Innovational Barriers for Smes in China

Innovational Barriers for SMES in China

Although in recent years the development of small and medium-sized enterprises (SMEs) has increased significantly, these enterprises continue to face institutional barriers especially in the innovation sector. These barriers can be further broken down into five key areas: fairness in competition, regulations surrounding the sector, tax burdens, the lack of a support system and finally, what this assignment tries to highlight, the access these SMEs have to finance. The inability of a SME to access suitable finance has been identified in numerous countries globally as the most significant factor that acts as a barrier for the survival and overall growth of these enterprises. (Acs, Carlsson, & Karlsson, 1999; OECD, 2008) As stated previously, investors and commercial banks are unwilling or reluctant to offer financial support to these SMEs due to their high-risk profile. The high risk of bankruptcy and the fact that the majority of these new enterprises are unable to provide sufficient collateral, has caused these lending institutes to lack the necessary information and skill to offer finance. (Arora, 2009) Although the SMEs in China account for 60% of the national GDP, they only obtain less than 25% of bank credit. (Zhu & Sanderson, 2009) This can be seen as the largest barrier for these enterprises in China, the inability to gain financial backing has resulted in a market where most of these enterprises have to rely on providing their own capital and in turn these SMEs are wholly profit orientated and are unwilling to invest in research and development of their products. The short-term scope of business caused by the lack of funding does not allow these enterprises to engage in the more long-term process of innovation and floods the market with pop up business that you would not see in the more developed West. Taking Ireland as an example of the difference of lending options for SMEs, 2015 figures show that the refusal rates are decreasing from 38% last quarter to 32%. These figures show that banks are more willing to invest in startup enterprises in Europe as the demand for lending has remained constant at 43%. Without the willingness of these lending partners in China, many SMEs have looked elsewhere to less legal areas such as shadow banking. However in Ireland there are still many other options if a SMEs fails to obtain capital from the banks. The government has step up agencies like Enterprise Ireland that provides advice and mentoring to new enterprises as well as supplying funding and opening doors to international market places dotted around the globe. It is through these mediums that the government plan to increase the success rates of new SMEs and secure economic growth. Current economic indicators (April 2015) show that CPI inflation currently stands at -0.6% and the standard unemployment rate has now reduced to 10%. (isme.ie)