, project
documentation, marketing and finance as well as to improve their communication and negotiation skills in
order to prepare themselves for the business meetings and negotiations with potential investors. Investment
readiness programs will be an opportunity to eliminate some misunderstandings and to clarify business
angels` expectations and entrepreneurs` perception of investors` requirements. Also, it is neccessary to
promote the equity financing and to develop regulatory and funding mechanisms for encouragement of
formal and informal venture capital investment in SMEs.
4. CONCLUSION
Slower development dynamics of the SMEE sector in the times of crisis, made the development problems of
the sector in the fields of financing entrepreneurship venture more visible. Weak financial structure of SMEs
is heavily dependent on external financing and due to lower or no credit rating (especially in case of start-up
firms) they have limited external financing options.
Existing scope of financial support to SME sector in Serbia, although significantly improved, is not enough
specially in times of crisis to contribute to faster growth and development of SMEs and entreprepneuship.
658
Regarding the debt financing, the cost of credit and of banking services generally increased. Although
available, loans are not accessible for SMEs in Serbia having in mind the SMEs are not profitable enough to
be able to afford significant level of debt financing at the existing interest rates in Serbia. Start-up businesses
are in particularly difficult position. Banks frequently hesitate or try to avoid providing loans to them because
they have no track records or sufficient collateral.
External equity financing in Serbia is in the initial stage of development. Venture capital companies are
generally focused on large companies, while the existing Law on Investment Fund does not impact
substantially on innovative SMEs nor venture capital companies investing in them. Informal investors
(business angels) can be the substitute for bank financing or venture capital especially at the early stage of a
company?s life. But, in Serbia this is the missing piece of the puzzle, and more traning and education is
necessary in order to promote and introduce the essence of this kind of financing. Very first initiative to
establish the network of business angels in Serbia was implemented via SBAN web portal enabling
entrepreneurs to present their business ideas and projects on one side and investors to better allocate their
investment decisions in the area of their interest.
Development of new financial instruments which will support primarily innovative SMEs and provide access
to equity-based investments, was envisaged as the priority of SME policy in the area of financing SMEs in
Serbia by the Strategy for Development of Competitive and Innovative SMEs 2008-2013. Besides providing
direct financial support to SME sector, it is also necessary, in the conditions of a financial crisis, to work more
actively on improving the knowledge of SME owners and entrepreneurs in the field of availability of funding,
information on how to access these sources as well as how to manage them efficiently.
REFERENCES
Deakins, D., Freel M. (2009), Entrepreneurship and Small Firms, Mc Graw Hill Companies
Dollinger M. J. (2003), Entrepreneurship – strategies and resources, Prentice Hall, Pearson Education
International
EBRD (2008), Business Environment and Enterprise Performance Survey. Retrieved from
http://www.ebrd.com/pages/research/analysis/surveys/beeps.shtml
Kaplan J.M. (2003), Patterns of Entrepreneurship, John Wiley & Sons, Inc
Ministry of Economy and Regional Development, Republic Development Bureau, Republic Agency for
Development of SME and Entrepreneurship (2009): Report on Small and medium-sized enterprises
and entrepreneurship
Ministry of Economy and Regional Development, Republic Agency for SMEE Development, Serbian
Statistics Office (2009): Survey on current situation, problems, and needs of the SMEE sector
Ministry of Economy and Regional Development, National Agency for Regional Development (2011), Report
on small and medium-sized enterprises and entrepreneurship
Ministry of Economy and Regional Development, Serbian Statistics Office (2011): Survey on current
situation, problems, and needs of the SMEE sector
OECD Policy brief (November 2006): Financing SMEs and Entrepreneurs
OECD, EC, ETF, EBRD (2009): SME Policy Index 2009 – Progress in the Implementation of the European
Charter for Small Enterprises in the Western Balkan
OECD Centre for Entrepreneurship, SMEs and Local Development (2009), Impact of the Global Crisis on
SME and Entrepreneurship Financing and Policy Responses
Torre A., Pería M.S.M, Schmukler S.L.(2010), Bank involvement with SMEs: Beyond relationship lending,
Journal of Banking & Finance 34 (2010), p. 2280–2293
World Bank, Finance and private sector development department Europe and Central Asia Region: Bank
lending to small and medium enterprises - the Republic of Serbia. Retrieved from
http://siteresources.worldbank.org
World Bank – Doing business 2012
659
MANAGEMENT PRACTICE, SUCCESS AND/OR GOOD PERFORMANCE
OF SMALL BUSINESSES
Slobodan Mari?
1
, Bojan Lekovi?
2
1
Faculty of Economics Subotica, University of Novi Sad, [email protected]
2
Faculty of Economics Subotica, University of Novi Sad, [email protected]
Abstract: One of the main goals of this paper is to define formal management practices, as well as to define
success, i.e. good performance of small businesses. Current dilemmas in the cited triangle are of immediate
interest because of different research results on this subject. Initiating critical thought on the subject creates
necessary conditions for further research within the framework of the defined field, increases the
understanding of the research problem and contributes to better dissemination and usefulness of future
research results. Considered from the aspect of future research intentions, this paper is a necessary step on
a defined path, that is, a necessary condition for further research.
Keywords: management practice, success, good performance, small business
1. INTRODUCTION
Numerous works published in academic publications, as professional journals, including research results on
management practice and success and/or good performance appeared about 50 years ago. At the
beginning, significant part of this sort of researches related to large enterprises, therefore, most management
practice was founded on methods and procedures developed for large enterprises, where operative and
financial goals were very precise and clear and could be very easily turn into concrete actions Simpson M.,
Padmore J., Frecknall-Hughes J., 2007). Recently, the realized balance and part of attention have been paid
to small business. This change of behavior relationships have been caused by the opinion and a very logical
attitude that management practice is the principal culprit for success/failure of large companies and
everything good for large companies is also good for small ones. This attitude is confirmed by many
researches where managerial practice was on the top as a critical factor for the success of small business.
Significant research space within the framework of this subject after five decades of current importance has
been present for opposite results of authors when researching in this field. The previous statement should be
accepted very carefully. Results of the cited researches can be hardly compared because there is some
dose of relativism when determining how an author understands the key variables of researches as
managerial practice, success, performance and indices for indicating these variables. The work, as part of a
wider research project will enable the adequate starting points and the realization of planned researches to
determine the interdependence of management practice and success/performance of small business. The
main result, the practical result, of these attempts should be the managerial framework in the form of
managerial recommendations for success, i.e. good performance of small business, as well as the adequate
way to disseminate these results with a view of advancing practice in the field of researching. It is also very
important to emphasize the necessity of clearing up the starting points and complete understanding of some
categories so the results of this research can be definite, unambiguous and completely useful. This means,
firstly, that we must determine precisely the categories of formal management practice, as well as to limit the
categories of success and good performance; these will be some of the key variables in the research.
2. EXISTANCE OF MANAGEMENET PRACTICE
As the beginning phase in the life cycle of an enterprise, i.e. development, considered from the aspect of its
size, small business, as the social-legal entity – societies have a significant distance in relation to medium
enterprises, when speaking on management practice and the level of its application. Management and
intention for the long-term existence, as well as the realization of its own mission make small business an
officially accepted entity of the economic activity. The existence of management orientation clearly divides
small business from the entrepreneurial undertakings, as visually explained in Figure 1. In the same way,
starting management practice, largely, qualitatively divides small business from medium enterprises, as the
next phase in development, where management is present at one higher, professional level.
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Figure 1. Differences between entrepreneurial investments and small business
management
Small business
management
S
t
r
a
t
e
g
i
c
o
r
i
e
n
t
a
t
i
o
n
Innovations
G
r
o
w
t
h
p
o
t
e
n
t
i
a
l
Entrepreneurial
venture
Source: Wickham, P, 2004.: «Strategic entrepreneurship», Prentice Hall, p. 103.
Therefore, small businesses divided from the segments of medium ones, where the category of micro
enterprises is turned off, represent one homogeneous entirety, i.e. one qualitatively precise and clearly
limited field of researching. As seen in the previous part of the work, as selected research field appears a
subgroup of small businesses where the category of micro enterprises numbering until ten enterprises is
excluded. Reasons are exclusively of the substantial character and they significantly exert influence on the
quality of researching. The basic set of small businesses without micro enterprises, defined in this way, is
completely compatible and comparable with the same segment of economic societies as defined in EU and
the surrounding countries. It is not the case in our country. In the analysis of interpreting and usability of
research results based on the realized compatibility of the research field, we get the broader field, in the time
and space sense, for medium enterprises dissemination. Except micro enterprises, the sub-segment of
medium enterprises is also excluded because small businesses have specific features in relation to the
medium ones, as for the attained level of management practice. As obliging in the next part is the precise
determination of key research variables in order to interpret causes, relationships and connections of some
results with a dose of reliability and usability. One of the main independent variables in this research is
certainly management practice in small businesses. There are different approaches and determinations in
the scope of this part of the research field. According to Wickham and the model illustrated in Figure 1, the
existence of small business management within entrepreneurial undertakings is confirmed with the strategic
orientation and it represents the basic indicator of management practice in small business (Wickham P.,
2004, p. 41). The substantial strategic orientation means the existence of the long-term determination with
small business for realizing business activities materialized in strategic goals, defined mission and business
vision. The presence of formal small business management is mostly identified with planned activities. The
dominant activity within the framework of strategic management is planning. Planning as the first phase of
management process is definitely the key subject of small business and management practice. Some
authors connect planning with the advancement of performance, others treat planning as the key factor of
success. Connecting management practice for planned activities exclusively points to some indications that it
is about the beginning phases of management system and its development in small businesses according to
the level of business activities of economic entities as small businesses. The following citations speak about
the importance of business planning for small business. If the beginner entrepreneur asks for advices to
advance business, the most often answer is “Start with planning” (Brinckmann et al, 2010). In addition, most
university in the U.S. A. having study entrepreneurship programs, teach students on the importance and
carrying out business plans (Brinckmann et al, 2010). Seventy-seven schools of 100 business schools in the
U.S.A. have courses for carrying out business plans (Honig, 2004). Many leading professors of
entrepreneurship consider business plan development as the most methodical unit in entrepreneurship
661
instruction (Hills, 1988). In many countries, business plan is one of the leading instruments for
entrepreneurship development and regional development (Russell et al, 2008; Lange et al, 2007). In
addition, in many countries, hundreds of people participate every year in the government instruction
programs for carrying out business plans (Brinckmann et al, 2010). Citing these attitudes in detail, we have
not yet defined precisely how we understand management practice in small businesses. According to the
previous question, there are two opposite schools: the planning school as opposed to the learning school
(Wiltbank et al, 2010). Supporters of the planning school emphasize that learning generally advances
efficiency, therefore the performance of small business (Ansoff, 1991). As the main components of business
planning, they cite strategic goals, strategies, evaluation and decision-making as part of control
implementation (Armstrong, 1982; Porter, 1985). Supporters of the learning school focus dominantly on
learning, strategic flexibility and resource control, not on the predefined behavior in the form of formal plans
(Mosakowski, 1997; Mintzberg, 1994; Waters, 1985). In addition, one of the researchers who connect
management practice of small business with the survival and good performance is Johan Maes et al (2005).
He cites, in his work, the following activities proving the existence of management practice and their
influence on financial performances in small business.
Figure 2. Rrelationships on performance
Financial performance
Owner–manager characteristics
Education +
Knowledge of cost accounting +
Financial knowledge +
Experience +
Company characteristics
Size +
Age +
Internal factors or management practices
Equity above minimum level
Percentage of time spent on administrative
affairs
+
-
Use of external professional advice +
Planning horizon +
A priori screening of clients +
Avoidance of cash credits +
Gathering of non-financial information +
Standard costing +
Actual costing +
Factors used in costing process +
Budgeting +
Quality control +
Supporting use of informatics +
Percentage of jobs as a subcontractor -
Source: Johan,M., Luc, S., Filip, R., (2005), Modelling the Link Between
Management Practices and Financial Performance Evidence from Small
Construction Companies, Small Business Economics 25: 17–34
The list of business activities is illustrated in Figure 2, being identified as the form of management practice,
unambiguously points to the beginning steps in building the management structure, which is typical of
enterprises in the beginning phases of development as small businesses. The cited activities in this research
cause the interdependence with financial performances and are very important for the survival of small
business. From our standpoint, only their presence and the form in which they appear are interesting. In this
way owners/managers confirm the thesis about intentions and efforts on the long-term survival, building the
organized business system; all this has the characteristics of strategic orientation.
2. SUCCESS AND/OR GOOD PERFORMANCE
In all the fields of social and economic engagement, participants try to realize success. Success is not
always the end goal in undertaking some activities, but it becomes the resource for realizing many other
goals. Success is something to which owners/managers/beginners of small businesses also gravitate. For
economic activity and enterprise management, success can be measured and expressed by a large number
662
of indicators, but an overall expression of success is realized by means of synthetic indicator called profit.
Besides this representative indicator, success can be considered in different business segments where
success can be presented in different ways as productivity increase in production, winning a new part of the
market, sale volume increase, introducing a new product on the market, increasing the number of
employees, production increase, etc. Most attitudes, presented in the literature considering success, define
successful enterprise in the following way: to be considered as successful, the enterprise must realize at
least average profit of its economic branch. However, as for small business, is it the same? For success in
an entrepreneurial undertaking, it is necessary to satisfy all the conditions so business activities can result in
successful business results. These conditions relate to knowledge, skills and capabilities of the entrepreneur
who, as a person, should have them, then good business ideas, as well as conditions ruling in the business
environment. There is no guarantee for entrepreneurs. Simply, there is no way to eliminate all risks
connected with starting small businesses, but the chances for success can be increased by good planning,
preparations, evaluation of strengths and weaknesses of potential owners/managers of small businesses.
Except of all these usual legalities, there are exceptions as many successful owners of small businesses are
who, in the age of adolescence, were team players, athletes, leaders at school, excellent students, never
considering status quo. However, it is quite usual to meet many successful entrepreneurs inclined to be
rebellious people, and inclined to taking risk, as well as those having tendency to be “off beat” and it is
considered as necessary for successful carrying out an entrepreneurial undertaking. Obviously, there is not a
well-known formula for success, but there are numerous open questions and dilemmas what it represents
and how to measure it in small businesses. To treat the problem of performance categories and success of
small business represents one of the key points in this work. There is not firm determination what the
previously cited categories mean, as there is a wide range of variables for measuring performance/success.
Most management practice is based on methods and procedures being developed for large companies,
where operative and financial goals are very precise and clear and which can be easily transformed into
concrete actions (Simpson M., Padmore J., Frecknall-Hughes J., p. 1). As for small businesses and the
relationship between management practice and success/performance (Rue and Ibrahim, 1998; Perry, 2001;
Gibson and Cassar, 2006; Simpson et all, 2007; Wiesner et al, 2007), there are some difficulties mostly
relating to objective measurement. But, in most researches, a significant part of success/performance of
small businesses is connected with management practice, illustrated in Figure 3. According to some authors,
success is interpreted as a specific aspect of performance (Brush and Wanderwerf et al, 1992, p. 159);
others equalize success with high performance (Brooksbank et al, 2003), while some authors bring it in touch
growth and profitability (Perren, 2000).
Figure 3. Relative importance of the factor of small business failure
Causes %
Lack of management skills 29.1
High interest rates 15.6
Economic recession – inflation/unemployment 11.4
Taxes 10.1
Competition 5.8
Money flows 5.8
Laws and other bylaws 5.0
High business costs 3.6
Source: Peterson,R., Kozmetsky, G., Ridgway, N.: « Perceived
Causes of Small Business Failures», American Journal of Small
Business, 2003., p. 15
Some authors connect small business success with the survival itself, i.e. avoiding failure. As for defining
small business failure, it may be the simplest way when it equalizes with its formal bankruptcy (Cochran,
1991). Using different sources of information on small business failure, there is a possibility to widen the
previous definition by the category of conscious retreat from business, including here small businesses that
stop working because of the loss financial resources, which also means bankruptcy, as well as conscious
retreat, leaving nonpaid liabilities to creditors (Dun & Bradstreet, 1999).
Because of different understanding of success and performance, and the way of measurement, there is the
necessity of precise limitations and defining. As for owners/entrepreneurs/managers of small businesses and
the wide spectrum of their goals, as quality independence and life style (Jennings and Beaver, 1997, p. 63)
663
speaks enough about the complexity of problems. The illustration of success by means of financial
indicators, as the total income per employee, profit per employee or the period of investment return is not
enough to apply in the context of small businesses, disregarding they are easy to measure because they
ignore the alternative criteria of success based on personal goals of owners/entrepreneurs/managers.
Personal goals of owners/entrepreneurs/managers should not be harmonized with business goals, financial
indicators do not often state them, and it additionally complicates the current situation. Some financial
categories, total income, profit, property, as quantitative statements are differently calculated because they,
in their structure, include different elements, and it makes the category of financial indicators and their values
relativistic. According to Frecknall-Hughes at al (2007), the main shortages of accounting and financial
indicators of performance are:
? Ratios give meaningless figures if the company has generated a loss;
? There is no absolute definition as to what constitutes a “correct” ratio;
? Given (ii), they may be calculated almost as one likes, which means that they are capable of
manipulation;
? Compounding (ii) and (iii), ratios are often just presented as figures, without any supporting
calculations or definitions;
? Ratio analysis deals only with financial numbers and does not take account of other factors which
may affect company performance; and
? If they are calculated over a period of years to provide longitudinal data, then the value of currency in
later years will not be the same as that of earlier years, owing to the effect of inflation, etc.
For the concept of small business success, i.e. owners/entrepreneurs/managers, we can say that it is a
subjective-absolute category as a measure in realizing the set goals of the company, which can be simple
and having one meaning; therefore, they can reflect individual, personal aspirations and motives.
Performance represents the relative-objective dimension of success as a multi-dimensional, qualitative and
quantitative, the expression of success compared to other enterprises or relevant groups of enterprises.
Performance itself represents the attained level of realization, i.e. the principal result of business activities of
the company, in this case, small business. Such defined limited categories of success and performance point
to the fact that the company can be successful in realizing the set goals, but also it finds itself in an
unsatisfactory level of performance- good, high, optimal), for instance , regarding to growth and
development, as a multi-dimensional term of success (Jennings and Beaver, 1997, p. 68). When the analysis
is oriented toward small businesses, as the pattern and the basic set defined within the framework of this
research, the main resource of mutual comparison to the dimension of relative success is certainly
performance expressed by selected indicators, which unambiguously represent this category. The selection
of indicators for stating the level of performance is certainly the key factor of success of all the efforts
expressed in this and similar researches, which have performance as an independent variable. Lumpkin and
Dess are very precise when researching the multi-dimensional nature of performance, deciding for traditional
indicators of growth, market participation, profitability, stakeholders? satisfaction, etc. (Lumpkin and Dess,
1996, p. 153). In this research, indicators of survival, growth, development and profitability are selected with
a view of measuring small business performance. The cited selection represents one consensus on the
subject of performance indicators, and it is seen in the research carried out by Murphy with authors within the
framework of 51 works, where he identified 71 different performance measures, classifying them into nine
principal groups, where growth and profitability are the most frequent (Murphy, Trailer and Hill, 1966, p. 16).
3. CONCLUSION
Based on the previous attitudes, determinations within the framework of this research are as follow.
Documented business plans do not represent strategically oriented management practice in small
businesses, but the formal planning is part of a strategic management process. Learning a lesson from the
previous sentence, for management practice, we mean planning and documented business plans, as well as
management activities in all the phases of management processes with formal documentation.
As for measuring and business result statements in small businesses, there is a significant distinction
between the categories of success and performance. For the category of small and medium enterprises, we
can say that it is a specific aspect of performance characterized by subjectivity and the personal dimension
of owners/managers/entrepreneurs, which should not be in accordance with realized business results, i.e.
performance. As a qualitative statement, it is very hard to express it by means of numerical indicators, and it
represents the basic shortage of financial success indicators, when talking about small business.
Performance measuring, as an objective statement of business success, does not point to the level of
664
realized business goals of owners/entrepreneurs/managers and it points to the need of inclusion of
qualitative indicators of the entrepreneur?s business success. If we want performance indicators to express
the real measure of business success and realized results in the form of selected financial indicators, some
mutual comparisons within the framework of some related groups of companies in the same economic
branch are necessary. It is also necessary that financial indicators are uniform to relative relationship of
selected categories and being compared and in this way; they make a comparable ratio structure. In any
case, the volume of management activities, according to all the phases of management process and the
degree of its formality in the form of written documents, is connected with success, i.e. small business
performance. The former researches partly and contradictorily covered such a defined problematic
orientation, opening the space for intentions set in this research.
REFERENCES
Ansoff, H.I., (1991), Critique of Henry Mintzberg's “The design school: reconsidering the basic premises of
strategic planning”. Strategic Management Journal 12 (6), 449–461;
Brinkmann, J., Grichnick, D., Diana, K., (2010), Should entrepreneurs plan or just storm the castle? A meta-
analysis on contextual factors impacting the business planning–performance relationship in small firms,
Journal of Business Venturing 25 (2010) 24–40
Cochran, B., (1991), «Small Business Mortality Rates», Journal of Small Business Management
Dun & Bradstreet (1999), «The Business Failure Record», Business Economics Division, New York
Gibson, B. and Cassar, G. (2005), „Longitudinal Analysis of Relationships Between Planning and
Performance in Small Firms?, Small Business Economics, vol. 25, pp. 207-222;
Hills, G., (1988), “Variations in university entrepreneurship education: an empirical study of an evolving field”
Journal of Business Venturing 3 (2), 109–122;
Honig, B., (2004), “Entrepreneurship education: toward amodel of contingency-based business planning”,
Academy of Management Learning & Education 3 (3), 258–273;
Honig, B., Karlsson, T., (2004), “Institutional forces and the written business plan” Journal of Management 30
(1), 29–48;
Jennings, P.L. and Beaver, G. (1997), „The Performance and Competitive Advantage of Small Firms: A
Management Perspective?, International Small Business Journal, vol. 15, no. 2, pp. 63-75;
Johan,M., Luc, S., Filip, R., (2005), Modelling the Link Between Management Practices and Financial
Performance Evidence from Small Construction Companies, Small Business Economics 25: 17–34
Lumpkin, G. T, R. C. Shrader and G.E. Hills, (1998), „Does Formal Business Planning Enhance The
Performance of New Ventures?”, Paper presented at the 1998 Babson Entrepreneurship Research
Conference, Gent, Belgium;
Megginson L., C., Byrd M., J., Megginson W., L. (2003), “Small Business Management”, McGraw Hill,
Boston;
Mintzberg, H., (1994), “The Rise and Fall of Strategic Planning”. The Free Press, New York, NY;
Mosakowski, E., (1997), “Strategy making under causal ambiguity: conceptual issues and empirical
evidence”. Organization Science 8 (4), 414–442;
Murphy, G. B., J. W. Trailer and R. C. Hill (1996), „Measuring Performance in Entrepreneurship Research?,
Journal of Business Research 36, 15–23;
Perren, L. (2000),"Factors in the growth of micro-enterprises (Part 2): exploring the implications",
Perry, S.C. (2001), „The Relationship Between Written Business Plans and the Failure of Small Businesses
in the U.S.?, Journal of Small Business Management, vol. 39, no. 3, pp. 201-208;
Rue, L.W. and Ibrahim, N.A. (1998), „The Relationship Between Planning Sophistication and Performance in
Small Business?, Journal of Small Business Management, vol. 36, no. 4, pp. 24-32;
Russell, R., Atchison, M., Brooks, R., (2008). Business plan competitions in tertiary institutions: encouraging
entrepreneurship education. Journal of Higher Education Policy & Management 30 (2), 123–138;
Simpson, M., Padmore, J., Frecknall-Hughes, J. (2007), “Measuring the Performance of Small and Medium
Sized Enterprises”, Institute for Small Business & Entrepreneurship, Conference Proceedings, Glasgow;
Simpson, M., Padmore, J., Frecknall-Hughes, J. (2007), “Measuring the Performance of Small and Medium
Sized Enterprises”, Institute for Small Business & Entrepreneurship, Conference Proceedings, Glasgow;
Wickham P., A. (2004), “Strategic entrepreneurship” Prentice Hall, Harlov;
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strategy. Strategic Management Journal 27 (10), 981–998;
665
SMALL AND MEDIUM SIZED ENTERPRISES OWNER PROBLEMS AND
INFLUENCE FACTORS
Siniša Arsi?
1
, Marko Mihi?
2
Miloš Arsi?
3
1
Faculty of Organizational Sciences, [email protected]
2
Faculty of Organizational Sciences, [email protected]
3
Faculty for Strategic and Operational Management, [email protected]
Abstract: This paper describes the role of owners of small or medium sized businesses as the main pillars of
business functioning, and outlines potential impacts (positive or negative) on owners of SMEs. The objective
of this research is theoretical understanding of the problems SME owners face every day, and possible
identification of local SME owners (in Serbia) with foreign or domestic problems abroad. Specific methods
used in writing this paper were confrontation of views of various authors on the same issue, and the
synthesis of the authors’ own findings, or the findings of others. The authors have gained insight into the
quantity and quality of problems and factors affecting owners of SMEs, and the daily amount of tasks which
an owner has to deal with. The limitation of this study may be a lack of practical research, but it can certainly
be a good impetus for further work. The paper has revealed a strong correlation between owners of SMEs
and ways in which they are introduced to problems, or whether they will succeed in minimizing side effects.
This theoretical study may serve to existing or future entrepreneurs and researchers, to elaborate on the
topic.
Key Words: small, enterprise, owner, influence, business
1. INTRODUCTION
Concept of entrepreneurship now basically covers the design and organization of business activities with the
ultimate goal of profit making. An entrepreneur is a person who is constantly looking for changes, and
responses to changes in the environment, using them as an opportunity for further development.
Entrepreneurs innovate constantly in order to keep up with market conditions. Within-entrepreneur
(intrapreneur) is a person working in a company apart from other activities, and the company is actively
involved in innovation, as well as in revitalization / diversification of business. Entrepreneur has to feel the
freedom of action in order to explore and implement ideas, although the outcome effect of that work will be
greater than the whole company can withstand, but also the entire company has to take over the risk that
comes with such actions. Entrepreneurs usually play a major role in developing the economy of a country, or
to increase the GDP of a country. Social development of a country or region is also marked by the influence
of entrepreneurial activity.
2. THE ROLE OF A SME OWNER
In business there are no guarantees. There is simply no way to eliminate all risks associated with start-up
businesses - but it is possible to increase the chances of success with good planning, preparation and close
examination of business conditions. The owner must have a good idea to assess the strengths and
weaknesses of his small business. It must be carefully considered including all concerns, such as:
? Do you venture into everything yourself (i.e., whether each project, organizing, monitoring, just go
through the owner or someone else),
? How well is the owner getting along with the environment (the owners have to develop working
relationships with a variety of people including customers, vendors, bankers, lawyers, consultants, etc...)
? How well and how does the owner plan to organize a business (a good finance organization, storage,
distribution, production can help avoid many downfalls),
? Is the urge to own a business strong enough (business management can significantly emotionally
downfall on owners, so many owners burn out quickly, precisely in order to submit all the pressure, all
liability for (non) success of their business).
? How will the business affect the family of the owner (the first few years can be very difficult for the family
life of the owner, so it is important for family members of owners to know what to expect, but for the
666
owner it is very important to know that they will have the support of family members when it comes to
difficulties in business) (Morgan, 2007.).
Picture 1 (Saroj and Mehndiratta, 2009.)
Ideas to the new business owner can come from various sources. Some owners run the business and
develop existing ones, according to some of their personal interests. Any specialized knowledge or skill may
be the owners to indicate, and the possibility of turning it into a business. Through time, as companies
reduce, or require more external services (outsource), so the opportunities for entrepreneurs are born. Any
task or responsibility that large companies do not want, or do not have time to do it, can be the basis of the
owner of an SME to be involved in cooperation (and Saroj Mehndiratta, 2009.).
The role of the SME owner is to learn all aspects of his business potential, to make such a good knowledge
that could lead to good functional and business decisions. There are entrepreneurs who are very inventive in
their work, including developing new or improving existing products which can interfere with much larger
"players" in the market. There are some advantages in developing your own business. Again, the owner is
the main pillar of that development. It is less costly to start and develop their own business, rather than to
buy someone else?s which already had numerous disadvantages encountered. Most people who start their
own business are good at what they do, so it is easier for their colleagues to rely on them in the process of
developing a business (and Saroj Mehndiratta, 2009.).
When owner family members are involved in the whole story, then it is possible to develop their own
management style and approach, their own policies, ways of treating the problem (and of course there are
risks that cannot stop the realization of the process of business development) (Saroj and Mehndiratta, 2009.
).
The characteristics that a SME owner has (at least most of them) to meet are:
? Ability to take initiative - an entrepreneur is a person that identifies an opportunity, trying to extract the
best outcome from it, if he doesn?t have this capability, the entrepreneur cannot continue to progress,
? Self-confidence,
? Possession of leadership quality- an entrepreneur would have to be able to influence the behavior of his
employees so that they achieve the objectives of the organization,
? Ability to assume the risk- an entrepreneur would have to be able to analyze the opportunities and
calculate risk factors before taking the next step,
? Originality,
? The ability to predict- an entrepreneur must try to understand future trends and to plan for their outbreak,
? Creativity- an entrepreneur must be able to generate new ideas and designs, to depart from ordinary
products, and to open new markets,
? The inner drive to succeed- entrepreneurs set big goals in front of them, they tend to behave very
ambitious, removing obstacles to success,
? Dynamics- entrepreneurs recognize the importance of coming and staying "on top", and the only way to
achieve this is to change and grow depending on the situation in the region,
? High Motivation- high standards and objectives that need to be achieved by looking for entrepreneurs to
be motivated and to motivate their employees,
? Acceptance of constructive criticism-good entrepreneurs must know how to receive criticism, hurdling
obstacles are a part of the picture in business conduct , so they have to be treated, with analyticity,
? Good interpersonal relations-Entrepreneurs with good interpersonal relationships can more easily find
their way to market, to develop a network with its suppliers, etc. retailers. Good relationships help them
work more efficiently,
? Appropriate strategic planning-, medium-term and operational planning must be present to access
business opportunities in the best possible way, to be implemented (and Saroj Mehndiratta, 2009.).
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3. SME OWNER PROBLEMS
The work and the type of work performed, the fear of job loss or employment, fatigue, short deadlines, lack of
parent support, a sense that he cannot manage their time or work performance, inability to influence the way
or work organization, sense of alienation other employees of the company, a sense or feeling excessive
exploitness unused in connection with work tasks set before the owner, any gap in the work, monotony, and
numerous physical, biological, or chemical influences at work - these are all potential problems that arise in
entrepreneurial life.
On the other hand, Brixia (2011.) defines several key limitations that owners of a major problem and obstacle
to the initiation and maintenance of entrepreneurial ventures, including its:
? High tax rates;
? The inefficiency of tax administration;
? Advanced obtaining permits and licenses;
? Corruption;
? Poor infrastructure.
Stress is a daily companion, a certain feature of organizational life and largely associated with the execution
of duties and tasks at work, daily routine, relationships with other people, control and performance
management processes, as well as a variety of unplanned and unforeseen circumstances which business
owners face with, during their company?s life cycle.
While between all the employees in any organization exists a normal, natural, level of stress, the business
owner's situation is slightly different (Lovelace et al., 2004.). Directors of large systems generally are under
increasing pressure over the short-term problems, while the main stress of SME owners are about the long-
term planning, financial investment, job security, as well as the status of their business (Fassin et al., 2011.)
Leaders of organizations are more prone to experiencing different problems because of the position and
level of responsibility demands that are expected of them to meet. In order to create a healthy and motivating
work environment, the owner is the one who needs to develop leadership skills and autonomy of thinking of
other employees.
The practice of „self-leadership“ is the development of personal motivation and desire for achievement of
organizational goals, but in a way that will help reduce stress and increase job satisfaction or easier coping
with problems (Lovelace et al., 2004). .
The biggest motivation for almost every owner of a SME is a possibility of prosperity and growth of his small
business. According to Ward (2004)., owners of small and medium businesses cited six major problems for
long-term development of their business, which in some way motivate them in a positive (or negative)
direction:
• Maturation of business life cycle and increasing competitiveness;
• Limited capital for business growth;
• Next generation of business owners (if inheritance is between family members);
• Ownership changes dependently and inflexibility;
• Conflicts between the heirs;
• Incompatible goals of family values and needs.
4. INFLUENCE FACTORS ON SME OWNERS
The authors believe that the owners of large businesses seek to achieve the highest possible profit, while the
owners of small businesses do not think that way. The main fact is that the profit level is satisfactory and
constant, to maintain their business, and to preserve the pleasure of owning their own business (Sarasvathy
et al., 2011.).
What can spoil the plans is a bad tax system, and the inability to find and retain good employees and loyal
customers. The advantage of entrepreneurs is primarily in that they are doing what they love, and to affect
668
their satisfaction is knowing that they are independent, free to create their own money (Alstom, 2009.). On
the other hand, risk and responsibility is often a big negative impact on entrepreneurs. All this with long
working hours, or the lack of working time leads to stress.
What is not discussed here, that there are some very important reasons why entrepreneurs of the
enumerated factors of influence haven?t seen as something negative, but in spite of them engage in creating
their own business. For this it would primarily be required a study of the psychological characteristics of
entrepreneurs and the way of thinking where you might be concluded that these entrepreneurs are simply
people who love challenges and do not like to be a self-controlled part of the organizational hierarchy.
Lussier and Halabi (2010). Cited several factors as reasons for failure of a family business, of which the most
important are:
• Planning-companies that do not have a business plan are more likely to fail than those that have (a
business plan),
• Parents (owners) whose parents had had a family business are less likely to experience failure of their
business,
• The age-young people who start businesses are more likely to experience failure than older colleagues,
• Management-owners who have no experience in management are more prone to failure than colleagues
who have managerial experience.
As for relations in firm size and success of entrepreneurship is the only association seen in the influence of
the duration of a company. Entrepreneurship has a stronger and better impact on the longevity of small
businesses, while the major factor in the company is weaker and negative (Ha-Brookshire, 2009.).
The family business firms can be improved and some of the factors that influence is not directly related to the
job. This is primarily done to reduce tension among family members, living in families with two or three
generations, devoting more time to the detriment of business and holiday hiring temporary help, during a
turbulent period. The family has a stronger impact on business than on the family business (Olson et al.,
2003.).
Threats, such destabilization operations, which follow from the specific personalities owners of SMEs, can be
activated by the subjective, knowledge, personal values and beliefs, perceptions and experiences of the
owner as an individual who cannot easily be replicated, and are therefore an important factor (un) successful
business (Kor et al., 2007).
Factors threats coming from outside are often unable to reach owners and small businesses would usually
resort to strategies of avoidance, is often faced with insufficient institutional support their enterprise. But also,
too little capacity resources is an important factor that may determine the success of an SME (Welter and
Smallbone, 2011.).
So often employed in an MSA does not really look favorably on new employees who come right out of
college in business, since they are a potential threat due to a higher level of education. Employees of SMEs,
if they are employed because of nepotism, additional pressure will be done by the owner to not only recruit
graduates (Gao et al., 2011.). SME owners need to further fight against it, because otherwise it could not be
expected to increase the capacity of its business.
A Portuguese study has proved the claim that the slowdown in the rate of growth of SMEs is under the
increasing influence of the economic crisis, but because it affects the growth of large companies (Amorim
Varum and Rocha, 2011.), and therefore the economic crisis should be appreciated as an important factor
impact on SMEs also.
Companies that do not invest in R&D projects will inevitably experience a nearly complete or total slowing
growth rates. As an additional factor appears the lack of quality human resources to participate in such R&D
projects, while larger firms have such capital (Macas Nunes et al., 2011.)
There are several major factors that influence the barrier to a stable rate of growth of SMEs, such as the
inability of entrepreneurs to establish an appropriate organizational model in the company. This
organizational model would imply a professionalized management system and development of methods,
techniques and processes to support development (Barbero et al., 2011.)
669
Several factors influence the operations of an SME should be further explored in other papers, as well as
their role in everyday relations in such organizations. Factors which influence the following (below), can in
some cases represent a barrier to normal functioning and development of SMEs, but also can contribute to
stimulating the owners of SMEs in certain situations for the sake of achieving greater efficiency.
Motivation is any influence that causes, or maintains a direct human behavior. In the management of family
SMEs, motivation plays an important role because with a higher level of owner motivation they are trying to
meet the desires of their business environment, so that it contributes to the realization of various benefits for
the owner.
There are various emotional (psychological) factors affecting the owner of small or medium businesses,
which will certainly affect his motivation for running the business. They can be classified into:
• Autonomy in work;
• The power of decision making;
• Challenges;
• Continuity of operations (Zellweger and Astrachan, 2008.).
For the owner of an SME, he may be affected by the three environments:
• Home;
• Business;
• Personal career flow.
Considering the first environment, it is related to marital status, number of working hours, responsibilities
towards children, living expenses, work at home. The business environment influences the owner through
the available resources, employee behavior and performance of employees. The third environment that may
affect the owners of SMEs is reflected in the transition from economic inactivity into entrepreneurship, family
business management experience, and age (Jayawarna et al., 2011.)
5. CONCLUSION
It is difficult to choose what problems most affect a small business owner. That is, each owner is dealing
during his career in the SME sector, with various problems, never (or seldom) repeating the same problem.
What is really possible to show, that's the way the owners can deal with these problems. There is no
universal pattern, but there is a certain mindset, that can overcome most of the risks and problems. As for
the impact, the implications are too many and it would be pointless to compare them, or even by a classified
order. But what can be concluded, it is that any "attack" on the company, each factor of instability-is surely
preventable, or at least can be mitigated so it makes no major problems. This story can be repeated in circle
until the owner of the company, as the main pillar of the link between all sectors of the company, can fit in
and integrate the parts into a whole so that external influences are not the reason for the decrease in profits,
or business-shutdown.
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671
ENTREPRENEURIAL TEAM IN NEW VENTURE CREATION: THE KEY CHALLENGES
FOR MANAGEMENT
Verica Babi?
1
, Jelena Eri?
2
, Jelena Nikoli?
3
1
Faculty of Economics, University of Kragujevac, [email protected]
2
Faculty of Economics, University of Kragujevac, [email protected]
3
Faculty of Economics, University of Kragujevac, [email protected]
Abstract: When starting a new venture, entrepreneurs usually select founding team members with skills and
expertise closely matching their own. In choosing cofounders it is wise to focus on complementary aspects
when it comes to the knowledge base, but on similarity in terms of personal characteristics and attributes.
Once the appropriate founding team is assembled, these individuals must work together effectively if their
venture is to succeed. The main research focus of this paper is to analyze principles of building effective
business relations within a new venture along with establishing an optimal team structure and size. As a new
venture grows and the number of employees rises, new skills and capabilities enhance performance.
Founding team diversity is prerequisite to innovativeness and creativity that result in a successful new
venture.
Keywords: entrepreneurship, team, new venture, management
1. INTRODUCTION
People tend to feel more comfortable to work and cooperate with persons who are similar to themselves in
various ways, and therefore, entrepreneurs usually select cofounders with skills and expertise closely
matching their own. Nevertheless, since variety and diversity of knowledge, experience and training is
significant advantage to new venture, it is reasonable to select members of founding team on the basis of
complementarities rather than similarities. In other words, in choosing cofounders it is wise to focus on
complementary aspects when it comes to knowledge base, but to similarity with respect to personal
characteristic and attributes. In order to choose excellent cofounders, entrepreneurs must perform the task of
social perception well, which is not an easy task since others don?t portray themselves accurately, but
engage in various tactics designed to impress and present them in favorable light. Therefore, entrepreneurs
should be careful when choosing cofounders and double check information provided by other contacts. They
often confront deception, or other efforts by others to actively mislead them, and if they make wrong decision
when choosing founding team, that can lead to disastrous results.
Once the appropriate founding team is assembled, these individuals must work together effectively if their
venture is to succeed. One of the key ingredients in establishing strong working relations is development of
clearly defined roles, responsibilities and jurisdiction. Because of the self-serving bias and other factors,
individuals often perceive that they are not being treated fairly by others – that they are not receiving a share
of rewards according to their contributions. Reactions to such perceived unfairness range from demanding
more or doing less. Because of potential problems that may arise, entrepreneur should take active steps to
assure that all the members of the founding team feel that they are being treated fairly. Another ingredient in
strong working relationships is effective communication. Entrepreneurs should deliver constructive criticism,
or otherwise he will face atmosphere of conflict and hostility (Baron & Shane, 2005, pp. 107-128).
As new venture grow, requirements for additional human resources increase. Often these new employees
are hired through the founding team? social network. Evidence suggests that the greater the number of
employees in new venture, the greater success, due to the quality of the opportunity being exploited. The
choice between hiring temporary and permanent employees is a complex one, since both offer advantages
and disadvantages. Ultimately, this decision must depend on the situation and specific circumstances.
2. THE ROLE OF OPTIMAL HUMAN RESOURCE COMPOSITION IN THE NEW VENTURE
CREATION
The beginning of new millennium brought knowledge economy, globalization of competition and increasing
expectations of Internet commercial use. During the last decade initial dot.com enthusiasm has dwindled and
investors realized that there is much more sense to invest in industries where intellectual property rights are
legally protected and consequently new ventures based on radical entrepreneurial ideas came to the spot of
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the light. The most prospective ventures are in the field of high technologies since they bring investors
multiple returns on investment, either through acquisition or initial public offering (Stojanovi? Aleksi?, Šapi?,
& Eri?, 2010).
Schumpeter was the first one who described new venture concept in 1934. arguing that “entrepreneurs have
need to compete; they are overwhelmed with activities providing encouragement for launching radical
innovation that cause irreversible turn of events and structural market change” (Busenitz, 2007, pp: 183-
185). Entrepreneurial new venture creates added value through innovation of products, services, markets,
technology, distribution channels or business strategy (Allen, 2009, p. 9). Ventures can have legal form of
independent enterprise or they can be incorporated in organizational structure as dependent business unit,
established as a result of corporate entrepreneurship process (Babic, Eric & Nikolic, 2010). Entrepreneurial
venture and small enterprise are two related concepts, but are not synonymous. Entrepreneurs tend to
disrupt the existing market equilibrium and present new products or processes that change the way business
works, while small business owners are focused to provide their own existence and lifestyle. The latter
should not be neglected because they are the backbone of any national economy. Those entrepreneurs are
emotionally involved with their company survival and growth, but only to the point of meeting personal needs.
The most successful new ventures were initially founded as a small business.
Employees create innovative ideas, overcome rigid organizational hierarchy, make necessary modifications
and strive to obtain key resources and support for their implementation (Stojanovic Aleksic & Eric, 2011).The
success of a new business venture depends on the quality of human resources: knowledge, experience,
skills, capabilities and the network of business relations of not only the founder but the team of his or her
associates as well. Although the largest number of ventures is started by teams, there are relatively few
attempts to explain the process of their effective creation and management. The team consists of two or
more individuals who jointly create a venture they have a business interest in. (Kamm, Shuman, Seeger, &
Nurick, 1990). There are two reasons for which they are the subject of research; the first one is that new
ventures are much more frequently led by teams rather than individuals, and the second one is that their
performance is determined by the successfulness of the venture.
Several significant researches conducted in the 1990?s showed that 55-80% of the analyzed ventures had
been founded by teams (Kamm, Shuman, Seeger, & Nurick, 1990). The key reason lies in the fact that, in
high-technology activities, it is not probable that an individual has all the knowledge needed for a venture to
succeed. Recent researches (Davidsson, P., 2006, pp. 33-36), conducted by Ruef, Aldrich and Carter have
accounted for the fact that 52% of new ventures are started by teams. In the largest number of cases, 74%,
teams consist of two members, and in less than 5% of the cases, they consist of five members. Even 53% of
teams of two members are spouses or partners, 18% are family members and only 15% of the ventures
were founded by partners only related to each other through business. The conclusion of this research was
that it is much more probable that a new venture will be started by a team rather than an individual. A similar
research was conducted by Chandler, Honig and Wiklund, and they came to a conclusion that there is
reverse proportionality between the number of new members joining a team and the time needed for a new
venture to reach the desired profitability rate. The offered explanation is based on two theses: first, when a
new member joins a team, it is a disturbing factor for the venture?s functioning, and second, the venture has
already been facing difficulties since it needs a new member, so, for that reason, profitability also suffers.
Teams have a much greater chance for success than solo efforts for a variety of reasons (Allen, p.154):
? The intense effort required of a start-up can be shared;
? Should any one team member leave, it is less likely to result in the abandonment of the start-up;
? Founding team covers major functional areas (marketing, finance, operations);
? A skilled founding team lends credibility to the new venture in the eyes of lenders, investors, and
others;
? The entrepreneur's ability to analyze information and make decision is improved besause she or he
benefits from the varied expertise of the team, and ideas might be viewed from several perspectives;
In psychology, an individual is known to tend to feel the most comfortable when being with people similar to
him- or herself. Such a tendency when the starting of a new business venture is concerned can have its
negative side. If people are similar, that means their knowledge, experience and attitudes significantly
overlap. Furthermore, this means that they lack the same or almost the same skills. The optimizing of the
673
personnel structure imposes a need for achieving complementarity by means of harmonizing various
personal and business capabilities of all participants in a venture.
Finding partners with complementary skills means making sure that the team is not overloaded with people
who all have the same expertise. A team of three engineers or three finance analysts is generally less
attractive then a team with more diverse skills. Teams with more diverse skills make better strategic choices
that lead to higher performance. In terms of skills sets, heterogeneous teams also tend to handle the
complexity of new ventures better. Five factors that have great significance in team composition are: a)
homogeneity, or similarity; b) functionality, or skills diversity; c) status expectations, or cultural bias; d)
network constraints, or social contacts; e) ecological constraints, or geographic distribution (Allen, pp. 155-
157).
When the start-up effort is collective, with a team that displays diverse capabilities, the new venture is more
likely to be innovative. Evidence suggests that firms founded by heterogeneous teams are more successful
than those founded by individuals (Bird, 1989). Lead entrepreneurs drive the development of new venture
and serve as guardian of their vision. They have the ability to see what others cannot see and to identify
ways to change marketplace rather than simply recognize an opportunity.
To make a perfect match between an entrepreneur as the initiator of a new business venture and right co-
workers is a huge challenge. There are several activities (Baron, & Shane, 2005, pp. 107-127) which he or
she must carry out to create the optimal personnel structure for the venture. First, they must consider if they
are in need of partners to start their venture and which characteristics and knowledge they should possess.
Second, they must start the process of searching for partners, which is a very complex process. Third, they
must establish effective communication between their partners and other employees, based on clearly
demarcated authorities and responsibilities and the principle of impartiality in awarding as well. Four, they
must make a decision if and on which principles they will seek external consultants? help.
An entrepreneur must have the skill of social perception, i.e. assessment of one?s personality, because only
then can they recognize other people?s potential and capabilities they need. That would not be difficult unless
people had a tendency to show themselves in their best light, which usually does not coincide with their real
capabilities. They hide their feelings and motives with an aim to impress their collocutor. For that reason, an
entrepreneur must separate the external impression a potential partner has made on them and its essence.
To be able to know what to expect from other team members, an entrepreneur must reconsider personal
values and capabilities they are bringing to the venture. There are two reasons for this to be a challenging
task. First, it is not always clear why an entrepreneur behaves the way they do. He may want to include
someone in the team because he or she feels attracted to that person because of his or her personality, but
could not provide a precise answer to what it is he or she exactly feels attracted to in that person. So, there
are factors that have an influence on the behaviour of an entrepreneur which he or she is not fully aware of,
which makes the self-evaluation process more difficult. The second reason is that an entrepreneur can
become aware of his or her characteristics only through interaction with other people. An entrepreneur as
leader should focus him- or herself on complementarity when his members? knowledge, skills and experience
are concerned, and on similarity when their motives and personal characteristics are in question. The
effectiveness of every type of leader behaviour directly depends on the nature of the situation and factors
such as characteristics of the task, organization and employees (Stojanovi? Aleksi?, Eri?, Šapi?, 2010).
3. CREATING THE FOUNDING TEAM
The manner in which an entrepreneur creates a team is an interesting piece of information for potential
investors (Allen, 2009, pp. 153-158). New ventures are analyzed by investors from the aspect of their
personnel structure. From their viewpoint, the team whose members have already had an opportunity to
cooperate is of a better quality than it is the one being formed for the first time. An entrepreneur tends to
achieve a high degree of business control and is worried about a possibility that he or she might employ a
wrong person in the key position, so, for that reason, they are frequently not ready to employ staff who have
experience in management positions. There are also those who are aware of their shortcomings and tend to
form their team so that it consists of individuals complementary with each other with respect to their skills.
The venture must have a strong management team, dedicated, competent, dynamic, and persistent, with
relevant experience and highly flexible (McAleese, 2004, pp. 182-183). The investor would rather invest in a
worse idea implemented by first-class management team, than vice versa (Eric & Nikolic, 2010). If team
lacks certain competencies, investor provides assistance in overcoming difficulties (Gladstone & Gladstone,
2002, pp. 54-55).
674
Some authors (Franke, Gruber, Harhoff, & Henker, 2006), came to a conclusion that, when they are
supposed to make a decision whether to invest their capital in a concrete venture, investors are significantly
influenced by the so-called similarity hypothesis, defined by psychologist Burne in 1971. In brief, it says that
the bigger the similarity, both professional and personal, between the founding team?s members and the
investor, the bigger a probability that a favorable decision on investing in a new venture. That means that the
process of accessing external sources of financing has its psychological dimension as well, and an
entrepreneur should have the dimension in view.
When creating a team, two sorts of problems appear: first, there is a possibility of a collision and conflicts,
and second, a problem can arise with a need to define the formal organizational structure and hierarchy of
decision-making. This process is additionally complicated when several partners found a venture. There are
several factors that determine the quality of a team (Barringer & Ireland, 2006, pp. 127-129) on the basis of
which differences between founding teams are possible to identify according to several different dimensions:
their scope, the type of the venture, the pace of accession and the individual members? contribution.
A more recent research (Beckman, 2006) accounted for the fact that the composition of a team has an
influence on whether exploitative or explorative behavior will be favored within the framework of a venture.
Team members who previously worked together in another company know and understand each other well
and have routine performance schemes, and for that reason they prefer a rather passive exploitative style of
behavior. Contrary to that, team members who did not previously directly cooperate with each other on a
business basis bring fresh ideas in a venture, force creativity and promote the explorative type of behavior. It
can be concluded that there is a strong correlation between team members? previous experience and the
degree of innovativeness promoted by organizational culture, so that a higher degree of knowledge and
unique competences dispersion contribute to the creation of the ambience of innovativeness and change.
Analysis 161 of a high-technology company from the Silicone Valley (Beckman, Burton, & O'Reilly, 2007)
only corroborated these statements, proving that higher efficiency is achieved by teams composed of
members who used to work for a larger number of employers and have more diverse working experience.
These differences lead to stimulating constructive discussions amongst the members reducing the probability
of rash decision-making without considering relevant alternatives. Apart from that, the research suggests that
the structure of the founding team has an influence on the capability of carrying out critical activities, such as
the acquisition of the venture capital.
Although for a long time an attitude prevailed that, due to a high level of turbulences, a team in high-
technology ventures should have the organic structure characterized by the adaptability and a low degree of
formalization, a more recent research (Sine, Mitsushashi, & Kirsh, 2006) proved the superiority of teams
characterized by a formal structure and high specialization in the venture founding stage. The shortcoming of
the theory laid down by authors Burns and Stalker in 1961 is reflected in that they did not analyze ventures in
their emergence stage, but in their mature stage, which significantly influenced giving advantage to the
organic organizational design.
Choosing partners to start new venture is one of the most critically important tasks that an entrepreneur must
undertake. It is a difficult task because it is often not possible to understand a person?s character until that
person has spent some time working in the company. The stressful environment of a start-up may bring out
traits and responses that were not apparent when the person was originally selected. Everyone from
investors to bankers to potential customers looks at the founding team of the new venture to determine
whether its members have the ability to execute their plans. Thus it is vital to choose partners who have
complementary skills and experience and who do not have a history that might be detrimental to the
company.
There is another advantage to forming a team. Because members of an entrepreneurial team often invest
not only their time but also their money, the burden of gathering resources is shared. The lead entrepreneur
also gains access to the network of contacts of the other members. This vastly increases the information and
resources available to the new venture and enables it to grow more rapidly. Of course, it isn?t always
possible or necessary to put together the perfect team from the start. The right person to fill a particular need
may not have been determined, or the right person may be too expensive to bring on board during start-up.
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3.1 Building effective business relations amongst team members
One of the latest researches (Eden, Hitt, & Ireland, 2008) led us to interesting conclusions when
interpersonal relations within the framework of a venture are concerned. They suggest that the entrepreneur
prefers to cooperate within a venture with his or her friends who he or she trusts; however, if that is not
possible, due to a lack of trust, they establish business relations with absolute strangers rather than
superficial acquaintances. These conclusions do, to a certain extent, coincide with the results of the research
conducted by Fracis and Sendberg (2000), where they suggested that stronger interpersonal relations
amongst the team members lead to more efficient decision-making, a higher level of participation, as well as
the domination of cognitive rather than affective conflicts. Besides, top management teams characterized by
unique dynamics and interpersonal relatedness, family ties among other relations, lead to a higher cohesion
and a stronger strategic consensus in view of the future of the venture (Nordqvist, 2005, pp. 285-290).
Although there is no universal recipe how to build a team who will operate successfully, yet there are several
aspects (Barringer & Ireland, 2006, pp. 129-131) which, in that view, can represent a stimulating but also
limiting factor:
a) The demarcation of authority and responsibility – the main source of conflicts amongst employees is
a lack of clear authorizations. If it is not clear who has the decision-making authority, then probably
there will be conflicts. When founding a new venture, partners should share responsibility according
to their competences and skills, which means they must stick to the complementarity principle.
b) Showing respect for the principle of impartiality – psychology has proved that every individual has a
tendency to give themselves credits for work done successfully, and fault others for a failure or
attribute it to external factors which could not be influenced. So, he concludes, their performance is
not adequately valued comparing with the results of other employees. The entrepreneur must
seriously approach this problem and promote the principle of distributive impartiality reflected in that
the employee?s contribution/award for performance ratio must be the same for all. A balance among
different interests must be found and clear rules for all must be established.
c) Effective communication – this is the key factor in the creating and maintaining harmonious business
relations. Constructive criticizing other people, based on respecting their feelings and dignities,
deprived of aggression and antagonisms, subjecting no one to condemnation and offering concrete
proposals for improvement are always beneficial for all team members. A functional conflict is
desirable because it brings to surface different ideas, motivates employees to observe things from
another person?s viewpoint and leads to more quality business decisions.
Although there are no perfect founding teams and no fail-safe rules for forming them, effective founding
teams tend to display the following characteristic (Allen, 2009, p. 157):
? The lead entrepreneur and the team share the same vision of the new venture;
? The team members are passionate about the business concept and will work as hard as the lead
entrepreneur to make it happen;
? One or more members of the founding team have experience in the industry in which the venture is
being launched;
? The team has solid industry contacts with sources of capital;
? The team?s expertise covers the key functional areas of the business: finance, marketing and
operations;
? The team members have good credit ratings, which will be important when the firms seeking
financing;
? The team is free to spend the time a start-up demands and can endure the financial constraints of a
typical start-up.
3.2 Founding team extension
The entrepreneur and his or her team make maximal efforts, use their maximal knowledge and capabilities to
provide the functioning of their business venture. However, it is impossible to create a team capable of
having all necessary knowledge and information at any moment, which means that, sooner or later, the team
will need services provided by experts and external consultants (Hisrich, Peters, & Shepherd, 2008, p. 282).
New ventures have significant difficulties when engaging quality personnel is concerned. They are unknown
to a broader public, they have not built their business image and credibility yet, which is the case with
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existing enterprises. It is a big shortcoming of theirs in the labor market, so entrepreneurs are forced to use
their own business contacts to come to quality personnel. There are two basic reasons why entrepreneurs
employ new personnel (Forbes, Borchert, Zellmer-Bruhn, & Sapienza, 2006): they either possess knowledge
their venture is in need of or personal traits perceived as desirable by the entrepreneur. They employ people
who they know in person or who have been recommended by another person, and, in that way, they save
their time, energy and resources. Besides, it is easier for them to persuade people they know of the quality of
ideas and their ideas? potential.
One of the key issues the entrepreneur has to deal with is the number of employees needed for the
functioning of a new business venture. Although a larger number of employees has obvious advantages,
brings new energy, ideas and information, there are certain negative sides as well, reflected for the most part
in high fixed costs from salaries. The engagement of new personnel is a sword that cuts both ways; in the
majority of cases, however, positive effects prevail. Neither is there any doubt about advantages from
engaging a team because the team has a plethora of various skills, experiences and talented people with
numerous professional contacts supporting and helping each other. There is general agreement about
positive correlation between the number of the employed and a probability that a new business venture will
be successful; however, it should not be taken for granted because it has not yet been proved empirically
beyond any reasonable doubt.
The entrepreneur has a right of discretion to make decisions on the optimal size of a team. Sometimes it
happens that a team is too small for the creation of a complex venture; however, it is more frequently the
case that entrepreneurs make an even more dangerous mistake when creating too big a team. With the
number of team members, the number of problems related to the functioning and interpersonal relations also
increases. One question is asked: if a smaller team is better, why do entrepreneurs make this mistake? The
uncritical application of the the-more-the-better way of thinking (Baron, & Shane, 2005, pp. 124-126) is one
part of the answer; the main reason, however, is of psychological nature and lies in any individual?s need to
share their responsibility with as large a number of people as possible. In that manner the team becomes
over capacitated and neither is capable of efficient operations nor does it demonstrate the necessary
originality and inventiveness in managing a new venture.
Additional question which the entrepreneur must answer is: which employees should be engaged
permanently and which ones from time to time? Both alternatives have their advantages and disadvantages.
To engage personnel from time to time is, from the viewpoint of the project principle, more profitable and
provides greater flexibility; on the other hand, of course, those employees are usually insufficiently motivated
and are not loyal, which may be a problem, especially if they have access to the venture-related sensitive
information competitors would like to learn about and are prepared to pay for. Permanently employed people
are much more dedicated and more loyal to the venture; however, their engagement is a bigger cost. So, a
choice the venture founder has to make is everything but easy. It is recommended that, in activities where
flexibility and the fastness of response are important, the entrepreneur should engage personnel he or she
needs at the moment, whereas in those branches where the environment is more stable, it is rather
advisable that they should employ people on a permanent basis.
When the new firm is in its infancy, it generally doesn?t have the resources to hire professional help such as
an attorney or accountant. Instead, it must rely on building relationships with professionals on an as-needed
basis. These professionals provide services and information not normally within the scope of expertise of
most entrepreneurs, pointing out potential flaws in the business concept. There is hardly any aspect of
starting a new venture that is not touched by the law. Attorneys are professionals who typically specialize in
one area of the law – taxes, real estate, business or intellectual property. Within their area of expertise
attorneys can: advise the entrepreneur in selecting appropriate organization structure and in preparation for
acquisition of intellectual property rights and licensing agreements; negotiate and prepare contracts; advise
the entrepreneur on compliance with regulations related to financing, etc. Another type of expert help
entrepreneur can get from an accountant. The accountant may set up the company?s books and maintain
them on the periodic basis, or may hire a bookkeeper to perform the day-to-day recoding of transactions.
Bankers, insurance agents, and other specialist today, more than ever will put the new venture in better
position to compete on the market (Allen, 2009, pp. 160-163).
A growing number of start-ups are forming advisory boards to provide them direction and guidance. An
advisory board is a panel of experts who are asked by a firm?s managers to provide counsel on the daily
bases. Unlike board of directors, an advisory board possesses no legal responsibility for the firm and gives
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nonbinding advice. Some firms have advisory boards for specific issue or need, such as to help identify new
products ideas or dealing with an emerging challenge (Baron & Shane, 2005, pp.134-137).
4. CONCLUSIONS
In organizations, there is never ending tension between need for stability, which implies effective
performance of current business activities as prerequisite for maintaining current competitive position, and
constant quest for new products and business activities that would provide superior competitiveness in the
future. Entrepreneurs in their quest for independence often attempted a new venture as soloist. In this way
they could retain sole ownership, make key decisions and not have to share profits. This approach is still
common in small lifestyle businesses and among craftspeople.
However, in today?s global and complex environment, most entrepreneurs find it necessary to start their
venture with a team. It is rare for an entrepreneur to conclude that she or he has all the expertise and access
to resources that are needed by the new venture. It is very important for entrepreneur to identify the essential
participants for the initial launch. Not everyone involved with the new venture has to be an owner or
employee. It is not uncommon to find that one or more members of an otherwise cohesive team had different
expectations for the outcomes of the business or their role in it. These differences must be discussed and
agreed upon before moving forward as a team. It will be far more costly in time and money, not to mention
relationships, if these differences are ignored and cause problem later when the business is growing.
Creating optimal team structure is still huge challenge, and relevant research studies are yet to be done.
Researchers must focus their attention more on how to manage heterogeneity and diversity within
entrepreneurial teams, but in a way that will not jeopardize innovativeness, creativity and lateral thinking.
How to select not best individuals, but individuals that will fit the best, remains the main issue and dilemma
entrepreneur will face in the future.
ACKNOWLEDGEMENTS
This paper represents the research result of the fundamental research projects: “Preclinical Research of
Bioactive Substances” funded by Ministry of Education, Republic of Serbia (41010) and “Contemporary
Management and Marketing Methods Application in Improving Competitiveness of Serbian Companies in the
Process of European Union Integration” funded by Ministry of Education, Republic of Serbia (179062).
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SMES INNOVATION AND GROWTH IN EU
Elena Nikolova
1
, Marija Gogova Samonikov
2
1
Faculty of Economics, Goce Delcev University, Stip, Macedonia
[email protected]
2
Faculty of Economics, Goce Delcev University, Stip, Macedonia
[email protected]
Abstract: The focus of this paper is the analysis of the most important factors for SME performance, survival
and growth in the EU.
The main objective is to consider what determines potential failure of young companies to innovate
and grow. The importance of innovations and growth for new, young and thus often still small firms is
commonly claimed. Therefore, factors that would inhibit these small, young companies from achieving their
goals can have a huge public impact.
The research results show that the age of the firm (which reflects its reputation) is important to the
degree to which the firm feels financially constrained. Also, finance barriers can be associated with market
failure. Risk and informational asymmetries create capital market imperfections and a firm’s lack of
reputation and collateral become crucial elements.
Conclusions reveal that the ability of SMEs to grow depends highly on their potential to invest in
restructuring, innovation and qualification. All of these investments require capital and, therefore, access to
finance. Recent policy initiatives aim at improving the financial environment for European entrepreneurial
activity and, more specifically, supporting newly-founded innovative firms in order to increase their global
competitiveness and spur innovation.
Key words: SMEs, financing, innovation, growth.
1. INTRODUCTION
We are living a period of financial and economic crisis. It is accompanied by widespread pessimism
and lack of confidence and trust. Under these circumstances the focus on long run growth and innovation
may appear out of place. This paper is an argue against such a perspective. It is important to take a long run
perspective precisely in moments of crisis and turmoil. From the earliest period on record up to the
eighteenth century, the standards of living have been quite stable over the long run. Sharp variations in
standards of living were associated with disease, famine and war. Nevertheless, they would not persist over
the very long run. The Malthus / Ricardo model was able to reconcile long run stable standards of living with
technological progress over time (Lucas, 2002).
The engine of growth is a capitalist society based on competition and change. Joseph Schumpeter
characterizes economic development as: “The spontaneous and discontinuous change […] which forever
disturbs the equilibrium state that previously existed”.
Nobel Prize winner Robert Solow showed that for a sustained economic growth technological
progress is more important than factor accumulation. For Schumpeter behind innovation (i.e. the economic
application of technological improvements) lies entrepreneurship. Innovation involves the industrial or
commercial use of something new: a new good or service, a new production method, a new market or
source of supply, a new form of organization or a new method of financial organization. For Schumpeter
innovation is fraught with difficulties. One of them stems from the need for external financing (Levine, 2005).
2. A SCHUMPETERIAN LOOK AT THE GROWTH PERFORMANCE OF THE EU
After a long period of technological catch-up since the WWII, the productivity gap between Europe and
the US began widening again in 1995. Structural conditions necessary for Europe to catch-up with the
productivity leader, the US, were present from the end of the war to the first oil shock and afterwards.
However, conditions needed for creation, innovation and leadership in a knowledge economy worked against
Europe (relative to the US).
The recovery of the US productivity growth in the post-1995 period and the corresponding decline in the
EU reflects the influence of key technology and policy factors. Below are discussed three interrelated
determinants: ICT (information and communication technology), innovation and firm dynamics.
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2.1 The role of ICT as a general purpose in EU productivity growth
Sectional data suggest that the divergence in productivity growth between the US and the EU in the
post-1995 period is primarily explained by differences in the pattern of production and use of ICT.
? Labor productivity growth in ICT producing manufacturing industries has been particularly high in
both the US and the EU. However, the US benefited from a leading initial position and an increasing
growth in the post-1995 period in high-tech industries such as office machinery, electronic valves &
tubes, telecom equipment, TVs, and scientific instruments.
? ICT using services have been the focus of the most profound technological gap with the US,
particularly in the retail and wholesale sectors and in banking and finance. On the other hand, more
restrictive regulatory barriers in European countries have been detrimental to the diffusion of ICT.
More recent firm level evidence (Bloom, 2007) confirms that the US productivity advantage is not only
related to a higher ICT spending by US firms (in ICT using sectors), but US firms as well as their subsidiaries
operating outside the US-specific conditions reap a higher return from their ICT investments. This suggests
that other firm-specific advantages are important, such as the quality of management practices.
2.2 The importance of knowledge production and diffusion
In the present context, we need to define the extent to which the example of ICT is an isolated case or
is likely to be replicated in other high-growth, high-tech industries. This is a pertinent question if one accepts
that the US?s lead in ICT is not an isolated case.
Assuming that a failure of EU enterprises to recapture the full potential and benefits related to ICT is a
credible risk, the following key questions arise: 1. Does the EU have specific problems regarding its
innovation infrastructure?; 2. Does the US have specific features/framework conditions which make it more
likely to be the locus for the next future breakthroughs in technology?; 3. Why is the EU less apt to creating
and exploiting new technologies in general? In order to better understand the EU–US innovation deficit,
discussion beyond ICT importance is needed.
Figure 1: EU’s overall innovation performance relative to the US
Source: EIS 2006.
Despite some signs of catching-up, Figure 1 confirms the presence of persistent innovation deficit in the
EU. As this innovation indicator comprises several innovation input and output measures, the EU innovation
gap goes beyond the deficit in R&D spending. The R&D deficit is a symptom rather than a cause of a
weakness in the EU?s capacity to innovate; the cause is rooted in the structure and dynamics of industry and
enterprise (O?Sullivan, 2007).
A comparison of innovation inputs shows that SMEs represent a larger share of R&D expenditures in
the EU than in the US and Japan. On the other hand, EU SMEs are less R&D intensive than in the US,
although the SME gap is similar to the overall gap in R&D spending. The average R&D intensity of SMEs in
Europe is 0.34% versus 0.53% in the US. This compares to an overall average R&D intensity in Europe of
1.17% versus 1.57% in the US (Results are based on DG RTD, 2007).
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However, specific contribution of SMEs to innovation goes beyond the share of SMEs in R&D
expenditures or in innovation output. SMEs have a very important indirect effect. Usually young small
innovating firms create radical new technologies and markets, whose further developments are completed by
large players. Baumol (2002) recognizes the complementarity between small and large firms, but at the
same time notes the importance of small firms in large innovations. In 1994 the Small Business
Administration Office of Advocacy prepared a list of breakthrough innovations made by small firms during the
20th century. It is impressive going literally from A (airplane) to Z (zipper) with many innovations that have
been crucial to the economy. Other studies on the distribution of innovations certified as “significant” by
industry experts, confirmed that small (as well as large) firms outperform medium-sized firms for the US (see
OECD (2006) for an overview).
According to Baumol, private sector innovations in the US come from two distinct sources, firstly from
the activities of large firms and secondly from the efforts of independent inventors and their entrepreneurial
partners. Baumol asserts that the active presence of both groups enhances the overall innovation process
since their activities are complementary. Independent inventors/entrepreneurs specialize in breakthrough
innovations while R&D departments of the larger firms enhance these breakthroughs and add to their overall
usefulness.
2.3 Firm demography and the creative destruction process in Europe
EU-US productivity growth differences can be additionally explained by (a change in) the firm?s
demography. The churning process has substantial effects on labor productivity growth because large part of
it results from reallocations from less productive to more productive firms. Industries and/or countries where
the churning process is inhibited, exhibit lower productivity and employment rates.
All European industries exhibit a greater number of small firms and also a higher share in total
employment than in the US. American manufacturing firms are larger and they display wider size dispersion,
particularly in high-tech sectors and in wholesale and retail.
Figure 2 on aggregate entry, exit and net entry rates from the research work of Cincera and Galgau
(2005) shows that although both entry and exit rates are lower in the EU than in the US, the differences in
exit rates are substantially larger. The average size of entrants is much smaller in the US. Lower entry as
well as lower exit (firing) costs in the US allow benefiting from the experimentation process supplied by the
market. While there is a high positive correlation between the entry and exit in the US, correlation is
insignificant in the EU and even negative in France, Italy and Portugal. A positive correlation reflects
churning of firms within sectors as a part of the creative destruction process. A negative correlation reflects
more traditional sectoral shocks (positive for entry, negative for exit).
Figure 2: Aggregate entry, exit and net entry rates (in %) by country (1997–2003)
Source: M. Cincera and O. Galgau (2005), “Impact of Market Entry and Exit on EU Productivity Growth
Performance”, EC Economic Papers p. 222
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Post entry performance also differs between Europe and the US as shown in Figure 3: net employment
gains amongst surviving firms at different limits, from the empirical research of Bartelsman et al. (2004). The
short term survival rate (2 years) for American entrants is very low, but after this market experimentation
period, the conditional survival rate of successful firms becomes high. In addition, the growth for firms that
survive for 7 years is higher in the US than in Europe. These results are a clear indication that there are also
higher barriers to growth for SMEs in Europe.
Figure 3: Net employment gains among surviving firms at different lifetimes
(net gains as a ratio of initial employment)
Source: Excerpt from Bartelsman et al. (2004).
2.4 The impact of the creative process on productivity growth
The overall labor productivity growth originates mainly in growth of incumbent firms, both in the US and
the European manufacturing sector. However, the EU-US differential growth performance can be explained
by the reallocation effect between firms and the net entry component. This seems to be a clear indication
that creative destruction process is less effective in European countries than in the US in both low and high
tech industries.
? The exit effect is always positive, both in the US and the EU, which means that exiting firms are the
least productive firms.
? The long-run effect of entry on aggregate manufacturing productivity growth has a smaller magnitude
in the EU than in the US. Furthermore, the effect of entry depends on the industry?s distance to the
technology frontier. The positive effect of entry on productivity growth is more significant the closer a
country or sector is to the technological frontier.
? In high-tech sectors, the entry effect is positive in all countries and this suggests an important role for
new firms in more technology intensive industries. In these industries, the entry effect is much
stronger in the US than in the European countries. Similar observations apply to exit barriers.
? New and small firms contribute to aggregate productivity growth directly through their own growth
performance, and indirectly by affecting growth of large incumbents. Thus, the US firms? post-entry
growth and productivity performance is higher. Moreover, beneficial interactions between small and
large firms, especially in sectors where technical ideas and innovations are an important ingredient
of growth, could be at the heart of different effects that entry has on aggregate productivity growth.
In summary, Europe?s growth gap results partly from an inappropriate industrial structure in which small
and new firms, occupying the main part of total employment, fail to play a significant role in the dynamics of
the industry, especially in the high-tech intensive sectors. This is illustrated by their inability to enter, but most
importantly, for the most efficient innovative entrants, to grow. The churning that characterizes the creative
destruction process in a knowledge based economy encounters significant obstacles in the EU, suggesting
barriers to growth for small innovating firms which ultimately weakens Europe?s growth potential.
Economic analysis suggests the following “problem drivers” for the insufficient exit and low post-entry
growth:
? weaker product market competition (e.g. barriers to cross- border trade in services, national
regulations, etc);
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? protection of inefficient firms through subsidies, bail-outs, etc.;
? labor market and other regulations that kick in when a firm grows beyond a certain size threshold;
? financial market developments.
3. FINANCING OF SMALL AND YOUNG INNOVATIVE COMPANIES
The literature generally supports the importance of new, young and therefore often still small firms for
innovations and growth, even if they are small in number. Therefore, factors that would inhibit these small,
young companies to innovate and grow can have a huge public impact.
In the analysis of the (failing) contribution of small and young firms to innovation and growth, access to
finance is a priority issue. Survey data for the EU confirm the importance of access to finance. Excessively
high economic risks are the major hampering factors for innovation for all types of firms, but somewhat more
for small than for large firms. A second tier of barriers is formed by the access to skills, which again impedes
both small as well as large firms. Regulatory burden is also included in the second tier of barriers. The
empirical evidence suggests that this burden is somewhat stronger for small firms.
Table 1: Proportion of enterprises that regard selected hampering factors as highly important
(% of all enterprises); by size class
Source: Eurostat (2004).
Analysis of survey data on firms? financial constraints perceptions show that the age of the firm, which
reflects its reputation, is more important than its size in determining the degree to which the firm feels
financially constrained. A possible interpretation of this result is that age might reflect reputation of the firm
which, in turn, significantly affects access to finance.
The access to finance barrier can be associated with the market failure. Risk and informational
asymmetries create capital market imperfections and a firm?s lack of reputation and collateral become crucial
elements. Existing literature demonstrates substantial differences between small and large firms in this
respect. Hall (2005) shows that imperfections in capital markets usually affect small firms more than large
ones which can rely on internal financing. Young firms are even more likely to be constrained than other
small firms as reputation and collateral are important to mitigate capital market imperfections. More radical
investment projects further exacerbate the imperfect, incomplete and asymmetric information problem. Thus,
young innovative companies, which combine the disadvantages of a small scale, a short history, less
retained earnings and more risky innovative projects, are even more likely to be financially constrained than
other small, young and/or innovating firms.
Along with this financial market failure, particular for the EU, stands the highly fragmented nature of its
venture capital market with 27 different operating environments adversely affecting both fundraising and
investing. Complexity in operating across borders means that some funds have difficulties in expanding,
growing and reaching a critical mass. This makes access to financing even more difficult and more
expensive in the EU.
3.1 Characterizing YICs
Young Innovative Companies (YICs) are defined in the EU State Aid Rules as small enterprises, less
than 6 years old, being “certified” by external experts on the basis of a business plan as capable of
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developing products or processes which are technologically new or substantially improved and which carry a
risk of technological or commercial failure, or have R&D intensity of at least 15% in the last three years or
currently (for start-ups). The YIC dummy takes a value of 1 if an innovation active company is less than 6
years old, has less than 250 employees and spends at least 15% of its revenues on R&D.
Out of the sample of 1342 German innovation-active companies (A research done by the Catholic
University of Leuven, 2006), only 51 companies qualify for YIC status, using the EU State Aid definition. This
confirms the “rareness” of YICs, representing only 3.8% of all innovation-active companies in West-Germany
in 2006. Even within the group of small innovators or young innovators, YICs are rare (4.3% and 24%,
respectively).
A “typical” YIC has a micro size, with about 20 employees. This is considerably smaller than other
innovating SMEs, as well as young innovators. Also on R&D intensity and basicness of its R&D profile, a
“typical” YIC scores much higher than any of these reference categories. These statistics confirm that it is a
combination of age, size and R&D profile that composes the particularity of YICs. YICs are not the same as
innovative SMEs or young innovators. Finally, YICs are overrepresented in knowledge-intensive,
technological sectors, specifically services (ICT and R&D engineering) while they are absent in more
traditional manufacturing industries.
3.2 YICs and barriers to innovation
Table 2 presents the results on whether YICs perceive differently obstacles to innovation. Respondents
were asked to give a score to each (potential) hampering factor on a scale going from zero (not relevant) to
three (high). The first column indicates the share of firms that considered this factor to be relevant (i.e. firms
that scored one or more), while the second column reports the mean score.
Table 2: Obstacles to innovation
Source: Schneider and Veugelers (2008)
As expected, YICs face, on average, higher obstacles to innovation than other innovating firms. When
comparing across barriers, results confirm the presumption that financial constraints (both internal and
external) are the most important barriers to innovation for YICs. Although this ranking also holds for other
innovating firms, the YIC-differential is the largest and strongly statistically significant on both financial
constraints. The evidence presented by Schneider and Veugelers (2008) show that young innovative
companies, combining newness, smallness and high R&D intensity are rare in the sample of innovative
firms. They view financial constraints, both internal and external, as an important factor hampering their
innovation activities, significantly more so than other innovation active firms.
4. CONCLUSION
We have argued that innovation is an important determinant of competitiveness and important to
address global challenges, such as sustainable development. The importance of innovation has been
reinforced by a fast development of new technologies (ICTs in particular), which enabled new forms of
competition and opened new markets for creation of innovative products. Nevertheless, despite importance
of innovation, as well as new opportunities offered by globalization and new technologies, improvement in
productivity in the EU, the EU seems to be lagging behind the US in this area.
We try to document the importance of SMEs and young innovative companies (YICs) for the innovation
process. Both of them are source of dynamism and in particular, YICs are directly related with research
activities and are a key component of the innovation system, facilitating the emergence of new products and
685
markets. However, evidence shows that in Europe small and new firms fail to play a significant role in the
dynamics of the industry, although they account for a majority of employment. Not only they face significant
entry barriers, but also successful entrants face difficulties to grow.
However, the ability of SMEs to grow depends highly on their potential to invest in restructuring,
innovation and qualification. All of these investments require capital and therefore access to finance. Recent
policy initiatives, such as the creation of the YICs status at the European level, aim at improving the financial
environment for European entrepreneurial activity and more specifically to support newly-founded innovative
firms in order to increase their global competitiveness and spur innovation.
Empirical research on access to finance for SMEs and young innovative companies has been limited,
however, a recent analysis confirms the presumption that young, small, innovation-intensive firms are a very
small but distinct segment in the group of innovative companies. Furthermore, access to finance is the most
important factor that hampers YICs? innovation activities, significantly more than other innovating firms.
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Bloom, N. and ?.R. (2007), “Measuring and Explaining Management Practices Across Firms and Countries”,
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European Economy, Economic Papers N° 222.
European Commission, Directorate General for Economic and Financial Affairs.
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Innovation Management“, Oxford: Blackwell Publishers Ltd., 2005.
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Interest and the Business Cycle“, Transaction Publishers (14th printing 2008).
doc_508180810.pdf
In this particular detailed information related to entrepreneurship and management of small and medium enterprises.
633
ENTREPRENEURSHIP AND MANAGEMENT
OF SMALL AND MEDIUM ENTERPRISES
IMPROVEMENT OF SMES ENVIRONMENTAL SUPPORT PLANNING BASED ON NEW STRUCTURE OF SUPPORT
DETERMINATION .................................................................................................................................................634
Zoran Rakidevid, Jasmina Omerbegovid-Bijelovid, Gordana Lazid-Rašovid
ENTREPRENEURSHIP AS MARKET VALORIZED CREATIVE POTENTIAL ...................................................................643
Dragan Gruevski, Mirjana Cvetkovska
FINANCING ENTREPRENEURSHIP IN TIMES OF CRISIS – CASE OF SERBIA ............................................................652
Svetislav Paunovid, Maja Paunovid
MANAGEMENT PRACTICE, SUCCESS AND/OR GOOD PERFORMANCE OF SMALL BUSINESSES .............................659
Slobodan Marid, Bojan Lekovid
SMALL AND MEDIUM SIZED ENTERPRISES OWNER PROBLEMS AND INFLUENCE FACTORS..................................665
Siniša Arsid, Marko Mihid
Miloš Arsid
ENTREPRENEURIAL TEAM IN NEW VENTURE CREATION: THE KEY CHALLENGES FOR MANAGEMENT ..................671
Verica Babid, Jelena Erid, Jelena Nikolid
SMEs INNOVATION AND GROWTH IN EU ............................................................................................................679
Elena Nikolova, Marija Gogova Samonikov
634
IMPROVEMENT OF SMES ENVIRONMENTAL SUPPORT PLANNING
BASED ON NEW STRUCTURE OF SUPPORT DETERMINATION
Zoran Raki?evi?
1
, Jasmina Omerbegovi?-Bijelovi?
2
, Gordana Lazi?-Rašovi?
3
1
Faculty of Organizational Sciences, [email protected]
2
Faculty of Organizational Sciences, [email protected]
3
Regional Center for Development of SMEs and Entrepreneurship “Belgrade“, [email protected]
Abstract: The subject of this paper was prompted by the importance of Suitable Structure of Support (SSS)
determination, as one of the support actions that the environment provides to the SME sector – in the case of
SMEs in Serbia. (Support can be viewed as a type of service, with a significant share of material resources in
that service, i.e. in a specific form of support. Therefore, Structure of Support (SS) is the primary issue in this
paper. If support is viewed as a service, it is also important to follow the process of providing that service). It
is recognized that structure support planning is the root of successful support to the SME sector, so the
subject of this paper is the improvement of the SMEs structure support planning process based on new
structure determination (which, therefore, contributes to the suitability of structure support). Problem: Weak
effect of the environment support to SMEs (not only in Serbia) at the beginning of the 21st century is the
problem whose solution this paper is dedicated to. The conducted survey has identified the cause of the
problem: the environment provides Low Suitability of Structure Support in relation to SMEs’ support needs.
Therefore, the ways of structure support planning and, consequently, an inappropriate process of planning
and providing support has been recognized as a real problem of insufficient effectiveness of support
provided to SMEs. The need for the improvement of the existing SMEs support planning process, as well as
the need for innovation in the way support structure is determined, have been identified. Idea: (H0): If the
planning of structure support that the environment provides to the SME sector achieves higher suitability with
the structure envisaged by the owners/management of SMEs, better results of that support are achieved
(and also higher SMEs’ business performance). Of course, such structured support should and can be
incorporated into support plans and, thus, support could be more effective and "supported" SMEs more
successful. The presented idea has been tested in the case of providing support to the SME sector in Serbia.
The intention is to show that the SMEs structure support can be improved (made more suitable for the one
needed, or at least for the one that the owners/managers of SMEs want), and that this leads to the
improvement of the planning and the overall management of providing support to SMEs, as well as of SMEs’
successfulness. Purpose: This paper is intended for those who are planning and/or providing support to the
SME sector. They are proposed to improve the "Structure of Support” performance (especially the "Suitability
of Structure Support” indicator). This would, as an innovation, improve the process (as well as the system) of
planning and the overall management of providing support and make it more effective. Result of the
survey/Contribution of the paper: Based on the "Research on the conditions, needs and problems of
SMEs and entrepreneurs" (conducted in 2010 and 2011), it is shown that better results are achieved by
those who apply the here proposed method of designing structure support while planning support for the
SME sector. This conclusion is derived from the observation that SMEs support is more effective if it is more
in accordance with the objective needs of SMEs, or at least with the ones desired by the owners/managers
of SMEs. Therefore, the conclusion is that the first step should be to determine the required/desired SMEs
structure of support from the environment, and then to plan other support characteristics (such as details on
types of support, scopes, periods, methods of delivery, etc.). It is concluded that the new way of designing
structure of support and the proposed planning process of providing support leads to the improvement of the
SMEs environmental support, which should be "kept permanently open" for improvement.
Keywords: Small and Medium Enterprises (SME), Support for SMEs, Structure of SMEs support, Suitability
of SMEs support, Planning the environmental support for SMEs.
1. INTRODUCTION
Subject of the paper is in the scientific field of Entrepreneurship and SME management. It refers to the
improvement of the planning of SMEs? support system (more specifically: the process of planning the
Structure of Support - SS). Identification of the actors involved in the support system should be the first step
in defining of the suitable SMEs? support. There are two types of actors: the actors who are demanding for
support (small and medium enterprises and entrepreneurs - SMEs) and the actors who are providing the
support (government and its institutions, international institutions and other organizations that provide
635
support). The actors who are demanding for support (SMEs) have their needs and form their own
expectations (rarely: requirements) for support (which is usually done by the managers/owners of SMEs, but
the help of experts would be more reliable). It is shown in practice that the actors who are providing the
support are actually trying to help the SMEs. The problem occurs because the SMEs? support that these
organizations design is usually independent from the actual needs of the SME sector (but is designed
according to their own competence/interest), so the delivered support is not suitable enough with the
needs/requirements of SMEs. Support usually doesn?t have the suitable structure and other performances.
The authors of the paper provide an answer to the research question: Does the support whose structure is
more suitable with the one expected by the managers/owners of SMEs (related to solving problems and
satisfying the needs of SMEs) achieve better effects (that have an impact on the overall business of SMEs)?
The authors give an answer to the research question in accordance to analysis of the data collected by the
Survey
1
.
After reminding of the: a) Basic concepts of SMEs, their characteristics, problems and needs and b) SMEs?
environment that provide support to the SME sector through the structure, institutions and resources of
support (in case of Serbia), it is proceeded to the idea of improvement of the planning SMEs? support (so that
SS is in accordance with the desired one). The concept of planning support, presented in this paper, can
contribute to higher suitability of the SS with the one required, resulting in increased performance of
providing support.
2. SMALL AND MEDIUM ENTERPRISES
Small and medium enterprises - SMEs is the phrase used for special type of enterprises that are becoming
very important in the last decades of the 20th century. SMEs are recognized as: the engine of national
economies? growth; the biggest potential of (self-) employment; the new job generator; companies that have
great influence in the national, regional and local development (as a "tool" for prevention of the migration of
people from some passive geographical areas) and as companies that obtained international character
(because of their business in the global market). SMEs are a key source of national economies? growth
(Spicer & Sadler-Smith, 2006, p. 134). SMEs are determined – using the criteria defined by the European
Commission – as companies with up to 250 employees, whose annual turnover does not exceed 50 million
[€] and/or whose total capital does not exceed 43 million [€] (The New SME definition, p. 5).
SMEs, as the largest category of companies (99.8 [%] of total enterprises in the EU and Serbia are SMEs)
have many common features, despite the diversity and specificity of each of them. Attention of this paper is
drawn to only one relevant characteristic: shortage of SMEs? resources. That characteristic of SMEs is the
main constraint. It reflects to the other characteristics of SMEs: a) Integration of ownership and management;
b) SMEs? small capacity; c) Specialized (niche) market; d) Lack of standard use, etc.
According to Barney (1991, p. 106), the necessary condition for developing competitive advantage and
reaching company?s strategic goal is the availability of resources. He notes that sustainable competitive
advantages of a company come from its resources that are valuable, irreplaceable and difficult to imitate.
Due to the limitation of SMEs? resource potential, it is obvious that SMEs need extra help.
Shortage of financial resources (as a universal resource) is one of the most commonly used justification
2
for
the problems and failures of SMEs. SMEs? owners have difficulties with finance because they invest their
personal savings and assets and the funds borrowed from family and friends into their business (Irwin, 1998,
p. 162). Based on the characteristics of SMEs (in particular - on the basis of modest resource capacities) and
the problems they face, it can be concluded that the SME sector needs the help and support. SMEs?
environment is a potential source of help and support.
SMEs? environment is an important factor, viewed from the aspect of SMEs? support that is explored in this
paper. The business environment is the business potential and resource of SMEs (Lazic-Rašovi? &
Omerbegovi?-Bijelovi?, 2006, p. 5). According to Porter (1990, r. 73) "root of companies? competitiveness is
in the nature of their business environment". Actors of SMEs? business environment are its stakeholders:
customers, suppliers, competitors, banks and investors, educational and research institutions, the
1
"Survey of conditions, needs and problems of SMEs and entrepreneurs", organized by the Regional Center for
Development of SMEs and Entrepreneurship - Belgrade, conducted in 2010 – 2011, on a sample of 310 SMEs in Serbia
(from cities: Belgrade, Kragujevac, Vranje, Jagodina, Aran?elovac and Sombor).
2
Research conducted in 2006 – 2008, during the preparation of a doctoral dissertation: "The contribution to application
research of contemporary metamanagerial tools in small and medium enterprises with unbalancelly developed
resources" (2008), M.Sc. Brankica Ljami?-Ivanovi? (under supervision of prof. dr J. Omerbegovi?-Bijelovi?), showed that
the most important resource for the success of SMEs is the owner?s competence.
636
government and its institutions, local communities, environmentally oriented organizations, media,
organizations and agencies that provide support to the SME sector (Omerbegovi?-Bijelovi?, 2006, p. 5).
SMEs can benefit and receive help and support from its stakeholders (whether in money or in other
resources - material resources, knowledge, information, etc.). The rule is that each stakeholder has an
interest to observe (and also to help and support) the existence and development of a specific SME.
The state that the SME sector needs help and that it expects the environmental support is justified by the
analyzed data from the Survey - which shows that every SME from the sample had at least one problem in
its business. The average number of problems per SME was 3.87 [problem/SME]. (Some of the main
problems in the survey were: Shortage of financial resources (86.4 [%] of respondents), Lack of business
ISO standard certifications (92.7 [%]), Inability of doing business on the international market (86 [%]),
Inadequate legislation (34.3 [%]), Lack of information about the market trends and situation (29 [%]), Lack of
trained personnel (12.5 [%]).)
In the Survey, SMEs were also asked about the types of support which they believe would assist in
overcoming their problems. Survey has shown that every company in the sample reported at least one
missing/desirable form of support. The average number was 2.88 [types of support/SME]. (Some of the most
demanded forms of support are: Easy access to financial resources (82.9 [%] of respondents), Help in the
promotion (54.8 [%]), Procurement of the missing equipment or replacement of the existing equipment (41.6
[%]), Professional support through training, consulting and mentoring (40.5 [%]). Therefore, based on the
presented data, it can be concluded that the SMEs have a strong need for help and support from the
environment.
3. SMEs SUPPORT
Term of SMEs support refers to any form of financial or non-financial help to SMEs that is provided from the
environment (by other individuals, companies, institutions, state or some supra-system). The sources of
various forms of SMEs support can be: Supply chain participants (customers, suppliers), banks, agencies
(accountants, lawyers and consultants), business associations, government organizations, media, family,
friends and others. Bennett and Robson (1999, p. 161) explain how buyers and suppliers can be a good
source of information and help: a) Customers of a company may provide a good signal of product?s market
success; b) Suppliers are the sources of information about new technologies, opportunities and chances for
innovation and cost reduction.
Usage of external support is strongly associated with successful business growth (Bennett & Robson, 1999,
p. 155). Chrisman and McMullan (2004) have shown that small businesses that use the support services of
public agencies have a higher rate of survival and growth than the firms that do not use these types of
services. Therefore, the conclusion is that support is very important and that, consequently, the improvement
of the environmental support can help the SME sector more effectively.
According to the basic categories of resources, the help/support that can be provided to SMEs is divided into
two main types: financial and non-financial support.
Financial support – money is the key resource of this type of SMEs support. More precisely, it refers to the
financial help of various institutions and organizations to start new business (start-up loans) or to improve the
business of existing SMEs (loans to finance current operations). In many cases, money that is given to
support SMEs is not a help itself, but a resource for the achievement of specific objectives, so it must be
spent on planned activities. (For example, the support institutions provide funds to SMEs for: purchase
equipment, employee trainings, export activities and innovation of products/ services/ processes/
management).
Financial resource, as a form of support, is necessary for the development of new business ventures. Patzelt
and Shepherd (2009, p. 322) claim that entrepreneurs can achieve their strategic goals only if they have
sufficient funds and available sources of funds.
Non-financial support refers to support that does not include money as a resource of support. It is some
kind of service: consulting, mentoring, training and seminars in various educational fields (e.g. legal aspects
of operations, business planning, marketing, finance, human resource management, change management,
innovation), intended for "managers" of SMEs (owners, entrepreneurs and managers). The main objectives
of non-financial support are knowledge and competence improvement of the SMEs? owners, management
and employees. The non-financial form of support may also include: the transfer of technology, help with
business networking (entrance into clusters and other associations), contribution to the SMEs? reputation and
637
promotion, reduced administrative barriers and increase of tax incentives, but also a platform for business
development - such as business incubators and technology parks.
Non-financial support includes provision of resources and activities combination. The most important are: a)
Technology transfer is very important for the development of the enterprises in many countries, so support
measures for this process are created (such as: Technology Transfer Agencies and Technology Transfer
Offices); b) Entrepreneurial networking - an important form of non-financial support, which refers to the
formal and informal links of entrepreneurs and SMEs with other individuals and organizations, through which
they do economic transactions. Those networks can provide access to important knowledge and improve the
visibility and reputation of a new business ventures. Support creators use them for placing numerous support
program this type of support (entrepreneurial networking) for numerous support program (e.g. for formation
of clusters); c) Knowledge - a very important resource for the development of every company and one of the
most important sources of competitive advantage (Spicer & Sadler-Smith, 2006, p.133). According to the
Knowledge based theory, it is a basic asset/resource for any company. All other resources depend on it
(Chirico, 2008, p. 434). There are three very important types of knowledge: 1 - knowledge about
management and development of existing business or newly established company; 2 - knowledge about
processes of products and services development and production; 3 - knowledge about market, where the
new company will operate; d) Removal or reduction of administrative barriers allow entrepreneurs to focus on
daily operations and finding new business opportunities in their environment (because high levels of
bureaucracy and administrative barriers have a negative impact on new business ventures development,
according to Patzelt & Shepherd, 2009, p. 326); e) Tax incentives - they can be an excellent form of support,
so the governments of many European countries provide large number of them (e.g. reduction of tax rates
and respite in tax payment).
The existing forms of support which are provided to SMEs in Serbia are presented in Table 1. It is obtained
by research on forms of support intended for SMEs in Serbia (Support for Success, 2012).
Table 1: Institutions and type of support for the SME sector in Serbia
Institution Support intended for: Type of support
Ministry of Economy and
Regional Development
Fast growing SMEs
(“gazelles”)
The funds for financing activities
for encouragement of SMEs? competitiveness.
SMEs
The funds for financing activities for strengthening of SMEs?
innovativeness.
Free services provided by the regional development agencies
(consulting, training, promotion).
National Employment
Service
Potential
Entrepreneurs
Subsidies for self-employment.
Mentoring and specialized training for entrepreneurs who have
received subsidies for self-employment.
SMEs
Subsidies for new job creation.
Subsidies for employment of persons with disabilities.
Professional practice - financial subsidies for training of
unemployed persons without work experience.
National Agency for
Regional Development
Potential
Entrepreneurs
Non-financial and financial support to the business starters who
are returning to their cities (underdeveloped municipalities).
SMEs
Support programs for co-financing (up to 50 [%]) of project
costs for the development of SMEs? competitiveness.
Mentoring for start-ups and existing SMEs.
SME clusters
Support programs for co-financing innovative project activities
(up to 50 [%])
SME/Entrepreneurs
European Network of Entrepreneurship Program: Information
about conditions for entering into the EU market, export
opportunities, new technologies, potential partners, etc.
Innovation fund SMEs
Program of early development of start-up and spin-off
companies
that have the technological innovation with potential of creating
new intellectual property.
Serbia Investment and
Export Promotion
Agency
SMEs
Grants for financing export activities and the international
promotion.
Export Credit and
Insurance
SMEs
Short-term loans for financing export activities.
Guarantees issuance
638
Agency of the Republic of
Serbia
Receivables insurance
Factoring (assignment of receivables)
SME/Entrepreneurs Consulting for potential exporters.
Development fund SME/Entrepreneurs
Loans for arts and old crafts.
Credit support for beginners (newly established SMEs and
entrepreneurs, women entrepreneurship).
Guarantees for SMEs? and entrepreneurs? loans.
Short-term loans for encouragement of competitiveness and
liquidity, investment loans
Low interest loans for development of SMEs/entrepreneurs
in underdeveloped regions
National Bank of Serbia SMEs
European Investment Bank, the Government of Italy and the
European Agency for Reconstruction loans for SMEs
The Intellectual Property
Office of the Republic of
Serbia
SMEs
SMEs? intellectual property diagnostics
Education of SMEs about intellectual property
Therefore, the Structure of SMEs Support (SS), as a set of individual environmental support components that
are designed for solving SMEs? problems has next characteristics:
? Type of support - complex characteristic that indicates on: its form, nature of resources that are
provided to SMEs, specific purpose;
? Volume of support - the number of different support types that are integrated into the SS that is
provided to SMEs. If the SS, consists of several types, the volume of support is higher;
? The intensity of support - characteristic that involves introduction of indicators (and measuring unit
of the indicator expression intensity) which may be: period of providing support, financial value of
support, number of participants who provide support to SMEs (mentors, consultants, listeners).
Intensity of one support type refers to the amount of certain type of resource that is used in the
implementation of a specific form of support;
? Process of providing support - an essential part of the structure of environmental support
(because processes "justified" structure). It also refers to the cost, time and risk that are appearing in
support;
? Support recipient satisfaction – refers to the level of SMEs? managers/owners satisfaction with
received support. It can be measured as a level of fulfillment of expectations for support;
? Support provider satisfaction – an indicator of fulfillment of their intentions and expectations;
? The quality of support – measure of fulfillment of the SMEs? support expectations (and also of the
involved stakeholders expectations), which is usually expressed as the effectiveness and efficiency
of SMEs support. The authors of this paper suggest that the quality of support can be determined
through the other two characteristics: Suitability of support and Successfulness of support;
? Suitability of support - it can be defined as an indicator of compatibility of support provided to
SMEs with the SMEs? problems recognized by competent individuals or organizations (experts,
SMEs? owners/managers, specialized consulting organizations). According to Chrisman & McMullan
(2004, p. 231) support should be conceptualized and organized so that, in terms of its structure, it
corresponds to the particular problems and requirements/expectations of SMEs. They are drawing
attention to the suitability of support: "It is preferable that advisors (who provide support to SMEs)
rely on the ideas that are given by the owners/managers of SMEs, than to rely on prefabricated
solutions to the SMEs? problems", because "the SMEs? owners/managers expect support that is
suitable with their needs, that are numerous and that vary according to the activities, firm?s sectors,
firm?s development phase and also according to the ambitions from the owner/manager "(Audet,
Berger-Douce & St-Jean, 2007, p . 30);
? Successfulness of support – it refers to the effect of support on the problem solving and SMEs?
performance indicators. It can be measured by different (direct or indirect) indicators: the degree to
which problems in the company are solved, i.e. the effects on company performance (an increase of:
revenue, profit, number of employees, market share, etc). Possibility of measuring the
successfulness of support through the integral objective function, that will satisfy more stakeholders
at the same time, is particularly interesting;
The main hypothesis of this paper refers to the connection of support suitability with the support
successfulness (and therefore SMEs? successfulness): If the planning of SS that environment provides to the
SME sector achieve higher suitability (SSS - as a performance indicator of SS) with the structure expected
639
by the owners/management of SMEs, better results of that support are achieved (and also higher SMEs?
business performance).
For the purpose of proving the main hypothesis, 310 SMEs were surveyed. Two different things were
analyzed - SMEs? requests for support (requests for solving problems that are identified by the SMEs?
managers/owners), on one side, and the specific forms of support (that are provided to SMEs), on the one
side. The level of agreement between the support SMEs are looking for and the support that is provided to
SMEs is recorded as a variable - suitability of support. That variable could take integer value of how many
times used SMEs support is suitable with the requirements of the manager/owner. An indicator/variable
"Direct growth of total SMEs revenues", expressed in [%], was used for support success measuring.
Correlation analysis of these two variables gave the following result: Pearson Correlation ? (suitability;
increase in revenue) = 0.422 was statistically significant (sig = 0.002). The obtained coefficient of correlation
is in the category of medium correlation. Dependence between suitability and successfulness of support
(precisely, in this paper it refers to one successfulness indicator: direct increase of revenue as a result of the
environmental support to SMEs) can be established on the basis of that correlation. (The authors believe that
the reason why the relationship between two variables is not stronger (? > 0.5), is in the answer to the
question "Are the owners/managers of SMEs competent enough to identify what is the problem of their
SMEs?".
Since the statistical test confirmed a statistically significant relationship, it can be concluded that the
hypothesis is true, i.e. that if support achieve higher suitability of structures (SS) with the structure expected
by the SMEs? managers/owners, the better SMEs? business score will be achieved.
(The next conclusion is that if more competent experts define SMEs? needs, the more suitable structure of
support will be given. That will lead to even higher improvement of planning/plans of support to SMEs).
Based on this conclusion, the suggestion for improvement of the planning support process (and also the
whole support system) should be defined by including the innovated ways of defining and designing structure
of SMEs support. This can help the improvement of SMEs support and the success of their business.
4. IMPROVING THE PLANNING SUPPORT PROCESS TO SMEs
The purpose of planning model, that is proposed in this paper, is to help in directing always limited resources
to the forms or activities of SMEs support that is "most promising", i.e. support that will have the biggest
positive effect on the success of SME sector and, consequently, on the economy and quality of life. The
initial hypothesis is defined to indicate that there is regularity in the designing of SMEs structure of support.
Stakeholders are advised how to improve the system of SMEs support and how to participate in it.
Support planning is part of a more complex process which occurs in the support management system.
Therefore, the complex management process of providing SMEs support can be presented in two phases
(Omerbegovi?-Bijelovi? J. et al., 2010, p. 141 and p. 245):
F1. Planning – creation of plans for SMEs support where the highest goal(s) are decomposed into:
a) hierarchically-organized (and time-synchronized) goals? tree-structure, and b) A set of appropriate actions
(up to the level of work assignments for the direct objects of work transformation) for achievement of the
planning goals, c) Resource defined by type and quantity (planned activities should be implemented over
them) s and d) Specifying of the ways for providing resources to SMEs support;
F2. Execution of providing support plans, where other three classical phases of management could be found:
a) Organization for plans execution - where the decomposed goals and other elements of plans (like:
information about planned activities and the authority for managing necessary quantity of planned resources
for planned activities perform) are assigned to individuals or groups (organizational units); b) Realizations of
SMEs support plans where the availability of necessary recourses is provided through purchasing and
supplying (at the each relevant (work) place and at all planned horizons). It this phase planned resources
are used to obtain the output - planned support (with planned quality, planned costs, in planned moment,
with optimized values of output characteristics, for planned users); c) Controlling the execution of support
plans through all goals and tasks, time horizons, management objects (resources, processes, functions) and
indicators of the quality/ success of business operations, through the stages: 1) Identification of conditions of
SMEs support management entity, 2) Determination of deviations between the real condition and planned
values, 3a) Discovering of the deviations causes in parallel with, 3b) Operative removal of achieving goals
obstacles and 4) recording of experience and recommendation for next cycle of management improvement.
SMEs support planning system in Serbia (as an illustration for possible of SMEs structure of support
innovation and as an improvement object for planning process of the motioned support) is concretized with
“The Development Strategy of Competitive and Innovative Small and Medium Sized Enterprises for the
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period 2008-2013”. The strategy is adapted every five years, and it includes the defined aims for SMEs
support. More precisely, it is a strategic plan that is defined by the Serbian Government, which includes the
aims that should be achieved by the government institutions and organizations through their activities in the
planned period. The Strategy is document for SMEs policy development. That document defines the main
priorities (goals) and ways (actions) for their realization in planned period. The main goal of Strategy is to
develop Serbian entrepreneurial economy based on knowledge and innovation. It needs to create a strong,
competitive and export-oriented SME sector and to significantly contribute the improvement of life standards
in Serbia. The general goal of the Strategy is further decomposed into the five most important objectives –
“pillars”:
? Promotion and support to entrepreneurship and the development of new enterprises
? Human resources for competitive SME sector
? Financing and taxation of SMEs
? Competitive advantages of SMEs in export markets
? Legal, institutional and business environment for SMEs
For the purposes of meeting the defined five "pillars" or the main aims of the Strategy, the particularly
activities are defined. Therefore, the strategy was defined according to the “top-down” principle - from the
main goal at the state level towards specific objectives and activities designed for the SME sector.
Authors of this paper think that another complementary approach (a "bottom-up" approach that is based on
concrete problems and needs of SME sector) is missing in defining Strategy. Based on the hypothesis
conceptualized and proven dependence between the results of provided support (the success of SMEs) and
its suitability with the problems and needs of SMEs, the authors present the concept (proposed
methodology) to improve the planning of support system (as part of SMEs management support system), so
that each individual support, meets demands and needs of SME in the best way. Additional contribution of
this concept would be a better definition of support strategy for SME sector.
Support planning process should be initiated with "call for help" - that the owners/ managers of SMEs send to
the particular SME support institution. However, in many cases, owners/managers of SMEs are not able to
identify when they have problem, what is the problem and even does the problem really exist in their
company. SMEs? owners/managers are also not informed well enough about the capabilities of many support
institutions. Therefore, the support institutions often encourage SMEs? support demands with a numerous
proactive programs and activities. It can be said that the institutions start the planning process for SME
support. So, the beginning of the SMEs support planning process can have two sources of "impulses":
Particular SMEs or institutions that provide support to them).
During the designing of SMEs support planning process, next things must be taken into considerations:
? Structure of support that is provided to the SME, which is in accordance to their problems and need.
This element of support planning can include all important aspects of support (type, scope, intensity,
quality, suitability and desired successfulness);
? Resources required for realization of support (money, people, knowledge, information, time, etc.).
where care should be taken about their availability in different time-planning period;
? Time period in which the support is implemented. It must be in accordance with the SMEs support
needs in the observed period, and with the resource availability of organization that provides support;
? Institution or organization that has task to implement support, because the organizations that
planned support to SME, are often not the ones that implement support.
SMEs support planning process (stages S1-S9) cannot be regarded as isolated, but in the context of integral
planning, and also in entire support management process (or at least on the level of operational
management - in stage S7). Therefore SMEs support planning process can be conducted through the
following stages:
S1) Investigate the problem of SMEs – i.e. do an accurate diagnosis of the SMEs? condition, problems and
needs. It is necessary to define the SMEs? problems, because incorrectly defined problems can lead to
inefficiency of the whole support system). Therefore, this phase is crucial for the further support planning and
support realization process;
S2) Define the goal that will be achieved through the support. Well-defined SMEs? problems (in previous
stage), may determine the purpose and goals of providing support to SMEs. While considering the goals the
expectations of many stakeholders should be take into consideration;
S3) Define suitable structure of support which meets goal identified in stage 2. At this stage, with respect
to the support suitability, structure of support that is intended to SMEs is precisely defined;
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S4) Define the necessary resources by types and quantities and specify the dynamics of resource needs
(which may be the major constraint to achieve support goals) for implementation of support. The goal is to
make the greatest support effect with rational use of always limited resources;
S5) Define the support intensity in accordance to the SMEs? needs and support providers resource
constraints;
S6) Define indicators for monitoring the support results – while support planning, the indicators that will
monitor the achievement of planned support and successfulness of realized support forms are also defined.
Those measurable indicators could be: a) degree of plan achievement, b) degree of resources utilization, c)
degree of support needs satisfaction and g) degree of particularly stakeholders? satisfaction;
S7) Implement the support – according to strict classification it is not included in the planning stage
because it is a realization phase. However one part of realization stage (transformation, i.e. direct providing
support activities), cannot be separated from operational preparation of support planning, and even less from
the operational preparation of providing support. They are so close that they are not even separate from the
operational management of SMEs support activities realization. Information about validity of the applied
planning process, and ideas for SMEs support planning process improvement come from this stage;
S8) Analyze the performance indicators of the provided support structure. Indicators for measuring
success of planning and support providing are analyzed after the execution of support. If the results meet
expectations, it can be concluded that the support was successful and that the plan achieved the goal.
According to Omerbegovi?-Bijelovi? et al. (2010, p. 151) "measure or degree of planning objectives
fulfillment is the quality of planning. It can be defined as: effectiveness - an indicator that measure the
achievement of planning purpose and efficiency - as the ratio between the benefits and cost of planning
process"), Otherwise, it is necessary to work on further improvement of the planning system of SMEs
support (primarily, here observed structure of support);
S9) Define further actions – SMEs support planning process usually does not end after the successful or
unsuccessful completion of the planning and plans executing cycle,. New cycles of providing support are
defined and planned towards a further SMEs problem solving and improvement of their success. Continual
improvement activities of the system for monitoring SMEs? needs, problem solving and successfulness, are
defined through the following: measurement, analysis of the results, determining deviations, further planning
of improvement and implementation of SMEs support activities. After one cycle of improvement, next cycles
should be repeated.
An important characteristic of the SMEs support planning system is the structure of that system, in addition
to the process of providing support. Organizational structure for SMEs support planning objectives
achievement is defined in accordance to the decomposition of those objectives. Theoretically, that process
goes through: 1) Delegation of (planning) goal?s components to individuals and/or to organizational entities of
the complex SMEs support planning system (i.e. assignment of specific goals to groups and individuals) 2)
Allocation of authorizations for: a) use of necessary resources to achieve assigned planning goals and b)
initiating and managing the activities of planning goals. Although the organization of planning is just one
phase of SMEs support planning management, it is necessary to consider the time horizon, and to
synchronize the organization ("activities assignment") with that aspect of planning (and the entire
management) SMEs support. However, this topic will further be discussed in another paper.
5. CONCLUSION
Providing support to SMEs is a serious social and professional task. The role of science is to make decisions
in this area be based on the facts. The result of the survey of the relationship between the suitability of SMEs
structure support (SSS) and the effects of providing that support (in case of SMEs support in the Republic of
Serbia) is presented in this paper. It was found that the effect of the support depends on its suitability with
and the actual needs for environmental support (at least as the owners/managers of SMEs saw those
needs). It is shown that the success in providing support to SMEs (including the SMEs? business success) is
higher if the provided support is more suitable with the one needed.
Based on the proven hypothesis and the innovated way of SMEs structure of support (SS) designing, the
authors made an improved concept of SMEs support planning process. Through this new concept, the
authors want to direct the institutions and organizations that provide support to SMEs towards the real needs
of practice – that during the process of SS planning and providing support they have to consider the real
needs and problems of SMEs, in order to achieve greater success.
The concept of SMEs support planning has many benefits. It can serve as a guide to:
? Small and medium enterprises – for better planning of their own support needs and learning about
the available support forms from their environment;
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? Government and its institutions – for better understanding of the SMEs? problems and their needs for
support (with the aim of defining more adequate forms of support provided/coordinated by the
Government of RS);
? Institutions and organizations that provide support to SMEs - for better planning of: support,
necessary resources and support activities.
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2008-2013, Ministry of Economy and Regional Development, Republic of Serbia,
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European Commision; Publications office.
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ENTREPRENEURSHIP AS MARKET VALORIZED CREATIVE POTENTIAL
Dragan Gruevski
1
; Mirjana Cvetkovska
2
1
University “St. Kliment Ohridski” – Bitola, Faculty of Administration and Information Systems Management,
[email protected]
2
Project Coordinator, Foundation for Small and Medium-Sized Enterprises Development,
[email protected]
Abstract: The transition period of the society has left us richer for certain immediate experiences that will not
remain without influence on future generations. The transition from the old paradigm (socialist society) to the
new one (entrepreneurial society), is an uncertain and a long-lasting process, merely due to its radicalism.
Thus, this study aims at determining the quantity of entrepreneurial resources for those who manage and
operate organizations, institutions, and companies in the Republic of Macedonia, through determining the
extent of some of their personal characteristics that are considered part of the profile of any successful
entrepreneur. Inventive and creative potential, reliability, attitude toward change, attitude toward risk-taking
are the personal traits, in which we are interested in terms of management of human resources. It is said that
they broadly represent, but not fully cover the entrepreneurial personality. The research comprises a sample
of 132 respondents from different levels and activities in the Republic of Macedonia and the conclusions
have been reached according to their results on the TTS test by Eugene Rodsep, the test for determining
confidence, the MI 1 test for measuring the attitude toward changes, and the questionnaire assessing the
level and attitude toward risk-taking. The results of the research have shown that the managers in the
Republic of Macedonia possess, more or less, the tested characteristics, but they are very unevenly
distributed among individuals. In conclusion, this research aims to help managers of different organizations
to become aware of their “entrepreneurial spirit”, to help HR managers and the state authorities to develop it
and give directions for further development of entrepreneurship.
Keywords: Entrepreneurship, entrepreneur?s profile, inventive- creative potential.
1. INTRODUCTION
The period of transition of the society has left us richer for certain immediate experiences that will not remain
without influence on future generations. The transition from the old paradigm (socialistic society) into the new
one (entrepreneurial society), is uncertain and long lasting process, by the mere fact of its radicalism.
Collectivism, averaging, closeness, redistributive ethic, rigidity, maintaining of certain social justice, require to
be replaced with the values of the modern times. Market economy, pluralism of ideas and opportunities,
private initiative, entrepreneurship promotion, etc., are the clear objectives that we have targeted. From here,
the context of all contemporary developments, as much it seems hard to understand and accept, represents
confrontation of the individual with reality and often means certain discontinuity of living. Thus, on the one
hand, a process of rejection of the negative baggage occurs from the past, which is a measure of
convergence towards the new. And on the other hand, it becomes more clearly that this change requires
time - but not empty and unorganized, but filled with thought-out steps that will mean success. Hence, it is
understandable that the period in which we live is a challenge to professional profiles of different facets of
human activity. All of them from their own aspect are trying to observe and explore the entrepreneurship.
2. THEORETICAL FRAMEWORK AND DEFINITION OF THE KEY VARIABLES
Inventiveness and entrepreneurship are part of the key concepts, determinants of the development of any
society. They can be understood if presented as interconnected elements, characteristic for those individuals
who make change. Entrepreneurs are basically innovators, and innovation is the core of entrepreneurship.
Hence, the determination of entrepreneurship inevitably will lead by setting the remaining terms, which
constitute its essence. We start with innovation.
Innovation is a process of creating something new and as a phenomenon is a key determinant of the
development of any society. Certain need that appears in a certain area of the human life can become a
problem, inevitably requires adequate innovation (content, product, service).
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“The term innovation under the proposed definition of the OECD include transforming an idea into a market
product or service, new or improved production or distribution process, i.e. new way of social service.”
(Petkovski, ?. & Sulejmani, N., 2001:11)
“The innovativeness would mean:
? Renewal or expansion of the assortment of products and services, as well as, connecting the markets;
? Establishing new ways of production, supply and distribution;
? Introduction of changes in management, organization of work, working conditions and skills of the
workforce.” (Kralev,?., 2001:32)
Previous determinations of the innovation put the emphasis on the outcome of the process. In another
words, they focus on the consequences of it, while listing to what the innovativeness has led and where it is
needed. However, we think that for practical reasons that would function in a certain meaningful treatment of
the field of innovativeness fostering and development, in the determination of this term it is necessary to
include some other more fundamental determinants (processes, capabilities, features) that will allow more
accurate and bigger understanding of the innovativeness. Explaining the scheme of “the process of creative
problem solving” by defining the characteristics of the person who does it - creatively solve certain problem,
is the essence of the innovativeness, which, as was told, is the core of the entrepreneurship. (Figure 1)
How to?
Why?
Situation
Elements
Experience
Capabilities
“Armor”
Personality
Motivation
“curiosity”
Flexibility
Reorganization
Functionality
Sensitivity
Self-confidence
Prejudice
Referent frame
Proactive
Inventiveness
inventiveness
Figure 1: Process of creative problem solving (Gruevski, D., 2010: 119)
Hence, the phenomenon of creativity is not reduced only to a divergent production of ideas, but the process
of creative problem solving fully and very concretely explains the essence which may have practical
implications. As the professor Lj. Madzhar says: “In fact, the entrepreneurship by definition is capability and
current practice of solving completely new, very nonstandard problems on which from the previous
experience can be drawn only poor or no lessons.” (www.yurope.com / Republic, Sources of
entrepreneurship in transformed Serbia, pg.1)
Thus, is started from some emerging unmet needs, which by themselves represent a particular problem
whose solving through a creative process answers the following questions: “why”, “what” and “how to”, in a
certain constellation of structural elements of a particular creative person, acting in suitable conditions, leads
to innovation that he or someone else, the market, may valorize. In fact, entrepreneurship is only applied
and market valorized innovativeness - creativity.
Actually, if we recall the development of scientific thought and aspects that were crucial in explaining the
concept of entrepreneurship, given in the review made by professor Petkovski, we will get to the following:
“the risk taking”, as the main determinant of the entrepreneurs: ”the 'entrepreneur is one who takes risk,
unlike the person who provides the capital.”; “development carriers”, not only about “risk carriers”: “the
entrepreneur is an innovator and instigator of growth.”; “The entrepreneur has the ability for creation and
situation assessment.”; “The entrepreneur takes initiative, organizes social and economic mechanisms and
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assumes the risk of losses in the activity that he realizes.”; “The entrepreneur is one who sees the
opportunity for gaining a profit.” etc. At the end we will come to the determination which is most acceptable
and understanding to us – the explanation of Peter Drucker, who emphasizes “the economic valorization of
creativity”, as crucial: “Entrepreneurship is based on recognition of the opportunities for innovation and their
fastest market and economic evaluation.” (Petkovski, ?. & Jankulovska, P., 2001)
Of course, what is not completely clear is the answer to the question whether the process of creativity and
the process of its economic valorization is identical and is present as personal category in the same person
to call him entrepreneur or it is about two processes - one of generating creative ideas that later someone
else manages until their economic valorization? Or, we can speak about the entrepreneur only when the two
abilities (creating and management until the economic valorization of the creation), are clearly expressed?
Thereby, the answers to this question are probably already given by some authors. Yet according to us, they
are not clearly defined. For example, according to Ljubomir Madzhar: “Entrepreneurship is very
heterogeneous and complex mixture of ingenuity, the ability to predict or even presentiment about future
events, the ability to accept unusual and unconventional ideas, courage, persistence and other natural gifts,
and on the other hand it is the result of some favorable ambient conditions largely related to factors and
constellations that reduce the uncertainty.” (www.yurope.com / Republic, Sources of entrepreneurship in
transformed Serbia, pg.1)
On the other hand, indeed there are many ambiguities and misconceptions regarding the determination of
the essence of the matter, which have negative practical implications for the attempts to systematically
encourage and develop, reminds professor Vlajko Petkovic, who summarizing the various definitions and
understandings of entrepreneurship talks about misconceptions about the term:
First delusion: Entrepreneurship is not just forming a new company, but also introducing a new activity,
creating a new product or service. Entrepreneurial may be even those enterprises established in the past
century, if in their work are introducing major innovations which are of general importance and interest.
Second delusion: Relating of entrepreneurship to small commercial ventures. The large firms, even the
largest state enterprises, may be entrepreneurial. It is about making something new, unknown or not used in
the practice.
Third delusion: Refers to the ownership of the entrepreneur. The entrepreneurship can be developed in all
enterprises regardless of their ownership status.
Fourth delusion: It refers to the relating of entrepreneurship only to commercial enterprises. The
entrepreneurship also exists in the non-profit activities (science, education, health, information, etc.).
(www.ekof.bg.ac.yu / Economic chronicles, Entrepreneurship and entrepreneurs, pg. 1-2)
Besides the economic and social aspects in defining of the entrepreneurship, retention to the characteristics
of personality and behavior of typical entrepreneurs would mean special approach and contribution. Through
the literature can found lists of characteristics of individual entrepreneurs (profiles). They highlight various
characteristics among which dominate the following: high level of motive for achievement, small fear of
failure; strongly expressed sense of self-control and self-criticism; capability of dealing with uncertain
situations, great confidence, optimism, determination - commitment, great energy, emphasized individualism,
etc.
This, it can be said that for the entrepreneurial person is characteristic a certain set of manifesto and
recognizable behavior, which would amount to: orientation to goals setting, commitment to those goals,
persistence in their achievement; constantly decision making, calculated risk, acceptance of responsibility,
innovativeness.
Quite understandably, besides defining of the concept, the next crucial question that arises and which is of
special interest for each country refers to the possibility of a systematic approach to any organized attempt to
encourage the development of entrepreneurial consciousness and culture.
Namely, if we know that the development of entrepreneurship is an essential factor for acceleration of the
economy and rapid development of every country, every state must to encourage its development with
various measures. The factors - determinants that affect the development of entrepreneurship, various
authors divided into: “objective - subjective, internal - external, personal factors of the environment. Some
have divided them into: economic, psychological, sociological, legal, information, technical - technological.”
(Ibid, pg. 1-2)
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According to Professor V.Petkovic, it is more useful to elaborate the basic conditions for development of
entrepreneurship, which are exhausted by the existence of a) Free market; b) State deregulation in the
economy; c) Innovative culture, climate, tradition. Also other authors listed factors, activities that can be
placed in the previously mentioned, conditions.
“There are various forms of state aid for development of entrepreneurship. These include: providing legal
certainty to entrepreneurs, infrastructure and above all, stability of the economic system and democracy.
Also, one of the forms of state aid is the promotion of entrepreneurship and stimulating of young talents to
pursue a career in small business, the establishment of institutes and special forums, which should
contribute to removing barriers that hinder the development of entrepreneurship. Particularly, the state
should help in creating of a stable and reliable framework for managing.” (Ibid, pg. 4)
“It is necessary first to create conditions for competition in the economy, which represents the most favorable
climate for entrepreneurship development. That would mean building a market infrastructure, institutional and
public infrastructure, which includes primarily agencies and funds for development of entrepreneurship and
running a stable economic policy.” (Ibid, pg. 5)
On the other hand, the professor Lj. Madzhar lists the as well the international sanctions and the economic
blockade, as appropriate mechanisms and environment for entrepreneurship development. Of course, not
forgetting this phenomenon to be named as “often mistakenly targeted and exploited entrepreneurial energy
and resources”, characteristic for him is that he does not believe in the possibility of systematic development
of entrepreneurship through the forms of any formal education: “Unlike the management in the business and
other organizations, the entrepreneurship is not a factor that would thoughtfully and meaningfully grew
through learning and educational activities, least through some formal education, where courses in the area
of entrepreneurship would have a central place.” (www.yurope.com / Republic, Sources of entrepreneurship
in transformed Serbia, pg.4)
Of course, this attitude is extremely questionable and calls into question concepts and theories of education
and socialization. And precisely this dilemma opens the question that we have set as a problem. Namely,
who is an entrepreneur, those who are creative, or those who successfully and quickly manages a creative
idea to its economic valorization, or both? It seems interesting because both of them through education and
socialization processes surely can be systematically developed and encouraged.
3. PROBLEM – SUBJECT FRAMEWORK OF THE RESEARCH
The fact that all proposed activities, concepts, strategies, methods of development of entrepreneurship are
based on the assumption of the existence of individuals with their personal characteristics apart from others
and who can properly use such opportunities given and constructed, leads to the question of personality of
the entrepreneur and the possibilities for systematic action in the direction of fostering, encouraging and
developing certain abilities, traits, values, attitudes and beliefs from their early age through the education
system and families.
Because, the inventiveness, creativity is defined as the core of entrepreneurship, for which we said that it is
nothing else than “applied creativity found its market valuation”, we think that nurturing, encouraging and
maintaining the inventive-creative potential through thoughtful treatment represents a form of support and
development of entrepreneurship. On the other hand, also the confidence of the person, as characteristic of
the image for himself, the “self concept”, over which can be directly acted and it can be shaped through the
process of socialization and by imitation and which is mentioned as characteristic of the entrepreneurs,
represents a point of interest in this study.
The support and attitude toward change is another important dimension which is different for entrepreneurs
(initiators, leaders, innovators, non-conformists, flexible) and the others that hinder, and prevent the
development, and that is the goal of this research. Hence, it is focused on: determining the extent and
certain diagnosis of the inventive-creative potential, reliability, attitude to change and the attitude toward risk
taking of those who successfully manage, operate with organizations, institutions, companies in Republic of
Macedonia and for who exist indicators of their entrepreneurial trait, with the main goals:
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? To verify which of the personal traits that make “the entrepreneur profile” given in the literature are
present in individuals who manage their own business or manage with other organizations in Republic
of Macedonia;
? To set the foundation for building of an experimental model - system for encouraging and developing of
the inventive-creative entrepreneurial potential in children and adolescents of school and adolescent
age;
? To test the use value and validity of some psychometric instruments and procedures used in this
research.
4. METHODOLOGY OF THE RESEARCH PROCEDURE AND INSTRUMENTS
In terms of methodology, the research can be placed in the group of preliminary researches with the main
objective to verify, determine the level, to diagnose the situation and as such it is part of a wider activity
towards trying to establish a system to encourage and develop entrepreneurial awareness and culture where
the values obtained will be useful for certain profiling of the local entrepreneurs as the basis for future
recommendations and analysis.
In the research was used the test procedure by using validated instruments such as: the TTS test of Eugene
Rodsep (test for determining the confidence), the MI 1 test for measuring the attitude toward the changes,
and the questionnaire referring the level and attitude toward risk taking.
The test for measuring the attitude towards creativity – TTS is authorship of Eugene Rodsep and it has
been already used in research on creativity in Republic of Macedonia. It is quite extensive with 50 offered
attitudes and a few words that are chosen through several alternatives. The processing and scoring is made
according to a key on the given scale of creativity: from 21 to 14 / uncreative, from 15 to 29 / under average
creative, from 30 to 55 / average creative, from 56 to 84 / above average creative, from 85 to 109 / highly
creative , from 110 to 140 / extremely highly creative.
The test for measuring the confidence CC/C is adapted to the needs of some researchers in Macedonia
(K.Petkovski, 2001). Its metric features are not fully tested on our soil. It contains list of given statements with
which the respondent may agree or not, the test is easy to check and evaluate by elaborated key. It provides
rough indicators on the extent of one's confidence – non confidence on the confidence scale: from 0 to 15 /
unconfident, from 16 to 24 / confident, from 25 and more / very confident.
The test for measuring the reaction towards change - MI-1 (RTCI) is proposed as a simple and fast tool for
identifying the degree of acceptance / repulsion towards change (Smilevski, C., 2000: pg. 529). It contains 30
words referring the change. The preference of certain words that are most often associated with some
changes, allows using prepared key and scoring system, to calculate the certain score which then is seen on
a scale of acceptance of change: 40 and over / strong support, from 20 to 30 / moderate support; from 10 to -
10 / subjection to change, from -20 to -30 / moderate resistance to change; of -40 and less / strong
resistance to change.
The attitude towards risk taking recognized through direct response to the question “To what extent do
you take risk?” on a scale from 1-7, where the rounded answer no. 1 means: “I often take risks by exceeding
the positions that are previously defined, set out, agreed”. And the other extreme under no.7 means: “I
almost never take risks by not going beyond what I had previously scheduled, planned, conceived”.
5. DYNAMIC AND STREAM OF THE RESEARCH
As previously mentioned, the study is focused on sizing the entrepreneurial resource of those who manage,
operate with organizations, institutions in the Southwest region in the Republic of Macedonia (municipalities
of Bitola, Prilep, Demir Hisar, Krusevo, Resen), through determining the extent of some of their personal
characteristics that are considered part of the profile of every successful entrepreneur. Hence, the sample
consists of 132 managers, owners of private companies and a number of heads of public sector
organizations. The choice has been made based on several criteria: a) persons who started and run their
own business (in any area); b) persons who applied and participated in the realization of projects connected
with the promotion and development of entrepreneurship; c) people who were / are customers of business
start - up centers or other development foundations, associations, NGOs working in the area.
648
Given the nature of the research, the type of research procedures, the usual closure of the business world
for the researchers - especially with this type of research, the field work of the research was done on several
occasions and it is mainly done in part of the free sessions at several training, seminars, in whose realization
we participated. Hence, the overall process of collecting data, with certain interruptions, lasted several
months in 2010 and 2011.
6. RESULTS FROM THE RESEARCH
This research focuses on sizing the entrepreneurial resource for those who represent certain example of
successful individuals who manage, through determining the levels of their inventive - creative and
confidence dimension, as well as the attitude towards risk taking and acceptance of change.
After the conducted research, the results obtained are presented qualitatively and quantitatively, and is used
a statistical methodology for concluding by calculating the indicators of the descriptive statistics (measures of
central tendency and measures of variability and dispersion) (Table 1). These indicators clearly show the
extent to which each of the examined entrepreneurial characteristics is present among managers from
private and public sector in Macedonia, which actually is the aim of the study.
After processing of the results a ranking of the respondents was made, separately for each test and for all
tests together, collecting the achieved scores for each respondent. The results indicate that there are certain
variations in the range of respondents on different tests. Given the deviations in the scores we consider that
they are significant and show that very few (about 15% of the total number of respondents) are those who
achieved high scores on all tests. In others there is variation in matter that on some tests they achieved
extremely high, and on others - extremely low scores.
Table 1 Descriptive statistics’ indicators of the examined variables
TTS SS/S MI 1 Risk
Measures of central tendency
? - Arithmetic mean 60.64 15.13 17.42 4.09
?? – Median 60.00 15.00 20.00 4.00
?? – Mode 59.00 17.00 30.00 6.00
Measures of variability and dispersion
Min. – Minimum 29.00 5.00 - 30.00 1.00
Max. – Maximum 95.00 24.00 50.00 7.00
Range 66.00 19.00 80.00 6.00
?
2
- Empirical dispersion
122.03 16.04 381.10 3.43
? - Standard deviation 11.05 4.00 19.52 1.85
Kv – Coefficient of variation 18.22 26.47 112.04 45.25
Ka – Coefficient of asymmetry 0.41 - 0.09 - 0.34 - 0.11
n – Sample size 132 132 132 132
From table 1 is obvious that when speaking of the first variable - the attitude towards creativity (TTS) the
largest part of the respondents fall into the category of “creative above average” (? = 60.64). It is confirmed
by the graph (figure 2) in which 64% of respondents fall into this category. The relatively high value of
standard deviation, however, is a sign that the scores of the most respondents are different i.e. have major
deviations from the arithmetic mean value.
In the results for the variable - confidence (CC / C) the average score achieved ? = 15.13 indicates that
most respondents are on the limit between "unconfident” and "confident". Most respondents, 53%, were
unconfident. As for variability and dispersion can be said that exists pretty high variability, especially
considering the values of standard deviation, variance and the empirical coefficient of variation.
As for the reaction towards change (MI 1), the average achieved score ? = 17.42 indicates "moderate
support for change" as characteristic of most respondents. Majority of the - 46% have that attitude towards
change. From the range of sores it is evident that with respect to this variable there are big differences from
“strong support”, to “strong resistance” to change, confirmed by the fairly high value of standard deviation.
649
70
53%
62
47%
Confidence
Unconfi
dent
The indicators for the fourth investigated variable - the attitude towards risk taking - indicate that the most
respondents have average willingness to take risk (? = 4.09) on a scale from 1 - 7. Here, respondents are
fairly divided by “often taking risk” to “not taking risk at all”, for which speak the indicators of variability.
All this is concisely presented in the following graphs:
Figure 2 Distribution of “Creativity Figure 3 Distribution of “Confidence”
Figure 4 Distribution of “Reaction towards change” Figure 5 Distribution of “Attitude towards risk taking”
7. CONCLUSION
Given the fact that in Republic of Macedonia do not exist similar researches aimed at determining the levels
of these delicate personal parameters, our discussion will remain focused on the indications of some authors
from which indirectly can be drawn certain conclusions.
In addition, although it was not subject of this research, however lacking in other studies related to other
parameters that we measured, we intentionally focus on the exploration of "the achievement motive" realized
in our country. We say intentionally because:
? It is a subject that is of scientific interest since the time of socialism and offers certain comparison;
? It is known that it is a gained motive which is subjected to development and change;
? It is a key of the entrepreneurial profile and
? Its structure includes the attitude towards risk taking and towards change which are variables of our
interest. (McClelland according N.Rot, 1987).
Namely, the research conducted in the former Yugoslavia pointed to its low level, compared with levels in the
population of developed countries. (Havelka & Lazarevic, 1981) and (Nikolovski, 1991). But its more recent
measurements suggest that living in the transition has not remained without influence on the socialization of
new generations. Specifically, it is claimed that it has an upward growth and tend to be equalized with the
same levels set in the same population of the Western countries. (Donevska, 2010)
1
1%
43
32%
84
64%
4
3%
Creativity
Under
average
creative
Average
creative
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Hence, it appears that the issue regarding the risk taking, based on our results, as it was expected, the
propensity to take risk is average - ? = 4.09.
Finally, we can conclude that:
? The results indicate that it is necessary every eventual strategy for encouragement and development
of the entrepreneurial potential to contain adequate, adjusted contents and activities which will be
implemented under the supervision and guidance of specially selected and trained individuals -
synergists, mentors, especially in the structure of values and attitudes (attitude towards change and
risk taking). Even more, given the model and structure of the human capital in which, among other,
are distinguished the values for which the famous author and researcher in this field M.Rokic spoke
as for "cognitive represent of the connotative." (according Kolevski, N. & Kotevska, M., 1992: 331)
? There are individual cases in the group of respondents who possess personal characteristics
regarding all investigated parameters, which can be considered as positive role models that might try
to establish certain future cooperation, and the modeling system to encourage and development of
the inventive - creative and entrepreneurial potential in our environment.
? By registering of the relatively high score in the attitude towards creativity, in Republic of Macedonia
is reinforced the conviction that entrepreneurship is nothing but "market valorized creativity" and is
easily explainable with some contemporary concepts and models of the relationship of creativity with
other variables (Renzuli) .
Taking into consideration the opinions of the authors Petkovic and Madzar, regarding the definition of the
concept and its differential separation from something it is not, which is summarized in the text as "delusions
about the concept " we consider that the criteria" successful business " and even more "wealthy boss" often
used in the context of determining the level, development, directions, tendencies, etc. of the
entrepreneurship, are not fully appropriate in situations when is needed to identify or distinguish models of
people - entrepreneurs. Of course, this is due to the existence of many other intervening variables that is
obviously difficult controllable in an attempt to define "success, wealth," and ways of getting them. Hence, we
believe that our attempt: the models of successful entrepreneurs with who in the future we would like to
cooperate, on the way of fostering and development of the entrepreneurial awareness and culture, to choose
the group of those who meet a certain level of characteristics described throughout the literature is entirely
justified and appropriate. Of course, the variables emphasized in this research are one of the key in that
profile.
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Milenkovski, B. (2010). Entrepreneurship and Innovativeness – basic mechanisms of the knowledge based
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Creativity and Development” (Sexton et. all). Skopje: DETRA.
Smilevski, C. (2000). The challenge and mastery of the organizational changes. Skopje: DETRA.
652
FINANCING ENTREPRENEURSHIP IN TIMES OF CRISIS
– CASE OF SERBIA
Svetislav Paunovi?
1
, Maja Paunovi?
2
1
BBA - Faculty of Banking, Insurance and Finance, Belgrade, Serbia, [email protected]
2
Faculty of Management, Sremski Karlovci, Serbia, [email protected]
Abstract: The paper elaborates on the current situation in the field of financing entrepreneurial venture in
Serbia in times of crisis. The global financial crisis significantly hit the SME sector in Serbia, reduced the
liquidity and solvency of the enterprises, reduced the amount of available funding and loans for SMEs,
increased the cost of capital and generally made existing financing problems even more difficult. The number
of registered enterprises and entrepreneurs is constantly dropping, while the number of those ceasing to
work has been going up since 2008. In times of crisis, SMEs are more vulnerable, since it is very difficult for
them to downsize. Also, their weak financial structure is heavily dependent on external financing.
Financing entrepreneurial ventures became one of the key challenges entrepreneurs are facing today and
one of the major barriers to the rapid development of SMEs. Therefore, this paper aims to give an overview
of available instruments of financing in Serbia, as well as to emphasize missing options. Regarding debt
financing, since costs of credits and banking services in general are relatively high, SMEs are not profitable
enough to be able to afford significant levels of debt financing at the existing interest rates in Serbia.
Collateral requirements are still high, the procedures for obtaining guarantees and loan approval are too
long, and loan amounts limited. Loans, although available, are not accessible to SMEs. Equity financing is in
the initial stage of development. Venture capital companies are generally focused on large companies, while
the segment of informal investors (business angels), who can substitute bank financing or venture capital
at the early stage of a firm’s life cycle in particular, is the missing piece of the puzzle. Serbian entrepreneurs
are not quite familiar with the advantages and disadvantages of equity financing, and more training and
education are necessary in order to introduce this kind of financing. Investment readiness programs could be
an excellent opportunity to clarify business angels` expectations and entrepreneurs` perception of investors`
requirements. Confronted with this gap and realizing that the existing market failure inhibits the provision of
appropriate financing for SMEs, the Serbian government plays a very active role in providing subsidized
loans and grants.
The analysis was mainly based on existing surveys conducted by Serbian and international institutions. The
problems were analyzed from different perspectives using available statistics and we tried to provide relevant
inputs of value to Serbian SME policy makers, entrepreneurs, banks and potential investors. The
development of new financial instruments, especially in times of crisis, in order to support innovative SMEs
and provide access to equity-based investments, has been envisaged as the priority of SME policy in Serbia.
It is neccessary to develop regulatory and funding mechanisms for encouraging formal and informal venture
capital investments in SMEs.
Keywords: entrepreneur, SME, bank, debt financing, equity financing
1. THE LATEST DEVELOPMENTS IN SME SECTOR IN SERBIA
Since 2000 significant progress has been made in creating an institutional and legislative framework for
business development in Serbia. The SME sector became the most efficient segment of the Serbian
economy and the key generator of income and employment. In terms of SME developments, Serbia has
managed to catch up with other countries in transition.
Table 1: Key development indicators of the SME sector in Serbia
SME sector Share of SME sector
2009 2010 2009 2010
No. of enterprises 314.827 318.540 99,8 99,8
No. of employees 872.540 814.585 66,7 66,4
Turnover (mil. RSD) 4.380.545 4.677.933 67,8 65,3
GVA (mil. RSD) 778.108 817.417 57,1 55,9
Export (mil. RSD) 275.378 339.845 50,5 46,4
Import (mil. RSD) 627.147 680.549 60,9 54,3
Investments (mil. RSD) 259.796 ... 52,6 ...
Source: MoERD,NARD: Report on SMEs and entrepreneurship development (2011), adapted by autors
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Number of SMEs and number of employees generally has the positive trends in the period 2006-2009. It is
worth mentioning that the number of new jobs created in the SME sector in the period 2005 – 2008 was
higher than the number of jobs lost due to the restructuring of large enterprises (MoERD, RDB, RASMEE,
2009). In 2010 the SMEE sector accounted for more than 99% of total number of enterprises, 66.4% of the
employment, 65.3% of the total turnover and 55.6% of the gross added value of Serbian economy
(MoERD,NARD, 2011). Micro business entities - entrepreneurs and micro enterprises account for the highest
share in the number of SME sector entities, whereas small and medium-sized enterprises are dominant
according to number of employees, total turnover and GVA, total export and import.
Decrease of foreign and national demand and investments had a negative impact on the business
operations and the overall entrepreneurial climate. Slower development dynamics of the SMEE sector in
2009 and 2010, made the development problems of the sector more visible. The structure of SMEE, due to
dominant share of micro enterprises and entrepreneurs and insufficient number of medium-sized enterprises
(which are the key drivers in all developed countries), is unfavorable in a longer period of time and reflects
pretty slow transition of micro into small and especially small into medium-sized enterprises. Secondly,
prevailing position of low-tech industries is evident within the manufacturing sector (64% of all SMEs, 59% of
total number of employees and 55% of GVA were realized in low-tech industries) while, medium-high-
technology industries and high-technology industries encompass only 10% of all SMEs, 17% of number of
employees and generate 21% of GVA.
Table 2: Indicators of SME sector in manufacturing industry in 2010 by technological structure (%)
Industries
No. of
enterprises
No. of
persons
employed
Turnover GVA Export Import
Manufacturing industry – SMEs 100,0 100,0 100,0 100,0 100,0 100,0
Low tech industries 63,6 59,0 55,6 54,4 54,6 40,6
Medium-low-tech industries 26,4 24,1 23,5 25,3 24,8 24,9
Medium-high-tech industries 6,6 12,8 13,2 14,1 15,8 17,6
High-tech industries 3,4 4,1 7,7 6,3 4,8 16,8
Source: MoERD,NARD: Report on SMEs and entrepreneurship development (2011), adapted by autors
Relatively low level of competitiveness is crucial problem of SMEE sector in Serbia which generates
significant trade deficit. Low level of production and financial capacities produced increased investment
dependency of this sector on the external sources of financing. Preliminary results from the Business
Environment and Enterprise Performance Survey (EBRD, 2008) clearly showed increased reliance of SMEs
in Serbia on bank borrowing as compared to the findings of the same survey run in 2005. Bank loans are the
most important external source of financing SMEs (40%), whereas significantly less important sources are
loans from friends, relatives or partners, leasing, government funds, foreign loans, guarantees and donors?
support.
2. IMPACT OF FINANCIAL CRISIS ON SME SECTOR
At the present time, SMEs have been especially hard hit by the global crisis. These firms are more
vulnerable now for many reasons: not only has the traditional challenge of accessing finance continued to
apply, but new, particularly supply-side, difficulties are currently apparent (OECD Centre for
Entrepreneurship, SMEs and Local Development, 2009). There is the evidence that since 2008 SMEs in
Serbia are being constantly faced with a clear decline in demand for goods and services. In this context, it is
very difficult for micro and small enterprises as well as entrepreneurs, which are the dominant segment of
SME sector, to downsize business operations as they are already small. Two related factors were of special
importance for the SME sector: increased payment delays (which produced the decrease in liquidity) and
increased insolvency and bankruptcy rates (due to weaker financial structure, lower or no credit rating and
inability of SMEs to obtain short-term financing).
The number of registered enterprises and entrepreneurs has been constantly dropping, and the number of
business entities ceasing to work has been going up since 2008. The ratio of established and closed
enterprises, has been declining every year indicating less newly established enterprises compared to
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number of closed enterprises. In this context, constant negative trends can be found in decrease of birth
rates and increase of death rates of enterprises.
Table 3: Established/closed ratio and birth rate vs. death rate
Established/closed ratio Total
enterprises sole traders Birth rate Death rate
2006 7,5 1,7 22,3 10,6
2007 5,9 1,5 20,7 12,1
2008 3,7 1,3 18,0 13,2
2009 2,8 1,1 15,7 12,7
2010 1,0 0,9 14,2 14,9
Source: MoERD,NARD: Report on SMEs and entrepreneurship development (2011), adapted by autors
According to Survey of small and medium-sized enterprises and entrepreneurs (Republic Statistical Office,
2011), 60% of respondents are coping with challenges of the current economic crisis, among which there is
a small number of enterprises that do not feel the effect of the crisis (14%). There are 21% of respondents
faced with decisions on dismissal of employees, and as much as 19% of them are faced with uncertain
perspective in terms of further survival. Share of surveyed enterprises that feel stronger impact of the
economic crises was reduced compared to the findings of the surveys in the previous years (40% compared
to 51% in 2010, and 48% in 2009). Most of enterprises in 2011 intend to continue working with the increased
(44%) or the same scope of business activities (48%) in the following three years. Negative outcome was
considered by 8% of respondents, where 4% is related to reducing business activities, 3% to closing the
business and 1% to transferring the business to somebody else.
Table 4: Orientation and plans of SMEs in times of crisis
Business
expansion
The same
workload
Reduced
workload
Closing the
business
Transfer
business to
others
Micro 32,2% 55,6% 6,1% 4,7% 1,5%
Small 45,9% 47,2% 3,8% 2,0% 1,1%
Medium 58,7% 37,6% 2,4% 0,9% 0,5%
Entrepreneurs 29,1% 59,1% 4,6% 5,3% 2,0%
Total SME 43,6% 48,5% 3,8% 2,9% 1,2%
Source: MoERD,NARD: Report on SMEs and entrepreneurship development (2011)
In the similar survey conducted in 2006, there was much more enthusiasm among entrepreneurs: 66% of
respondents intended to expand their business, and 26% planned to keep the existing level.
Governments generally responded on financial crisis by three types of measures aimed at: supporting sales
and preventing depletion of SMEs’ working capital, enhancing SME’s access to liquidity and helping SMEs to
maintain their investment level (OECD Centre for Entrepreneurship, SMEs and Local Development, 2009).
Serbian Ministry of Economy and Regional Development in 2009 initiated the scheme and put in place anti-
crisis packages, through the Serbian Development Fund in cooperation with the commercial banks, which
enables subsidized loans for businesses covering investments, liquidity maintenance, financing of long-term
working capital, export activities and financial leasing.
3. FINANCING ENTREPRENEURSHIP IN SERBIA
3.1 Debt financing
SME sector has become an important segment of interest of banking sector and an increasingly attractive
customer group although the banks in Serbia have been traditionally cautious with lending to SMEs due to
high risks associated with the sector. Consisting of 33 banks with network of 2.432 organizational units at the
end of 2011, the banking sector in Serbia provides the range of both standardized as well as specially
tailored banking products/services. Banks became more aware of the importance of the SME sector in
Serbia and majority of them have separate departments dealing with SMEs. In this context, banks that are a
part of international banking groups have changed the terms of access, the risk analysis and risk
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management practices for SMEs. Concerning banks` operational management, the small enterprises
became the part of retail lending while the medium enterprises became the part of corporate lending. The
existence of financial infrastructure, such as credit Bureau of the Banking Association and the Solvency
Centre in the NBS, have been of major importance to allow introduction of modern credit risk appraisal
techniques.
Serbian banking system operates under very strict and tight legislations and regulations. Although the bank
lending conditions have significantly tightened, growth rate of credit potential of banking sector in Serbia had
increasing trend in 2008 and 2009, but slower than in the period 2005-2007, indicating the direct impact of
financial crisis. Deposit potential had a negative growth only in 2008 as a direct consequence of the first
wave of financial crisis.
Table 5: Indicators of banking sector in Serbia
2005 2006 2007 2008 2009
Number of banks 40 37 35 34 34
Growth rates of credit potential (in %) 40.0 26.2 38.7 21.4 7.2
Growth rate of deposit potential (in %) 35.2 52.2 45.4 -2.7 14.2
Source: NBS and ECB, 2010
From the bank?s perspective, profit potential from SME lending is high, but some obstacles, basically policy
related, were identified (http://siteresources.worldbank.org). The most serious obstacle is the legal and
contractual environment (including weak protection of creditors and property rights, problems with contract
and collateral enforcement, judiciary inefficiency and slow and costly bankruptcy procedures). Banks in
Serbia are trying to deal with these inefficiencies by demanding high levels of collateral for practically all
types of credit products. Macroeconomic factors related to regulations were also recognized as obstacle to
SME finance. Due to very tight monetary policy implemented by National Bank of Serbia and high cost of
compliance, the cost of credit and of banking services generally in Serbia has significantly increased. It is
widely recognized that SMEs are not profitable enough to be able to afford significant level of debt financing
at the existing interest rates in Serbia. In the field of bank?s policy, they frequently try to avoid providing loans
to certain types of SMEs particularly start ups and very young firms without track records that typically lack
sufficient collateral, or firms whose activities offer the possibility of high returns but at a substantial risk of
loss (OECD, 2006). In this context, loans although available are not accessible for SMEs in Serbia.
On the other side, SMEs? perspectives elaborated in the Survey on current situation, problems, and needs of
the SMEE (MoERD, RASMEE, SSO, 2009), conducted on a sample of 3,000 enterprises, provided insight
into the existing situation and problems encountered by the SMEE sector. Entrepreneurs found very limited
possibilities and poor assortment of sources of finance on the domestic financial market. Commercial banks?
offer is still not stimulatory enough and unreachable for the majority of SMEs. High interest rates are the
main problem regarding loan arrangements of small enterprises, banking costs as well as collateral required
are still high, the procedures of obtaining guarantees and approving loans are complicated and too long, and
loan amounts limited. Serbian Business Registration Agency and the Serbian Development Fund have a fully
operative system for the registration of movable assets allowing firms to use movable assets as collateral in
their efforts to access bank finance. Additionally, it should be emphasized that some opportunities for
reduction of collateral requirements through credit guarantee schemes exist in Serbia. The Serbian
Guarantee Fund and Vojvodina Guarantee Fund issue guarantees for SMEs, entrepreneurs, start-ups and
agricultural producers. Export credit and Insurance Agency is focused on export oriented sectors and
provides credit guarantee schemes. There is an idea that credit guarantee schemes should be privately
managed in order to achieve efficient allocation of resources through the incentive schemes.
3.2 Government intervention
Due to existing market failure that inhibits the provision of appropriate financing suitable for the SMEs,
Serbian government still plays an important role in supporting the SME sector. There is a number of
government-sponsored programs aiming to stimulate the SME development. Existing financial infrastructure
at the national level that directly or indirectly provides financial support to SMEs and entrepreneurs from
government sources consists of several institutions.
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Table 6: Government support
Institution Types of support
1. Ministry of Economy and
Regional Development
? Subsidies for quality certification, cluster development,
entrepreneurship development and innovations
? Subsidies within Program for stimulating investment in innovations in
Serbian companies
? Loans for development of enterprises and entrepreneurship in under
developed municipalities
? Loans for improvement of the quality of tourist products in SMEs
? Low interest rate loans for start–ups
2. Ministry of Science and
Technological
Development
? Subsidies for innovation projects
3. Ministry of Agriculture ? Financial support to entrepreneurs and NGOs in the field of
agriculture for developing safety and quality systems for agro
products in 2009 as well as for providing consultancy work.
4. Development Fund of
Serbia
? Low interest rate loans in order to facilitate SME start up and
development (including investments in new programs/innovations,
reconstruction and modernizing, and in working capital)
5. Development Fund of
Vojvodina
? Long term and short term loans for SME development and export
finance
6. Guarantee Fund of the
Republic of Serbia
? Approves and guarantees for company loans parts approved by the
banks and other financial institutions. Guarantee Fund approves
30% and the banks 70% of the loan.
7. Guarantee Fund of
Vojvodina
? Issuance of guarantees to banks as the collateral of regular bank
loans repayment by individual farmers, private entrepreneurs, small
and medium enterprises
8. National Agency for
Regional Development
(former Republic Agency
for SME Development)
? Low interest rate loans for start-ups (as implementing institution
within the government program)
? Subsidies for quality certification, entrepreneurship development and
innovations (as implementing institution within the government
program)
9. Export Credit and
Insurance Agency of
Serbia (AOFI)
? Short –term financing, export credit insurance, factoring, foreign
buyer financing, refinancing of a foreign buyer via commercial bank
and financing from other sources.
10. Serbia Investment and
Export Promotion Agency
(SIEPA)
? Subsidies for the participation of Serbian companies at international
fairs, creation of business linkages as well as organization of trade
missions for the foreign companies interested in doing business with
Serbian companies
11. National Employment
Service (NES).
? Subsidies for job creation – mostly for the ones listed in the NES`s
database as unemployed and other incentives for job creation.
As far as state-funded credits are concerned, the Development Fund of the Republic of Serbia is the
principal channel, providing (subsidized) financing for different programs related to economic, regional and
SME development, increasing competitiveness and related activities. This Fund has a number of credit
products including: Long term credits up to five years at an annual interest rate of one per cent, funded by
the Ministry of Economy and Regional Development; Short-term credits (6 months), with annual interest rate
of 3.5% from Fund own resources; Long-term credits of up to five years at 4.5% annual interest and with a
grace period of one year; Credits for financing development of production trades (craftwork) and services –
entrepreneurial credits (4 years) with 1-year grace period and annual interest rate of 1-3%.
657
Banks were very positive about the need for the Government to take an active role in trying to facilitate
lending to SMEs (http://siteresources.worldbank.org). Although the subsidized programs have provided
interest rates that were significantly smaller than that of banks, when asked to evaluate the Government-
sponsored credit programs, banks responded that the programs have little or no real impact on the market or
the SME development. One explanation for such an opinion can be that the total volume of funding available
from the government-sponsored sources is actually rather small to affect the market rates, which is partially
true. More importantly, there is no reliable impact assessment of the incentives to SMEs put in place by
Serbian government. It should be the very clear indicator of efficiency of SME policy in the context of
financing entrepreneurship. Therefore, it is necessary to design clear monitoring processes for all
government-sponsored programs aiming to finance and stimulate the SME development.
3.3. External equity financing – the missing piece of the puzzle
Financial markets in Serbia are generaly underdeveloped and there are limits for SMEs to use other financial
instruments coming from the capital market and corresponding financial organizations. The Law on
Investment Funds (2006) was a first step towards allowing the establishment of private equity funds in
Serbia. The OECD report “Progress in the Implementation of the European Charter for Small Enterprises in the
Western Balkans: 2009 SME Policy Index” (2009) states that several private equity funds are operating in
Serbia. But, these funds confine their investments to the acquisitions of stakes in larger Serbian enterprises.
Existing Law on Investment Fund does not impact substantially on innovative SMEs nor venture capital
companies investing in them.
Despite the importance of innovative SMEs, having in mind that they represent higher risk than traditional
SMEs or large firms, they face particular problems when attempting to access traditional bank loans. On the
other hand, SMEs are also disadvantaged having in mind that investors (who provide risk capital in return for
the equity share in the company), are generally focused on large companies. Financing innovative SMEs is
additionally complicated by the fact that these firms require different financing at different stages of their
development.
Business angels can be a substitute for bank financing or venture capital which can be difficult to attract
at the early stage of a company?s life. In contrast to bank finance, venture capital companies and business
angels do not seek scheduled repayment, but for a minority stake in the share capital of a company in return
for cash. Business angel, as private investor who brings not only capital but also experience and know-how
in company management at the early stage, is generally interested in the high-risk and high-reward business
opportunities that the venture creation offered. Business angel tends to operate on a smaller scale than
formal venture capital companies and probably concentrates more on start-ups than in expanding
enterprises. For these reasons venture capital companies and business angels are usually regarded as
separate categories.
Although, there is no formal representative association of business angels in Serbia, in the end of 2009, the
first informal network of business angels was established in Serbia, called “Serbian Business Angels
Network” (SBAN). SBAN provides an opportunity for entrepreneurs, through the web portal that serves as a
type of matchmaking platform, to place their business ideas and to search for potential investors. Investors,
business angels, members of the network, can see all the projects and browse through projects according to
their field of interest or value of capital needed as investment. SBAN also allows the investors a potential
joint investment. It is of vital importance for entrepreneurs in Serbia, through attending trainings,
conferences, workshops and lectures, to improve knowledge on designing business plans, project
documentation, marketing and finance as well as to improve their communication and negotiation skills in
order to prepare themselves for the business meetings and negotiations with potential investors. Investment
readiness programs will be an opportunity to eliminate some misunderstandings and to clarify business
angels` expectations and entrepreneurs` perception of investors` requirements. Also, it is neccessary to
promote the equity financing and to develop regulatory and funding mechanisms for encouragement of
formal and informal venture capital investment in SMEs.
4. CONCLUSION
Slower development dynamics of the SMEE sector in the times of crisis, made the development problems of
the sector in the fields of financing entrepreneurship venture more visible. Weak financial structure of SMEs
is heavily dependent on external financing and due to lower or no credit rating (especially in case of start-up
firms) they have limited external financing options.
Existing scope of financial support to SME sector in Serbia, although significantly improved, is not enough
specially in times of crisis to contribute to faster growth and development of SMEs and entreprepneuship.
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Regarding the debt financing, the cost of credit and of banking services generally increased. Although
available, loans are not accessible for SMEs in Serbia having in mind the SMEs are not profitable enough to
be able to afford significant level of debt financing at the existing interest rates in Serbia. Start-up businesses
are in particularly difficult position. Banks frequently hesitate or try to avoid providing loans to them because
they have no track records or sufficient collateral.
External equity financing in Serbia is in the initial stage of development. Venture capital companies are
generally focused on large companies, while the existing Law on Investment Fund does not impact
substantially on innovative SMEs nor venture capital companies investing in them. Informal investors
(business angels) can be the substitute for bank financing or venture capital especially at the early stage of a
company?s life. But, in Serbia this is the missing piece of the puzzle, and more traning and education is
necessary in order to promote and introduce the essence of this kind of financing. Very first initiative to
establish the network of business angels in Serbia was implemented via SBAN web portal enabling
entrepreneurs to present their business ideas and projects on one side and investors to better allocate their
investment decisions in the area of their interest.
Development of new financial instruments which will support primarily innovative SMEs and provide access
to equity-based investments, was envisaged as the priority of SME policy in the area of financing SMEs in
Serbia by the Strategy for Development of Competitive and Innovative SMEs 2008-2013. Besides providing
direct financial support to SME sector, it is also necessary, in the conditions of a financial crisis, to work more
actively on improving the knowledge of SME owners and entrepreneurs in the field of availability of funding,
information on how to access these sources as well as how to manage them efficiently.
REFERENCES
Deakins, D., Freel M. (2009), Entrepreneurship and Small Firms, Mc Graw Hill Companies
Dollinger M. J. (2003), Entrepreneurship – strategies and resources, Prentice Hall, Pearson Education
International
EBRD (2008), Business Environment and Enterprise Performance Survey. Retrieved from
http://www.ebrd.com/pages/research/analysis/surveys/beeps.shtml
Kaplan J.M. (2003), Patterns of Entrepreneurship, John Wiley & Sons, Inc
Ministry of Economy and Regional Development, Republic Development Bureau, Republic Agency for
Development of SME and Entrepreneurship (2009): Report on Small and medium-sized enterprises
and entrepreneurship
Ministry of Economy and Regional Development, Republic Agency for SMEE Development, Serbian
Statistics Office (2009): Survey on current situation, problems, and needs of the SMEE sector
Ministry of Economy and Regional Development, National Agency for Regional Development (2011), Report
on small and medium-sized enterprises and entrepreneurship
Ministry of Economy and Regional Development, Serbian Statistics Office (2011): Survey on current
situation, problems, and needs of the SMEE sector
OECD Policy brief (November 2006): Financing SMEs and Entrepreneurs
OECD, EC, ETF, EBRD (2009): SME Policy Index 2009 – Progress in the Implementation of the European
Charter for Small Enterprises in the Western Balkan
OECD Centre for Entrepreneurship, SMEs and Local Development (2009), Impact of the Global Crisis on
SME and Entrepreneurship Financing and Policy Responses
Torre A., Pería M.S.M, Schmukler S.L.(2010), Bank involvement with SMEs: Beyond relationship lending,
Journal of Banking & Finance 34 (2010), p. 2280–2293
World Bank, Finance and private sector development department Europe and Central Asia Region: Bank
lending to small and medium enterprises - the Republic of Serbia. Retrieved from
http://siteresources.worldbank.org
World Bank – Doing business 2012
659
MANAGEMENT PRACTICE, SUCCESS AND/OR GOOD PERFORMANCE
OF SMALL BUSINESSES
Slobodan Mari?
1
, Bojan Lekovi?
2
1
Faculty of Economics Subotica, University of Novi Sad, [email protected]
2
Faculty of Economics Subotica, University of Novi Sad, [email protected]
Abstract: One of the main goals of this paper is to define formal management practices, as well as to define
success, i.e. good performance of small businesses. Current dilemmas in the cited triangle are of immediate
interest because of different research results on this subject. Initiating critical thought on the subject creates
necessary conditions for further research within the framework of the defined field, increases the
understanding of the research problem and contributes to better dissemination and usefulness of future
research results. Considered from the aspect of future research intentions, this paper is a necessary step on
a defined path, that is, a necessary condition for further research.
Keywords: management practice, success, good performance, small business
1. INTRODUCTION
Numerous works published in academic publications, as professional journals, including research results on
management practice and success and/or good performance appeared about 50 years ago. At the
beginning, significant part of this sort of researches related to large enterprises, therefore, most management
practice was founded on methods and procedures developed for large enterprises, where operative and
financial goals were very precise and clear and could be very easily turn into concrete actions Simpson M.,
Padmore J., Frecknall-Hughes J., 2007). Recently, the realized balance and part of attention have been paid
to small business. This change of behavior relationships have been caused by the opinion and a very logical
attitude that management practice is the principal culprit for success/failure of large companies and
everything good for large companies is also good for small ones. This attitude is confirmed by many
researches where managerial practice was on the top as a critical factor for the success of small business.
Significant research space within the framework of this subject after five decades of current importance has
been present for opposite results of authors when researching in this field. The previous statement should be
accepted very carefully. Results of the cited researches can be hardly compared because there is some
dose of relativism when determining how an author understands the key variables of researches as
managerial practice, success, performance and indices for indicating these variables. The work, as part of a
wider research project will enable the adequate starting points and the realization of planned researches to
determine the interdependence of management practice and success/performance of small business. The
main result, the practical result, of these attempts should be the managerial framework in the form of
managerial recommendations for success, i.e. good performance of small business, as well as the adequate
way to disseminate these results with a view of advancing practice in the field of researching. It is also very
important to emphasize the necessity of clearing up the starting points and complete understanding of some
categories so the results of this research can be definite, unambiguous and completely useful. This means,
firstly, that we must determine precisely the categories of formal management practice, as well as to limit the
categories of success and good performance; these will be some of the key variables in the research.
2. EXISTANCE OF MANAGEMENET PRACTICE
As the beginning phase in the life cycle of an enterprise, i.e. development, considered from the aspect of its
size, small business, as the social-legal entity – societies have a significant distance in relation to medium
enterprises, when speaking on management practice and the level of its application. Management and
intention for the long-term existence, as well as the realization of its own mission make small business an
officially accepted entity of the economic activity. The existence of management orientation clearly divides
small business from the entrepreneurial undertakings, as visually explained in Figure 1. In the same way,
starting management practice, largely, qualitatively divides small business from medium enterprises, as the
next phase in development, where management is present at one higher, professional level.
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Figure 1. Differences between entrepreneurial investments and small business
management
Small business
management
S
t
r
a
t
e
g
i
c
o
r
i
e
n
t
a
t
i
o
n
Innovations
G
r
o
w
t
h
p
o
t
e
n
t
i
a
l
Entrepreneurial
venture
Source: Wickham, P, 2004.: «Strategic entrepreneurship», Prentice Hall, p. 103.
Therefore, small businesses divided from the segments of medium ones, where the category of micro
enterprises is turned off, represent one homogeneous entirety, i.e. one qualitatively precise and clearly
limited field of researching. As seen in the previous part of the work, as selected research field appears a
subgroup of small businesses where the category of micro enterprises numbering until ten enterprises is
excluded. Reasons are exclusively of the substantial character and they significantly exert influence on the
quality of researching. The basic set of small businesses without micro enterprises, defined in this way, is
completely compatible and comparable with the same segment of economic societies as defined in EU and
the surrounding countries. It is not the case in our country. In the analysis of interpreting and usability of
research results based on the realized compatibility of the research field, we get the broader field, in the time
and space sense, for medium enterprises dissemination. Except micro enterprises, the sub-segment of
medium enterprises is also excluded because small businesses have specific features in relation to the
medium ones, as for the attained level of management practice. As obliging in the next part is the precise
determination of key research variables in order to interpret causes, relationships and connections of some
results with a dose of reliability and usability. One of the main independent variables in this research is
certainly management practice in small businesses. There are different approaches and determinations in
the scope of this part of the research field. According to Wickham and the model illustrated in Figure 1, the
existence of small business management within entrepreneurial undertakings is confirmed with the strategic
orientation and it represents the basic indicator of management practice in small business (Wickham P.,
2004, p. 41). The substantial strategic orientation means the existence of the long-term determination with
small business for realizing business activities materialized in strategic goals, defined mission and business
vision. The presence of formal small business management is mostly identified with planned activities. The
dominant activity within the framework of strategic management is planning. Planning as the first phase of
management process is definitely the key subject of small business and management practice. Some
authors connect planning with the advancement of performance, others treat planning as the key factor of
success. Connecting management practice for planned activities exclusively points to some indications that it
is about the beginning phases of management system and its development in small businesses according to
the level of business activities of economic entities as small businesses. The following citations speak about
the importance of business planning for small business. If the beginner entrepreneur asks for advices to
advance business, the most often answer is “Start with planning” (Brinckmann et al, 2010). In addition, most
university in the U.S. A. having study entrepreneurship programs, teach students on the importance and
carrying out business plans (Brinckmann et al, 2010). Seventy-seven schools of 100 business schools in the
U.S.A. have courses for carrying out business plans (Honig, 2004). Many leading professors of
entrepreneurship consider business plan development as the most methodical unit in entrepreneurship
661
instruction (Hills, 1988). In many countries, business plan is one of the leading instruments for
entrepreneurship development and regional development (Russell et al, 2008; Lange et al, 2007). In
addition, in many countries, hundreds of people participate every year in the government instruction
programs for carrying out business plans (Brinckmann et al, 2010). Citing these attitudes in detail, we have
not yet defined precisely how we understand management practice in small businesses. According to the
previous question, there are two opposite schools: the planning school as opposed to the learning school
(Wiltbank et al, 2010). Supporters of the planning school emphasize that learning generally advances
efficiency, therefore the performance of small business (Ansoff, 1991). As the main components of business
planning, they cite strategic goals, strategies, evaluation and decision-making as part of control
implementation (Armstrong, 1982; Porter, 1985). Supporters of the learning school focus dominantly on
learning, strategic flexibility and resource control, not on the predefined behavior in the form of formal plans
(Mosakowski, 1997; Mintzberg, 1994; Waters, 1985). In addition, one of the researchers who connect
management practice of small business with the survival and good performance is Johan Maes et al (2005).
He cites, in his work, the following activities proving the existence of management practice and their
influence on financial performances in small business.
Figure 2. Rrelationships on performance
Financial performance
Owner–manager characteristics
Education +
Knowledge of cost accounting +
Financial knowledge +
Experience +
Company characteristics
Size +
Age +
Internal factors or management practices
Equity above minimum level
Percentage of time spent on administrative
affairs
+
-
Use of external professional advice +
Planning horizon +
A priori screening of clients +
Avoidance of cash credits +
Gathering of non-financial information +
Standard costing +
Actual costing +
Factors used in costing process +
Budgeting +
Quality control +
Supporting use of informatics +
Percentage of jobs as a subcontractor -
Source: Johan,M., Luc, S., Filip, R., (2005), Modelling the Link Between
Management Practices and Financial Performance Evidence from Small
Construction Companies, Small Business Economics 25: 17–34
The list of business activities is illustrated in Figure 2, being identified as the form of management practice,
unambiguously points to the beginning steps in building the management structure, which is typical of
enterprises in the beginning phases of development as small businesses. The cited activities in this research
cause the interdependence with financial performances and are very important for the survival of small
business. From our standpoint, only their presence and the form in which they appear are interesting. In this
way owners/managers confirm the thesis about intentions and efforts on the long-term survival, building the
organized business system; all this has the characteristics of strategic orientation.
2. SUCCESS AND/OR GOOD PERFORMANCE
In all the fields of social and economic engagement, participants try to realize success. Success is not
always the end goal in undertaking some activities, but it becomes the resource for realizing many other
goals. Success is something to which owners/managers/beginners of small businesses also gravitate. For
economic activity and enterprise management, success can be measured and expressed by a large number
662
of indicators, but an overall expression of success is realized by means of synthetic indicator called profit.
Besides this representative indicator, success can be considered in different business segments where
success can be presented in different ways as productivity increase in production, winning a new part of the
market, sale volume increase, introducing a new product on the market, increasing the number of
employees, production increase, etc. Most attitudes, presented in the literature considering success, define
successful enterprise in the following way: to be considered as successful, the enterprise must realize at
least average profit of its economic branch. However, as for small business, is it the same? For success in
an entrepreneurial undertaking, it is necessary to satisfy all the conditions so business activities can result in
successful business results. These conditions relate to knowledge, skills and capabilities of the entrepreneur
who, as a person, should have them, then good business ideas, as well as conditions ruling in the business
environment. There is no guarantee for entrepreneurs. Simply, there is no way to eliminate all risks
connected with starting small businesses, but the chances for success can be increased by good planning,
preparations, evaluation of strengths and weaknesses of potential owners/managers of small businesses.
Except of all these usual legalities, there are exceptions as many successful owners of small businesses are
who, in the age of adolescence, were team players, athletes, leaders at school, excellent students, never
considering status quo. However, it is quite usual to meet many successful entrepreneurs inclined to be
rebellious people, and inclined to taking risk, as well as those having tendency to be “off beat” and it is
considered as necessary for successful carrying out an entrepreneurial undertaking. Obviously, there is not a
well-known formula for success, but there are numerous open questions and dilemmas what it represents
and how to measure it in small businesses. To treat the problem of performance categories and success of
small business represents one of the key points in this work. There is not firm determination what the
previously cited categories mean, as there is a wide range of variables for measuring performance/success.
Most management practice is based on methods and procedures being developed for large companies,
where operative and financial goals are very precise and clear and which can be easily transformed into
concrete actions (Simpson M., Padmore J., Frecknall-Hughes J., p. 1). As for small businesses and the
relationship between management practice and success/performance (Rue and Ibrahim, 1998; Perry, 2001;
Gibson and Cassar, 2006; Simpson et all, 2007; Wiesner et al, 2007), there are some difficulties mostly
relating to objective measurement. But, in most researches, a significant part of success/performance of
small businesses is connected with management practice, illustrated in Figure 3. According to some authors,
success is interpreted as a specific aspect of performance (Brush and Wanderwerf et al, 1992, p. 159);
others equalize success with high performance (Brooksbank et al, 2003), while some authors bring it in touch
growth and profitability (Perren, 2000).
Figure 3. Relative importance of the factor of small business failure
Causes %
Lack of management skills 29.1
High interest rates 15.6
Economic recession – inflation/unemployment 11.4
Taxes 10.1
Competition 5.8
Money flows 5.8
Laws and other bylaws 5.0
High business costs 3.6
Source: Peterson,R., Kozmetsky, G., Ridgway, N.: « Perceived
Causes of Small Business Failures», American Journal of Small
Business, 2003., p. 15
Some authors connect small business success with the survival itself, i.e. avoiding failure. As for defining
small business failure, it may be the simplest way when it equalizes with its formal bankruptcy (Cochran,
1991). Using different sources of information on small business failure, there is a possibility to widen the
previous definition by the category of conscious retreat from business, including here small businesses that
stop working because of the loss financial resources, which also means bankruptcy, as well as conscious
retreat, leaving nonpaid liabilities to creditors (Dun & Bradstreet, 1999).
Because of different understanding of success and performance, and the way of measurement, there is the
necessity of precise limitations and defining. As for owners/entrepreneurs/managers of small businesses and
the wide spectrum of their goals, as quality independence and life style (Jennings and Beaver, 1997, p. 63)
663
speaks enough about the complexity of problems. The illustration of success by means of financial
indicators, as the total income per employee, profit per employee or the period of investment return is not
enough to apply in the context of small businesses, disregarding they are easy to measure because they
ignore the alternative criteria of success based on personal goals of owners/entrepreneurs/managers.
Personal goals of owners/entrepreneurs/managers should not be harmonized with business goals, financial
indicators do not often state them, and it additionally complicates the current situation. Some financial
categories, total income, profit, property, as quantitative statements are differently calculated because they,
in their structure, include different elements, and it makes the category of financial indicators and their values
relativistic. According to Frecknall-Hughes at al (2007), the main shortages of accounting and financial
indicators of performance are:
? Ratios give meaningless figures if the company has generated a loss;
? There is no absolute definition as to what constitutes a “correct” ratio;
? Given (ii), they may be calculated almost as one likes, which means that they are capable of
manipulation;
? Compounding (ii) and (iii), ratios are often just presented as figures, without any supporting
calculations or definitions;
? Ratio analysis deals only with financial numbers and does not take account of other factors which
may affect company performance; and
? If they are calculated over a period of years to provide longitudinal data, then the value of currency in
later years will not be the same as that of earlier years, owing to the effect of inflation, etc.
For the concept of small business success, i.e. owners/entrepreneurs/managers, we can say that it is a
subjective-absolute category as a measure in realizing the set goals of the company, which can be simple
and having one meaning; therefore, they can reflect individual, personal aspirations and motives.
Performance represents the relative-objective dimension of success as a multi-dimensional, qualitative and
quantitative, the expression of success compared to other enterprises or relevant groups of enterprises.
Performance itself represents the attained level of realization, i.e. the principal result of business activities of
the company, in this case, small business. Such defined limited categories of success and performance point
to the fact that the company can be successful in realizing the set goals, but also it finds itself in an
unsatisfactory level of performance- good, high, optimal), for instance , regarding to growth and
development, as a multi-dimensional term of success (Jennings and Beaver, 1997, p. 68). When the analysis
is oriented toward small businesses, as the pattern and the basic set defined within the framework of this
research, the main resource of mutual comparison to the dimension of relative success is certainly
performance expressed by selected indicators, which unambiguously represent this category. The selection
of indicators for stating the level of performance is certainly the key factor of success of all the efforts
expressed in this and similar researches, which have performance as an independent variable. Lumpkin and
Dess are very precise when researching the multi-dimensional nature of performance, deciding for traditional
indicators of growth, market participation, profitability, stakeholders? satisfaction, etc. (Lumpkin and Dess,
1996, p. 153). In this research, indicators of survival, growth, development and profitability are selected with
a view of measuring small business performance. The cited selection represents one consensus on the
subject of performance indicators, and it is seen in the research carried out by Murphy with authors within the
framework of 51 works, where he identified 71 different performance measures, classifying them into nine
principal groups, where growth and profitability are the most frequent (Murphy, Trailer and Hill, 1966, p. 16).
3. CONCLUSION
Based on the previous attitudes, determinations within the framework of this research are as follow.
Documented business plans do not represent strategically oriented management practice in small
businesses, but the formal planning is part of a strategic management process. Learning a lesson from the
previous sentence, for management practice, we mean planning and documented business plans, as well as
management activities in all the phases of management processes with formal documentation.
As for measuring and business result statements in small businesses, there is a significant distinction
between the categories of success and performance. For the category of small and medium enterprises, we
can say that it is a specific aspect of performance characterized by subjectivity and the personal dimension
of owners/managers/entrepreneurs, which should not be in accordance with realized business results, i.e.
performance. As a qualitative statement, it is very hard to express it by means of numerical indicators, and it
represents the basic shortage of financial success indicators, when talking about small business.
Performance measuring, as an objective statement of business success, does not point to the level of
664
realized business goals of owners/entrepreneurs/managers and it points to the need of inclusion of
qualitative indicators of the entrepreneur?s business success. If we want performance indicators to express
the real measure of business success and realized results in the form of selected financial indicators, some
mutual comparisons within the framework of some related groups of companies in the same economic
branch are necessary. It is also necessary that financial indicators are uniform to relative relationship of
selected categories and being compared and in this way; they make a comparable ratio structure. In any
case, the volume of management activities, according to all the phases of management process and the
degree of its formality in the form of written documents, is connected with success, i.e. small business
performance. The former researches partly and contradictorily covered such a defined problematic
orientation, opening the space for intentions set in this research.
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665
SMALL AND MEDIUM SIZED ENTERPRISES OWNER PROBLEMS AND
INFLUENCE FACTORS
Siniša Arsi?
1
, Marko Mihi?
2
Miloš Arsi?
3
1
Faculty of Organizational Sciences, [email protected]
2
Faculty of Organizational Sciences, [email protected]
3
Faculty for Strategic and Operational Management, [email protected]
Abstract: This paper describes the role of owners of small or medium sized businesses as the main pillars of
business functioning, and outlines potential impacts (positive or negative) on owners of SMEs. The objective
of this research is theoretical understanding of the problems SME owners face every day, and possible
identification of local SME owners (in Serbia) with foreign or domestic problems abroad. Specific methods
used in writing this paper were confrontation of views of various authors on the same issue, and the
synthesis of the authors’ own findings, or the findings of others. The authors have gained insight into the
quantity and quality of problems and factors affecting owners of SMEs, and the daily amount of tasks which
an owner has to deal with. The limitation of this study may be a lack of practical research, but it can certainly
be a good impetus for further work. The paper has revealed a strong correlation between owners of SMEs
and ways in which they are introduced to problems, or whether they will succeed in minimizing side effects.
This theoretical study may serve to existing or future entrepreneurs and researchers, to elaborate on the
topic.
Key Words: small, enterprise, owner, influence, business
1. INTRODUCTION
Concept of entrepreneurship now basically covers the design and organization of business activities with the
ultimate goal of profit making. An entrepreneur is a person who is constantly looking for changes, and
responses to changes in the environment, using them as an opportunity for further development.
Entrepreneurs innovate constantly in order to keep up with market conditions. Within-entrepreneur
(intrapreneur) is a person working in a company apart from other activities, and the company is actively
involved in innovation, as well as in revitalization / diversification of business. Entrepreneur has to feel the
freedom of action in order to explore and implement ideas, although the outcome effect of that work will be
greater than the whole company can withstand, but also the entire company has to take over the risk that
comes with such actions. Entrepreneurs usually play a major role in developing the economy of a country, or
to increase the GDP of a country. Social development of a country or region is also marked by the influence
of entrepreneurial activity.
2. THE ROLE OF A SME OWNER
In business there are no guarantees. There is simply no way to eliminate all risks associated with start-up
businesses - but it is possible to increase the chances of success with good planning, preparation and close
examination of business conditions. The owner must have a good idea to assess the strengths and
weaknesses of his small business. It must be carefully considered including all concerns, such as:
? Do you venture into everything yourself (i.e., whether each project, organizing, monitoring, just go
through the owner or someone else),
? How well is the owner getting along with the environment (the owners have to develop working
relationships with a variety of people including customers, vendors, bankers, lawyers, consultants, etc...)
? How well and how does the owner plan to organize a business (a good finance organization, storage,
distribution, production can help avoid many downfalls),
? Is the urge to own a business strong enough (business management can significantly emotionally
downfall on owners, so many owners burn out quickly, precisely in order to submit all the pressure, all
liability for (non) success of their business).
? How will the business affect the family of the owner (the first few years can be very difficult for the family
life of the owner, so it is important for family members of owners to know what to expect, but for the
666
owner it is very important to know that they will have the support of family members when it comes to
difficulties in business) (Morgan, 2007.).
Picture 1 (Saroj and Mehndiratta, 2009.)
Ideas to the new business owner can come from various sources. Some owners run the business and
develop existing ones, according to some of their personal interests. Any specialized knowledge or skill may
be the owners to indicate, and the possibility of turning it into a business. Through time, as companies
reduce, or require more external services (outsource), so the opportunities for entrepreneurs are born. Any
task or responsibility that large companies do not want, or do not have time to do it, can be the basis of the
owner of an SME to be involved in cooperation (and Saroj Mehndiratta, 2009.).
The role of the SME owner is to learn all aspects of his business potential, to make such a good knowledge
that could lead to good functional and business decisions. There are entrepreneurs who are very inventive in
their work, including developing new or improving existing products which can interfere with much larger
"players" in the market. There are some advantages in developing your own business. Again, the owner is
the main pillar of that development. It is less costly to start and develop their own business, rather than to
buy someone else?s which already had numerous disadvantages encountered. Most people who start their
own business are good at what they do, so it is easier for their colleagues to rely on them in the process of
developing a business (and Saroj Mehndiratta, 2009.).
When owner family members are involved in the whole story, then it is possible to develop their own
management style and approach, their own policies, ways of treating the problem (and of course there are
risks that cannot stop the realization of the process of business development) (Saroj and Mehndiratta, 2009.
).
The characteristics that a SME owner has (at least most of them) to meet are:
? Ability to take initiative - an entrepreneur is a person that identifies an opportunity, trying to extract the
best outcome from it, if he doesn?t have this capability, the entrepreneur cannot continue to progress,
? Self-confidence,
? Possession of leadership quality- an entrepreneur would have to be able to influence the behavior of his
employees so that they achieve the objectives of the organization,
? Ability to assume the risk- an entrepreneur would have to be able to analyze the opportunities and
calculate risk factors before taking the next step,
? Originality,
? The ability to predict- an entrepreneur must try to understand future trends and to plan for their outbreak,
? Creativity- an entrepreneur must be able to generate new ideas and designs, to depart from ordinary
products, and to open new markets,
? The inner drive to succeed- entrepreneurs set big goals in front of them, they tend to behave very
ambitious, removing obstacles to success,
? Dynamics- entrepreneurs recognize the importance of coming and staying "on top", and the only way to
achieve this is to change and grow depending on the situation in the region,
? High Motivation- high standards and objectives that need to be achieved by looking for entrepreneurs to
be motivated and to motivate their employees,
? Acceptance of constructive criticism-good entrepreneurs must know how to receive criticism, hurdling
obstacles are a part of the picture in business conduct , so they have to be treated, with analyticity,
? Good interpersonal relations-Entrepreneurs with good interpersonal relationships can more easily find
their way to market, to develop a network with its suppliers, etc. retailers. Good relationships help them
work more efficiently,
? Appropriate strategic planning-, medium-term and operational planning must be present to access
business opportunities in the best possible way, to be implemented (and Saroj Mehndiratta, 2009.).
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3. SME OWNER PROBLEMS
The work and the type of work performed, the fear of job loss or employment, fatigue, short deadlines, lack of
parent support, a sense that he cannot manage their time or work performance, inability to influence the way
or work organization, sense of alienation other employees of the company, a sense or feeling excessive
exploitness unused in connection with work tasks set before the owner, any gap in the work, monotony, and
numerous physical, biological, or chemical influences at work - these are all potential problems that arise in
entrepreneurial life.
On the other hand, Brixia (2011.) defines several key limitations that owners of a major problem and obstacle
to the initiation and maintenance of entrepreneurial ventures, including its:
? High tax rates;
? The inefficiency of tax administration;
? Advanced obtaining permits and licenses;
? Corruption;
? Poor infrastructure.
Stress is a daily companion, a certain feature of organizational life and largely associated with the execution
of duties and tasks at work, daily routine, relationships with other people, control and performance
management processes, as well as a variety of unplanned and unforeseen circumstances which business
owners face with, during their company?s life cycle.
While between all the employees in any organization exists a normal, natural, level of stress, the business
owner's situation is slightly different (Lovelace et al., 2004.). Directors of large systems generally are under
increasing pressure over the short-term problems, while the main stress of SME owners are about the long-
term planning, financial investment, job security, as well as the status of their business (Fassin et al., 2011.)
Leaders of organizations are more prone to experiencing different problems because of the position and
level of responsibility demands that are expected of them to meet. In order to create a healthy and motivating
work environment, the owner is the one who needs to develop leadership skills and autonomy of thinking of
other employees.
The practice of „self-leadership“ is the development of personal motivation and desire for achievement of
organizational goals, but in a way that will help reduce stress and increase job satisfaction or easier coping
with problems (Lovelace et al., 2004). .
The biggest motivation for almost every owner of a SME is a possibility of prosperity and growth of his small
business. According to Ward (2004)., owners of small and medium businesses cited six major problems for
long-term development of their business, which in some way motivate them in a positive (or negative)
direction:
• Maturation of business life cycle and increasing competitiveness;
• Limited capital for business growth;
• Next generation of business owners (if inheritance is between family members);
• Ownership changes dependently and inflexibility;
• Conflicts between the heirs;
• Incompatible goals of family values and needs.
4. INFLUENCE FACTORS ON SME OWNERS
The authors believe that the owners of large businesses seek to achieve the highest possible profit, while the
owners of small businesses do not think that way. The main fact is that the profit level is satisfactory and
constant, to maintain their business, and to preserve the pleasure of owning their own business (Sarasvathy
et al., 2011.).
What can spoil the plans is a bad tax system, and the inability to find and retain good employees and loyal
customers. The advantage of entrepreneurs is primarily in that they are doing what they love, and to affect
668
their satisfaction is knowing that they are independent, free to create their own money (Alstom, 2009.). On
the other hand, risk and responsibility is often a big negative impact on entrepreneurs. All this with long
working hours, or the lack of working time leads to stress.
What is not discussed here, that there are some very important reasons why entrepreneurs of the
enumerated factors of influence haven?t seen as something negative, but in spite of them engage in creating
their own business. For this it would primarily be required a study of the psychological characteristics of
entrepreneurs and the way of thinking where you might be concluded that these entrepreneurs are simply
people who love challenges and do not like to be a self-controlled part of the organizational hierarchy.
Lussier and Halabi (2010). Cited several factors as reasons for failure of a family business, of which the most
important are:
• Planning-companies that do not have a business plan are more likely to fail than those that have (a
business plan),
• Parents (owners) whose parents had had a family business are less likely to experience failure of their
business,
• The age-young people who start businesses are more likely to experience failure than older colleagues,
• Management-owners who have no experience in management are more prone to failure than colleagues
who have managerial experience.
As for relations in firm size and success of entrepreneurship is the only association seen in the influence of
the duration of a company. Entrepreneurship has a stronger and better impact on the longevity of small
businesses, while the major factor in the company is weaker and negative (Ha-Brookshire, 2009.).
The family business firms can be improved and some of the factors that influence is not directly related to the
job. This is primarily done to reduce tension among family members, living in families with two or three
generations, devoting more time to the detriment of business and holiday hiring temporary help, during a
turbulent period. The family has a stronger impact on business than on the family business (Olson et al.,
2003.).
Threats, such destabilization operations, which follow from the specific personalities owners of SMEs, can be
activated by the subjective, knowledge, personal values and beliefs, perceptions and experiences of the
owner as an individual who cannot easily be replicated, and are therefore an important factor (un) successful
business (Kor et al., 2007).
Factors threats coming from outside are often unable to reach owners and small businesses would usually
resort to strategies of avoidance, is often faced with insufficient institutional support their enterprise. But also,
too little capacity resources is an important factor that may determine the success of an SME (Welter and
Smallbone, 2011.).
So often employed in an MSA does not really look favorably on new employees who come right out of
college in business, since they are a potential threat due to a higher level of education. Employees of SMEs,
if they are employed because of nepotism, additional pressure will be done by the owner to not only recruit
graduates (Gao et al., 2011.). SME owners need to further fight against it, because otherwise it could not be
expected to increase the capacity of its business.
A Portuguese study has proved the claim that the slowdown in the rate of growth of SMEs is under the
increasing influence of the economic crisis, but because it affects the growth of large companies (Amorim
Varum and Rocha, 2011.), and therefore the economic crisis should be appreciated as an important factor
impact on SMEs also.
Companies that do not invest in R&D projects will inevitably experience a nearly complete or total slowing
growth rates. As an additional factor appears the lack of quality human resources to participate in such R&D
projects, while larger firms have such capital (Macas Nunes et al., 2011.)
There are several major factors that influence the barrier to a stable rate of growth of SMEs, such as the
inability of entrepreneurs to establish an appropriate organizational model in the company. This
organizational model would imply a professionalized management system and development of methods,
techniques and processes to support development (Barbero et al., 2011.)
669
Several factors influence the operations of an SME should be further explored in other papers, as well as
their role in everyday relations in such organizations. Factors which influence the following (below), can in
some cases represent a barrier to normal functioning and development of SMEs, but also can contribute to
stimulating the owners of SMEs in certain situations for the sake of achieving greater efficiency.
Motivation is any influence that causes, or maintains a direct human behavior. In the management of family
SMEs, motivation plays an important role because with a higher level of owner motivation they are trying to
meet the desires of their business environment, so that it contributes to the realization of various benefits for
the owner.
There are various emotional (psychological) factors affecting the owner of small or medium businesses,
which will certainly affect his motivation for running the business. They can be classified into:
• Autonomy in work;
• The power of decision making;
• Challenges;
• Continuity of operations (Zellweger and Astrachan, 2008.).
For the owner of an SME, he may be affected by the three environments:
• Home;
• Business;
• Personal career flow.
Considering the first environment, it is related to marital status, number of working hours, responsibilities
towards children, living expenses, work at home. The business environment influences the owner through
the available resources, employee behavior and performance of employees. The third environment that may
affect the owners of SMEs is reflected in the transition from economic inactivity into entrepreneurship, family
business management experience, and age (Jayawarna et al., 2011.)
5. CONCLUSION
It is difficult to choose what problems most affect a small business owner. That is, each owner is dealing
during his career in the SME sector, with various problems, never (or seldom) repeating the same problem.
What is really possible to show, that's the way the owners can deal with these problems. There is no
universal pattern, but there is a certain mindset, that can overcome most of the risks and problems. As for
the impact, the implications are too many and it would be pointless to compare them, or even by a classified
order. But what can be concluded, it is that any "attack" on the company, each factor of instability-is surely
preventable, or at least can be mitigated so it makes no major problems. This story can be repeated in circle
until the owner of the company, as the main pillar of the link between all sectors of the company, can fit in
and integrate the parts into a whole so that external influences are not the reason for the decrease in profits,
or business-shutdown.
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671
ENTREPRENEURIAL TEAM IN NEW VENTURE CREATION: THE KEY CHALLENGES
FOR MANAGEMENT
Verica Babi?
1
, Jelena Eri?
2
, Jelena Nikoli?
3
1
Faculty of Economics, University of Kragujevac, [email protected]
2
Faculty of Economics, University of Kragujevac, [email protected]
3
Faculty of Economics, University of Kragujevac, [email protected]
Abstract: When starting a new venture, entrepreneurs usually select founding team members with skills and
expertise closely matching their own. In choosing cofounders it is wise to focus on complementary aspects
when it comes to the knowledge base, but on similarity in terms of personal characteristics and attributes.
Once the appropriate founding team is assembled, these individuals must work together effectively if their
venture is to succeed. The main research focus of this paper is to analyze principles of building effective
business relations within a new venture along with establishing an optimal team structure and size. As a new
venture grows and the number of employees rises, new skills and capabilities enhance performance.
Founding team diversity is prerequisite to innovativeness and creativity that result in a successful new
venture.
Keywords: entrepreneurship, team, new venture, management
1. INTRODUCTION
People tend to feel more comfortable to work and cooperate with persons who are similar to themselves in
various ways, and therefore, entrepreneurs usually select cofounders with skills and expertise closely
matching their own. Nevertheless, since variety and diversity of knowledge, experience and training is
significant advantage to new venture, it is reasonable to select members of founding team on the basis of
complementarities rather than similarities. In other words, in choosing cofounders it is wise to focus on
complementary aspects when it comes to knowledge base, but to similarity with respect to personal
characteristic and attributes. In order to choose excellent cofounders, entrepreneurs must perform the task of
social perception well, which is not an easy task since others don?t portray themselves accurately, but
engage in various tactics designed to impress and present them in favorable light. Therefore, entrepreneurs
should be careful when choosing cofounders and double check information provided by other contacts. They
often confront deception, or other efforts by others to actively mislead them, and if they make wrong decision
when choosing founding team, that can lead to disastrous results.
Once the appropriate founding team is assembled, these individuals must work together effectively if their
venture is to succeed. One of the key ingredients in establishing strong working relations is development of
clearly defined roles, responsibilities and jurisdiction. Because of the self-serving bias and other factors,
individuals often perceive that they are not being treated fairly by others – that they are not receiving a share
of rewards according to their contributions. Reactions to such perceived unfairness range from demanding
more or doing less. Because of potential problems that may arise, entrepreneur should take active steps to
assure that all the members of the founding team feel that they are being treated fairly. Another ingredient in
strong working relationships is effective communication. Entrepreneurs should deliver constructive criticism,
or otherwise he will face atmosphere of conflict and hostility (Baron & Shane, 2005, pp. 107-128).
As new venture grow, requirements for additional human resources increase. Often these new employees
are hired through the founding team? social network. Evidence suggests that the greater the number of
employees in new venture, the greater success, due to the quality of the opportunity being exploited. The
choice between hiring temporary and permanent employees is a complex one, since both offer advantages
and disadvantages. Ultimately, this decision must depend on the situation and specific circumstances.
2. THE ROLE OF OPTIMAL HUMAN RESOURCE COMPOSITION IN THE NEW VENTURE
CREATION
The beginning of new millennium brought knowledge economy, globalization of competition and increasing
expectations of Internet commercial use. During the last decade initial dot.com enthusiasm has dwindled and
investors realized that there is much more sense to invest in industries where intellectual property rights are
legally protected and consequently new ventures based on radical entrepreneurial ideas came to the spot of
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the light. The most prospective ventures are in the field of high technologies since they bring investors
multiple returns on investment, either through acquisition or initial public offering (Stojanovi? Aleksi?, Šapi?,
& Eri?, 2010).
Schumpeter was the first one who described new venture concept in 1934. arguing that “entrepreneurs have
need to compete; they are overwhelmed with activities providing encouragement for launching radical
innovation that cause irreversible turn of events and structural market change” (Busenitz, 2007, pp: 183-
185). Entrepreneurial new venture creates added value through innovation of products, services, markets,
technology, distribution channels or business strategy (Allen, 2009, p. 9). Ventures can have legal form of
independent enterprise or they can be incorporated in organizational structure as dependent business unit,
established as a result of corporate entrepreneurship process (Babic, Eric & Nikolic, 2010). Entrepreneurial
venture and small enterprise are two related concepts, but are not synonymous. Entrepreneurs tend to
disrupt the existing market equilibrium and present new products or processes that change the way business
works, while small business owners are focused to provide their own existence and lifestyle. The latter
should not be neglected because they are the backbone of any national economy. Those entrepreneurs are
emotionally involved with their company survival and growth, but only to the point of meeting personal needs.
The most successful new ventures were initially founded as a small business.
Employees create innovative ideas, overcome rigid organizational hierarchy, make necessary modifications
and strive to obtain key resources and support for their implementation (Stojanovic Aleksic & Eric, 2011).The
success of a new business venture depends on the quality of human resources: knowledge, experience,
skills, capabilities and the network of business relations of not only the founder but the team of his or her
associates as well. Although the largest number of ventures is started by teams, there are relatively few
attempts to explain the process of their effective creation and management. The team consists of two or
more individuals who jointly create a venture they have a business interest in. (Kamm, Shuman, Seeger, &
Nurick, 1990). There are two reasons for which they are the subject of research; the first one is that new
ventures are much more frequently led by teams rather than individuals, and the second one is that their
performance is determined by the successfulness of the venture.
Several significant researches conducted in the 1990?s showed that 55-80% of the analyzed ventures had
been founded by teams (Kamm, Shuman, Seeger, & Nurick, 1990). The key reason lies in the fact that, in
high-technology activities, it is not probable that an individual has all the knowledge needed for a venture to
succeed. Recent researches (Davidsson, P., 2006, pp. 33-36), conducted by Ruef, Aldrich and Carter have
accounted for the fact that 52% of new ventures are started by teams. In the largest number of cases, 74%,
teams consist of two members, and in less than 5% of the cases, they consist of five members. Even 53% of
teams of two members are spouses or partners, 18% are family members and only 15% of the ventures
were founded by partners only related to each other through business. The conclusion of this research was
that it is much more probable that a new venture will be started by a team rather than an individual. A similar
research was conducted by Chandler, Honig and Wiklund, and they came to a conclusion that there is
reverse proportionality between the number of new members joining a team and the time needed for a new
venture to reach the desired profitability rate. The offered explanation is based on two theses: first, when a
new member joins a team, it is a disturbing factor for the venture?s functioning, and second, the venture has
already been facing difficulties since it needs a new member, so, for that reason, profitability also suffers.
Teams have a much greater chance for success than solo efforts for a variety of reasons (Allen, p.154):
? The intense effort required of a start-up can be shared;
? Should any one team member leave, it is less likely to result in the abandonment of the start-up;
? Founding team covers major functional areas (marketing, finance, operations);
? A skilled founding team lends credibility to the new venture in the eyes of lenders, investors, and
others;
? The entrepreneur's ability to analyze information and make decision is improved besause she or he
benefits from the varied expertise of the team, and ideas might be viewed from several perspectives;
In psychology, an individual is known to tend to feel the most comfortable when being with people similar to
him- or herself. Such a tendency when the starting of a new business venture is concerned can have its
negative side. If people are similar, that means their knowledge, experience and attitudes significantly
overlap. Furthermore, this means that they lack the same or almost the same skills. The optimizing of the
673
personnel structure imposes a need for achieving complementarity by means of harmonizing various
personal and business capabilities of all participants in a venture.
Finding partners with complementary skills means making sure that the team is not overloaded with people
who all have the same expertise. A team of three engineers or three finance analysts is generally less
attractive then a team with more diverse skills. Teams with more diverse skills make better strategic choices
that lead to higher performance. In terms of skills sets, heterogeneous teams also tend to handle the
complexity of new ventures better. Five factors that have great significance in team composition are: a)
homogeneity, or similarity; b) functionality, or skills diversity; c) status expectations, or cultural bias; d)
network constraints, or social contacts; e) ecological constraints, or geographic distribution (Allen, pp. 155-
157).
When the start-up effort is collective, with a team that displays diverse capabilities, the new venture is more
likely to be innovative. Evidence suggests that firms founded by heterogeneous teams are more successful
than those founded by individuals (Bird, 1989). Lead entrepreneurs drive the development of new venture
and serve as guardian of their vision. They have the ability to see what others cannot see and to identify
ways to change marketplace rather than simply recognize an opportunity.
To make a perfect match between an entrepreneur as the initiator of a new business venture and right co-
workers is a huge challenge. There are several activities (Baron, & Shane, 2005, pp. 107-127) which he or
she must carry out to create the optimal personnel structure for the venture. First, they must consider if they
are in need of partners to start their venture and which characteristics and knowledge they should possess.
Second, they must start the process of searching for partners, which is a very complex process. Third, they
must establish effective communication between their partners and other employees, based on clearly
demarcated authorities and responsibilities and the principle of impartiality in awarding as well. Four, they
must make a decision if and on which principles they will seek external consultants? help.
An entrepreneur must have the skill of social perception, i.e. assessment of one?s personality, because only
then can they recognize other people?s potential and capabilities they need. That would not be difficult unless
people had a tendency to show themselves in their best light, which usually does not coincide with their real
capabilities. They hide their feelings and motives with an aim to impress their collocutor. For that reason, an
entrepreneur must separate the external impression a potential partner has made on them and its essence.
To be able to know what to expect from other team members, an entrepreneur must reconsider personal
values and capabilities they are bringing to the venture. There are two reasons for this to be a challenging
task. First, it is not always clear why an entrepreneur behaves the way they do. He may want to include
someone in the team because he or she feels attracted to that person because of his or her personality, but
could not provide a precise answer to what it is he or she exactly feels attracted to in that person. So, there
are factors that have an influence on the behaviour of an entrepreneur which he or she is not fully aware of,
which makes the self-evaluation process more difficult. The second reason is that an entrepreneur can
become aware of his or her characteristics only through interaction with other people. An entrepreneur as
leader should focus him- or herself on complementarity when his members? knowledge, skills and experience
are concerned, and on similarity when their motives and personal characteristics are in question. The
effectiveness of every type of leader behaviour directly depends on the nature of the situation and factors
such as characteristics of the task, organization and employees (Stojanovi? Aleksi?, Eri?, Šapi?, 2010).
3. CREATING THE FOUNDING TEAM
The manner in which an entrepreneur creates a team is an interesting piece of information for potential
investors (Allen, 2009, pp. 153-158). New ventures are analyzed by investors from the aspect of their
personnel structure. From their viewpoint, the team whose members have already had an opportunity to
cooperate is of a better quality than it is the one being formed for the first time. An entrepreneur tends to
achieve a high degree of business control and is worried about a possibility that he or she might employ a
wrong person in the key position, so, for that reason, they are frequently not ready to employ staff who have
experience in management positions. There are also those who are aware of their shortcomings and tend to
form their team so that it consists of individuals complementary with each other with respect to their skills.
The venture must have a strong management team, dedicated, competent, dynamic, and persistent, with
relevant experience and highly flexible (McAleese, 2004, pp. 182-183). The investor would rather invest in a
worse idea implemented by first-class management team, than vice versa (Eric & Nikolic, 2010). If team
lacks certain competencies, investor provides assistance in overcoming difficulties (Gladstone & Gladstone,
2002, pp. 54-55).
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Some authors (Franke, Gruber, Harhoff, & Henker, 2006), came to a conclusion that, when they are
supposed to make a decision whether to invest their capital in a concrete venture, investors are significantly
influenced by the so-called similarity hypothesis, defined by psychologist Burne in 1971. In brief, it says that
the bigger the similarity, both professional and personal, between the founding team?s members and the
investor, the bigger a probability that a favorable decision on investing in a new venture. That means that the
process of accessing external sources of financing has its psychological dimension as well, and an
entrepreneur should have the dimension in view.
When creating a team, two sorts of problems appear: first, there is a possibility of a collision and conflicts,
and second, a problem can arise with a need to define the formal organizational structure and hierarchy of
decision-making. This process is additionally complicated when several partners found a venture. There are
several factors that determine the quality of a team (Barringer & Ireland, 2006, pp. 127-129) on the basis of
which differences between founding teams are possible to identify according to several different dimensions:
their scope, the type of the venture, the pace of accession and the individual members? contribution.
A more recent research (Beckman, 2006) accounted for the fact that the composition of a team has an
influence on whether exploitative or explorative behavior will be favored within the framework of a venture.
Team members who previously worked together in another company know and understand each other well
and have routine performance schemes, and for that reason they prefer a rather passive exploitative style of
behavior. Contrary to that, team members who did not previously directly cooperate with each other on a
business basis bring fresh ideas in a venture, force creativity and promote the explorative type of behavior. It
can be concluded that there is a strong correlation between team members? previous experience and the
degree of innovativeness promoted by organizational culture, so that a higher degree of knowledge and
unique competences dispersion contribute to the creation of the ambience of innovativeness and change.
Analysis 161 of a high-technology company from the Silicone Valley (Beckman, Burton, & O'Reilly, 2007)
only corroborated these statements, proving that higher efficiency is achieved by teams composed of
members who used to work for a larger number of employers and have more diverse working experience.
These differences lead to stimulating constructive discussions amongst the members reducing the probability
of rash decision-making without considering relevant alternatives. Apart from that, the research suggests that
the structure of the founding team has an influence on the capability of carrying out critical activities, such as
the acquisition of the venture capital.
Although for a long time an attitude prevailed that, due to a high level of turbulences, a team in high-
technology ventures should have the organic structure characterized by the adaptability and a low degree of
formalization, a more recent research (Sine, Mitsushashi, & Kirsh, 2006) proved the superiority of teams
characterized by a formal structure and high specialization in the venture founding stage. The shortcoming of
the theory laid down by authors Burns and Stalker in 1961 is reflected in that they did not analyze ventures in
their emergence stage, but in their mature stage, which significantly influenced giving advantage to the
organic organizational design.
Choosing partners to start new venture is one of the most critically important tasks that an entrepreneur must
undertake. It is a difficult task because it is often not possible to understand a person?s character until that
person has spent some time working in the company. The stressful environment of a start-up may bring out
traits and responses that were not apparent when the person was originally selected. Everyone from
investors to bankers to potential customers looks at the founding team of the new venture to determine
whether its members have the ability to execute their plans. Thus it is vital to choose partners who have
complementary skills and experience and who do not have a history that might be detrimental to the
company.
There is another advantage to forming a team. Because members of an entrepreneurial team often invest
not only their time but also their money, the burden of gathering resources is shared. The lead entrepreneur
also gains access to the network of contacts of the other members. This vastly increases the information and
resources available to the new venture and enables it to grow more rapidly. Of course, it isn?t always
possible or necessary to put together the perfect team from the start. The right person to fill a particular need
may not have been determined, or the right person may be too expensive to bring on board during start-up.
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3.1 Building effective business relations amongst team members
One of the latest researches (Eden, Hitt, & Ireland, 2008) led us to interesting conclusions when
interpersonal relations within the framework of a venture are concerned. They suggest that the entrepreneur
prefers to cooperate within a venture with his or her friends who he or she trusts; however, if that is not
possible, due to a lack of trust, they establish business relations with absolute strangers rather than
superficial acquaintances. These conclusions do, to a certain extent, coincide with the results of the research
conducted by Fracis and Sendberg (2000), where they suggested that stronger interpersonal relations
amongst the team members lead to more efficient decision-making, a higher level of participation, as well as
the domination of cognitive rather than affective conflicts. Besides, top management teams characterized by
unique dynamics and interpersonal relatedness, family ties among other relations, lead to a higher cohesion
and a stronger strategic consensus in view of the future of the venture (Nordqvist, 2005, pp. 285-290).
Although there is no universal recipe how to build a team who will operate successfully, yet there are several
aspects (Barringer & Ireland, 2006, pp. 129-131) which, in that view, can represent a stimulating but also
limiting factor:
a) The demarcation of authority and responsibility – the main source of conflicts amongst employees is
a lack of clear authorizations. If it is not clear who has the decision-making authority, then probably
there will be conflicts. When founding a new venture, partners should share responsibility according
to their competences and skills, which means they must stick to the complementarity principle.
b) Showing respect for the principle of impartiality – psychology has proved that every individual has a
tendency to give themselves credits for work done successfully, and fault others for a failure or
attribute it to external factors which could not be influenced. So, he concludes, their performance is
not adequately valued comparing with the results of other employees. The entrepreneur must
seriously approach this problem and promote the principle of distributive impartiality reflected in that
the employee?s contribution/award for performance ratio must be the same for all. A balance among
different interests must be found and clear rules for all must be established.
c) Effective communication – this is the key factor in the creating and maintaining harmonious business
relations. Constructive criticizing other people, based on respecting their feelings and dignities,
deprived of aggression and antagonisms, subjecting no one to condemnation and offering concrete
proposals for improvement are always beneficial for all team members. A functional conflict is
desirable because it brings to surface different ideas, motivates employees to observe things from
another person?s viewpoint and leads to more quality business decisions.
Although there are no perfect founding teams and no fail-safe rules for forming them, effective founding
teams tend to display the following characteristic (Allen, 2009, p. 157):
? The lead entrepreneur and the team share the same vision of the new venture;
? The team members are passionate about the business concept and will work as hard as the lead
entrepreneur to make it happen;
? One or more members of the founding team have experience in the industry in which the venture is
being launched;
? The team has solid industry contacts with sources of capital;
? The team?s expertise covers the key functional areas of the business: finance, marketing and
operations;
? The team members have good credit ratings, which will be important when the firms seeking
financing;
? The team is free to spend the time a start-up demands and can endure the financial constraints of a
typical start-up.
3.2 Founding team extension
The entrepreneur and his or her team make maximal efforts, use their maximal knowledge and capabilities to
provide the functioning of their business venture. However, it is impossible to create a team capable of
having all necessary knowledge and information at any moment, which means that, sooner or later, the team
will need services provided by experts and external consultants (Hisrich, Peters, & Shepherd, 2008, p. 282).
New ventures have significant difficulties when engaging quality personnel is concerned. They are unknown
to a broader public, they have not built their business image and credibility yet, which is the case with
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existing enterprises. It is a big shortcoming of theirs in the labor market, so entrepreneurs are forced to use
their own business contacts to come to quality personnel. There are two basic reasons why entrepreneurs
employ new personnel (Forbes, Borchert, Zellmer-Bruhn, & Sapienza, 2006): they either possess knowledge
their venture is in need of or personal traits perceived as desirable by the entrepreneur. They employ people
who they know in person or who have been recommended by another person, and, in that way, they save
their time, energy and resources. Besides, it is easier for them to persuade people they know of the quality of
ideas and their ideas? potential.
One of the key issues the entrepreneur has to deal with is the number of employees needed for the
functioning of a new business venture. Although a larger number of employees has obvious advantages,
brings new energy, ideas and information, there are certain negative sides as well, reflected for the most part
in high fixed costs from salaries. The engagement of new personnel is a sword that cuts both ways; in the
majority of cases, however, positive effects prevail. Neither is there any doubt about advantages from
engaging a team because the team has a plethora of various skills, experiences and talented people with
numerous professional contacts supporting and helping each other. There is general agreement about
positive correlation between the number of the employed and a probability that a new business venture will
be successful; however, it should not be taken for granted because it has not yet been proved empirically
beyond any reasonable doubt.
The entrepreneur has a right of discretion to make decisions on the optimal size of a team. Sometimes it
happens that a team is too small for the creation of a complex venture; however, it is more frequently the
case that entrepreneurs make an even more dangerous mistake when creating too big a team. With the
number of team members, the number of problems related to the functioning and interpersonal relations also
increases. One question is asked: if a smaller team is better, why do entrepreneurs make this mistake? The
uncritical application of the the-more-the-better way of thinking (Baron, & Shane, 2005, pp. 124-126) is one
part of the answer; the main reason, however, is of psychological nature and lies in any individual?s need to
share their responsibility with as large a number of people as possible. In that manner the team becomes
over capacitated and neither is capable of efficient operations nor does it demonstrate the necessary
originality and inventiveness in managing a new venture.
Additional question which the entrepreneur must answer is: which employees should be engaged
permanently and which ones from time to time? Both alternatives have their advantages and disadvantages.
To engage personnel from time to time is, from the viewpoint of the project principle, more profitable and
provides greater flexibility; on the other hand, of course, those employees are usually insufficiently motivated
and are not loyal, which may be a problem, especially if they have access to the venture-related sensitive
information competitors would like to learn about and are prepared to pay for. Permanently employed people
are much more dedicated and more loyal to the venture; however, their engagement is a bigger cost. So, a
choice the venture founder has to make is everything but easy. It is recommended that, in activities where
flexibility and the fastness of response are important, the entrepreneur should engage personnel he or she
needs at the moment, whereas in those branches where the environment is more stable, it is rather
advisable that they should employ people on a permanent basis.
When the new firm is in its infancy, it generally doesn?t have the resources to hire professional help such as
an attorney or accountant. Instead, it must rely on building relationships with professionals on an as-needed
basis. These professionals provide services and information not normally within the scope of expertise of
most entrepreneurs, pointing out potential flaws in the business concept. There is hardly any aspect of
starting a new venture that is not touched by the law. Attorneys are professionals who typically specialize in
one area of the law – taxes, real estate, business or intellectual property. Within their area of expertise
attorneys can: advise the entrepreneur in selecting appropriate organization structure and in preparation for
acquisition of intellectual property rights and licensing agreements; negotiate and prepare contracts; advise
the entrepreneur on compliance with regulations related to financing, etc. Another type of expert help
entrepreneur can get from an accountant. The accountant may set up the company?s books and maintain
them on the periodic basis, or may hire a bookkeeper to perform the day-to-day recoding of transactions.
Bankers, insurance agents, and other specialist today, more than ever will put the new venture in better
position to compete on the market (Allen, 2009, pp. 160-163).
A growing number of start-ups are forming advisory boards to provide them direction and guidance. An
advisory board is a panel of experts who are asked by a firm?s managers to provide counsel on the daily
bases. Unlike board of directors, an advisory board possesses no legal responsibility for the firm and gives
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nonbinding advice. Some firms have advisory boards for specific issue or need, such as to help identify new
products ideas or dealing with an emerging challenge (Baron & Shane, 2005, pp.134-137).
4. CONCLUSIONS
In organizations, there is never ending tension between need for stability, which implies effective
performance of current business activities as prerequisite for maintaining current competitive position, and
constant quest for new products and business activities that would provide superior competitiveness in the
future. Entrepreneurs in their quest for independence often attempted a new venture as soloist. In this way
they could retain sole ownership, make key decisions and not have to share profits. This approach is still
common in small lifestyle businesses and among craftspeople.
However, in today?s global and complex environment, most entrepreneurs find it necessary to start their
venture with a team. It is rare for an entrepreneur to conclude that she or he has all the expertise and access
to resources that are needed by the new venture. It is very important for entrepreneur to identify the essential
participants for the initial launch. Not everyone involved with the new venture has to be an owner or
employee. It is not uncommon to find that one or more members of an otherwise cohesive team had different
expectations for the outcomes of the business or their role in it. These differences must be discussed and
agreed upon before moving forward as a team. It will be far more costly in time and money, not to mention
relationships, if these differences are ignored and cause problem later when the business is growing.
Creating optimal team structure is still huge challenge, and relevant research studies are yet to be done.
Researchers must focus their attention more on how to manage heterogeneity and diversity within
entrepreneurial teams, but in a way that will not jeopardize innovativeness, creativity and lateral thinking.
How to select not best individuals, but individuals that will fit the best, remains the main issue and dilemma
entrepreneur will face in the future.
ACKNOWLEDGEMENTS
This paper represents the research result of the fundamental research projects: “Preclinical Research of
Bioactive Substances” funded by Ministry of Education, Republic of Serbia (41010) and “Contemporary
Management and Marketing Methods Application in Improving Competitiveness of Serbian Companies in the
Process of European Union Integration” funded by Ministry of Education, Republic of Serbia (179062).
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SMES INNOVATION AND GROWTH IN EU
Elena Nikolova
1
, Marija Gogova Samonikov
2
1
Faculty of Economics, Goce Delcev University, Stip, Macedonia
[email protected]
2
Faculty of Economics, Goce Delcev University, Stip, Macedonia
[email protected]
Abstract: The focus of this paper is the analysis of the most important factors for SME performance, survival
and growth in the EU.
The main objective is to consider what determines potential failure of young companies to innovate
and grow. The importance of innovations and growth for new, young and thus often still small firms is
commonly claimed. Therefore, factors that would inhibit these small, young companies from achieving their
goals can have a huge public impact.
The research results show that the age of the firm (which reflects its reputation) is important to the
degree to which the firm feels financially constrained. Also, finance barriers can be associated with market
failure. Risk and informational asymmetries create capital market imperfections and a firm’s lack of
reputation and collateral become crucial elements.
Conclusions reveal that the ability of SMEs to grow depends highly on their potential to invest in
restructuring, innovation and qualification. All of these investments require capital and, therefore, access to
finance. Recent policy initiatives aim at improving the financial environment for European entrepreneurial
activity and, more specifically, supporting newly-founded innovative firms in order to increase their global
competitiveness and spur innovation.
Key words: SMEs, financing, innovation, growth.
1. INTRODUCTION
We are living a period of financial and economic crisis. It is accompanied by widespread pessimism
and lack of confidence and trust. Under these circumstances the focus on long run growth and innovation
may appear out of place. This paper is an argue against such a perspective. It is important to take a long run
perspective precisely in moments of crisis and turmoil. From the earliest period on record up to the
eighteenth century, the standards of living have been quite stable over the long run. Sharp variations in
standards of living were associated with disease, famine and war. Nevertheless, they would not persist over
the very long run. The Malthus / Ricardo model was able to reconcile long run stable standards of living with
technological progress over time (Lucas, 2002).
The engine of growth is a capitalist society based on competition and change. Joseph Schumpeter
characterizes economic development as: “The spontaneous and discontinuous change […] which forever
disturbs the equilibrium state that previously existed”.
Nobel Prize winner Robert Solow showed that for a sustained economic growth technological
progress is more important than factor accumulation. For Schumpeter behind innovation (i.e. the economic
application of technological improvements) lies entrepreneurship. Innovation involves the industrial or
commercial use of something new: a new good or service, a new production method, a new market or
source of supply, a new form of organization or a new method of financial organization. For Schumpeter
innovation is fraught with difficulties. One of them stems from the need for external financing (Levine, 2005).
2. A SCHUMPETERIAN LOOK AT THE GROWTH PERFORMANCE OF THE EU
After a long period of technological catch-up since the WWII, the productivity gap between Europe and
the US began widening again in 1995. Structural conditions necessary for Europe to catch-up with the
productivity leader, the US, were present from the end of the war to the first oil shock and afterwards.
However, conditions needed for creation, innovation and leadership in a knowledge economy worked against
Europe (relative to the US).
The recovery of the US productivity growth in the post-1995 period and the corresponding decline in the
EU reflects the influence of key technology and policy factors. Below are discussed three interrelated
determinants: ICT (information and communication technology), innovation and firm dynamics.
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2.1 The role of ICT as a general purpose in EU productivity growth
Sectional data suggest that the divergence in productivity growth between the US and the EU in the
post-1995 period is primarily explained by differences in the pattern of production and use of ICT.
? Labor productivity growth in ICT producing manufacturing industries has been particularly high in
both the US and the EU. However, the US benefited from a leading initial position and an increasing
growth in the post-1995 period in high-tech industries such as office machinery, electronic valves &
tubes, telecom equipment, TVs, and scientific instruments.
? ICT using services have been the focus of the most profound technological gap with the US,
particularly in the retail and wholesale sectors and in banking and finance. On the other hand, more
restrictive regulatory barriers in European countries have been detrimental to the diffusion of ICT.
More recent firm level evidence (Bloom, 2007) confirms that the US productivity advantage is not only
related to a higher ICT spending by US firms (in ICT using sectors), but US firms as well as their subsidiaries
operating outside the US-specific conditions reap a higher return from their ICT investments. This suggests
that other firm-specific advantages are important, such as the quality of management practices.
2.2 The importance of knowledge production and diffusion
In the present context, we need to define the extent to which the example of ICT is an isolated case or
is likely to be replicated in other high-growth, high-tech industries. This is a pertinent question if one accepts
that the US?s lead in ICT is not an isolated case.
Assuming that a failure of EU enterprises to recapture the full potential and benefits related to ICT is a
credible risk, the following key questions arise: 1. Does the EU have specific problems regarding its
innovation infrastructure?; 2. Does the US have specific features/framework conditions which make it more
likely to be the locus for the next future breakthroughs in technology?; 3. Why is the EU less apt to creating
and exploiting new technologies in general? In order to better understand the EU–US innovation deficit,
discussion beyond ICT importance is needed.
Figure 1: EU’s overall innovation performance relative to the US
Source: EIS 2006.
Despite some signs of catching-up, Figure 1 confirms the presence of persistent innovation deficit in the
EU. As this innovation indicator comprises several innovation input and output measures, the EU innovation
gap goes beyond the deficit in R&D spending. The R&D deficit is a symptom rather than a cause of a
weakness in the EU?s capacity to innovate; the cause is rooted in the structure and dynamics of industry and
enterprise (O?Sullivan, 2007).
A comparison of innovation inputs shows that SMEs represent a larger share of R&D expenditures in
the EU than in the US and Japan. On the other hand, EU SMEs are less R&D intensive than in the US,
although the SME gap is similar to the overall gap in R&D spending. The average R&D intensity of SMEs in
Europe is 0.34% versus 0.53% in the US. This compares to an overall average R&D intensity in Europe of
1.17% versus 1.57% in the US (Results are based on DG RTD, 2007).
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However, specific contribution of SMEs to innovation goes beyond the share of SMEs in R&D
expenditures or in innovation output. SMEs have a very important indirect effect. Usually young small
innovating firms create radical new technologies and markets, whose further developments are completed by
large players. Baumol (2002) recognizes the complementarity between small and large firms, but at the
same time notes the importance of small firms in large innovations. In 1994 the Small Business
Administration Office of Advocacy prepared a list of breakthrough innovations made by small firms during the
20th century. It is impressive going literally from A (airplane) to Z (zipper) with many innovations that have
been crucial to the economy. Other studies on the distribution of innovations certified as “significant” by
industry experts, confirmed that small (as well as large) firms outperform medium-sized firms for the US (see
OECD (2006) for an overview).
According to Baumol, private sector innovations in the US come from two distinct sources, firstly from
the activities of large firms and secondly from the efforts of independent inventors and their entrepreneurial
partners. Baumol asserts that the active presence of both groups enhances the overall innovation process
since their activities are complementary. Independent inventors/entrepreneurs specialize in breakthrough
innovations while R&D departments of the larger firms enhance these breakthroughs and add to their overall
usefulness.
2.3 Firm demography and the creative destruction process in Europe
EU-US productivity growth differences can be additionally explained by (a change in) the firm?s
demography. The churning process has substantial effects on labor productivity growth because large part of
it results from reallocations from less productive to more productive firms. Industries and/or countries where
the churning process is inhibited, exhibit lower productivity and employment rates.
All European industries exhibit a greater number of small firms and also a higher share in total
employment than in the US. American manufacturing firms are larger and they display wider size dispersion,
particularly in high-tech sectors and in wholesale and retail.
Figure 2 on aggregate entry, exit and net entry rates from the research work of Cincera and Galgau
(2005) shows that although both entry and exit rates are lower in the EU than in the US, the differences in
exit rates are substantially larger. The average size of entrants is much smaller in the US. Lower entry as
well as lower exit (firing) costs in the US allow benefiting from the experimentation process supplied by the
market. While there is a high positive correlation between the entry and exit in the US, correlation is
insignificant in the EU and even negative in France, Italy and Portugal. A positive correlation reflects
churning of firms within sectors as a part of the creative destruction process. A negative correlation reflects
more traditional sectoral shocks (positive for entry, negative for exit).
Figure 2: Aggregate entry, exit and net entry rates (in %) by country (1997–2003)
Source: M. Cincera and O. Galgau (2005), “Impact of Market Entry and Exit on EU Productivity Growth
Performance”, EC Economic Papers p. 222
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Post entry performance also differs between Europe and the US as shown in Figure 3: net employment
gains amongst surviving firms at different limits, from the empirical research of Bartelsman et al. (2004). The
short term survival rate (2 years) for American entrants is very low, but after this market experimentation
period, the conditional survival rate of successful firms becomes high. In addition, the growth for firms that
survive for 7 years is higher in the US than in Europe. These results are a clear indication that there are also
higher barriers to growth for SMEs in Europe.
Figure 3: Net employment gains among surviving firms at different lifetimes
(net gains as a ratio of initial employment)
Source: Excerpt from Bartelsman et al. (2004).
2.4 The impact of the creative process on productivity growth
The overall labor productivity growth originates mainly in growth of incumbent firms, both in the US and
the European manufacturing sector. However, the EU-US differential growth performance can be explained
by the reallocation effect between firms and the net entry component. This seems to be a clear indication
that creative destruction process is less effective in European countries than in the US in both low and high
tech industries.
? The exit effect is always positive, both in the US and the EU, which means that exiting firms are the
least productive firms.
? The long-run effect of entry on aggregate manufacturing productivity growth has a smaller magnitude
in the EU than in the US. Furthermore, the effect of entry depends on the industry?s distance to the
technology frontier. The positive effect of entry on productivity growth is more significant the closer a
country or sector is to the technological frontier.
? In high-tech sectors, the entry effect is positive in all countries and this suggests an important role for
new firms in more technology intensive industries. In these industries, the entry effect is much
stronger in the US than in the European countries. Similar observations apply to exit barriers.
? New and small firms contribute to aggregate productivity growth directly through their own growth
performance, and indirectly by affecting growth of large incumbents. Thus, the US firms? post-entry
growth and productivity performance is higher. Moreover, beneficial interactions between small and
large firms, especially in sectors where technical ideas and innovations are an important ingredient
of growth, could be at the heart of different effects that entry has on aggregate productivity growth.
In summary, Europe?s growth gap results partly from an inappropriate industrial structure in which small
and new firms, occupying the main part of total employment, fail to play a significant role in the dynamics of
the industry, especially in the high-tech intensive sectors. This is illustrated by their inability to enter, but most
importantly, for the most efficient innovative entrants, to grow. The churning that characterizes the creative
destruction process in a knowledge based economy encounters significant obstacles in the EU, suggesting
barriers to growth for small innovating firms which ultimately weakens Europe?s growth potential.
Economic analysis suggests the following “problem drivers” for the insufficient exit and low post-entry
growth:
? weaker product market competition (e.g. barriers to cross- border trade in services, national
regulations, etc);
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? protection of inefficient firms through subsidies, bail-outs, etc.;
? labor market and other regulations that kick in when a firm grows beyond a certain size threshold;
? financial market developments.
3. FINANCING OF SMALL AND YOUNG INNOVATIVE COMPANIES
The literature generally supports the importance of new, young and therefore often still small firms for
innovations and growth, even if they are small in number. Therefore, factors that would inhibit these small,
young companies to innovate and grow can have a huge public impact.
In the analysis of the (failing) contribution of small and young firms to innovation and growth, access to
finance is a priority issue. Survey data for the EU confirm the importance of access to finance. Excessively
high economic risks are the major hampering factors for innovation for all types of firms, but somewhat more
for small than for large firms. A second tier of barriers is formed by the access to skills, which again impedes
both small as well as large firms. Regulatory burden is also included in the second tier of barriers. The
empirical evidence suggests that this burden is somewhat stronger for small firms.
Table 1: Proportion of enterprises that regard selected hampering factors as highly important
(% of all enterprises); by size class
Source: Eurostat (2004).
Analysis of survey data on firms? financial constraints perceptions show that the age of the firm, which
reflects its reputation, is more important than its size in determining the degree to which the firm feels
financially constrained. A possible interpretation of this result is that age might reflect reputation of the firm
which, in turn, significantly affects access to finance.
The access to finance barrier can be associated with the market failure. Risk and informational
asymmetries create capital market imperfections and a firm?s lack of reputation and collateral become crucial
elements. Existing literature demonstrates substantial differences between small and large firms in this
respect. Hall (2005) shows that imperfections in capital markets usually affect small firms more than large
ones which can rely on internal financing. Young firms are even more likely to be constrained than other
small firms as reputation and collateral are important to mitigate capital market imperfections. More radical
investment projects further exacerbate the imperfect, incomplete and asymmetric information problem. Thus,
young innovative companies, which combine the disadvantages of a small scale, a short history, less
retained earnings and more risky innovative projects, are even more likely to be financially constrained than
other small, young and/or innovating firms.
Along with this financial market failure, particular for the EU, stands the highly fragmented nature of its
venture capital market with 27 different operating environments adversely affecting both fundraising and
investing. Complexity in operating across borders means that some funds have difficulties in expanding,
growing and reaching a critical mass. This makes access to financing even more difficult and more
expensive in the EU.
3.1 Characterizing YICs
Young Innovative Companies (YICs) are defined in the EU State Aid Rules as small enterprises, less
than 6 years old, being “certified” by external experts on the basis of a business plan as capable of
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developing products or processes which are technologically new or substantially improved and which carry a
risk of technological or commercial failure, or have R&D intensity of at least 15% in the last three years or
currently (for start-ups). The YIC dummy takes a value of 1 if an innovation active company is less than 6
years old, has less than 250 employees and spends at least 15% of its revenues on R&D.
Out of the sample of 1342 German innovation-active companies (A research done by the Catholic
University of Leuven, 2006), only 51 companies qualify for YIC status, using the EU State Aid definition. This
confirms the “rareness” of YICs, representing only 3.8% of all innovation-active companies in West-Germany
in 2006. Even within the group of small innovators or young innovators, YICs are rare (4.3% and 24%,
respectively).
A “typical” YIC has a micro size, with about 20 employees. This is considerably smaller than other
innovating SMEs, as well as young innovators. Also on R&D intensity and basicness of its R&D profile, a
“typical” YIC scores much higher than any of these reference categories. These statistics confirm that it is a
combination of age, size and R&D profile that composes the particularity of YICs. YICs are not the same as
innovative SMEs or young innovators. Finally, YICs are overrepresented in knowledge-intensive,
technological sectors, specifically services (ICT and R&D engineering) while they are absent in more
traditional manufacturing industries.
3.2 YICs and barriers to innovation
Table 2 presents the results on whether YICs perceive differently obstacles to innovation. Respondents
were asked to give a score to each (potential) hampering factor on a scale going from zero (not relevant) to
three (high). The first column indicates the share of firms that considered this factor to be relevant (i.e. firms
that scored one or more), while the second column reports the mean score.
Table 2: Obstacles to innovation
Source: Schneider and Veugelers (2008)
As expected, YICs face, on average, higher obstacles to innovation than other innovating firms. When
comparing across barriers, results confirm the presumption that financial constraints (both internal and
external) are the most important barriers to innovation for YICs. Although this ranking also holds for other
innovating firms, the YIC-differential is the largest and strongly statistically significant on both financial
constraints. The evidence presented by Schneider and Veugelers (2008) show that young innovative
companies, combining newness, smallness and high R&D intensity are rare in the sample of innovative
firms. They view financial constraints, both internal and external, as an important factor hampering their
innovation activities, significantly more so than other innovation active firms.
4. CONCLUSION
We have argued that innovation is an important determinant of competitiveness and important to
address global challenges, such as sustainable development. The importance of innovation has been
reinforced by a fast development of new technologies (ICTs in particular), which enabled new forms of
competition and opened new markets for creation of innovative products. Nevertheless, despite importance
of innovation, as well as new opportunities offered by globalization and new technologies, improvement in
productivity in the EU, the EU seems to be lagging behind the US in this area.
We try to document the importance of SMEs and young innovative companies (YICs) for the innovation
process. Both of them are source of dynamism and in particular, YICs are directly related with research
activities and are a key component of the innovation system, facilitating the emergence of new products and
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markets. However, evidence shows that in Europe small and new firms fail to play a significant role in the
dynamics of the industry, although they account for a majority of employment. Not only they face significant
entry barriers, but also successful entrants face difficulties to grow.
However, the ability of SMEs to grow depends highly on their potential to invest in restructuring,
innovation and qualification. All of these investments require capital and therefore access to finance. Recent
policy initiatives, such as the creation of the YICs status at the European level, aim at improving the financial
environment for European entrepreneurial activity and more specifically to support newly-founded innovative
firms in order to increase their global competitiveness and spur innovation.
Empirical research on access to finance for SMEs and young innovative companies has been limited,
however, a recent analysis confirms the presumption that young, small, innovation-intensive firms are a very
small but distinct segment in the group of innovative companies. Furthermore, access to finance is the most
important factor that hampers YICs? innovation activities, significantly more than other innovating firms.
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