Academic journal article Management : Journal of Contemporary Management Issues

Challenges of Small and Medium Sized Companies at Early Stage of Development: Insights from Bosnia and Herzegovina/izazovi Malim I Srednjim Poduzecima U Ranoj Fazi Razvoja: Rezultati Iz Bosne I Hercegovine

Academic journal article Management : Journal of Contemporary Management Issues

Challenges of Small and Medium Sized Companies at Early Stage of Development: Insights from Bosnia and Herzegovina/izazovi Malim I Srednjim Poduzecima U Ranoj Fazi Razvoja: Rezultati Iz Bosne I Hercegovine

Article excerpt

1. INTRODUCTION

A recent report from the European Commission (2015, p. 6) finds that a minority of SMEs expands their business and the number of employees, with the SMEs creating 58% of total added value and 67% of employment in the non-financial business sector in 2014. Small business is especially important in developing countries (Rao, 2014; Ratten, 2014; Ul Haq et al., 2014 as stated in Hyder and Lussier, 2016). In Bosnia and Herzegovina (B&H) as a developing transitional country, SMEs represent more than 99% of enterprises in non-financial business sector (Agency for Statistics of Bosnia and Herzegovina, 2015).

In order to stimulate the development and growth of SMEs, various instruments and models of financial and non-financial support to this sector have been developed (Grover and Suominen, 2014; OECD, 2014; Petkovic and Tesic, 2013). At the heart of the transitional process is entrepreneurial supporting institutions building as well as entrepreneurship and SMEs development (Hisrich et al., 2016; Trivic and Petkovic, 2015). Relevant institutions in a number of developed world economies, to a lesser or greater extent, stimulate growth and development of SMEs and entrepreneurship through adjusting business environment to defined needs of the SME sector, the rule of law or through the direct monetary incentives (Erastus et al., 2014).

Unfortunately, despite all the institutional support in developed countries, the failure rate of small businesses is high globally. About 50% of new businesses fail during their first five years. Many smaller enterprises are also under increasing pressure from the companies they supply to meet new standards and design requirements linked to improved resource efficiency and recyclability (European Commission, 2013, p.10).

The better understanding of reasons for entrepreneurial failure should provide additional assistance in increasing the success of new entrepreneurs, although it has been proved as difficult to predict which ventures will succeed or fail (Hyder and Lussier, 2016, p. 82). One of the main problems that SMEs are facing in transition countries such as B&H is access to external sources of financing (Hisrich et al., 2016; Balling et al., 2009; Burk and Lehmann, 2006). There is a rather weak recovery in the SME sector, as related to entrepreneurs' access to capital (OECD, 2014). Guaranteed loans remain the most widely used instrument at governments' disposal to ease SMEs' access to finance (OECD, 2015).

In the Republic of Srpska (RS), one of two B&H entities, where we have conducted empirical research, in addition to the lack of available alternative external sources of financing for start-ups and existing SMEs, such as angel investors, venture capital funds, factoring, mezzanine financing, crowdfunding, etc., there are a number of other factors, which could cause increasing failure rate of companies (Hisrich et al., 2016). During 2014, in the Republic of Srpska 3,242 new individual entrepreneurs were registered, while 4,965 were shut down. In addition, 839 new SMEs were registered, while 569 SMEs were shut down (Agency for development of small and medium-sized enterprises of the Republic of Srpska, 2015, p. 5).

Although enormous efforts are being invested in order to create a conductive business environment for the growth of newly formed and development of existing SMEs, due to the impact of a number of different factors, of both internal and external nature, many companies shut down during the first years of existence (Chittithaworn et al., 2011). The most challenging problems, faced by 4,928 young businesses in the US, which were surveyed by the Kauffman Firm Survey include slow or lost sales (36 percent) and unpredictable business conditions (28 percent) (Robb and Farhat, 2013). Shut down of SMEs results from the inability of the business founders, entrepreneurs and managers to provide the company's operations over the long term in accordance with the relevant legal provisions. …

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