Theories of Growth of Small Scale Enterprises

3310 Words Jan 27th, 2013 14 Pages
Theories of Growth of Small Enterprises

Various theoretical models have been developed which describe the growth of small businesses. One class of theoretical models focus on the learning process, either active or passive, and the other models refer to the stochastic and deterministic approaches.

In the passive learning model (Jovanic 1982 cited in Liedholm 2001), a firm enters a market without knowing its own potential growth. Only after entry does the firm start to learn about the distribution of its own profitability based on information from realized profits. By continually updating such learning, the firm decides to expand, contract, or to exit. This learning model states that firms and managers of firms learn about their
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These include in the first place the capital of the entrepreneurs themselves, occasionally supplemented with capital or loans from family members or friends. In line with this, Liedholm and Mead (1999) stated that initial investments in developing countries are almost wholly financed from personal savings or those of relatives and friends and subsequent investments are financed largely from retained earnings.

The empirical evidence shows that small businesses owners do not come from a particular social background and education, rather their business experience is developed through opportunities provided by the social background, and family links in their locality (Liedholm 2001).

A study by Daniels (1995) cited in Liedholm 2001 and Stel et al 2002 indicates that initial capital requirements and the level of regulation are found to be inversely related to the new start up of businesses.

Potential entrants face various obstacles. According to Kawai and Urata 2001, the three most obstacles are lack of financial resources, lack of human resources and difficulties in developing distribution network. Financial constraints on the start up of new ventures have received much attention in developing countries (USAID 2002). The measures of financial constraints include the size, number and source of loans, the rate and amount of reinvested profit,
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