Contribution of SMEs to Economic Development
The 20th and 21st-century economy has been characterized by major differences from what was experienced in the previous century. The economy is playing by rules that are different from the ones that characterized the 19th-century economy. The modern economy is witnessing a growth in new ideologies, including globalization and neoliberalism, which have witnessed an emergence of new players. The role of small and medium enterprises is becoming increasingly important as drivers of economic development. The businesses are viewed as important factors for a healthy business environment, the efficiency of the economy and development, and growth of the economy (González-Loureiro & Pita-Castelo, 2012). The reality is increasingly being seen in the developing economies. As opposed to the large-scale industries which were viewed as the main drivers of economic development, the view has completely changed. The SMEs have become important due to their nature as being quicker to adapt, necessitating low startup capital as well as low management cost (Naudé, 2013). They also require less production efforts, but they are labor intensive. However, there are some issues that have been associated with the SMEs, including the impact of “Peter Pan Syndrome.”
The Problem of a Small Business Expansion
Compared to the large-scale businesses, there is clear evidence of failure of growth among the SMEs. The enterprises are normally operating under smaller capital compared to the larger ones. Hence, they remain curtailed in terms of expansion potential. The companies tend to perform badly in times of economic challenges as they lack the capital to cushion them during such tough times (Pandya, 2012). The companies also tend to operate within limited resources, which could be among the primary reasons for their failure to expand. However, the primary reason for the failure to develop, as relates to the resources, is a subject that is still under investigation. The questions abound based on the availability of diverse sources of funding for business operations. There are major financial institutions that always willing to support business ventures through different forms of investment (Naudé, 2013). However, regardless of these opportunities, SMEs have remained the same size without any growth prospects. The businesses have remained the same financially and have failed to seek diversification to capitalize on the areas that will give them an advantage in case of economic challenges.
The Objectives of SMEs
According to Naudé (2013), there has been an increase in support for SMEs by government and economic experts. Governments all over the world, including in the United Arab Emirates and other developing economies have been coming up with progressive policies all aimed at supporting the creation of SMEs. There are important objectives of these ventures, which are the primary reasons behind their support. One of these objectives has been a reduction in unemployment as they play a role in creating new opportunities for employment through entrepreneurship development. They are also aimed at increasing income for those living in poverty by creating opportunities for self-employment by capitalizing on technology and indigenous assets. Through achieving industrialization in the rural areas, the SMEs are being created to discourage the movement of people from rural to urban regions. Balancing regional development and increased contribution to the gross domestic product are other critical objectives of the SMEs (Daszkiewicz & Wach, 2012). The SMEs are meant to play a part in encouraging the creation of import substitute and export-oriented goods by promoting agro-based business ventures.
The Peter Pan Syndrome
The Peter Pan Syndrome is one of the models that can be used in explaining the reasons why SMEs have “refused” to grow. Dan Kiley, in 1983, transformed psychology when he wrote The Peter Pan Syndrome, which is a state of fearing to grow because by doing so one would have to assume responsibilities. However, in the modern world, humans are not the only ones suffering from the condition (Sudhir & Talukdar, 2015). The condition is also affecting businesses. The idea is that there are some businesses that prefer to remain small rather than grow or expand. In the world of business, the Peter Pan Syndrome refers to a regulatory context within which a business remains small instead of growing. Within a wider system, there are chances that a part of firms will opt to remain small instead of growing. The situation remains the same even in the event that the businesses would be more profitable and productive if they had grown or expanded (Dilling-Hansen, 2017). The reality has become common in most of the SMEs as they have refused to take up the opportunities to grow.
Explaining the Failure to Grow
Reasons why Firms Have Refused to Grow
Running a single store differs from running a chain of stores. The informality which is evident in SMEs cannot be upheld in an environment where one desires growth for the business. Sustainable growth of a business is possible, but not always assumed. Realization of the extent of complexity in running large-scale businesses could be one of the reasons some businesses have refused to grow (Dilling-Hansen, 2017). The reality of the Peter Pan syndrome is evident in all parts of the world, within the developing and the developed economies (Sudhir & Talukdar, 2015). Firms are increasingly opting to remain small with the aim of evading a situation where they would reach a point where they are subjected to a different set of regulations. Some of the examples of the reality are evident in France and Portugal. In the former, manufacturing firms are expected to hire less than 50 workers, while in the latter, large-scale firms are exposed to stringent taxation systems when compared to the smaller ones. Under those economies that have strict regulations, SMEs normally chose to remain smaller rather than grow and face the tougher regulation standards.
There are many examples of countries where those running businesses have become obsessed with smallness, including Mexico. In the country, the firms are simply organized in such a manner that they remain small and profitable, a situation that is considered enough for those running them. Therefore, it is considered enough for a firm to continue making profits while remaining small because growing large will make them pay more in taxes. While such is the reality of many economies, the situation affects the economy in the long run (Dilling-Hansen, 2017). In a country where most of the businesses are small, it means that their contribution towards the economy in terms of distribution of resources will be minimal in the long run as they will continue evading payment of tax by remaining small. In other countries, the behavior might back up development of informal or even unlawful business practices where payment of taxes is not a priority. In fact, the aspect of remaining small does not contribute positively to the economy.
The Peter Pan Syndrome Manifestation
The Peter Pan syndrome has remained common because of the small business idea. In most economies, the small business idea has become largely romanticized, with the idea of easily running a business in a local neighborhood. The small firms can easily run without the challenges associated with larger businesses (Shin, 2015). However, this is not necessarily the case as running larger businesses can be more effective and efficient. The larger companies have the advantage of labor and capital. If the resources are well used, the larger companies can be more productive than the smaller ones. In fact, taking advantage of the economies of scale, it is more profitable to run a large-scale business than the small-scale ones (Sudhir & Talukdar, 2015). However, there are some governments that are intentionally curtailing the productivity of the larger businesses by imposing strict regulations. These measures are the reasons most firms are opting to remain as SMEs. The measures are forcing the concentration of resources on the firms that are less productive, negatively affecting the economic development.
A recent study carried out at Yale University has presented interesting details of the way corruption as well as low enforcement environment has been negatively affecting implementation of technology to enhance productivity. The study carried out on retailers in India indicated the tendency of firms to maintain their small size with the purpose of evading transparency (Sudhir & Talukdar, 2015). Due to the increase in technology use in the developing nations, there has been an increase in the demand for transparency and more firms are being caught in the tax net. Therefore, to avoid these challenges, the firms have been avoiding getting bigger because this would mean having to pay more taxes and being greatly regulated. In the environments with better enforcement of laws, technology is being adopted at a very high rate, compared to environments marred with corruption (Shin, 2015). The evidence is available in the many firms that have remained small despite being in operation for many years.
Policymaking on SME’s Support Programs
The economy would greatly benefit if firms grew and contributed towards its development. However, this is not the case where firms are avoiding growth to evade regulation and taxation. From the perspective of SMEs contributing to the economic growth, there is huge possibility that the slow economic development is related to the lack of efficiency and effectiveness in the running of the SMEs (Aulet & Murray, 2013). Hence, it is critical for the policymakers to reevaluate the working of the SMEs to ensure that they are achieving their objectives to play their role in the growth of the economy. Based on the failure to grow, the SMEs have failed to take advantage of the many opportunities provided by globalization and technological advancement (Sudhir & Talukdar, 2015). Currently, there are few SMEs that can recognize and take advantage of the vast opportunities. Within the developing economies, the firms have been unable or less able to take advantage of the benefits provided by global expansion. Worth noting is that without expansion, businesses cannot effectively compete with other firms in the local and international markets.
While the main problem could be the fear of expansion, the firms could also be deteriorating based on the failure of the policies and programs aimed at supporting their growth and expansion. Policymakers have the responsibility of identifying the cause of the problem and restructure the regulatory policies to give room for the SMEs to grow and take advantage of the modern opportunities. For instance, where the problem lies in the taxation system, the policymakers could change the taxation and regulatory regimes to make the environment suitable for business expansion (Dilling-Hansen, 2017).Generally, it is time the policymakers looked deeper into the working of the policies and programs that are in place to support the growth and development of SMEs. Indeed, that is the only way the firms will become more profitable and productive. It is the only approach that SMEs will continue contributing towards economic development. However, their establishment will be counterproductive to the economies of the developing and developed countries.
The Goal of an SME vs. the Objective of a MNC
SME, as small and medium enterprise, is created with the purpose of enhancing the economic position of the entrepreneurs who establish them and to contribute towards the economy of the country by, among other things, creating employment. Their focus is narrow, given that they operate under the goal of enhancing progress and prosperity of the communities within which they operate. The manufacturing-based firms are meant to change the communities by empowering the people within them, and in the long run, make a contribution to the society. Hence, the firms are not necessarily focused on growth and development as long as they are working to achieve their goal (Tavčar & Dermol, 2012). On the contrary, the primary objective of multinational corporations (MNCs) is wider in focus.
The goal of MNC is completely different from the ones underlying the operation of SME in that their goal is normally increased revenue and profit maximization. The corporations operate under the vision of expanding the sales of their products, through global expansion, in order to make more profits. While the SME operates within a particular culture, the MNC operates across cultures seeking to take advantage of globalization and technology to increase their cash flow, productivity, and profitability. In achieving the objectives, the MNC does not allow regional limitations to stand in the way of its operations. Unlike the SME, the MNC has the potential for growth and expansion, and it is always taking advantage of opportunities to achieve the objectives (Tavčar & Dermol, 2012). Also, unlike the SME, the MNCs do not focus on the contribution they make towards the economy of the country, but takes advantage of labor and capital to support their growth and expansion. The focus is not making the community better but making more profits for the investors.
The “BMW Syndrome” Against PPS
The BMW syndrome is a perspective in business that reflects an obsession with being big. It is borrowed from the notion that just because one is able to own a BMW (a big car), then he/she is capable of obtaining other expensive options. The idea qualifies in a business from the point of view of an obsession to continue growing than to remain small (Gassmann, Widenmayer, & Zeschky, 2012). In some business arenas, it is generally agreed that entrepreneurs have a kind of obsession to continue growing and performing better than others in the market. The BMW syndrome appears to be the opposite of the PPS from the perspective of the fearing to grow as opposed to being obsessed with growth. Hence, there is an evidence of being obsessed with making more sales, which is a characteristic driving force for the entrepreneurs (Bridge & O’Neill, 2012). Unlike the SMEs which are cast as suffering from the PPS, the BMW syndrome reflects a competitive business environment where the entrepreneurs are working very hard to outperform the others, and hence achieving continued growth and development.
Overprotection of Small Firms as Hindrance to SMEs Becoming Large Firms
There is a great deal of truth in the statement that the government has a role to play in the low transformation and growth of SMEs to large firms. In fact, this is based on the protective nature of the policies that are in place to enable the working of the SMEs. Governments across the world have instituted policies around the idea that SMEs have a role in the economic development, and hence should be protected to continue working towards these objectives. However, the view is proving counterproductive in the long run. The main contribution towards the growth of the economy out of business is through taxation. To protect the small firms, governments institutes taxation up to a particular level based on the size of the business. In fact, all the strict regulatory measures are subjected to the larger businesses. In that case, the small firms have opted to remain small to evade the responsibility (Sudhir & Talukdar, 2015). Continued growth will suggest that the firms are no longer under the protection. Hence, a majority would not want to deal with the complexities of managing larger firms without enjoying the protection.
Government Policies to help SME’s Overcome the PPS
Just like the way the government has played a role in supporting the PPS, the same effort can be used in helping the SMEs to overcome it. Just like a child, being overprotective is not conducive for growth and development. There reaches a time where the child has to be allowed, not only to grow, but also to assume the responsibilities that come with the growth. Even as the government is proactive in protecting the SMEs, it is time to develop policies that move away from curtailing their growth. There are two ways through which the government policies can support the growth of the SMEs. The first one is by ensuring that the smaller the firm is, the more unappealing it becomes, and hence offer the firm a better choice for growth and expansion (Boskov, 2016). The second would be providing incentives for the firms to grow, just like the government has provided incentives for them to start. Policies can be put in place that blends the two approaches to policy making for the SMEs.
Using the first approach, the government should revise its taxation regime. Exception of taxation and implementing less strict regulations for the SMEs has encouraged the Peter Pan Syndrome. Hence, doing the reverse will allow the SMEs to grow (Clarke, 2013). The policies can be designed and implemented, which impose taxation to encourage expansion. With such systems, it will be better for the firms to expand and pay taxes rather than remaining small and still pay the taxes. The system should be such that taxation becomes easier as productivity and profitability increase. This way, the firms will not be afraid of growing to become more productive and profitable (Boskov, 2016). At the end, they will be able to pay the taxes and remain profitable than when they are small and not paying the taxes.
The second option would be to provide incentives for the firms to expand. Most of the current policies are aimed at helping the SMEs to start operating. The policies leave things at the point where the firms are operating, without necessarily checking on their potential for growth. Policies should change such that the support from the government goes beyond the setting up of the business (Sudhir & Talukdar, 2015). The operating environment should include support for expansion and taking advantage of the advanced opportunities provided by globalization and technological advancement. For example, the government should provide incentives such as tax exemptions for the firms that are producing goods targeted for exportation. Such and other economic incentives will encourage the firms to grow and become more export-oriented. In that aspect, the SMEs will have an opportunity to get the necessary support from the government (Boskov, 2016). The benefits of expansion will be greater than the convenience of remaining small.
The UAE Case
The United Arab Emirates has thrived in terms of business, primarily based on oil and gas. In fact, this is one of the business environments where the state has supported the Peter Pan Syndrome by being overly protective of the SMEs. In 2007, for example, the Khalifa Fund for Enterprise Development was initiated. The fund is among the programs that are aimed at supporting the establishment of SMEs in Abu Dhabi. The fund has been increasing the capital for the businesses to start off. Capital is not the only support given by the state, but other sources of support, including business advice and training (Kargwell, 2012). The same support has not been provided to larger businesses, which is one of the reasons why the firms would rather remain small and continue benefiting from the support from the government. Evidently, the PPS is a reality in the UAE case, and the state is partly responsible for this situation in the country.
The regulatory framework of UAE continues to favor SMEs over larger firms because of their perceived contribution towards the economy. The government has been highly supportive of local businesses, making the operating environment more conducive for local investors than foreign ones. Hence, it would be better for businesses to operate local firms which are bigger and export oriented. From such a point of view, the environment appears to be better for firms that are big and have the potential for expanding to other countries within the oil and gas business (Kargwell, 2012). Thus, although the government is overly supportive of the SMEs, it would be better for the businesses to expand and take advantage of the local and global resources available. Such would be the driving motivation for growth and expansion, even as the SMEs are getting the support from the state.
SMEs have continued to play an important role in the expansion of economies in the developed and developing nations. Their primary objectives, all targeted to making the economy better for all, are the driving factor behind the continued support from the government. While this is aimed at working for the benefit of the firms and the economy, the approach has become counterproductive. The reality is that the support has bled what is commonly known as the Peter Pan Syndrome. It has made it more suitable for the firms to remain small rather than expand and face the responsibilities that come with the growth. There are many examples of countries that are experiencing the PPS as a result of the actions by the government in creating the taxation and regulatory regimes. Hence, just like the government has supported the emergence of the syndrome, it can also work towards addressing it.
Aulet, W., & Murray, F. (2013). A Tale of Two Entrepreneurs: Understanding differences in the Types of Entrepreneurship in the Economy.
Boskov, T. (2016). Growing the Global Economy through SMEs International Aspirations.
Bridge, S., & O’Neill, K. (2012). Understanding enterprise: entrepreneurship and small business. Palgrave Macmillan.
Clarke, W. M. (2013). Private enterprise in developing countries. Elsevier.
Daszkiewicz, N., & Wach, K. (2012). Internationalization of SMEs: Context, Models and Implementation.
Dilling-Hansen, M. (2017). SMEs: Peter Pan Syndrome or Firms not Grown Up?.
Gassmann, O., Widenmayer, B., & Zeschky, M. (2012). Implementing radical innovation in the business: the role of transition modes in large firms. R&D Management, 42(2), 120-132.
González-Loureiro, M., & Pita-Castelo, J. (2012). A model for assessing the contribution of innovative SMEs to economic growth: The intangible approach. Economics Letters, 116(3), 312-315.
Kargwell, S. A. (2012). A comparative study on gender and entrepreneurship development: still a male’s world within UAE cultural context. International Journal of Business and Social Science, 3(6).
Naudé, W. (2013). Entrepreneurship and economic development: Theory, evidence and policy. Browser Download This Paper.
Pandya, V. M. (2012, September). Comparative analysis of development of SMEs in developed and developing countries. In The 2012 International Conference on Business and Management (pp. 6-7).
Shin, J. (2015). Barriers to SME growth in Korea. Cover Story vol. 20 (no. 3).
Sudhir, K., & Talukdar, D. (2015). The “Peter Pan Syndrome” in Emerging Markets: The Productivity-Transparency Trade-off in IT Adoption. Marketing Science, 34(4), 500-521.
Tavčar, M. I., & Dermol, V. (2012). Global SMEs’ Strategy. International journal of management, knowledge and learning, (1), 109-123.