SMEs in Taiwan

Small firms, by definition, have limited resources and capabilities and are unlikely to possess substantial ownership advantages. They also have a limited capacity to influence and shape the development of markets, market structure and technological change (Ernst, 1998).

Due to their singular organizational design, the success keys of SMEs lie in different areas. The owner-manager or partners are the focal point of all operations:

they have complete control over the business operations of the firm: therefore, the most critical determinant of a small firm’s performance lie in its owner-manager. In many cases, the management of an SME is unplanned, reacts and adapts itself based on the market evolution. Management in large-firm is well-planned and follow the long-term objectives of the corporation, which has defined a clear strategic plan. The performance of large companies is influenced by a various number of general factors. SME generally do not formulate any kind of strategy and are more likely to “break the rules” to create a competitive advantage. They face constraints such as technological backwardness,

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lack of human resources, skills, weak management systems, lack of financial resources, unclear or lack of strategy orientation, entrepreneurial capabilities, insufficient use of professional advice, etc.. The competitive powers of SMEs are weaker than those of large firms and their strengths are found in different areas.

Taiwan’s business environment occupies a special place on the international stage. The island is a key player in the global information and communications technology industry, but it also acts as a bridge to the huge Chinese market. Coupled with pro-business government policies, robust intellectual property protection, and one of the lowest corporate tax rates in Asia, the island has become a choice location for many multinationals as their regional headquarters or regional hubs (Dexter Chang, PwC Taiwan). Along with the rapid industrialization and economic growth of the island during the latter half of the twentieth century, the government introduced aggressive programs to encourage investment by domestic as well as foreign companies. As a result, the number of SMEs in Taiwan broke the record of 1.3 million in 2012, while revenues totaled NT$11.38 trillion (US$379.3 billion).Taiwan is considered as opened in term of international business cooperation as China, and offer even more opportunities for foreigners in terms of investment policies than its giant neighbor.

However, the business environment of Taiwan has to be assessed carefully before being entered. The largest foreign investors in Taiwan are the United States, British Overseas Territories in the Caribbean, the Netherlands and Japan. The business environment of those countries are characterized by a high hierarchical recognition, as well as Taiwan.

However, Taiwan business environment belongs to a group-oriented culture while western countries tend to carry individualistic purposes. While western countries are more task-oriented, Taiwanese do business with people rather than companies. They are also by nature non-confrontational. Assessing the performance of SME needs to

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take into consideration the influence of external factors emerging from the environment.

In Taiwan and western countries, the political, economic and cultural factor shape different types of environment (hostile vs benign for instance). I may be lead to conclude that each environment studied needs a customize research structure in order to get relevant results about the firms’ performance. However, Ghosh and Kwan (1996) conducted a cross-national inter-sectoral study and identify common key success factors of 152 SMEs in Singapore and Australia. Additionally, Taylor (1997) explored high-growth medium-sized firms in the UK, Germany and the US, and presented significant results.

Therefore, although countries ‘environments differ in terms of political, culture and economic market, all SMEs are influenced by generic internal and external factors affecting their performance, that can be identified. The variables of Lussier (1995) contain such generic characteristics that allow us to apply them to my performance evaluation in Taiwan.

Taiwan is renowned for the outstanding performance of its SMEs; about 98 per cent of the enterprises in Taiwan are small or medium size. They have nurtured the country’s economic growth and have played a vital role in integrating its economy into the global world. Taiwan’s SMEs have modified their network structures to meet the requirements of the changing environment in the past 20 years. Organizational studies have also showed that the degree of fit between the business environment and organizational design affects a company’s performance. A stricken business behavior present in many Asian countries is their ability to form strategic alliance in respond to environment’s changes and competitiveness. Japan forms Keiretsu, an alliance of

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different actors (manufacturers, supply chain partners, distributors and financiers) who remain financially connected to ensure each other’s success; South Korea’s Chaebol is a business conglomerate that involves global multinationals owing numerous international enterprises, controlled by a chairman who has power over all the operations. Taiwan’s SME form informal peer groups, for instance, classmates (especially in elite schools) and former colleagues form tight networks that can be used to get information or form new business contracts. This type of organization combines the scale advantages of large firms with the speed and flexibility of smaller firms. SMEs can also have access to vital components and resources at a lower price than the one they would pay on the market.

Many businesses owned or managed by Western people face some challenges due to the lack of understanding of political, economic and cultural barriers. Although American and European businesses have acknowledged the importance of Guanxi, many still do not fully understand the other mechanisms shaping the Taiwanese business environment. My study aims at identifying those mechanisms to improve foreign firm performance and to help the local government to formulate policies more adapted to FDI current needs.

1.3 Research objectives: Detect Possible Factors to Influence SME Performance

In order to explore the factors affecting the performance of small FDI, I define performance as the survival and growth of the foreign SMEs. I choose to focus on survival for most small businesses are built around the owner-manager (Cooper, Gimeno-Gascon and Woo, 1994; Roper, 1999), and for whom the company very often is the main source of income (d’Amboise and Muldowney, 1988). For him or her,

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ensuring a stable revenue to cover his or her living expenses may be the sole objective of the company. On the other hand, due to a very suitable environment for business expansion and a large consumer market still spared from mass internationalization, some cases of tremendous growth and success have been observed among foreign FDI.

As SMEs may be reluctant to provide financial data on their performance (Dess and Robinson, 1984) and due to the fact that it may take several years before a new venture becomes profitable (Biggadike, 1979), I use subjective assessment of the entrepreneur to determine a firm’s success or failure (Powell, 1992a; Robinson and Pearce, 1988) instead of financial statements. Moreover, there is no generally accepted definition of performance and the literature is divided in the subject.

There is no generally accepted list of variables to assess a firm’s performance.

Lussier (1995) includes 15 variables related to owner-management characteristics, management know-how, capital and environment. I based my study on the result of Lussier and include the work of Maes, Sels and Roodhooft (2003) who found two endogenous inter-related factors having significant effects on small firm’s profitability.

My model includes the following factors: owner-manager characteristics, management practices and Capital.

Based on this list of factors, I have design a survey questionnaire to collect data from foreign SMEs in Taiwan.

1.4 Main contributions

The field of research in SMEs performance is fragmented and divided. Indeed, most studies on firm performance have been focusing on large-scaled corporations. The

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previous literature assessing large firm is dense and more unified than studies evaluating smaller firms performance. While some argues that the performance of small firms could be evaluated from a limited set of selected variables, some disagree and attempt to depict a more holistic model. Moreover, some studies may only focus on the effects of a single specific or narrow factor to assess SME performance, such as age, size or single industry sector for instance (Eisenhardt, 1999). However, as Storey (1994) argues, the effects of external factors must be taken into account in assessing performance; the firm’s internal characteristics alone aren’t enough to explain the effects of environment on the firm. Other authors have identified several attributes related to large-firm success, however, he argues that those characteristics are distinctive capabilities that cannot be replicate by other firms.

Therefore, a holistic perspective of firm performance would identify factors specific to a single firm and non-relevant for the development of a generic strategy. Even though the subject of SMEs’ performance has been explored (Bates, 1990); Cooper et al., 1994; Lussier, 1995; Lussier and Pfeifer, 2001; Roper, 1999), few studies have investigated the effects of interrelated factors on SME’s success (Gadenne, 1998). I merge the previous results of Lussier (1995); Lussier and Pfeifer (2001) and Maes, Sels and Roodhooft (2003) to identify the different factors and their variables that affect the firm’s performance. This study contributes in the harmonization of SME performance researches by testing the relevance of a set of limited variables in explaining small and medium firm performance. I will apply the variables of Lussier (1995) combined with literature-based selection of interrelated factors on foreign SMEs performance in the Taiwanese market. Finally, my study provides insight about the performance of small foreign direct investments in Taiwan

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CHAPTER 2

LITERATURE REVIEW

2.1 Theoretical perspectives of firm performance

Definition of performance

a. Success

Firm performance, in business researches takes on a multitude of different forms: there is no universally accepted definition of “success”, and “business success”

has been defined in many ways (Foley and Green, 1989); Morel d’Arleux, 1997). On the strategic level, firm performance is often defined as firm success or failure (Dess and Robinson, 1984; Ostgaard and Birley, 1994); in a general conception, “success” is referred as the achievement of the firm’s objectives or one’s own goals in whatever fields of life. However, in business studies, “success” is very often referred to a firm’s financial performance.

Due to the central role of an entrepreneur in a small firm, Jennings and Beaver (1997; 1995) argues that it would be accurate to consider the entrepreneur -the owner- and how he/she might define “success” or “failure” in the context of his/her firm. Success can be assessed in different ways: survival, profit, return on investment, sales growth, number of employees, reputation and so on (Vesper, 1990). There are at least two important dimensions of success:

i) financial vs other success ii) short vs. long-term success

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Performance is harder to measure in the case of small SME’s for several reasons. First, the main objectives of the firm may be other than financial, depending on the owner-manager’s expectations. Second, due to the fact that it is not compulsory for firms of this size to publish the financial data sheets, it is difficult to obtain reliable information concerning the financial situation of an SME. Moreover, in family businesses (and even in the case of a single owner-manager), it is difficult to take into account the individual inputs and expenses of the ownership that are not recorded following an appropriate accounting system. Third, SMEs may be very reluctant to provide financial data on their performance (Dess and Robinson, 1984). Finally, it may take several years before a new venture becomes profitable (Biggadike, 1979).

The main goal and objectives of the small and medium firms can be other than financial or can change frequently over the time. Rather than maximizing the financial performance of the firm, the owner-manager may seek for independence, financial comfort (without huge amount of revenues) and/or a particular style of life (Jennings and Beaver, 1995; Koiranen, 1998) for instance. Therefore, the influence of an entrepreneur’s values and expectations are very important in the definition of a firm’s purpose, success (achievements of goals) and failure (non-achievement of the goals).

However, in the long-run, even firms with non-financial goals should reach and maintain at least a minimum profitability in their operations; incomes should exceed costs to ensure the continuity of the operations. A firm’s profitability can be a useful measure of performance in the case of large companies.

b. Failure

There are several definitions of business failure (Watson and Everett, 1996;

1993). Firm failure has been described with many terms: bankruptcy, insolvency,

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liquidation, death, deregistering, discontinuance, ceasing to trade, closure and exit (Storey, 1994). Each of these terms have different meanings in different countries. It is important to notice that not all firms that go out of business do so as a result of failure, and those that do not should be separated from failure (Pasanen, 2003). For instance, the ultimate business failure for Lockett and Thompson (2001) happens when a business is liquidated or sold. However, I should make a distinction between optional and non-optional sales or liquidations. When there are no option for the owner-manager, the ceasing of the activities of the firm can be defined as failure. Hence, in this study, a failed firm is defined as a firm which has closed because of lack of necessary resources to maintain its activities. On the other hand, a business which is sold because, for instance, the owner-manager wants to realize a profit, is not considered as a failure.

Firm performance approaches

Firm performance is influenced by both the firm and its environment (Johnson and Scholes, 1993; Powell, 1992a; Hrebiniak and Joyce, 1985), performance can then be approached from an internal (firm) or an external (environment) viewpoint.

a. Resource-based view

The most popular recent approach used in the field of performance

assessment has been the resource-based view (Wernerfelt, 1984; Barney, 1991) and its extension, the knowledge-based view of the firm (Kogut and Zander, 1992; Spender and Grant, 1996).

The resource-based view (RBV) of the firm can be based on Penrose’s (1959) idea of viewing a firm as a bundle of resources. The theory argues that the resources hold by a firm (brand names, trade contracts, in-house knowledge of technology,

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employment of skilled personnel, machinery, efficient procedures, capital…) can be combined in some extent to create a competitive advantage (in terms of customer loyalty or technology leads for instance). “What a firm wants is to create a situation where its own resource position directly or indirectly makes it more difficult for others to catch up.” (Wernerfelt, 1984). In many studies later (Cooper, 1995; Cooper and Gimeno-Gascon, 1992; Cooper, Gimeno-Gascon, and Woo, 1994; Dunkelberg, Cooper, Woo, and Dennor Jr., 1987; Woo, Cooper, and Dunkelberg, 1988; Woo, Cooper, and Dunkelberg, 1991; Woo, Cooper, Dunkelberg, Daellenbach, and Dennis, 1989), it was then proved that the resources of a firm (capital, human, management skills) directly influence its performance and can be used as a way to overcome adverse obstacles for start-up ventures. Undoubtedly, the RBV is crucial in determining small firm success;

however in a continuously changing market, the RBV is not enough to predict foreign SMEs success or failure; too simplistic, it cannot be applied alone to new ventures and medium companies (Eisenhardt and Martin, 2000).

b. External viewpoint

The opposite approach, the external viewpoint, emphasized the influence of environmental forces and tries to explain organizational behavior based on environmental constraints. As a general term, environment refers here to all those arenas the firm is operating in and is attached to: it is defined by the PESTE frame as political, legal, economic, socio-cultural, technological and ecological factors which have indirect connections with firms. The firm interacts with its environment, additionally, the environment and its components affect firm performance directly and indirectly, in many ways.

Environment supports the survival of the fittest and destroy the less fitted

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ones. (Gimeno, Cooper and Woo, 1997). The environment carries needs and expectations (market opportunities) which the firm tries to match with its resources, capabilities and strategies. According to the contingency theory (Burns and Stalker, 1961), firm performance is the result of a proper match between the firm’s design and the environment it operates in. The better the match, the better the success.

As the environment is changing all the time, there is a continuous need for adjustment of the fit between the firm and its surrounding environment.

c. Strategic choice perspective

However, many theoretical constructions have been created based on empirical findings made from the observations of large firms. For the context of small firms, the business conception of Normann (1976) is seen to be the most fitted approach.

Strategic choice perspective. A strategic choice approach (Child, 1972; 1997) assumes that firms are in a state of continuous change, which is directed according to the actors’

subjective interpretations of the situation and their preferences (Vesalainen, 1995).

There are some external and internal constraints, but management keeps certain freedom regarding strategy formulation. According to Astley and Van de Ven (1983), the strategic choice approach emphasized on individuals and their interactions, social network constructions, autonomy and choices, as opposed to the constraints of their work responsibilities and functional interrelationships in the firm’s system. Both environment and structure are considered to influence and direct the actions of individuals.

This approach gives a pro-active role to entrepreneurs and a determinant role for the environment. Their choices are viewed as autonomous, and their actions

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are considered as energizing forces that shape the future of their firms.

2.2 Owner-manager characteristics

a. The Entrepreneur

Shane and Venkataraman (2000) emphasize that entrepreneurship emerges from two processes: i) the discovery of entrepreneurial opportunities, and ii) the exploitation of such opportunities. Shane (2000) poses the question: why some people discover opportunities and others do not?

He argues that people have different stocks of information and everyone’s way of acquiring information depends on how they live. More precisely, it plays a vital role in transforming incoming information into potential sources of opportunities.

Therefore, one with higher human capital quality should be able to identify an opportunity in a new economic activity and use his capital to exploit this activity successfully. For instance, prior knowledge influences social networks, which in turn influences entrepreneurial alertness and finally lead to the core process of opportunity recognition.

I define an entrepreneur (following Zhao, Seibert and Lumpkin, 2010) as the founder, owner and manager of a small firm. He/she is a capitalist who provides the main resources and capital for the new-venture, and a manager. As a manager, he/she supervises the organization’s activities, builds up the firm’s reputation and a system of cooperation within the organization.

There is no market for “opportunities”, therefore, an entrepreneur must

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previously develop his or her capabilities to obtain resources, discover and exploit opportunities (education, experience...). ( Lussier (1995) ) emphasizes on the general background of the entrepreneur in terms of knowledge that could lead to higher productivity and potential access to knowledge.

b. Human Capital

Many researches indicate that the work history and experience of the entrepreneur are crucial for entrepreneurship success (Bruno and Tyebjee, 1985;

Hisrich and Peters, 2002; Roberts, 1991; Sandberg and Hofer, 1987; Starr and MacMillan, 1990). Human capital is also the result of experiences and practical learning that takes place on the job, as well as non-formal education, such as specific training courses that are a part of traditional formal educational structures. Industry-specific knowledge and experience is also central in measuring performance. This knowledge is mostly tacit and costly to build up if the entrepreneur has no previous experience from the industry where the business is established. This view supports the strategic choice perspective in evaluating firm performance.

The firm founder’s performance is determined not only by his talent, the conditions of the environment but also by his human (experience and education), social and management capabilities. Bates (1990) and Lussier and Pfeifer (2001) have found

The firm founder’s performance is determined not only by his talent, the conditions of the environment but also by his human (experience and education), social and management capabilities. Bates (1990) and Lussier and Pfeifer (2001) have found