Factors for Small Business Failure in Developing Countries

Abstract

INTRODUCTION Small business failure is a costly and painful process for business owners, employees, and governments as well. This research project investigated factors that cause small business failure in developing countries, with special reference to Jordanian case. It also aimed at investigating role that governments and agencies interested in small business can play in developing these firms. Two hundred small business owners in manufacturing sector in Jordan were contacted to respond to a questionnaire that was developed as an instrument for data collection. The achieved sample was 112 responses. The findings indicate that main causes of small business failure, as perceived by respondents, can be categorized as two major factors: managerial factors and financial factors. Based on these findings and to upgrade capability of small business owners, special considerations should be given to these two types of skills. Respondents seem to expect too much support from government. They strongly believe that government can do a lot to support small business. Tax exemptions, protection, and regulation of businesses are among major roles that government is expected to play. Such expectations are seen as unrealistic given environment of business nowadays that concentrates on little government involvement in business affairs. Policy planners and economic and management scholars around globe are very much concerned about negative consequences of business failure. Business failure implies loss of jobs to some people, deprivation in society of goods and services that it wants, and declines in social and economic welfare, putting immense pressures on governments to deal with unemployment resulting from loss of jobs. The worldwide trend toward encouraging small businesses as a mechanism to activate role of private sector makes issue of business failure in context of small business an important one. Evidence indicates that small-scale businesses tend to have high labor intensity and better potential for creating additional employment at lower investment costs. Furthermore, experience of some countries indicates that owners of small business have a high propensity to save and to reinvest, even at quite low income levels, and they are able to utilize scattered raw materials that would otherwise not be used (Nelson, 1987, Salah, 1995). Therefore, small business failure implies a great loss of jobs in a decade that has witnessed great emphasis on small businesses. In fact, some scholars call present decade the decade of small company. In Candalino and Knowlton's (1994) own words the speed, quality, and innovation required in business today give advantage to small company, or large company that performs like a small enterprise (p. 25). The main purpose of present research is to investigate factors that contribute to failure of small businesses in developing countries, with special reference to Jordanian small manufacturing firms. IMPORTANCE OF THE STUDY Understanding factors that contribute to failure of small businesses is foundation for developing potential entrepreneurs. Based on results of present study, entrepreneurs' training programs developed by training institutions can be designed in a way that equips entrepreneurs with necessary skills to avoid causes of business failure and capitalize on causes of success. Furthermore, business schools could utilize these factors to develop courses in entrepreneurship and effective small business management (Ibrahim and Goodwin,1986). This study should also be helpful for university students who plan to start or work in small businesses. Policy planners and government agencies can also benefit from this study because some insights will be provided about what should be done to support small businesses. Why Study Small Business Failure in Developing Countries? …

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