The challenges of Globalization on Small Medium Enterprises

description on project background.

In the context of Tanzania, the majority of SMEs fall under the informal sector and engaging up to 4 people, in most cases family members or employing capital amounting up to Tshs.5.0 million / $3,235.83. (Tanzania chamber of commerce industry and Agriculture, 2007). “The SMEs cover non-farm economic activities mainly manufacturing, mining, commerce and services.” (Tanzania ministry of industry, trade and marketing, 2007).

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It is easy to establish SMEs all over the world and in Tanzania in particular, since their requirements in terms of capital, technology, management and even utilities are not as demanding as it is the case for large enterprises. These enterprises are also established in rural settings and thus add value to agro products and at the same time facilitate the dispersal of enterprises.

“About one third of the GDP originates from SME sector. The sector has more than 1.7 Million businesses, engaging about 3 million people, who occupy about 20% of the total labour force. 92% of the annual school leavers (at all levels) in Tanzania are potentially absorbed by the SME sector. There are about 700,000 new entrants in the SME sector every year.” (Saiguran, 2007) Therefore it is reflected already that the SME sector plays a crucial role in the economy.

Some of the problems faced by SMEs in Tanzania include;

“SMEs constitute a higher credit risk because they often lack diversification in their sources of income and/or are concentrated relative to large firms, with the possible exception of SMEs oriented to the consumer segment (niche market). They also suffer from significant uncertainty regarding potential tax liabilities. There is no Opaqueness in balance sheets therefore reflecting weak accounting practices and non-transparent information.” (Tanzania chamber of commerce industry and Agriculture, 2007). All this results into banks being reluctant to lend them money as a result of low credit worthiness which leaves SMEs with limited access to finance.

A report from the (ministry on industry and trade in Tanzania, 2002) reports the following problems;

In addition, Business Development Services, namely services related to entrepreneurship, business training, marketing, technology development and information are underdeveloped and not readily available.

There is very weak demand for the products produced by SMEs arising from low and dwindling consumer purchasing power as well as competition that arises with similar imported products.

Then again, SME operators lack information as well as appreciation for such services and can hardly manage to pay for to pay for the services. As a result, operators of the sector have rather low skills. Also, there is no umbrella connection for SMEs. Simultaneously, the institutions and associations supporting SMEs are weak, fragmented and uncoordinated partly due to lack of clear guidance and policy for the development of the sector.

Distortionary regulations affecting SMEs (Unfavorable legal and regulatory framework). Tanzania is listed among the top 10 difficult countries to build a warehouse, it takes 12 procedures to register a property, ¾ of Tanzanian businesses complain of taxation administration (local and central), and it takes 13 procedures to start a business and 35 days long, at a cost of 161 percent income per capita. These all add up to high compliance costs which tend to reduce the resources needed for investment and high operational costs which results into high competitiveness of local domestic products both in internal and external markets.

Another problem is as far as the infrastructure is concerned, the roads are very bad thus affecting transport in a way that it makes it difficult and costly to move goods from one point to another within the country and adds up to costs. The power is also unreliable and unstable and can disrupt deadlines. Communication is undeveloped and costly. It is difficult to obtain network in rural areas thus affecting the business activities of SMEs and also affecting their cost of production.

A heavy cost of compliance resulting from their size is also one of the problems faced by SMEs. This is because they have limited resources (in terms of financial means and manpower). Their spending for market research and market entry take a much higher proportion of their total spending.

All in all, this project will be analyzing the importance of SMEs in Tanzania and evaluate their contribution to the country. The problems/ challenges in terms of growth, and their characteristics in relation to Globalization including those mentioned above will be analyzed. Various ways in which SMEs can grow to venture into global markets will be sought for their betterment and future enhancement in their businesses.

C.

Brief description of project objectives.

(i.e. scope of proposal, constructs used, limitations and significance)

The objective of this project is to investigate the impact of Globalization on SMEs in Tanzania. These impacts can be both positive and negative. It will also evaluate the importance of SMEs in the Tanzanian economy. Secondly, would be to assess the challenges faced by SMEs due to Globalization. Thirdly, a review on existing Government promotion policies and strategies on the Tanzanian SMEs will be prepared. Lastly but not least, is to determine ways in which the SME’s in Tanzania can grow to become global players.

As for the limitations; for the questionnaires sent out, the responses may be limited. It would be very difficult to get the respondents to answer to the questionnaires. Another limitation would be in the selection of the sample. The sampling frame is very vast thus making it quite difficult to get the correct respondents for the interviews and questionnaires. As for the sample size which is about 100 people, the limitation is that the cost is relatively high especially when conducting long distance interviews over the phone. Lastly but not least, this research is limited to SMEs in Dar-es-Salaam so it may not be possible to generalize it to the whole of Tanzania.

The significance of this project is to look at the challenges of SMEs in Tanzania and use it as a prototype to other African countries. There is very limited research on SMEs in Tanzania and this project will contribute as a research paper. This project will also open the eyes of SMEs to growth and development in relation to Globalization.

D.

Brief description of the models/theories/concepts that will be used in this proposal.

(i.e. consumer behaviourism model, CSF and etc.)

In this project some important internationalization models will be used, they include, eclectic paradigm of international production by Professor John H. Dunning, Porters Diamond and the theory of Marginal Industry Dilation by Professor Kiyoshi Kojima.

There are three reasons for the use of the eclectic paradigm. “Firstly the paradigm is based on the theories about multinational enterprises. Secondly, the model can be used to explain all types of foreign direct investment (FDI). And lastly, and most importantly, the model embraces all the three ways in which a firm can engage in foreign activities, i.e. foreign direct investment, trade, and contractual resource transfers, e.g. licensing, technical assistance or management and franchising agreements. Moreover, the model makes it possible to predict which route will be preferred.” (Bulcke, 2003)

According to (Porter, 1998) he designed a diamond shaped basis of a framework to illustrate the determinants of national advantage. This diamond illustrates the national playing field that countries establish for their industries. Porters Diamond will be used to demonstrate the factors of competitive advantage for SMEs in Tanzania.

The theory of marginal industry dilation is an important foreign direct investment theory to developing countries. Its connotation fits for the true situation of countries middle and small size enterprises. SMEs could use this theory as a direction thus helping them go abroad bravely and develop multinational management. The expansive environment and ardent competition will develop SMEs and prepare them to face the challenge of the economic globalization. (Free papers, 2006)

E.

Academic research being carried out and other information, techniques being learnt.

(i.e. literature – what are the names of books you are going to read / data sets you are going to use)

The books used will mostly talk about Globalization, the African economy, Internationalization.

Journals, articles, and magazines will also be referred to.

Some of the references include the following:

Articles

Bulcke, 2003, Internationalization towards China after its Accession to the WTO, Katholieke Universiteit Leuven, Departement Oosterse & Slavische Studies, viewed on 1st September 2010, available at;

http://webcache.googleusercontent.com/search?q=cache:8b2CcFrEHjcJ:www.cemcweb.com/publication_doc/Opportunities%2520for%2520SMEs%2520in%2520China%2520-%2520thesis%2520of%2520Mattias%2520Grillet.doc+Internationalization+towards+China+after+its+Accession+to+the+WTO+Are+There+Opportunities+for+European+SMEs%3F&cd=1&hl=en&ct=clnk&gl=my

Ministry of Industry, trade and marketing, 2007, SME opportunities, viewed on 1st September 2010, available at;

http://www.mitm.go.tz/sme.php?cat=15&subcat=37

Porter, 1998, Competitive advantage of nations, Free Press, New York, available at;

Saiguran, E, 2007, SME development: Tanzania experience, Small Industries development organisation Tanzania, viewed on 4th September 2010, available at;

http://docs.google.com/viewer?a=v&q=cache:0jN8a7r-DCsJ:www.waitro.org/files/downloads/Proceedings/sme-steap2007/sido-emmanuel.pdf+how+many+smes+are+there+in+the+tanzania&hl=en&gl=my&pid=bl&srcid=ADGEESghp7HJMdzm_ULpMCu59dGnkdxqIEsl7lohW3QCim1T-r7i3o9A2e2nZREV-rzeZHiflUEgS0o6BGlaBeKaiIT-znZTgR6c7uJfyL2qfmmhJlvZTePS8gLx6PAc6KWjejorEj9Q&sig=AHIEtbRoLuZ9Z25T1nC3r7Y7Rk4pTScmtQ

Books

Africa Development bank, OECD, 2005, African Economic Outlook, OECD publishing, France, available at;

http://books.google.com.my/books?id=vTWgJJJgYswC&pg=PT411&lpg=PT411&dq=SMEs+classification+in+Tanzania&source=bl&ots=GvWIHnE-1j&sig=rJ8zK7Co_wNNSD5lgemJsqiXmNA&hl=en&ei=ek5-TPX3C4LyvQOp262EDg&sa=X&oi=book_result&ct=result&resnum=9&ved=0CDoQ6AEwCA#v=onepage&q=SMEs%20classification%20in%20Tanzania&f=false

Athanassiou, N. & D. Nigh, 2002, “The Impact of the Top Management Team’s International Business Experience on the Firm’s Internationalization: Social Networks at Work”, Management International Review 42:2,pp.157-181.

Björkman, I. & M. Forsgren (ed.), The Nature of the International Firm: Nordic Contributions to International Business Research, Handelshojskolens Forlag, Copenhagen, s.d..

Bürgel, O. & A. Fier & G. Licht & G. Murray & E. Nerlinger, 1998, The Internationalisation of British and German Start-Up Companies in High-Technology Industries, Discussion Paper No.98-34, Centre for European Economic Research.

Creswell, J, W., 2003, Research design: Qualitative, Quantitative and Mixed Methods Approaches, 2nd edition, Sage Publications, Inc, United Kingdom

Ghosal, V. & L. Prakash, 1999, The Differential Impact of Uncertainty on Investment in Small and Large Businesses, HWWA-Diskussionspapier 81, HWWA-Institut für Wirtschaftforschung, Hamburg.

Johanson, J. & Associates, 1994, “Internationalization, Relationships and Networks”, Studia Oeconomiae Negotiorum 36, Acta Universitatis Upsaliensis, Uppsala.

Johanson, J. & J.-E. Vahlne, 1994, “The Internationalization Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitments”, Journal of International Business Studies 8 (Spring/Summer 1977), pp.23-32, as publicized in Johanson & Associates, , pp.50-61.

Johanson, J. & J.-E. Vahlne, 1994, “The Mechanism of Internationalization”, International Marketing Review 7 (1990), pp.11-24, as publicized in Johanson & Associates, pp.84-95.

Johanson, J. & F. Wiedersheim-Paul, 1994, “Internationalization of the Firm: Four Swedish Cases”, Journal of Management Studies 12 (October 1975), pp.305-322 as publicized in Johanson & Associates, , pp.34-49.

Pedhazur, E, J., & Schmelkin, L, P., 1991, Measurement, Design, and Analysis; an Integrated Approach, Lawrence Erlbaum Associates, Inc, Hillsdale, New Jersey

Peter, J., , 1990, “Internationalization of Small Business in a Microeconomic Perspective”, International Small Business Series 4, Institute of Small Business, University of Goettingen.

F.

Brief description of the materials/methodologies needed by the proposal.

(i.e. data collection methods, sampling, sample size and target group etc.)

As for the data collection methods, there is a need to gather primary data in order to attain the basic information and get viewpoints, it includes; written and online questionnaires, telephone and online interviews and as for secondary data it will be used to get critical and more in-depth information on research that has already been done, it will mostly be used in the literature review. Here various books, journals, and articles will be used. Academic research will also be conducted and it will include scholarly articles by various universities, students or professors.

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Descriptive research to describe the characteristics of SMEs will be carried out. The research will seek answers to various questions, such as what are the problems faced by SMEs and what ways can be used to correct them. It is based on previous understanding of the problem. The research will be cross-sectional where by a representative subset is studied, at a defined time.

The sampling frame will include the top and middle management of SMEs in Tanzania. The sample size will be about 100 people.

The sampling methods used for this research would be probability and non-probability sampling because the research is vast. Under probability sampling; Stratified random method will be used thus selecting SMEs from certain demography in Dar-es-Salaam, Tanzania. The simple random sampling will also be used, hence choosing a choice of 100 SMEs from a choice of 500. The names of some of the SMEs include; Tanesco, Alexander Forbes Tanzania Limited, Showerlux Industries, Oryx, Gapco, Copper solution company, Raycom enterprises Ltd, Tanzania cigarette company Ltd, Zain Tanzania Ltd, Precision Air, Celtel Tanzania etc. Under non-probability sampling, snow-ball (referral by primary respondents) and self-selection (invite participation and collect data from those who respond) are methods that will be used.

G.

Brief description of the evaluation and analysis proposed for this project.

(i.e. project deliverables and hypothesis, correlation test etc)

This project will be of great use not only to Tanzanian but also to other African countries since it is aimed at finding ways to enhance the development of SMEs in relation to Globalization. Secondly, theories by other SMEs who have succeeded to go Global will be analyzed and will be proposed for application to benefit the SMEs in Tanzania.

The expected results for this project include; Firstly; With strengthened SME departments or introduction of the Ministry of small medium enterprises, a lot of time and money will be devoted to the sector thus enhancing the chances of Tanzanian SMEs to become Global players. Secondly; With high brand consciousness, the products of SMEs will be able to stand out in the international markets. Thirdly; With participation in trade exhibitions such as Expolink, India property expo, East Africa International trade exhibition, SMEs can effectively market their products overseas.

H.

Illustration of how this project will benefit the future employability

This thesis will help increase knowledge and understanding on SMEs. It will also help determine what problems are being faced by SMEs in Tanzania and what measurers can be taken to correct them. Lastly but most importantly, this project will help find a match between theory and practice and its application to the real world and will be a basic guide for all SMEs wanting to internationalize towards the economies.