Micro, Small and Medium Sized Enterprises: Definition
Micro, Small and Medium Sized Enterprises (MSMEs) are businesses that are defined according to some specific characteristics. These characteristics vary from country to country.
The most common characteristics under which every country classified its MSMEs are those stated by the European Union (EU); these are: number of employees, turnover or balance sheet total. The abbreviation "MSMEs" was also established by the European Union on the EU recommendation 2003/361 in 2003 (Ec.europa.eu).
According to the Organization for Economic Cooperation and Development (OECD, 2005), small and medium-sized enterprises (MSMEs) are
“Non-subsidiary, independent firms which employ less than a given number of employees, this number vary across countries. The most frequent upper limit designating an MSME is 250 employees, as in the European Union.
However, some countries set the limit at 200 employees, while the United States considers MSMEs to include firms with fewer than 500 employees”
( p. 17).
This publication also considers the financial information of small and medium sized enterprises, defining the limits under which their turnover rate should be in order for them to fall into the category of SME. Based on the number of employees, the OECD established the following:
“The turnover of medium-sized enterprises (50-249 employees) should not exceed EUR 50 million; that of small enterprises (10-49 employees) should not exceed EUR 10 million while that of micro firms (less than 10 employees) should not exceed EUR 2 million. Alternatively, balance sheets
for medium, small and micro enterprises should not exceed EUR 43 million, EUR 10 million and EUR 2 million, respectively.” (OECD SME and Entrepreneurship Outlook, 2005, p. 17).
In Nicaragua, the Ministry of Promotion, Industry and Commerce (MIFIC) defined the MSMEs through the law number 645 according to the number of employees in: Micro (1-5 employees), Small (6-30 employees), Medium (employees 31-100) and Large (101 or more employees). This decree also establishes that a business will be considered micro if its total assets sum 200 thousands cords (cords is the Nicaraguan currency), small (1.5 millions cords) and medium if reaches 6 million cords. Also if it´s total annual sales sum, for micro (1 million cords), small (9 million cords) and medium (40 million cords). The exchange rate on may 15, 2013 is for one USA dollar, 24.56480 cords.
Importance of Micro, Small and Medium Sized Enterprises
MSMEs are key sources not only for industrialized economies but for emerging and developing economies. “MSMEs constitute the dominant form of business organization, accounting for over 95% and up to 99% of enterprises depending on the country” (OECD, 2006, p. 1). This means that they are responsible of a considerate percentage of job creation, introduction of innovative products and new techniques to the market. Their contribution to the economy and social system is valuable. MSMEs are a fundamental pillar not only in current economy situation but also for the pursuing of growth and development.
The executive vice president and CEO of the International Finance Corporation defined MSMEs as “the growth engines of the world’s economies; yet their success rate is not as good as it could be simply because of a lack of access to good business management practices. Giving small businesses the information and new collaborative technologies they need, will help them grow and prosper” (Lars Thunell, Ifc.org). In developing countries where there are few big industries, MSMEs account as a big part of the economical system.
This is why governments and the society itself should encourage the entrepreneurs and survival of these businesses by providing the necessary resources and knowledge that will allow them to grow and become those big industries such that it will lead to the development of the country.
In developed countries like Japan and Italy, MSMEs represent a large share of the economy. In Japan for example, 81% of the employment has place in small and medium sized enterprises. Although in the United States small and medium sized enterprises represent a smaller share compared with Japan and Italy, all these countries equally allocate more than 50% of the entire budget of their public support programs to MSMEs. The most common ways of assistance for this sector are training programs, consultancy services, provision of updated equipment, funds for research and development etc (Luckacs, 2005; OECD, 1997).
The World Bank (WB) recognizes the impact of MSMEs on countries development specially in developing countries like Nicaragua; these impacts can be measured in terms of job creation, poverty reduction and economic growth among other benefits; therefore, it provides common resources needed by these small and medium sized businesses such as financing, training, technology, support for improvements in their business environment, better corporate governance etc. In 2001 the WB together with the IFC and Multilateral Investment Guarantee Agency (MIGA) approved approximately 2.8 billion dollars to cooperate with the MSMEs sector (World Bank, 2001).
In the European Union MSMEs represent 66% of the job, and generate 56.2% of the private sector turnover and in the United Kingdom (UK) 99.8% of the businesses are SME´s.
In Asia, Taiwan’s and Hong Kong´s economy heavily rely on MSMEs, (Luckas, 2005). For the United Kingdom MSMEs represent a great contribution to innovation as “originators of new ideas and technologies; as links in supply chains promoting technical advances; and as
sources of knowledge and specialized goods and services for larger businesses” (Luckas, 2005, p. 8).
Nicaragua is no exception because MSMEs produce nearly 300,000 jobs and generate 58% of employment in urban areas according to the Ministry of Industry and Commerce and the Urban Economic Board of the Central Bank of Nicaragua (cited in El Observador Economico, 2011).The former vice-president of the Republic of Nicaragua (Jaime Morales) defined the MSMEs as the backbone of Nicaragua´s economy, however; the vulnerability of this economic sector is a current and continuo concern. The Economic Commission for Latin America and the Caribbean (CEPAL) states that 50-70% of these enterprises disappear on the first 3 years of existence, from the MSMEs that survive the first 3 years, 90% disappear when a 5 years cycle of existence occurs and only 10% of these enterprises make it through 5 years of existence (Cited in La Prensa, 2012).
MSMEs have great potential especially for developing countries, their main objective is to accelerate and mobilize these countries’ economies; with globalization there is a great opportunity for MSMEs to create alliances with larger enterprises, explore international markets and expand domestic markets. The survival rate of this sector will increase in the extent this sector receives the tools to become competitive and sustainable (Knight, 2001).
Needs of Micro, Small and Medium Sized Enterprises.
According to Oertel and Walgenbach (2009), there are some environmental factors that determine the survival of MSMEs. These factors are known as inertia and change, density dependence, age dependence, resource partitioning and niche width and all of them are fragments of the organizational ecology theory. According to these authors, those MSMEs that fit the environmental requirements are more likely to survive. Those businesses that count on a solid organizational structure might have more chances to adjust to the
environment and survive. However, a proper organizational structure is a common need for MSMEs (Abell 1980).
A qualitative study conducted by Obregon and Yeh (2013) found that the main needs of small and medium sized enterprises (SMEs) in Nicaragua are: access to financing, access to new technologies or technological improvement, innovation, and access to markets. Rising in utilities prices and updated infrastructure represented as well a big limitation for this sector of the economy. The study highlighted the importance of financing for these enterprises. The bank loan rate and the access to the bank loan become a huge barrier for the SMEs because they do not have the proper administrative documentation (i.e. financial documents) to support their business and fulfill the bank requirements for the application of the loan. From those enterprises that apply to bank loans, only few receive it. According to Mr. Ramiro Perez, business manager for SME at a local bank in Nicaragua; from those whom receive a bank loan, very few invest it correctly or according to the priorities of their business.
This study brought into the surface the experience of different groups, the owners of SMEs and the experts on this sector. The results showed that the owners focus on the external needs such as rising utilities prices and the experts’ responses were oriented to the internal needs SMEs have such as lack of innovation or formal control and organization of their processes. In anyway, the results showed those weak areas where assistance should be focused and oriented in order to alleviate and reduce the high mortality rate of SMEs.
Although the study conducted by Obregon and Yeh in 2013 focused on SMEs, it is still considered an important contribution on this study which includes micro enterprises as well.
Performance Indicators of Micro, Small and Medium Sized Enterprises Innovation of the Product/Service
Product innovation refers to any new product, process or service that has been implemented or developed by a group of people and it can be categorized as technical or administrative innovation depending on the type. For example technical may stand for technologies, product, services and new procedures may stand for administrative. To understand innovation from a managerial perspective, people should consider the dynamic of communities’ interaction, ideas, transaction and environment itself. Innovation can be the combination of old ideas or an added value to other´s existing idea (Van de Ven, 1986).
According to the Small Business Administration, there are four levels of significance for innovation:
“(1) the innovation established an entirely new category of product; (2) the innovation is the first of its type on the market in a product category already in existence; (3) the innovation represents a significant improvement in existing technology; and (4) the innovation is a modest improvement designed to update an existing product” (Zoltan & Audretsch, 1988, p. 681).
Gunasekaran, Lloria- Aramburo and March- Chorda (2002) state that “The major critical factors for the success of product development and innovation are classified into three groups:
top management support, product development planning, and analysis of market requirements” (p. 302).
Innovative MSMEs role is to seize technological and market opportunities in order to economically grow and expand. These types of MSMEs are also more likely to rapidly employ more workers, require more specific skills, improve salaries and offer better and stable environments for their workforce (OECD, 1996). The transition of innovation is very difficult for MSMEs; there are many obstacles that make the process sometimes impossible
for most small and medium size businesses, such as lack of qualified workers, expertise, information and knowledge, managerial skills and eligibility for financial support, etc (Freel, 2000).
Barriers can be classified in external or exogenous and internal or endogenous. All those factors related to supply, demand and environment are considered external and can include difficulties in getting technological information, raw materials, and access to finance. The most common ones for MSMEs especially start ups businesses are access to financing and technological innovation. On the other hand, the one that involves resources such as employee resistance to innovation or lack of internal funds, are associated to internal barriers (Piatier, 1984; Rush & Bessant, 1992, as cited in Hadjimanolis, 1988).
Innovative MSMEs have the advantage of being more competitive in the market, more flexible to environment changes and more qualified for international markets. Although not many MSMEs are considered innovative, those that develop or improve their product or services are more likely to survive and grow. The performance of innovative firms is better in terms of communication, staff interaction and quality of information (Gunasekaran, March-Chorda, & Lloria-Aramburo, 2002).
Quality of the Product/Service
Quality has been described as "the single most important force leading to the economic growth of companies in international markets" (Feigenbaum, 1982, p. 22).
Reves and Bednar (1994) use excellence, value, conformance to specifications and meeting or exceeding consumer expectations to define quality because only by knowing customers expectations and needs, using quality control processes or practices and adding extra value to the product/service MSMEs offer, success, development and growing will be achieved.
Studies conducted in USA, Japan and Singapore have emphasized the importance of quality. Some of the results of these studies were reproduced by the Strategic Planning Institute of USA (SPI, 1986) finding the following statements:
• “Product/service quality is an important determinant of business profitability.
• Businesses offering premium quality products and services usually have large market shares.
• Quality is positively and significantly related to a higher return on investment for almost all kinds of products and market situations
• A strategy of quality improvement usually leads to increased market share, but at a cost in terms of short-term profitability.
• High quality producers can usually charge premium prices”( as cited in Hezan & Padibajo, 1998, p. 490)
MSMEs that supply larger corporations find a lot of pressure on quality requirements;
quality is basically what makes them competitive but with limited resources it is hard for these small and medium sized businesses to implement quality systems that allow them to fulfill domestic and international conditions to commercialize their product (Haksever, 1996;
Henricks, 1992). It happens very often that when purchasing a product or service, people does not get what they were expecting, it could be that they get something better or that they get something worst. This lack of standardization is what threatens the most MSMEs, especially when talking about quality standardization of service or product.
Capacity to Respond to the Market Demand
Market behavior is very dynamic and sometimes unpredictable, and in all types of businesses customer orientation is defined by the market they serve; therefore, it is very
important especially for MSMEs to have the ability to adapt and respond to customers’ needs and desires (Kwaku & Satyendra, 1998).
MSMEs that know their market and count on technological resources are more likely to explore and exploit new opportunities. Information about their capacity to respond to their current target and general market behavior will allow them to take risks or approach different niches. MSMEs that are aware of customer’s expectations and needs are the ones that see the opportunities where the competitors see threatens (Wiklund & Sheperd, 2003).
There should be an equilibrium between the dynamic of MSMEs strategies and market requirements, this can only be accomplished through the understanding of the business and the customers that serves (Day, 1997). “As a concept marketing is the anticipation and satisfaction of consumers’ need and wants profitably” (Baker, 2000, as cited in Abimbola, 2001, p. 98). This means that MSMEs will be more competitive in the extent in which they know their customers and their market and the extent in which they possess unique advantages between the competitors (e.g. more efficient and faster ways of serving the customer) (Abimbola, 2001).
Globalization has forced MSMEs to enroll in activities related to trades, international investment and participation on strategic alliances, partnerships and networking associations.
These practices have a significant impact on the MSMEs performance. Besides the opportunity to access to larger and new market niches, there is great possibility to improve or upgrades technological capabilities, and also the potential to become high-grow firms and have easier access to financing (OECD, 2004a).
One way to insert in globalization is by acquiring updated and modern technology.
MSMEs that possess updated systems, procedures and practices are more likely to respond to the changes and challenges of a globalized market. If a business is able to define its market strategies it means that it is able to respond to market that serves. These can be accomplished
by putting efforts to meet strict product standards or develop unique characteristics in the product or service that will be offered. Global markets are not far from local markets in terms of diversity on consumer’s needs, competitor’s offerings, different economic and technological conditions etc. Therefore it is highly important for MSMEs to count with the resources and conditions to face the various scenarios of globalization and economy variation.
Efficacy and efficiency are highly related to technological processes because one of the main purposes of technology is to reduce time and cost, especially on production process.
Reduction of time and cost is of great importance for MSMEs, by implementing technology in their practices and having necessary resources such as financing, networking, knowledge etc.; small and medium sized enterprises would be able to respond to local and international market demand. Accessing international market requires MSMEs to standardize their product/services and subsequently their processes, once this is accomplish the benefits for the economy of both parties (MSMEs and large international companies) would be vast (Knight, 1998).
Formal Organization Administration
Knowledge is the unique source of lasting competitive advantage in dynamic, changing and unpredictable economies. Those MSMEs that constantly update and create new knowledge are those who will succeed when markets change, technologies proliferate, competitors multiply and product /services become outdated (Nonaka, 1991).
“Firms should produce wealth but should also enable personal development and values in the firm’s human resources (e.g., workers, middle management, upper management), as these are the foundation and starting point of all entrepreneurial competencies” (Senge, Roberts, Ross, Smith, Kleiner, 1994, as cited in Garcia, Llorens, & Verdu 2007, p. 547).
The majority of MSMEs do not count with formal internal administrative processes or instruments; there is usually lack of human resources practices, managerial capacity, limited
capital resources etc. This directly affects the overall performance of the business. If business want to access to financial institutions, they do not have supportive documents of their business functions which makes acquisition of financing almost impossible. For decision making there are no strategies aligned with formal objectives because sometimes MSMEs owners are no clear of their business objectives, and in most cases employees perform different positions at the same time which decrease their motivation and employee commitment, and increases the turnover rate (Garengo, Biazzo & Bititci, 2005).
Formalization of the organizational system refers to: “the exact determination of all components of the organization system and their consignment in detailed organizational documents, serving as working instruments for the company’s components and for the work control and their performances by the entrepreneur and managers” (Nicolescu, 2009, p. 409).
MSMEs owners need to be trained in managerial practices in order to improve or develop skills and abilities necessary to successfully run their businesses in terms of administration;
for short term when looking for financial assistance and long term when visioning international markets. MSMEs survival heavily relies on the capacity of their owners to backup the internal practices and predict future scenarios (Nicolescu, 2009).
Business Incubators: Origin and Definition
According to the National Business Incubator Association (NBIA), the first formal concept of Business Incubator began in the United States in 1959 in Batavia, New York. By the 1980´s the industry of incubators rapidly grew because people valued the great contributions these institutions were giving to sustain local economies. In addition, there were some activities that enhanced the creation of more and more incubators such as the efforts of the United States Small Business Administration (SBA) to hold conferences in order to
deeply explain the purpose and characteristics of incubators and the sponsorship to incubators programs from larger companies (Nbia.org, 2009b).
Unlike the origin, there are many definitions of business incubators but for the purpose of this research, the NBIA definition will be use. The definition states that: Business Incubators are programs that encourage and accelerate entrepreneurs and MSMEs success by providing resources and services that facilitate them to grow and establish in the market.
Incubators also intend to revitalize economies by graduating MSMEs with potential to
Incubators also intend to revitalize economies by graduating MSMEs with potential to