Smes Failure

Introduction

Nowadays, with the development of the society and economic, more and more small firms come to the stage of business. Some of them did survive in the critical competition and achieved profits, however, some of them died. Studies revealed that the size of the organizations and the internal and external factors both play vital roles in the process. This essay will explore the reasons why the small firms failed and assess whether they are useful to prevent the failures.

What is failure

The extent of failure

Before exploring the reason why the small firms failed, it is necessary to know how failure is defined. According to the research of Carter and Auken (2006), there is a variety of definition of failure. The two extreme failure can be defined as the total change of business owner and the termination of business. Some of the studies believe that the former one is not an actual failure because the business is still running but under a new leader. However, Watson and Evertt (1999) insist that due to the change of the owner, the business resources will be redesigned and the business strategies will be changed, on this aspect, it also means the failure of the organization. On the contrary, Headd(2003) demonstrated that the change of owner also leads to the continuous development of the organization, so it cannot be defined as a failure. Besides the extreme situation, there are 4 more definitions of failure, which are discontinuance for any reason, bankruptcy, business liquidation, and failing to be outstanding. These definitions mainly focus on the performance of business. The different uses of the definitions will lead to the differences of failure rate. The border the definition is, the higher the failure rate will be.

The rate of failure

In different eras, due to the different reorganizations of failure, studies provided different data for the rate of failure. For example, in the 1980s, it is reported that more than one-half of the all the new companies with one-year launch has failed and one-third of the organization disappeared with four years (Cooper, Dunkelberg and Woo, 1988). However, the recent studies showed that the rate of failure of the small firms is not as high as predicted before. The research of Hedd(2003) indicated that two-third of the small enterprises lasted more than two years and half of the firms survived more than four years. The difference might be caused by the external economic environment or the definition of what is a failure. Besides, there are differences between industries. Phillips and Kirchoff(1989) found that the construction companies has the worst performance as the rate of failure was the highest.  Moreover, some studies also found that the younger the companies are, the easier they will fail (Kallberge and Leicht, 1991). The recent research focuses more on the impact of the external impact. For example, the research of Tian and Wang (2014) showed that when there is an innovation of technology, the failure rate of the small organization will be reduced evidently. Meanwhile, the easy monetary policies of the government also benefit the small enterprises a lot, as it provided indirect financial support to those organization. Finally, the failure rate of small companies is also related to the local market. The research of Stearns et.al(1995) demonstrated that the location of the organization has a significant influence on the development of the enterprise. The reasons include the local market capacity, the local need of the productions and the competitions. In conclusion, the failure rate can show the current situation of the small firms. However, the definition of failure and the external environment have a huge impact on the status.