AN EXPLORATORY STUDY OF FACTORS AFFECTING LOCAL SMALL AND MEDIUM ENTERPRISES (SMES) FAILURE

Abstract

The recent emerging interest in the small and medium enterprises (SMEs) stamped from the recognition that this group of firms is responsible for the lion share of total employment in a country and is the major contributor to the economic growth. Unfortunately, SMEs tend to have low mortality rate. It was estimated that new business went bust within first five years of its existence (Nadu, 1978). Much research and studies have been conducted in this SME field to identify salient factors that determine their success. However, there is lack of effort in identifying failure factors that may explain their low survival rate. Understanding the causes of failure will enable relevant government agencies and associations to take remedial actions to correct the situation. It may provides guidance to the related bodies in formulating assistance plans and schemes to help and develop the SMEs. Such identification may also serve as a warning signal to existing entrepreneurs in avoiding fatal pitfalls experienced by their predecessors. The realisation of a lack of information on factors which may lead to SME failure and the contribution that such information can make, have prompted me to undertake this study in the local context. A questionnaire survey was conducted. The target respondents were either the owners or managers of local SMEs. Based on their responses, the following analysis are performed :- (a) calculation of the mean and standard deviation of each factor to identify its importance and the degree of consensus among the respondents (b) calculation of the overall means and standard deviations for each category of factors to compare their importance (c) conduct paired-sample t-test to reveal any significant difference between the means of each category of factors and (d) conduct Wilcoxon signed rank test, a nonparametric test which is analogous to paired-sample t-test, for the same purpose as (c) and also to identify any differences in the conclusion derived from the two tests. The results of these analysis have indicated that endogenous factors are viewed by respondents as more important in causing the SME failure than exogenous factors. The difference in the means of these two groups of factors is significant even at the 1 % level. Similar conclusions are also obtained for the differences between exogenous factors and the two sub-categories of endogenous factors - personal shortcomings of the owners and financial and operation shortcomings of the firm. However, no significant difference between the means of the two sub-categories is identified. Since controllable internal factors are identified to be the most important, it implies that SME failure can largely be avoidable by adopting a more efficient and professional method of managing the company and by having the entrepreneurs overcome their own personal weaknesses. Although my results show significant insights into the underlying causes of SME failure, there is still ample room for further research in this field, especially by studying the empirical data of firms that have already gone bust.