AN ASSESSMENT OF THE EFFECT OF FIRM SIZE

AN ASSESSMENT OF THE EFFECT OF FIRM SIZE ON SMALL TO MEDIUM ENTERPRISES’ EXPORT PERFORMANCE IN THE EXPORT MANUFACTURINGSECTOR IN HARARE, ZIMBABWE... RELEASE FORMTitle of the research pro

AN ASSESSMENT OF THE EFFECT OF FIRM SIZE ON SMALL TO MEDIUM ENTERPRISES’ EXPORT PERFORMANCE IN THE EXPORT MANUFACTURING

SECTOR IN HARARE, ZIMBABWE.

Chinhoyi, Zimbabwe YEAR: 2013

RELEASE FORM

Title of the research project: AN ASSESSMENT OF THE EFFECT OF FIRM

SIZE ON SMALL TO MEDIUM ENTERPRISES’ EXPORT PERFORMANCE IN THE EXPORT MANUFACTURING SECTOR IN HARARE,

ZIMBABWE

Programme for which the

Permission is hereby granted to the Chinhoyi University of Technology Library to produce single copies of this project and to lend or sell such copies for private, scholarly, or scientific research purposesonly The author does not reserve other publication rights and the project nor extensive contracts from itmay be printed or otherwise reproduced without the author’s written permission

Permanent address: 12034 Charira Close Zengeza 4, Chitungwiza

I, MAVETO BOTHWELL S, do hereby declare that this research report is the result of my own work, except to the extent indicated in the acknowledgements, references and by comments included in the body of the report, and that it has not been submitted in part or in full for any other degree to any other university

………

Name of student

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Date

requirements for the Bachelor of Science in International Marketing.

I would like to dedicate this dissertation to my father and mother, Mr C and Mrs T Maveto whostood by me all the way and lastly but not least to Rumbidzai Chaitezvi whose words ofencouragement catapulted me to achieve all I have now, thank you Rumbidzai

ACKNOWLEDGEMENTS

We sometimes feel what we do is just a drop in the ocean But the ocean would be less because

of that missing drop.

Mother Theresa

-Completion of this research project would not have been possible had it not been for thecollaborative efforts of various individuals who sometimes went out of their ways to help Thisrepresents one piece of work that I am proud of, thus I will forever be indebted to them because Icould not have made it on my own

First and foremost, I would like to thank the Lord almighty for affording me the chance, making

me meet the right people and paving my way into a bright future Thank you Lord and I willalways keep the faith

Secondly, I would like to express my sincere appreciation to Mr Gutu for the outstandingsupervision I received from him while undertaking this research study His support wasreinforced by some respondents whose co-operation deserves great appreciation

Lastly I would like to thank my friends who helped me realise that a book is never the work ofone person but a working together of a number of people

is continuously depleting the nation’s meager reserves leaving the nation with sky-rocketinglevels of debts to international financial institutions The study concludes that size, experience,and unsupportive business environment are the characteristics that strongly contribute toperceived constraints The study observes that the construct underpinning the current constraints

to sound export performance by the sector is inadequate experiential knowledge Scrutiny of theconstraint construct shows that organisational characteristics explain both exporter weaknessesand their strategic shortfalls The study concludes that SMEs in the export manufacturing sector

of Zimbabwe are faced with a myriad of challenges: shortage of finance, inadequate experientialknowledge, lack of supportive policies, limited access to foreign markets and poor capacityutilization

RELEASE FORM ii

DECLARATION iii

APPROVAL FORM iv

DEDICATION v

ACKNOWLEDGEMENTS vi

ABSTRACT vii

CHAPTER 1 1

Introduction 1

1.1 Background of the study 1

1.2 Statement of the problem 3

1.3 Research Objectives 4

1.4 Research questions 4

1.5 Assumptions 4

1.6 Delimitations (scope of the study) 4

1.7 Significance of the study (Benefits of the study) 4

1.8 Limitations of the study 5

1.9 Definition of key terms 5

1.10 Organization of research report 6

1.11 Summary 6

CHAPTER 2 7

2.0 Introduction 7

2.1 Exporting 7

Direct Export Strategy: 8

Indirect Export Strategy: 9

2.2 An overview of challenges faced in exporting 9

2.3 An overview of Export Performance variables 11

2.4 Motives for exporting 16

2.5 Small to Medium Enterprises 17

2.6 Summary 29

CHAPTER 3 30

3.1 Introduction 30

3.2 Research design 30

3.3 Population and Sample 31

3.4 Sampling procedure 32

3.5 Research Instruments 33

3.6 Data Collection Procedures 35

3.7 Data Analysis and Presentation Procedures 36

3.8 Validity and Reliability 36

3.9 Ethical considerations 38

3.10 Conclusion 39

CHAPTER 4 40

4.0 Introduction 40

4.1 Response rate 40

4.2 Section A (Background Information of respondents) 40

4.3 Section B: Response to Financial issues 42

4.4 Section C: Response to Production and Quality issues 44

4.5 Section D: Response to management skills 47

4.6 Section E: Response to market Access 50

4.7 Section F: Responses to tax policies and other policies 52

4.8 Interviews to promotion organisation 53

4.9 Discussion of results 54

4.10 Chapter summary 55

CHAPTER 5 56

5.1 Introduction 56

5.2 Summary 56

5.3 Conclusions 56

5.4 Recommendations 57

REFERENCES 61

constraining exports, there is need to understand two fundamental issues, namely: (a) the challenges faced by SME exporters; and (b) the key determinants for sound export performance.

1.1 Background of the study

Small and Medium Enterprises (SMEs) are universally acknowledged as effective instrumentsfor employment generation and economic growth (Beyene, 2000) SMEs contribute a verysubstantial percentage to employment generation and export earnings especially in Africa wherethe private sector is not well developed There is little doubt that private firms contributesignificantly to any economic transformation process (Kondinelli et al, 1993)

The three surveys of SMEs in Zimbabwe conducted by GEMINI came up with valuableinformation on the scope and nature of these organizations The first country-wide survey carriedout in 1991 recognized that the country had a total of 845 000 SMEs, retaining around 1,6

million employees in small-scale manufacturing, trade and services The majority of the SMEstraded their products straight to customers and had the owner as the chief employee.Substantially, the study recorded a high turnover rate in this sector which is described by anaverage lifetime of 4 to 6 years of those SMEs which failed (USAID, 1991) These metricsincreased in the next GEMINI study (1994) which pointed out that the number of SMEs hadamplified to 942 000 with a 14,4% increase in the number of people employed The evolution ofthe SME sector was compelled by an increase in labour supply procreated by retrenchmentsassociated with ESAP which had been launched two years earlier (Simpson et al, 2010: 41) Inactual fact, the SMEs sector was operational on a survivalist course at the time of the survey andthis also denoted the drop of manufacturing SMEs and saw a conforming rise in trade SMEs,largely centered on vending and peddling This 1994 GEMINI survey smeared a desolate futureabout the endurance prospects of the “low profit” SMEs and gave useful discernments intoemployment creation dynamics in the sector The last GEMINI country-wide survey of the SMEs(USAID, 1998) confirmed the missing middle phenomenon as proven by the low percentage ofSMEs which were able to progress to the middle over the passé 1994 to 1998

According to ZimTrade Chairman’s report for the year ended 31 December 2011, politicalunsteadiness and economic maladministration mined a heavy toll on Zimbabwe’s economy overthe last decade, traditional surpluses in agricultural products and industrial raw materials haveeither weakened or vanished spiraling Zimbabwe into a net importer of agricultural products.Exports volumes had been in decline each year ever since 1998 while both contracting exportsand imports have moved away from the EU to the South African market Yet, bearing in mindthe predominantly poor quality of Zimbabwe’s economic governance and the sanctions whichwere imposed on her exports, it is quite unexpected that all exports—apart from food products—have not contracted more, (ZimTrade Chairman’s report, 2011)

Zimbabwe’s exports have been shrinking, becoming less differentiated and gradually focused onproducts with low level of processing and high natural resource content steering to a tradedeficit This can be supported by Zimstat figures which show a cumulative trade deficit (importswhich exceed exports) for Zimbabwe as at 31 December 2011 being US$5 billion In 2011,exports grew by 9.5% relative to 46.8% imports growth in the same year (Zimstat newsletter2012) This shows that 2011 was characterized by a widening trade deficit, as exports continued

to be subdued by imports throughout that year A similar trend of monthly deficits was witnessed

in 2012, a condition which is unsustainable Statistics (fig 1.1) also show that Zimbabwe’scumulative trade deficit from January to May 2012 stood at US$842 million On one side, it isimportant to note that of the US$1.8 billion total value of exports to May 2012, 72% werecomprised of commodities mainly unprocessed minerals, unmanufactured tobacco and cotton

On the other side, imports continue to be consumptive in nature (e.g private vehicles, processedfoods, and electrical goods, among others) This then calls for the nation to urgently formulateand implement measures that are aimed at boosting the country’s exports

Following the restoration of macroeconomic stability in 2009 after more than a decade ofinflation and hyperinflation, the major barrier to economic activity has been removed Yet,macroeconomic stability alone could not improve its trading position; put the economy on thepath of sustained growth and to its former glory unless weaknesses in the country’s investmentclimate are addressed The damage inflicted by a decade of ill‐conceived economic policies hasbeen huge but it can be reversed once assessment of the factors affecting the export performance

of small to medium firms has been done and policies conducive to the revival of specializations

in line with Zimbabwe’s endowments in natural resources, relatively high quality of humancapital and attractive natural environment are in place

In Zimbabwe, SME’s have always played a pivotal role in building the nation’s economy sinceindependence through employment creation, increased national production and generatingforeign currency Traditionally the sector was well established and highly diverse and was wellsupported by a vibrant agricultural sector that has been providing raw materials and presentingopportunities for agro-processing The sector produces finished and semi-finished goods Theconcentration of factories is high in Harare which accounts for 63% while the other cities share37%, V Bhonyongwa (2008)

1.2 Statement of the problem

The volume of manufactured exports from small to medium enterprises since the last decadehave been declining leading to severe trade imbalances and subsequent closure of most small tomedium enterprises Zimbabwe is facing a cumulative trade deficit and this is of major concern

to macro-economic planners as the deficit is continuously depleting the nation’s meager reservesleaving the nation with sky-rocketing levels of debts to international financial institutions

1.3 Research Objectives

The study intents to make an assessment of the effect of firm size on the performance of small tomedium enterprises in the export manufacturing sector of Harare, Zimbabwe

The research’s intentions are:

1 To identify and understand factors which deter good export performance by ZimbabweanSME’s

2 To establish or determine key factors for successful export performance by SME’s

3 To provide possible solutions to alleviate the challenges faced by SME’s in the export sector

1.4 Research questions

2 What are the factors behind SME’s poor export performance

3 What are the key success factors for SMEs good export performance

4 What measures can be put in place to revamp the export performance of SMEs in themanufacturing sector of Harare, Zimbabwe

1.5 Assumptions

1) SME’s have been directly or indirectly affected by economic mismanagement

2) The research instrument to be used is valid and measures the desired construct

3) Research participants will provide truthful and accurate information

4) ZimTrade authorities will grant permission to look into issues pertaining to limitations of

good export performance by SME’s

1.6 Delimitations (scope of the study)

The research is going to be restricted to SME’s in Harare as this is Zimbabwe’s major city whereproduction is mainly located The study will not concentrate on general factors affecting SME’sbut will look into factors within the SME confinements that are affecting their exportperformance

1.7 Significance of the study (Benefits of the study)

The study addresses most significant areas which are of interest to stakeholders in the exportbusiness:

Government

It assist in identifying counter strategies and promotional needs for SMEs and draft soundpolicies for their development so as to create better and increased employment opportunities forthe nation

Assist develop an economic structure that is self-sustaining and conducive for the development

of a good export culture which widens the nation’s export base Help develop export culturewhich is tailored to cater for the needs of SMEs

Small to Medium Enterprises

Assist by giving firms a competitive advantage by improving the quality of their products andservices The study will also help to improve profitability and capacity utelisation therebybuilding the financial muscle of the enterprises

Researcher

Helps the researcher to appreciate more on factors necessary for sound export performance

Chinhoyi University of Technology

Helps the institution in designing programmes which can be an answer to the problems in thecountry’s export sector

1.8 Limitations of the study

Some of the respondents were not available at the time of calling and the researcher had to goback to ensure that the required information was acquired

1.9 Definition of key terms

Exporting: The Guide to Export Import Basics (2003) defines exporting as the selling of goods

beyond borders and the process involves the real shipment of physical goods and the

complementary documentary exchanges

SME: In Zimbabwe SMEs are defined as “Small income making entities, owned and managed

by moguls who work in it themselves, from which they stem their income, which hire very fewpeople if any, mostly depending on family members and employing very little capital”, (Butler S,2000)

Tariffs: Svend Hollensen (2011) defines a tariff as a direct tax that is levied on imports.

Quotas: this is a restriction on the amount of a good that can enter or leave a country during a

certain period of time S.Hollensen (2011)

1.10 Organization of research report

The research was divided into five chapters in which chapter one introduced the research topic,objectives, questions and the statement of the problem Chapter two gave literature review inwhich material from various scholars was used Chapter three presented the researchmethodology which presented the research design, population, sampling procedures andinstruments Chapter four presented the data collected during the research Chapter five is asynopsis of the research as a whole

1.11 Summary

In this chapter, the background and significance of the study have been outlined and the researchquestions and objectives listed The statement of the problem and hypothesis statement,assumptions, delimitations of the study have been indicated Related areas of limitations havealso been addressed The next chapter will look at the literature review

CHAPTER 2

LITERATURE REVIEW 2.0 Introduction

This chapter is a review of available related literature pertaining to the subject under study byacclaimed authors, academics and other interested stakeholders

2.1 Exporting

D Kapoor (2002) defines exporting as the process of selling products in foreign markets.According to the same author, exporting is about finding the customers and enterprise which canserve better than these customers’ current suppliers and it is in serving these customerssuccessfully that the enterprise grows and prospers, simultaneously increasing direct and indirectemployment The Guide to Export Import Basics (2003) notes that exporting requires key

documents such as: Contract of Sale, Bill of Lading (or other related transport documents),

payment related documents (particularly the documentary credit and the bill of exchange orblank draft, insurance document and other important documents that include the inspection orquality certificates

J Muranda (2002) contents that exporting is one of several ways in which a company caninternationalize its operations and that it is the commonest option for internationalizingoperations of companies in less developed countries (LDCs) Other alternatives ofinternationalizing operations involve establishing sales offices in export destinations,establishing strategic partnerships or joint ventures with companies in target foreign markets,taking advantage of the familiarity they already have with their markets, establishing subsidiaries

in target markets, or moving whole production processes into the target markets While the latterthree strategic options are not common for Zimbabwe's exporting companies, the first twoapproaches are commonly in use.

Exporting strategies

Several organizations decide on exporting as a foreign market entry mode as a strategicalternative that safeguards effort and resources while taking advantage of the foreign prospects(Czinkota et al, 1992) Exporting can turn out to be an international learning practice (Root,1994) Various companies select export as their principal foreign market entry approach It is theunsophisticated and low risk method to go into foreign markets It requires the minimum facilityapportionment and has the lowermost changes in the country marketing programs (Kotabe andHelsen, 2000)

A company using exporting approaches commonly attains certain advantages like, the fastness offoreign market entry, and no requisite venture in starting business in the host nation Directexporting bargains for a company a low risk possibility and easy way to initiate its internationalprocess and meet the demand and challenges Furthermore, in exporting as an entry mode, theorganisation and management obligation is usually minor (Hitt et al, 2003: Luostarinen andWelch, 1990) Export approaches are split into two classifications: direct export strategy andindirect export strategy

Direct Export Strategy:

In direct exporting companies are in interrelationships with foreign customers and markets Theoutcome of exporting is identical whether the actions are straight, personal or unplanned(Karkkainen, 2005) Corporations which are advised to export by foreign clients, regularlypractice this approach Herein this approach, the firm is linked to one or more salesrepresentatives in the country Firms, which agree to take all essential liabilities to trade theirproducts in the specific country, can try this export approach Thus, it entails high levels of

know-how in international marketing The benefits of this approach are additional sales, power

of control, market information, knowledge or experience and specialty of the firm in export,while the disadvantage is additional costs Diverse approaches of direct export are: export agents,mobile sales agents, sales branches, internal export department, and mail order (Albaum et al,2002)

Indirect Export Strategy:

In indirect export strategy, companies partake in international businesses via an agent and do nottransact with foreign buyers or companies (Karkkainen, 2005) Herein this approach the firmsends its products to foreign buyers via mediators in its country (Kotabe and Helsen, 2000) Thus

an organization engages indirect export strategy when its products are sold in foreign marketswithout any special activities inside the company In actual fact, if a company decides using thisapproach it will not be directly involved in international marketing This approach is mostfamiliar amongst firms which have just decided to export The approaches of indirect exportingare: by means of commercial companies, by means of export management companies,collaboration in export and distribution (Piggyback Marketing), intermediaries and export agents,and export cooperative organizations (Albaum et al, 2002)

2.2 An overview of challenges faced in exporting

According to L Gartside (1987) selling abroad is more difficult than selling at home It demandsknowledge not only of business conditions of customs and other regulations that constantlyfluctuate, but also of consumer preferences and prejudices The requirements of differentcountries vary considerably and need to be studied individually Language often presents seriousproblems especially in countries using more than one language The author also contents thatpolitical risks are greater in magnitude and must be reckoned: governments may placerestrictions on imports after the goods have been ordered or block the payment when they havebeen supplied

The bond amid size and export performance is one of several relationships that have not beencritically premeditated in less developed or developing nations There is a vibrant and solidreason for the qualified weakness of small companies in international markets involvement

(Bonarcossi 1992) Several firms that export just after their establishment have been found to besmall A study carried out about Zimbabwe’s textile and clothing exporters stated thatestablished new producers begin exporting at their early stages of existence, unlike large firmswhich do have a vivid domestic culture and mindset (Muranda 1999) Export experience has alsobeen noted in defining behavioural tendencies among exporters Kaynakand Kothari (1984) andKarafakioglu (1986) have observed that local or domestic market oriented approach is a keylimitation to a company's international business involvement in relation to exporting.Correspondingly Madsen (1989) established that there is an inverse relationship between localmarket appeal and export development However, with growing export involvement, companiesare prone to be less vague in their export undertakings, have a distinguished perceptive ofoverseas market systems, grow a linkage of private associates and customer relationships abroad,and, thus, project and execute valuable export marketing programmes In Katsikeas and Piercy's(1990) view, where there is an unscrupulous and non-methodical methodology to exporting,there is probability of a negative influence on improvement of observed or experiential realities

on exporting Investigation has stated that both physical and psychosomatic hurdles hinder firmsfrom exporting Case in point, Leibold (1984) detected this trend in South African exporters In aevaluation of aspects deliberated as hindrances to exporting by Brazilian firms, Da Rocha andChristensen (1994) congregated these factors into five classes: national export policies,comparative marketing costs, lack of export commitment, exogenous economic constraints, andcompetitive rivalry They moved on to settle that hindrances to exporting are inclined to belinked to phases in the export implementation method

According to Agrawal (1999) he wrote that a customer’s assessments of products aresignificantly influenced by products country of origin factor It has been discovered thatconsumers use the country of origin factor as a cue in making product quality decisions Givenconsumers embrace a optimistic (undesirable) country of origin image, this image possibly willhead to an unclear positive (negative) assessment and approach towards the products related to aparticular country Agrawal’s observation indicates that such a country of origin-based equitymight go as far as affecting other product sets because of orthodox biasness Thus observationand research have noted that gray marketing poses mutually prospects and restraints to thoseengaged in exporting Gray marketers these are agents who purchase products from a marketwhere prices are relatively low, whichever source producer or an approved broker, and import

into a country where prices for the same products are relatively higher (Cavusgil and Sikora1988) Gray marketing is in different numerous practices, mutually all have nearly similar effectand outcomes Mutual effects are shrunken or cannibalized transactions for the producer incountries where the products will have been imported to where prices are relatively higher andrisked relations with approved merchants who hold contractual privileges for their markets(Assmus and Wiese 1995) Myers (1999) notes that gray markets flourish to a greater extent ifprices are effective between markets Moreover they also enjoy enhanced information exchange,which is of date become accessible cheaply thus allowing distributors to arbitrage betweenmarkets (Assmus and Wiese 1995, Duhan and Sheffet 1988) At some instances suppliers alsotake advantage of these gray markets in a bid to increase their export sales and revenue DaRocha and Christensen (1994) noted that, it is not necessary to mind which stumbling blocks areprofessed as imperative by exporters, but it’s a matter of how possible it is to affect managers'opinions of obstructions to exporting and how those variations have significance on future exportperformance.

2.3 An overview of Export Performance variables

Managerial characteristics

Management’s international experience and commitment has a positive effect on the exportperformance of the firm Leonidou et al (1998) report a strong and positive relationship betweenthe manager’s experience and export performance Firms employing staff with little or notraining in international business tend to exhibit a lower performance because these managers areless aware of environmental opportunities and threats and make costly mistakes (Nakos et al.,1998) More experienced managers are better able to help a firm to identify and leverage oninternational opportunities while avoiding international threats (Zou and Stan, 1998) Moreover,managers with greater experience are expected to perform better because of their internationalnetworks and better understanding of foreign markets (Axinn, 1988)

Ford and Leonidou (1991) concluded from the reviews of his literature that management factorsare key determinants of export success Specific factors include: the level of managementcommitment to exporting (Madsen: 1989); the adoption of an international outlook bymanagement (Czinkota and Johnston, 1983); the foreign language proficiency of the export staff(Mason, 1980); international competence (Cavusgil and Zou, 1994), and perceptions on a range

of issues including risk taking (Axinn, 1988)

Export assistance

Export assistance has received an increasing amount of research attention in the literature From

a government perspective, exporting activity is important because it affects fiscal and monetarypolicies and contributes to the economic development of nations As a result, most governmentshave created export assistance programmes or increased their budget for those programmes, tohelp small and medium-sized firms in their export activities The use of such programmes has led

to the rapid expansion of exports in different sectors (Brezzo and Perkal, 1983) Exportassistance programmes can help firms improve their export performance by providinginformation on the market potential abroad, offering low-cost credit and by passing onknowledge from foreign markets and their customers thereby enabling firms to adjust to thatmarket (Czinkota, 1994) Export assistance programmes provide the firm with extra resources forsuccessful foreign market involvement; and managers that commit greater resources to exportactivities are usually rewarded with greater export success Not surprisingly, therefore, strong

evidence of a positive association between export assistance and export performance has beenreported in the literature (Czinkota, 1994)

Market situation analysis

According to J H Hair (2008) market situation analysis “…… is the monitoring of theappropriateness of a firm’s marketing strategy and determining whether changes to the strategyare necessary The purpose of situation analysis is to monitor market programs and determinewhether changes are necessary According to the same author it involves three decisions areas:market analysis, market segmentation and competition analysis J H Hair defines market analysis

as the process of collecting information on product markets for the purpose of forecasting howthey will change This helps the firms to move with the tides of time and remain competitive in

an ever-changing business environment

Market segmentation is the process of identifying similarities and differences in consumers’needs and using them to identify two or more segments within a market for a particularcompany’s products, J H Hair (2008) The objective is to collect information about customercharacteristics, product benefits, and brand preferences This data along with information on age,family size, income and lifestyle is then used to determine purchase patterns for particularproducts

Competitive analysis is a research approach for evaluating competitors’ strategy, strengths, andfuture plans, J F Hair (2008) The author contents that it is a process of asking customers toidentify key attributes that drive their purchase behavior and to rank those attributes Theseattributes might be price, quality, product performance, accuracy of shipping and delivery

Macroeconomic setting

Four variables represent the macroeconomic situation: inflation, privatization, governmentsubsidies and price liberalization, (Bruno and Easterly, 1995) All the top export performersexcept Bulgaria and Romania had reduced inflation to below 50% per year by 1994 Thisindicates a credible commitment to fight inflation A corrective price adjustment during the firstyear of a reform programme seems of little relevance for the pace of export reorientation; indeed,

a step increase in prices is frequently a necessary part of stabilization and marketization, and can

be a positive rather than a negative signal Beyond that, however, lax monetary policiesencourage the continuation of soft budget constraints, which in turn undermine incentives to shiftproduction toward import substitutes and profitable exportables (Bruno, 1994) Furthermore,inflationary expectations provide an extra incentive to hold hard currencies, and such'dollarization' of the economy exacerbates shortages of convertible currency and contributes tothe depreciation of domestic currency

Export controls

As with price liberalization, but measured more accurately, countries with good exportperformance had all dismantled export controls (except for those required by importers' non-tariff barriers) by 1993, (Bruno and Easterly, 1995) According to the same author exportcontrols are a trademark of central planning; their existence suggests that administrativedistortions still afflict the tradable goods sector Closely associated with export controls are thecontinuing monopoly of foreign trade, at least over major export items, and foreign exchangesurrender schemes which seek to capture for the state some of the returns from favoured exports.The state monopoly of foreign trade was formally terminated in all these transition countries; yet,

in the poorly performing countries, foreign commercial transactions for a vast number ofproducts were controlled directly or indirectly by the state, (Bruno and Easterly: 1995)

Market choice and adaption

Johanson and Vahlne (1977, 1990) and Wiedersheim- Paul et al (1978) concluded that to

enhance their chances of success, new exporters tend to choose the experience, extendprogressively to countries that are psychologically more distant The key variable in this respectwas “psychic distance”, defined as “the sum of factors preventing the flows of information fromand to the market, for example differences in language, education, business practices, culture,industrial development, etc.”, (Johanson and Vahlne: 1977)

In a related body of work, Douglas and Dubois (1977), concluded that the more a firm canrecognize and adapt its way of doing business to the local cultural environment (i.e reduce thepsychic distance), the better the chances of success

Government and infrastructure

Environmental market factors under governmental control have been examined as negativesuccess factors (Alexandrides, 1971) The general conclusion is that firms, particularly smallerfirms, that export to countries with significant government-imposed barriers such as tariffs havetheir chances of success reduced In addition, poor infrastructure, e.g road and telephonesystems, is a potential barrier to success Michell’s (1979) study confirmed that infrastructureissues become more important in less developed economies, particularly government andpolitical factors

Product

Product strength in terms of attribute uniqueness and quality are strongly related to exportsuccess (Burton and Schlegelmilch, 1987) However, the relationship between productadaptation and export success is less clear While some have found a positive link betweenadapting products to the local market and performance (Cavusgil and Zou, 1994), others have

found that a standard product is more successful (Christensen et al, 1987) Cavusgil and

Kirpalani (1993) have concluded that: “Product adaptation on initial export entry is not anecessary component of success However, subsequent adaptation contributes significantly tosuccess”

Price

Kirpalani and MacIntosh (1980) found a positive relationship between price competitiveness andperformance This is most likely in goods that are highly price elastic, i.e where consumers areprice sensitive Bilkey (1982, 1985) concluded that premium pricing vs domestic pricing waspositively correlated with export profitability, i.e price competitiveness and performance arenegatively associated Interestingly, Michell (1979) found that successful exporters in the UKgave relatively low importance to pricing

2.4 Motives for exporting

Driving motives to enter or increase exports vary from company to company, dependent onexport behavior, obligation and the primacies of diverse exporters From the past, companiesexported only after domestic markets had been saturated or after realizing that high profit margincould be earned from sales to particular foreign market In today’s increasingly integrated globalmarkets and in Zimbabwe in particular many companies export as a necessary part of thecompetitive strategy i.e “export or die” With the critical shortage of foreign currency in thecountry many companies find themselves exporting in order to generate foreign currency to buyraw materials for them to be able to manufacture their products

To gain a competitive edge over competitors

Companies have also realized that if their competitors are exporting, they may also need to do so,

in order to avoid being placed under disadvantage The Guide to Export-import Basics (2003)observes that one of the main sources of competitive advantages today lies in a company’sability to learn faster than its competitors Thus exporting activities enhance a company’s status

as learning organization As the company exports it will be exposed to International customers,foreign marketing, and distribution techniques that can teach the firm lessons that can becomeuseful in its operations in the local or home market

To diversify risk

International Trade Centre (ITC) (1999) notes that exporting help diversify risk This isexplained by the fact that as it exports, a company no longer becomes wholly dependent on sales

from a single market Exporting also tends to diminish the impact of a domestic deceleration insales In many cases the life cycle in foreign export markets tend to lag behind that of domesticmarket When sales are slow in the domestic market they are often still strong in the exportmarkets Transitions can now be made more easily to new markets Economies of scale can also

be achieved with export training Once personnel in company have been trained for internationaltrade with one country, such knowledge can be applied to trade with other future markets

To maintain a favorable balance of payments

Nations also export with the goal of maintaining a favorable balance of payments, which is astatement of accounts which shows the difference between the amount of money that has comeinto a country and the amount that has gone out of the country within a particular periodaccording to D C Kapoor (2002) From the nation’s point of view, the most important reason isthat unless a country exports it will not have the foreign currency to import the things it needsbut can’t supply itself Without foreign currency a developing country can’t import productionconsumables, equipment, and technology it needs for development- even the basic necessities oflife Most developing countries face a balance of payments deficit and thus there is need toincrease foreign exchange earnings and help solve balance of payments problems on a permanentbasis, D C Kapoor (2002) According to the same author, cutting imports instead of increasingexports is a poor solution because it can lead to stagnation and it prevents the purchase of capitalgoods and materials from abroad

2.5 Small to Medium Enterprises

There is no common definition of SMEs among nations, each country applies its own definitionand in some countries the definitions vary even among ministries (Michael 1991) In Zimbabwe,definition of Small to Medium Enterprise is defined in the Ministry of Small to Medium

Enterprise policy document by reference to the: Number of Employees and Legal structure

In Zimbabwe the Ministry of SMEs (2000) defines a small entity as one that does not employmore than thirty (30) employees while operating as a registered entity, a medium enterprise asone employing from seventy five (75) to one hundred (100) employees

Some Characteristics of SMEs

Muganda (2003) document some characteristics of SMEs These are presented and discussedbelow:

Outdated business methods

Ogutu et al (2006) suggest that SMEs are yet to adopt some modern business standards andpractices For example, there is personal ownership and management of enterprises which makesSME owners unable to differentiate between their businesses and their personal properties andlives Among other things, they employ relatives, friends and those in their networks of relationsregardless to whether these are competent in business or not They are also not used to accountfor the use of generated revenues as they mix personal and business expenditure This makesthem less competent than those enterprises that adopt modern and professional businesspractices

Limited linkages to Large Scale Enterprises (LSEs)

SMEs do not seem to be an important part of big business value chains (Ogutu et al: 2006) This

is because there are very limited linkages between SMEs and large firms As a result SMEs areunable to adequately enjoy the potential and actual opportunities offered by large businesses inthe context of mutually beneficial linkage effects – both forward and backward linkages in theinput and output markets This means that SMEs are not important factor input suppliers to thelarge firms (backward linkage) Neither are they important markets for factor outputs from thesefirms (forward linkage) Among the possible explanatory factors for this phenomenon is SMEs’lack of adequate capacity (especially financial and organisational capacities) to becomeimportant factor input suppliers for large firms Due to their highly limited financial capabilityfor example, SMEs are unable to supply the needed factor inputs to large firms They are easilyout-competed by large (especially foreign) firms in input supply tenders to large firms

Tax evasion and maltreatment

A study by Ogutu et al (2006), contents that SMEs are associated with tax evasion According tothe author, this may be due to problems associated with the tax regime (especially the

multiplicity and relatively high tax rates) and/or lack of tax education on part of the SMEs Thestudy also concludes that SMEs also feel that they are harassed by the tax authorities when thelatter attempts to enforce tax compliance It is argued that the taxation regime is not SME-friendly Besides the many and high tax rates, the mechanism to collect the same is not good forSMEs Another problem is that SMEs – as do many other tax stakeholders – do not see thebenefits (value for money) of the tax that they pay While the expectation is that tax revenues gotowards improvement of the climate under which SMEs work, among other uses, this isgenerally not the case For example infrastructure like roads, sewage systems and utility supplies

to the SMEs’ premises are either not present or in a very poor condition both in terms of quantityand quality (Ogutu et al: 2006)

Poor Record-Keeping

The SME Competitive Facility Journal by Ogutu et al (2006) notes that SMEs are also haveproblems in keeping proper information that may be required by various entities for decision-making purposes Information like sales volumes, sales revenue, profits and loss are generallynot available and accessible to outsiders When available and accessible they are likely to beoutdated and inadequate for proper decision-making This is because either SMEs do not keepthem or they do not keep correct information in order to, inter-alia, evade tax It is argued forexample that SMEs (arguably large firms too) have two books of accounts: one for the purpose

of impressing bank officials during loan applications, and one for the tax authorities for thepurpose of evading tax The record book for the bank reports profits and the one for taxauthorities reports losses

Limited or no use of the banking system

SMEs are found to be using cash transactions rather than using the banking system in theiroperations, however large is the monetary value of transactions (Ogutu et al: 2006) This impliesthat people travel with huge sums of money from one location to another to buy stocks for theirbusinesses Cash transactions are first and foremost not a safe or civilized way of doing business

It also makes tracing and documentation of the transactions rather difficult Possible reasons forthe practice of cash transactions among SMEs include illiteracy of the trading partners, lack oftrust, complicated and costly procedures involved in using the banking system, and insufficient

availability of and access to banks All these add to SME incompetence, particularly with respect

to the sophisticated world market With no clear bank transaction records for example, SMEsmay be unable to convince financial institutions that they are credit-worthy

SME Technology Levels

SMEs are also found to be using low and simple technology including labour intensivetechnologies and very basic and sometimes rudimentary tools (Ogutu et al: 2006) This makesthem less competitive than those using high and advanced technology in other countries Goodsand services produced by firms that use such kind of technology encounter problems incompeting with those produced using high technologies including computerized systems likeComputer Assisted Design (CAD) as is the case for many and cheap products from Asia (Chinaspecifically), Europe, America and other African countries like South Africa

An overview of challenges to small to medium enterprises

Kapoor (1997), notes that the small-scale sector in Zimbabwe has traditionally faced a variety ofconstraints within its framework on account of its historical circumstances Constraints such asthe lack of a suitable policy environment, the lack of management skills, lack of access tofinance, lack of infrastructure, inappropriate technology and the attitude of local and municipalauthorities have repeatedly been cited as major reasons responsible for SME failure and theunwillingness of informal establishments to enter the formal economy

These constraints are discussed in turn below:

1 Legal and Regulatory Impediments

Studies undertaken over three years by World Bank (1996) in seven countries in Africa revealedthat some regulatory constraints are more severe than other and that, in general, regulatoryobstacles are more important to the larger firms compared to small firms In particular foreignexchange controls and labor market regulations appeared more important than other categories ofregulations

Chidavaenzi (1998) highlighted that the small-scale sector in Zimbabwe, as indeed the whole

private sector, suffered from policy neglect for most of the first decade following independence

and it was only with the advent of the structural adjustment program that efforts have been made

to address the constraints facing the enterprise sector in a systematic manner Despite theseefforts, policy towards the sector is highly fragmented with the various Government agenciesdealing with the sector lacking an overall sense of direction and co-ordination

2 Registration and Licensing

Mugwara (1999) notes that the process of registering a business and getting the necessarylicenses can be a major deterrent for the small-scale sector and is an important reason whyinformal units are often reluctant to becoming legal Kapoor (1997) furthermore advocated thatthe process of registering a company in terms of Chapter 190 of the Companies Act can becumbersome Although on paper the process of forming a company appears to be relatively easyand inexpensive in reality the process can be extremely time consuming and expensive It is notuncommon for the registration process to take up to a year, with the applicant having to visitnumerous Government offices several times a year In addition staffing and capacity constraintswithin the Registrar's office further serve to delay the process On average, 1,000 applications areexamined in the Registrar's Harare office, every month, but only half of these get registered.Bradburd et al (1995) observed that the other problem is centralised administration Regulationsand policies have to be implemented by administrative institutions and authorities In manydeveloping countries, bureaucracy has displayed a high degree of centralisation of resources anddecision-making Initiatives by local authorities to promote SME activities are often stifled by acentralised decision-making process and lack of financial resources at the local level

3 Financial Constraints

Poorly functioning financial systems can seriously undermine the microeconomic fundamentals

of a country, resulting in lower growth in income and employment, United Nations (2001).

Finance has been identified in many business surveys as the most important factor determiningthe survival and growth of small and medium–sized enterprises in both developing anddeveloped countries Access to finance allows SMEs to undertake productive investments toexpand their businesses and to acquire the latest technologies, thus ensuring theircompetitiveness and that of the nation as a whole

McPherson Michael (1991) contended that the two principal financial constraints affecting thesmall-scale sector in Zimbabwe today are the lack of access to finance and the high cost offinance Indeed, financial constraints are repeatedly cited as being among the most bindingconstraints for all segments of the private sector

Most financial institutions are extremely reluctant to provide medium-to-long term loans toWorld Bank (2004) also highlights that Small firms finance a smaller share of their investmentwith bank loans and other formal sources of external financing than large firms, especially incountries where financial and legal systems are not well developed They face more obstaclesthan large firms, in the form of higher interest rates, more bank paperwork, and less access tolong-term loans, foreign banks, non-bank equity, and export finance

4 Management Skills

Levy et al (1995) observes that lack of management skills and business know-how is a keyrestraint hindering the development of the SME sector Some findings in Zimbabwe propose thatentrepreneurs in small scale sector ascribe low primacy to training and often they are not willing

to contribute in platforms that oblige them to fund even a minor fraction of their overall trainingcosts While these entrepreneurs are extremely vocal about the lack of credit facilities and thehigh cost of capital, they are less aware of the importance of acquiring the skills necessary to run

a business Areas of weakness identified include financial management, operations management,cost accounting, marketing, and general business management

Hamilton et al (1993) advocated that traditional types of training programs, such as seminars in

"how to start and succeed in business" still have a role to play; analysis of SMEs in developingcountries suggests that a powerful learning mechanism for emerging enterprises is learning byworking on-the-job, often assisted by using local and retired business experts The provision ofmatching grants to stimulate the use of domestic and foreign support services and to enable firms

to travel overseas in order to establish international contacts, identify niches in the internationalmarketplace and enhance competitiveness can be extremely valuable

SME owners think they have no need, money or time for training, evidence suggests that trainingoften constitutes a very cost effective intervention General awareness training is less useful than

training in specific industry skills within a sector, which is more relevant to the SME Vocationaltraining and programmes that focus on teaching mastery of the skills and procedures encountered

by small enterprise personnel in their day-to-day business management and operations have thegreatest effect, Nelson and Winner (1982:92)

Biggs (1995); advocates that, having acquired the market, the management is supposed to becommitted to exporting and have tangible strategies to penetrate foreign markets Strickland(2005) defines a strategy as a roadmap of a company’s future in terms of the direction; thebusiness position it intends to stake at, capabilities it plans to develop and customer needs itintends to serve The same author has also defined the concept as the competitive moves andbusiness approaches management employs in running a company The management’s game plan

is to:

1 Please customers

2 Position a company in its chosen market

3 Compete successfully

4 Achieve good business performance

Strategies are needed mainly for two reasons:

-1 To proactively shape how a company’s business will be conducted

2 To mold the independent actions and decisions of managers and employees into acoordinated company-wide game plan

Ross and Khami quoted by Strickland (2005) contend “Without a strategy, the organization is

like a ship without a rudder, going around in circles” According to prescriptive literature,

organizations should formulate and implement strategies for achieving sustainable competitiveadvantage

5 Information, Technology and Infrastructure

It is increasingly recognised that technology plays a significant role in the trade patterns not only

of developed countries but also of developing countries (Fagerber 1996:30) Technology hasbeen described as "the systematic application of scientific and other organized knowledge topractical task" Galbraith, (1971:85) Technological capabilities are the information and skills -technical, managerial and institutional - that allow productive enterprises to utilize equipmentand technology efficiently While there are some constants, such capabilities are in general sectorand firm specific, a form of institutional knowledge that consists of the combined skillsaccumulated by its member s over time Technological development is the process of building upsuch capabilities, Nelson and Winner (1982:79)

Studies undertaken in Africa (Biggs, Shah and Srivastova, 1995) have indicated that; Africaappears to suffer from two significant technology gaps The first is a large, and in many caseswidening, gap between the technological capabilities employed by African firms and thoseemployed by firms in other parts of the world Part of this gap in average capabilities appears to

be due to a large variance in domestic capabilities that exists among firms within manufacturingindustries Africa exhibits much more inter-firm technological heterogeneity than otherdeveloping regions The second is a gap in the "learning" environment in Africa appears weak, inthat many key learning mechanisms that proved the basis for these gaps can be traced to Africa'sdevelopment history, to the current business environment and to the process of technologicaldevelopment itself As African countries liberalize trade and expose their firms to the vigors ofimport and export, competition, the hope is that these technology gaps will begin to close

Donald C et al (1992:87) indicates that most SMEs have problems accessing information and donot know where to go for assistance or how to access resources such as credit facilities They arenot aware of the procedures and documentation required when they apply for licenses or where

to go for information While this constraint partly reflects the complexity of the regulatoryenvironment and the multiplicity of bureaucratic requirements, it is also a reflection of the poormanagerial capacity that exists within the sector that prevents the SMEs from undertaking theresearch and analysis necessary for starting an enterprise

Levy (1995:101) advocates that the lack of access to appropriate technology and equipment iscentral to some of the capacity problems encountered by the small-scale sector Surveys of the

SMEs sector often cite respondents complaining about not knowing where to go for procuringthe most cost-effective technology to enable them to service their clientele In this context, therecent establishment of government departments, and its overtures to the SME sector, is a step inthe right direction that will enable small businesses to get access to equipment, while at the sametime reducing start-up costs.

Gibbs (2006:12) argued that governments are expected to play a leading role in the ICT policydevelopment and also to increase intervention strategies and programmes that take cognisance ofthe needs and concerns of SMEs to facilitate ICT adoption in innovative ways

6 Market Access

World Bank (2004) reveals that access to markets, both local and foreign, remains a significantconstraint facing the small-scale entrepreneur The SME sector is not geared for exports andmost entrepreneurs find the costs and complications of exporting onerous

Kotler (1997) contents that once a company decides to go international; it has to determine thebest mode of entry if it is to realize meaningful results Different modes of entry may be moreappropriate under different circumstances, and the mode of entry becomes a very importantfactor in the success of the project Its broad choices include indirect exporting, direct exporting,licensing, joint ventures, and direct investment It is important to note that each succeedingstrategy involves more commitment, risk, control and profit potential The general trend is thatcompanies begin with indirect exporting then proceed through later stages as they gain moreexperience in the international markets

UNESCAP (2005) records that there are many challenges that SMEs face in trying to compete inthe global environment By reason of their stature, scope and isolation discrete SMEs are limitedfrom attaining economies of scale in input acquisition, materials, funding, and consultingservices; inability to pick and detect potential markets; inability to exploit market opportunitieswhich call for large volumes, steady quality and consistent standards, and steady supply Smallsize is also a restriction on gaining access to such serves as training, market intelligence, logisticsand technology Thus such limitations limit SMEs in gaining access to global markets; moreoverthese also restrain their operations in open, competitive local country markets

World Bank (2004) highlighted that lack proper planning on how to enter markets usually causesthe SMEs constraint of market access and contribute significantly to their failure

Biggs, Shah and Srivastova, (1995) advocated that having acquired the management skills themanagement is supposed to be committed to exporting and have tangible export plan to penetrateforeign markets They went on to note that these are some of the key success factors in exportingLevy (1995) observed that a good export plan helps a firm to obtain financial assistance,investors or any strategic partners necessary to make the export venture a success DenmarkTraining services (1996) agrees with Kotler (1997) that an export plan is a must for anyexporting company, as it becomes a source of direction for the particular company as it venturesinto foreign markets

7 Tax Policies and other policies

Trade policy should aim to make it as easy for SMEs to engage in international transactions asdoing business domestically Governments need to simplify their own regulations regardingimporting/exporting and harmonize their trade procedures with international standards MostWest European countries have established national trade and transport facilitation committees,bringing together representatives of relevant public and private sector institutions, to reach thisobjective (Nigel: 1981)

Kapil (1997) points out that high taxation is another issue raised by many SMEs as impactingnegatively on their decision of whether or not to export According to industry representatives,the tax regime does not distinguish between a large firm and a small-enterprise and,consequently, the financial burden on the latter can be quite substantial

The impact of government taxes on the SME sector depends largely on whether the taxes leviedare direct or indirect Double taxation (direct and indirect taxes) erodes profit thus minimizingre-investment, working capital and savings Also exceptions from duties on imported inputs forforeign investors create stiff competition for locally produced inputs Taxation may preventvertical expansion of the SMEs and their integration with the larger governments to achievecertain objectives such as income distribution, employment creation, transfer of technology, andmarket expansion Biggs, Shah and Srivastova, (1995)

The adjustment of the exchange rate through devaluation's can also have both negative andpositive effects on the production and competitiveness of the SME sector Generally, theimmediate effect of exchange rate devaluation is to raise the local price of imported goods andcreated temporary shortages in imported items leading to higher demand for SME sectorproducts Thus, to the extent that the SME sector rely mainly on local inputs, exchange rateadjustments can result in competitive advantage for SME products vis-à-vis larger enterprises.Mead et al (2006).

Dessing (1990) reiterated that the changes resulting from the fiscal and momentary reformsmight open many opportunities for SME sectors For instance in cases where SMEs products aregood substitutes of large enterprises output, it is possible that the impact of a fall in real incomebecause of adjustment policies may decrease demand for the latter and increase demand for theformer through the substitution effects (Tesfachew, 1992) argue that this would be a positivedevelopment for SMEs since it may involve not only a shift in demand but also a movement infactors of production from large enterprises to SMEs This point is supported further by thefindings from the study undertaken in Ghana and Tanzania (Dawson, 1990) The study notes thatthe economic vacuum created because of public and private sector was subsequently occupied bySMEs Dawson observes further that with the decline of public and private enterprises, there was

an increase in sub-contracting arrangements between the public and private sector and SMEs asthe former contract jobs that they previously did in-house

In some other African states, problem had been emanating from government inconsistencies andnon-routine and unclear policy implementation A good example is that of Nigeria Inacknowledging the existence of SMEs and their role in the economy, the government drafted andimplemented policies that encourage SME development These laws embedded contractregulations, leasing, corporate tax and also fiscal and export incentives Nevertheless, as is thenorm of most African politics the will to implement the policies properly was never there.Corruptive behaviors were seen thus diverting these programmes from the directed benefactors.Illegal permits and licenses were issued at all ranks to family members and friends runningunsanctioned small scale operations that were not tax relief qualified and other incentives Thus,

there was little or no impact on the original target group, Economic Commission for Africa

(2001)