CHARPTER TWO
LITERETURE REVIEW
2.0 Introduction
This chapter will review relevant literature from different scholars on the effect of small scale enterprises on the growth of towns in Uganda a case study of Banda Parish Nakawa division Kampala district
2.1 Benefits of small scale enterprises on the development
The important economic contribution of SMEs has aroused significant interest from both international organizations and academic researchers whose goals include using public policies to trigger growth in SMEs, ultimately enhancing overall economic performance. Accordingly, since the 1970’s, many researchers have worked to establish an explanatory framework for the growth of SMEs, for, example Farouk and Saleh, (2010), established an explanatory framework for the growth of SMEs in Egypt. They argued that, despite the considerable attention paid to SME growth, to date very few theories have been able to adequately explain why some SMEs grow and others fail. They concluded that, the growth of SMEs is a complex phenomenon. Although it has gained vast academic interest, not a single model has been developed to date that can adequately explain why some SMEs grow and others do not (Farouk and Saleh, 2010).
SMEs Theory of Chinese on factors that affected the growth of township and village’s enterprises run by township and villages defined as collective at provincial by Biggeri et al., (1999). The paper examined SMEs theory and the role of human capital in the SMEs development. Following this, it analyzed the development of Chinese township and village’s enterprises and their role in the socio-economic development of rural areas and of the national economy. A panel analysis was then performed, using provincial panel data of Collective Township and village’s enterprises over the period 1986 to 93, in order to capture the major determinants of provincial growth. The results of the panel estimations highlighted some important features of township and village’s enterprises run by town and village sector, and provide empirical evidence in support to the positive role of clustering and human capital in the provincial growth of this sector (Biggeri et al., 1999).
Halim et al., (2011) they looked at the internationalization process of Malaysian SMEs and how it fits the internationalization theories particularly, Uppsala model, network approach and international new venture or born global theory. Findings indicated that all three theories were still applicable as not all SMEs that internationalized are born global in nature. Exporting was the most used mode of entry and increasing profit was the main reason for internationalization.
Small business management theory developed by Chittithaworn et al., (2011) stated that, SMEs characteristic, management and know-how, products and services, customer and market, the way of doing business and cooperation, resources and finance, strategy, and external environment are the factors affecting business success of SMEs in Thailand.
Alberto et al., (2013) developed a SMEs theory of planned behavior on what marketing for SMEs entrepreneurs, the need to market the marketing approach. The theory stated that, the adoption of the marketing approach is conditioned by entrepreneurs’ own conception of marketing, which may be substantially different from that proposed, in a paradigmatic way, by academics under different names that is, the transactional, relationship existing between and among these SMEs, or inductional marketing. This implied that, the potential benefits for SMEs, coming from its adoption, rely upon what entrepreneurs really do when they think they are implementing a marketing programme (Alberto et al., 2013). Therefore the aim of this theory was: to shed light on SME entrepreneurs’ conception of marketing, in order to verify whether their interpretation differs from that proposed by marketing researchers, and to assess quantitatively the psychological determinants of the entrepreneurs’ intention (marketing technique) to adopt a marketing approach by applying a well-known model for predicting both human and organizational behaviors (Alberto et al., 2013).
Jones and Bartlett (2010) argued that, for any business with growth market strategies, the organization was attempting to gain more sales from existing market and alternatively native growth perspective might lead the firm to develop a new product or service that can generate sales from existing customers. Nguyen et al., (2010) argued that, Vietnamese government has mainly focused on increase the number of SMEs rather than improving the performance of SMEs and strengthening the business competitiveness.
2.2 Challenges faced by small and medium enterprises
Poor Infrastructure development
While the economic policy debate has gone through cycles of arguing for and against state intervention, the provision of infrastructure has always been regarded as one of the main tasks of the state according to Kikonyogo (2000). Kikonyogo (2000) further argues that the private sector can participate in making the infrastructure effective, but its regulation is above all a state function. The importance of this function has increased in recent years, because of the changing nature of competition in regional and global markets. Speedy and punctual delivery of manufactured goods has become a major parameter in the new competition. Kikonyogo (2000) further stresses that a well-developed infrastructure – for moving goods from factories to ports and for rapid international communication significantly reduces the transaction costs involved in exporting.
According to Ankole Private Sector Foundation (APSF) 2010, Bushenyi district in general lacks a good road network in the rural areas for proper and efficient transport of agricultural and business products. Only about 40 per cent of the country has pipe-borne water, the provision of electricity is inadequate and very limited in rural areas. In spite of the huge investments in physical infrastructure in the recent past in water from Nyaruzinga and other areas, road expansion and constant road repairs on the tarmac stretch, the district still has very poor and inadequate facilities for industrial development (APSF, 2010). Save for the tea factories in Kyamuhunga and Mashonga trading centers together with the coffee factories (not value adding apart from removing husks) in Bassajjabalaba industrial area, industrial activities are still low and privately initiated (BDLG, 2011).
In order to foster the economic performance and competitiveness of small enterprises in the district, functional, high-quality basic infrastructure is required. An optimal physical and IT infrastructure includes a good, well maintained road network, a stable power supply and an extensive telecommunication network that business friendly. Overall it seems that while considerable progress has been made in reforming the regulatory and policy framework, there has been less progress in improving infrastructure (APSF, 2010).
The bureaucratic systems in registration of business
There is need for an impartial legal system according to Kauffmann (2005) that can help settle contract disputes, commercial law reform and drafting and clarifying land titles, as well as effective bankruptcy procedures that are vital for growth of the business sector. A country’s tax laws can either coax small businesses into the formal sector of the economy or keep them out of it. Governments should also make sure that they pay small enterprises promptly, since public contracts are vital to the financial security of these firms (Hill, 2001).
According to Kauffmann (2005), it’s often argued that, absolute and unfair commercial laws have increased transaction costs for small enterprises (more than for larger firms), thereby hampering their economic performance and competitiveness. However, in countries such as Mauritius and South Africa the legal system appears to be more developed and conducive to small enterprise growth and development.
An appropriate political or consensual environment requires a government’s mediating role in involving the main interest groups in the process of industrial restructuring to discuss problems, to reach commonly agreed action plans and to implement policy recommendations. An inter-institution networking approach creates an atmosphere of trust among the interest groups (Kauffmann, 2005).
Unfavorable government policies
According to Richards (2010), proper government administration in regard to policies is key for the better performance of small enterprises since it facilitates good policy formulation and implementation. He further asserts that centralized administration is a major challenge in the growth of small enterprises in Uganda since, regulations and policies have to be implemented by administrative institutions and authorities.
In many developing countries, bureaucracy has displayed a high degree of centralisation of resources and decision-making. Initiatives by local authorities to promote small enterprises activities are often stifled by a centralized decision-making process and lack of financial resources at the local level (David, 2011). This is followed by the problem of red tape. Procedures to comply with regulations such as registration, taxation, health and environmental regulations and procedures necessary to benefit from government incentives (Richards et al, 2010).
Poor management of financial records
Financial management plays a big role in the growth of small enterprises. Financial management involves all the activities like monitoring, control, budgeting and evaluation that enable an enterprise to obtain capital for growth, allocate resources efficiently, maximize the income potential of the business activity and monitor results through accounting documents. Such management requires a well-written, comprehensive financial management plan clearly outlining the assets, debts and the current and future profit potential of the enterprise (Bryan Ziegler, 1990). Note should be made to the effect that small enterprises hardly keep proper records that are crucial in directing business growth.
Proper financial management requires adequate financial control which Stonner (2002) defines (financial control) as the process of regulating an organization’s financial resources and activities such that actual performance conforms to the standards set. Koontz and Heinz (2003), argues that the task of control is to make plans succeed; and normally control must reflect plans, and planning precedes control. They further observe that a budget is a widely used device for managerial control, and argue that budgeting is the formulation of plans for a given future period in numerical terms. Mohsin (2002), also assert that financial control must complement financial planning, and that the control function is composed of four distinct phases i.e. determination of operational standards, evaluation of the enterprise progress in relation to pre-determined standards, investigation of organization financial function and taking corrective action in event of deviation, and lastly follow up actions by the executive personnel to ascertain whether corrective actions are effective. Mohsin (2002) contends that the control function has to go hand in hand with coordination since the finance aspect affects almost every activity and department in an enterprise that the finance department has to coordinate various departments and activities by ensuring that financial information is availed to them so as to make consistent decisions in an enterprise.
Lack of uniform business management process
Over the years, the importance of business strategy in both large and small firms has been continuously emphasized in the strategic management. The business strategy comes from a well-defined strategic plan which gives the vision, mission statement goals and strategic objectives of the enterprise. This helps to identify where the small enterprise is going, brings more individuals in the decision making process for the future of the enterprise through setting an organisational culture, proper change management, effective communication, problem solving mechanisms, team building, time management, motivation, and other aspects (Byaruhanga, 2005). Byaruhanga (2005) further states that strategic planning has got to give details on the short term, medium and long term plans of where the business is expected to be.
2.3 Relationship between small business enterprises and the growth of towns
In infrastructure planning, Ombura (1997) points that infrastructure networks are useful instruments within network economies. Infrastructure and related services help to make things happen, it feeds and it is fed by trade, it fuels foreign direct investment, it backs up the creation and sustainability of industrial clusters, it cuts costs and raises competitiveness. A spatial planning approach ensures the most efficient use of land by balancing competing demands within the context of sustainable development (Rozee, 2003). It becomes an ongoing, enduring process of managing change by a range of actors, in the interests of sustainable development (Tewdwr, 2004).
This makes efforts to promote industrial development extremely urgent and rural focused. Entrepreneurial and small and medium-sized enterprises (SMEs) firm performance is a complex, multifaceted construct that should be examined with an eye toward its complexity. Yonggui et. al. (2002) examined a set of internal and external factors/variables that may be critical to distinguish high-growth SMEs from those of poor performance. The study based on the relationship between factors and determinants concerning entrepreneur/top management team, firm characteristics, organizational strategies and external environment, and poor performance and high-growth performance in SMEs in China. Van de Ven (1993) emphasized that the process of entrepreneurship is not limited to the for profit sector; numerous entrepreneurial factors in the public and not-for-profit sectors play crucial roles.
It motivates one to examine the different roles played by these factors, and how their joint contributions interact to develop and commercialize a new technology. This in turn makes it possible to understand how the risk, time, and cost to an individual entrepreneur are significantly influenced by developments in the overall infrastructure for entrepreneurship. The small and micro enterprises (SMEs) play an important role in the Kenyan Economy. According to the Economic Survey (2006), the sector contributed over 50 percent of new jobs created in the year 2005. Despite their significance, past statistics indicate that three out of five businesses fail within the first few months of operation (Kenya National Bureau of Statistics, 2007).
According to Amyx (2005), one of the most significant challenges is the negative perception towards SMEs. Potential clients perceive small businesses as lacking the ability to provide quality services and are unable to satisfy more than one critical project simultaneously. Often larger companies are selected and given business for their clout in the industry and name recognition alone.
Many commercial banks in developing countries, particularly Africa, have tried to introduce M-banking systems to improve their operations and reduce costs. This has developed from the fact that bank branches alone are no longer adequate to provide banking services to cater for the needs of demanding customers. Therefore, the provision of banking services through mobile banking has provided an alternative means to acquire banking services conveniently and timely to bank customers (Amin et al., 2008). Consequently, mobile phone operators and banks have partnered to identify M-banking/M-payments systems as a potential service to offer customers. Financial institutions, which have had difficulty providing profitable services through traditional channels to poor clients, see M-banking as a form of “branchless banking”, which lowers the costs of serving low-income customers (Ivatury and Mas, 2008). For instance, in South Africa, banks are in partnership with mobile operators to offer mobile banking (mobile money) services. The mobile banking providers are making investments into the mobile banking infrastructure for effective provision of mobile banking service to the low-income market (Mobile Telephone Network (MTN) banking, 2009).
Chandler and Hanks (2004) argue that the model of growth indicate that performance is a function of ability, motivation and opportunity. The performance of a business founder is measured by the growth of the organization (Schein, 2007), which is in turn influenced by the environment in within which the organization emerges. Rosa et al (2006) also outlined four different measures of comparative growth of business, that is, primary performance measures (number of employees, growth in employees, sales turnover, value of capital assets); proxy growth measures (geographical range of markets); subjective measures (including the ability of the business to meet business and domestic needs); and entrepreneurial performance measures (the desire for growth, the ownership of multiple businesses).