ID 6162
Burgis, Oliver: Small and medium-sized enterprises, globalization and the internet
Hamburg: Diplomica GmbH, 2002
Zugl.: Nürnberg, Fachhochschule, MBA-Arbeit / Master of Business Administration, 2002
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III
Table of contents
1. Introduction ...8
2. Small and medium-sized enterprises ...11
2.1. Definition of SMEs ...11
2.1.1. Quantitative features ...13
2.1.2. Qualitative features ...15
2.2. The importance of SMEs for the German national economy ...18
2.2.1. Historical development of the Mittelstand ...19
2.2.2. Economical and social importance of SMEs...20
2.3. Advantages and disadvantages of SMEs ...23
2.4. Actual trends und developments in the SME sector ...27
2.4.1. A new Mittelstand arises ...27
2.4.2. Co-operations ...28
2.4.3. Changes of consumer needs ...29
2.4.4. Handover of firms ...29
2.5. Summary ...30
3. Globalisation and internationalization ...32
3.1. Conceptual foundations ...33
3.1.1. Globalization ...33
3.1.2. Differentiation of globalization and internationalization ...34
3.1.3. Internationalization...34
3.1.4. International corporation ...35
3.2. The globalization of markets and SMEs ...36
3.3. SMEs and internationalization...39
3.4. Market entry strategies...43
3.4.1. Institutional forms of a market entry...43
3.4.1.1. Export ...46
3.4.1.2. Licensing ...47
3.4.1.3. Franchising ...48
3.4.1.4. Co-operations...49
3.4.1.5. Subsidiaries and direct investments...50
3.4.2. Timing strategy ...52
3.4.2.1. Waterfall strategy ...53
3.4.2.2. Sprinkler strategy...54
3.5. Summary ...55
IV
4. The Internet and eCommerce...56
4.1. The Internet...60
4.2. eBusiness activities ...62
4.2.1. eCommerce...64
4.2.2. eProcurement...67
4.3. Importance of eCommerce in German enterprises ...68
4.4. Future perspectives of eCommerce...73
4.4.1. Economy and enterprises ...74
4.4.2. Global economy ...75
4.4.3. Evolution of eCommerce ...76
4.4.4. The human factor ...79
4.5. Summary ...82
5. Internationalization and eCommerce ...83
5.1. Global eCommerce ...83
5.1.1. Benefits of global eCommerce...84
5.1.2. Barriers to global eCommerce...84
5.1.2.1. Legal barriers...84
5.1.2.2. Market access barriers ...85
5.1.2.3. Financial barriers ...85
5.1.2.4. Other barriers...86
5.2. International market entry strategies by means of the Internet...86
5.2.1. Market selection ...87
5.2.2. Selection of the institutional form of market entry ...88
5.2.2.1. Online-shops...90
5.2.2.2. Virtual shopping malls...91
5.2.2.3. Marketplaces...93
5.2.3. Timing strategy ...95
5.2.4. Market entry barriers...96
5.3. Chances and risks of an Internet-based internationalization...98
5.3.1. Chances ...98
5.3.2. Risks ...99
5.4. Summary ...100
6. Conclusion ...102
7. Bibliography...103
8. List of Internet references...111
V
Table of figures
Figure 1: Who are the shareholders of SMEs? ...16
Figure 2: Who leads the enterprise? ...17
Figure 3: Schematic representation of the enterprise size structure ...18
Figure 4: Macroeconomic performance of the German Mittelstand in 2000 ...18
Figure 5: Balance of jobs created in Western Germany between 1990 and 1994...22
Figure 6: Importance of different funding sources...24
Figure 7: Enterprise start-ups and liquidations in Germany...30
Figure 8: The global competition puts my company under pressure ...38
Figure 9: Companies, who have recognized an increased competition during the last
5 years grouped by number of employees...38
Figure 10: The global competition is rather a chance than a risk...40
Figure 11: Stages of an internationalization process ...44
Figure 12: Paths of market entry strategies ...45
Figure 13: Share of companies with foreign activities by form of engagement...45
Figure 14: Waterfall strategy...53
Figure 15: Sprinkler strategy ...54
Figure 16: Basic technologies as motor of the economy...58
Figure 17: The growth of different media ...59
Figure 18: Amount of Internet users worldwide ...59
Figure 19: Development prognosis of eBusiness activities...66
Figure 20: Forecasted global B2B online sales volume ...67
Figure 21: Most bought goods / used services ...70
Figure 22: Reasons for not engaging in eCommerce ...71
Figure 23: What the utilization of eCommerce really yields...72
Figure 24: Hoped for impacts of an eCommerce engagement ...72
Figure 25: uCommerce ...77
Figure 26: Prognosis of the worldwide development of penetration rates ...78
Figure 27: Disintermediation and reintermediation on the example of the book
industry...79
Figure 28: What role plays the Internet in your daily life?...80
Figure 29: Evolving consumer perception of value...81
Figure 30: Service exchange model of electronic marketplaces ...94
VI
Table of tables
Table 1: Classification scheme for SMEs as used by the IfM...14
Table 2: Classification scheme for SMEs as proposed by the European Commission
...14
Table 3: Chances and risks of different market entry forms ...52
Table 4: Number of Internet users by regions of the world...60
Table 5: Interaction matrix of eBusiness...63
Table 6: Changes for the Mittelstand by the means of eCommerce...66
Table 7: Overview of study results regarding turnover...71
VII
Table of abbreviations
ASEAN
B2B
B2C
BDA
BDI
BMWi
DIHK
Eco
EDI
EFT
EU
GATT
IfM
MERCOSUR
NAFTA
OECD
SME
UNCITRAL
VMU
WTO
WWW
Association of South East Asian Nations
Business-to-Business
Business-to-Customer
Bundesvereinigung der Deutschen Arbeitgeberverbände e.V.
Bundesverband der Deutscher Industrie
Bundesministerium für Wirtschaft und Technologie
Deutsche Industrie und Handelskammer
Electronic Commerce Forum e.V.
Electronic Data Interchange
Electronic Funds Transfer
European Union
General Agreement on Tariffs and Trade
Institut für Mittelstandsforschung, Bonn
Mercado Común del Cono Sur
North American Free Trade Association
Organization for Economic Co-Operation and Development
Small and medium-sized enterprise
United Nations Commission on International Trade Law
Vereinigung Mittelständischer Unternehmen
World Trade Organisation
World Wide Web
8
1. Introduction
The last decade was characterized by mainly to major developments. The first was
the ongoing globalization of the markets. A development that was not absolutely new
in the nineties, since it is already progressing since the fifties. But it was in recent
years when this development gained such an unprecedented momentum and
dynamics, which most people and enterprises were just not prepared for. The second
was the emerge of the Internet and the following e-hype about the "new economy".
Larry Downes named both in his much considered article "Behind Porter" as two of
three new driving forces and influencing factors for the economic affairs of the new
century. And he might probably be right. Although one of them suffered quite a
setback at the end of the nineties when the Internet bubble finally busted. But if one
looks on the technological developments taking place then there is no doubt, that the
Internet will continue its triumphal procession. Certainly in a different way as it did
in the last decade. And probably it will not constitute a "new" economy, but it
certainly will extremely change the old one.
The same is true for globalization, although its effects are maybe not that obvious.
But the trend towards one global market is obvious. The last event in that respect was
probably the Peoples Republic of China entering the World Trade Organization and
opening thereby up its markets for foreign enterprises.
Before that background and as policy-makers and business-people look for
development paths which might take economies successfully over the next decades,
three of the issues which are receiving a lot of attention are:
What is the effect of "globalization"?
What is the role of small and medium-sized enterprises?
What is the impact of "electronic commerce", the rapidly changing ways in
which commercial activities may be undertaken using innovations in
information technology?
The small and medium-sized enterprises are building the backbone of the German
economy. These companies where responsible for the fast recovery of Germany after
Second World War and since them have greatly contributed to develop Germany to
9
the third largest economy in terms of gross national product in the world. Ludwig
Erhardt, former German Chancellor and influential Minister of economics, once
described the importance of the "Mittelstand" for the German economy and society
in a speech held in Göteburg 50 years ago. And his words retain their full validity
even in the beginning of the 21
st
century.
And now these enterprises probably face their greatest challenge ever: the coping
with the afore mentioned developments.
As ice hockey great Wayne Grezky repedently said, that "the key to win is to get first
where the puck moves next." Compared with today's situation of the small and
medium-size enterprises in Germany one can say, that some do not even see the
puck, some are just behind it and only a few are really at the game. This assessment
might be a little bit exaggerated, but it somehow fits the situation.
It is true, that German small and medium-sized enterprises have caught up quite a bit
over the last two years when speaking about the utilization of the Internet and their
internationalization efforts. But regarding the Internet, they still use it far beyond its
possibilities especially regarding eBusiness and eCommerce. Although utilizing them
in a proper way not the way enterprises thought of during the e-hype years -, but
rather in a realistic one, this would really help them to better deal with both
globalizations and the increased and intensified competition. And speaking about
globalization, they do not seem to be fully aware of the consequences and necessities
it brings.
Objectives and structure of this master dissertation
The objective of this master dissertation is to give an overview about the special
situation of small and medium-sized enterprises in the national economy and
regarding to globalization and eBusiness. And finally to have a look on the
possibilities that eCommerce offers them as an instrument for their
internationalization strategy.
10
The first chapter will give a definition of small and medium-sized enterprises. After
that follows a short excursion on the historical development and the importance of
these enterprises for the social-economical environment. Then the characteristic
features, that determine the behaviour and also the advantages and disadvantages of
this class of enterprises, are derived from the discussed before. Finally some thoughts
about current trends concerning the small and medium-sized enterprises are given.
The second chapter will first discuss the meaning of globalization and
internationalization, followed by a description how this affect small and medium-
sized enterprises. At last an overview of a market entry strategy and the advantages
and disadvantages of certain forms of market entry possibilities is given.
The third chapter deals with the implication of the Internet and eBusiness and how
small and medium-sized enterprises have so far been affected and have reacted to
this developments. An outlook to where these developments are heading will
conclude this chapter.
The fourth chapter finally will show, how a possible market entry by means of the
Internet could look like, what has to be thought of and how this would facilitate
small and medium-sized enterprises in overcoming their size-immanent
disadvantages. At last will be a short discussion of chances and risks arising from
such a pursue.
11
2. Small and medium-sized enterprises
The small and medium-sized enterprises (SMEs) are starting point of this master
dissertation. The justification for an explicit study of this enterprise class is based on
the hypothesis that due to their structural differences opposite large-scale enterprises
and combines for the individual SMEs exist particular size specific advantages and
disadvantages as well as chances and risks in respect to an internationalization
strategy and the utilisation of the digital media in particular the Internet.
Provided that one is consistent with that, one has to consider, that economical
statements, which not generally relate to all, but only to a specific class of
enterprises
1
, are only reasonable, if the following two presumptions are met:
o
The various classes must differ from each other sufficiently.
o
The statements for the individual classes must differ from each other
significantly.
For the present master dissertation it is adopted that these presumptions are met. This
can aptly be summarized in the sentence "a small business is not a little big
business".
2
2.1. Definition of SMEs
The distinction between small, medium-sized and large enterprises results from
grouping these according to their size. In this case "small", "medium-sized" and
"large" are indications, which principally pertain to quantitative statements. With
respect to the scale of plant they can be interpreted as a dimension of the potential or
effective economical activity.
3
In practice, however, the concrete definition of the
size of a given enterprise, its resizing over time or its size difference to other
companies is quite difficult.
In the real world it seems hardly possible to develop a homogeneous measurement
for that purpose. Considered from outside there is basically no Mittelstand as a
uniform market anyway. The Mittelstand is rather characterized by a very strong
heterogeneity and fragmentation. In Germany 1531 different sub-industries can be
1
Frequently one distinguishes between the company as a technical-economical unit and the enterprise
or business as a financial-legal unit. For the further considerations of SMEs in this master dissertation
a cover equality of the technical-economical and financial-legal unit is assumed. Therefore the terms
company, enterprise and business are used synonymously.
2
Welsh/White (1980), p. 18.
3
Busse von Colbe (1976), p. 567.
12
identified, each with its own characteristics.
4
Added to that are the versatility and
dynamics of events within each enterprise. All this together complicates the search
for general criteria, which covers the respective company-internal features
adequately. Nevertheless in order to get ultimately an assessment of the size of an
enterprise, one or a few features are grasped that are regarded as representative for
the respective size class and whose characteristics can be determined as objectively
as possible.
5
Therefore in most countries the term "small and medium-sized enterprises" is used as
a synonym for a statistically measurable part of all enterprises participating in the
economy process. In Germany on the other side politicians, scientists and the press
refer to more extensive aspects of SMEs, when they use the term "Mittelstand". So
the term "Mittelstand" is common exclusively in Germany. In all other countries one
simply speaks of small and medium-sized enterprises.
Of course the German usage of this term also covers the statistically oriented
discussion about the SME sector, but goes, however, far beyond that with regard to
the contents. It includes next to the economical and thus quantitatively ascertainable
factors also social as well as psychological aspects, thus qualitative features. This
multidimensional definition is unavoidable in order to understand the motives,
conditions, peculiarities and the influence of an economic sector, established by
economically and legally independent economic units, in its entire nature. As already
mentioned in the introduction, Ludwig Erhard pointed up the features of the German
Mittelstand and its importance for the German economy quite precisely in a speech,
held almost 50 years ago.
6
And his statements retain their full validity even in the
beginning of the 21
st
century. According to his understanding the definition of the
Mittelstand must not be limited to the value of resources and assets, the height of
turnover, or the number of employees. To derive the importance of the Mittelstand
only from statistical figures would simply lead into a wrong direction. Hereby the
basic convictions and the attitudes in the social-economical and political process
4
Fritz (2001), p. 206.
5
Zimmermann (1960), p. 159.
6
Cf. Erhard (1956).
13
would be neglected.
7
The international (business) press stays more and more abreast of this special
perception in Germany and avoids translating the term "Mittelstand" into the
respective language (see articles in "The Economist", "Financial Times", etc.).
8
Which criteria for the delimitation of enterprises are finally chosen, depends
decisively on the respective purpose. This could be for example:
9
o
traditions,
o
statistical structuring of a country's economy,
o
prevalence of legal requirements (for example in the industrial law, law of
taxation, commercial law, etc.),
o
claim for means of conveyance and governmental aids,
o
scientifically practised SME studies.
In the following the different quantitative and qualitative criteria, which are
commonly used in the SME specific literature
10
, shall be discussed shortly.
2.1.1. Quantitative features
When one considers the term "Mittelstand" from a sheer quantitative point of view, it
encompasses all enterprises and free professions across all industries as far as they do
not exceed a specific size. Thereby statistical problems evolve from the definition of
quantity, because an appropriate size indicator that from a scientific perspective
covers all relevant aspects, has still not been found.
11
Science knows a large number of such indicators as for example balance-sheet total,
number of employees, fixed asset, sales etc. The usage of one of these criteria has to
7
His original words read as follows: "Wenn wir Mittelstand nur vom Materiellen her begreifen, wenn
man Mittelstand sozusagen nur an der Steuertabelle ablesen kann [...], dann ist dem
Mittelstandsbegriff meiner Ansicht nach eine sehr gefährliche Wendung gegeben. Der Mittelstand
kann materiell in seiner Bedeutung nicht voll ausgewogen werden, sondern er ist [...] viel stärker
ausgeprägt durch seine Gesinnung und eine Haltung im gesellschaftswirtschaftlichen und politischen
Prozeß.", Erhard (1956), p. 54.
8
Cf. e.g. The Economist: Mittelstand or Mittelfall?, October 15, 1998,
http://www.economist.com/displayStory.cfm?Story_ID=172620, 10/10/2002.
9
Mugler (1995), p. 17.
10
See e.g. n.n. (1997a).
11
Hauser (2000), p. 2.
14
be considered carefully, however, particularly if it is needed for comparison
purposes. In this case it must be sufficiently guaranteed that the respective company-
internal features, for example the production method or the market position, are
considered when defining the chosen variables.
12
Often the official statistics do not provide the needed figures for most of these
indicators. So for the quantitative description of SMEs commonly a pragmatic
approach is pursued internationally. Hereby only the number of employees and the
annual turnover is used as classification figures. Both criteria have the advantage to
be empirically operational and available in many official statistics.
13
However
varying quantitative thresholds are used by different countries and organizations.
This must be considered when comparing information form different sources.
14
Table
1 and Table 2 show exemplarily the classification schemes applied by the Institut für
Mittelstandsforschung Bonn (IfM) and the European Commission.
15
Table 1: Classification scheme for SMEs as used by the IfM
Size of enterprise
Number of employees
Annual turnover in
small
up to 9
up to 1 million
medium-size
10 to 499
1 to 50 million
large
500 and more
50 million and more
Source: IfM: Mittelstand Definition and Key Figures, http://www.ifm-bonn.org/dienste/daten-
engl.htm, 10/09/2002.
Table 2: Classification scheme for SMEs as proposed by the European Commission
Size of enterprise
Number of employees
Annual turnover in
small
up to 40
up to 9 million
medium-size
40 to 250
9 to 50 million
large
250 and more
40 million and more
Source: Europäische Kommission (1996), p. 7, actualized draft as of June 25
th
2002, 96/280/EG.
12
Rohlfing/Funck (2002), p. 6.
13
N.n. (1997), p. 2.
14
For the SME definitions used in selected European as well as further western countries see
Günterberg/Wolter (2002), pp. 16-19.
15
The three top associations BDI, BDA and DIHK criticize in a comment from August 12
th
2002
among other things the sheer quantitative definition of SMEs by the European Commission since
these do not reflect the actual economical situation. See BDI, BDA, DIHK (2002): Gemeinsame
Stellungnahme zur Änderung der KMU Definition, August 12, 2002, http://www.bdi-
online.de/sbRecherche/infostartpage.asp?InfoID={68DDD401-6D85-4B79-9959-BAF91F5265EE},
10/15/2002.
15
2.1.2. Qualitative features
Qualitative criteria assign features to SMEs which include economical, social and
psychological aspects in order to get a better understanding of the motives,
conditions, peculiarities and effects of a self-employed activity.
16
The advantage is that these kinds of criteria reflect typical categories of the
Mittelstand. However, the disadvantage hereby is that an exact assignment is not
possible, since a typical SME feature can by all means also appear at a large-scale
enterprise. In addition it is problematical to determine quantifiable auxiliary
measurements for such criteria. With such a multidimensional definition the special
features of the Mittelstand can be made visible exclusively by empirical surveys, if
necessary also with the aid of special evaluations by the Federal Statistic Office and
the Statistical State Offices.
17
The known catalogues of those qualitative criteria differ from each other both with
regard to their extent and in the weighting of the individual criteria.
18
In the following we will concentrate on particularly characteristic criteria, even
though a generalization is hardly possible with respect to this very heterogeneous
enterprise class. The most important characteristics are:
19
o
The SME is typically a family owned business;
o
the entrepreneur holds a central power position;
o
SMEs show particularities with respect to their objectives. They are for
example not necessarily growth oriented while maintaining their
independence is of great importance;
o
resources in the form of capital, management, personnel, know-how etc. are
more or less by definition - limited;
o
self-financing capacities play an important role;
o
the administrative organisation is limited and only slightly formalized;
o
the relationship between entrepreneur and employees are close and informal;
o
the strategic behaviour is specially characterized by a (in several dimensions
possible) specialization;
o
supplies have a comparably great importance;
16
N.n. (1997), p. 1.
17
Günterberg/Wolter (2002), p. 1.
18
For an especially extensive catalogue see e.g. Pfohl (1997), pp. 19-22.
19
Bamberger/Evers (1997b), pp. 108-109.
16
o
product/market strategies can be combined with cost advantage and/or
differentiation strategies;
o
internationally engaged SMEs are typically specialized enterprises with a
particular competitive advantage.
A further characteristic sometimes mentioned is, that SMEs must not take in a
dominant position and/or be relatively small compared to other enterprises within
their respective industry. This argumentation neglects, however, the highly
specialized niche suppliers that can even as a SME belong to the international market
leaders in their industry (the so-called "hidden champions").
But ultimately the special management system and/or decision-making behaviour of
SMEs are the central characteristics of the Mittelstand.
Figure 1: Who are the shareholders of SMEs?
18,70%
12,40%
9,50%
8,20%
7,70%
2,90%
0,50%
2,50%
89,30%
me myself / the entrepreneur
active partners
family
other companies
one privat person
more privat persons
employees
customers / suppliers
other
Source: Own graphic. Data: N.n. (2001a), p. 15.
The reason for this special management system and/or decision-making behaviour of
SMEs is the fact that SMEs are very frequently led by the entrepreneur himself,
relatively small and traditionally most of the time family owned businesses. Hereby a
further, particularly important qualitative criterion is introduced to the definition of
the Mittelstand. This is the absolute or at least extensive independence from any
combine.
20
According to calculations of the IfM 94.8 % of all SMEs belong to the
category of completely independent that means in no way interwoven with other
enterprises, group of proprietor enterprises.
21
The significance of this is also
20
This characteristic is also taken into account by the SME definition of the European Commission,
which demands next to the quantitative criteria shown in table 2 that a SME must not be in the
ownership of a greater enterprise by more than 25 %. Europäische Kommission (1996), p. 8.
21
Wolter/Hauser (2001), pp. 25-27.
17
confirmed by the results of the newest mind02-study concerning the shareholders of
SMEs (see Figure 1).
This close linkage between a person and an economic unit strongly influences its
market behaviour. This is amplified even more by the fact that in most cases the
entrepreneurs are not only the owners of the enterprise but are also the central
decision makers at the same time (see Figure 2).
Figure 2: Who leads the enterprise?
18,5%
11,1%
1,4%
1,4%
1,0%
66,6%
one proprietor / managing partner
more proprietors / managing partners
proprietor and family
proprietor and external manager
external manager alone
no information
Source: Own graphic. Data: N.n. (2001a), p. 15.
Because of the thereby implied central position of the entrepreneur the decision-
making process is strongly shaped by his personality and especially his values and
attitudes. The pattern and consistence in the entrepreneurial actions of a SME result
primarily from the vision of the entrepreneur, concerning the position of his
enterprise within the environment
22
as well as from his attitudes concerning (family-)
business traditions, risk and safety, change and independence.
23
This has
consequences for the relationship between management and employees, the nature of
the organization, the nature of the decision-making process, financing, the market
behaviour and the relationship between the enterprise and its environment. Further
more the entrepreneur is seldom willing to delegate decisions or generally to limit his
control options and/or influence. At the same time this determines an only slight
differentiation and specialization of the management structures.
In part these qualitative criteria determine the entire enterprise activities to such an
extent, that common quantitative aspects receive almost lower-level character. Thus
22
Obrecht (1995), p. 9.
23
Cf. Pfohl (1997).
18
even (industrial) enterprises with more than 500 employees - from a qualitative point
of view - can be understood as SMEs.
24
2.2. The importance of SMEs for the German national economy
Generally SMEs play a much more important role in the economy than is mostly
recognized. The reason is, that articles in the media relate almost exclusively to the
large-scale enterprises and combines and so the impression could be gained that they
are responsible for the main part of economical activities. But a view on the
enterprise size structure, for example in Europe (see Figure 3), reveals, that these
enterprises with more than 500 employees, however, just account for 0.1 % (in
Germany: 0.3 %) of all enterprises.
25
Numerically the small enterprises dominate by
far.
Figure 3: Schematic representation of the enterprise size structure
Source: Hamer (1997), p. 28.
Figure 4 gives an overview of the capability of the SME sector in Germany and its
macroeconomic performance.
Figure 4: Macroeconomic performance of the German Mittelstand in 2000
1. These are 99.7 % of all
enterprises subject to VAT.
99.7%
24
Hauser (2000), p. 2.
25
Frenkel/Fendel (1999), p. 7.
by turnover
by employees
0,5 mill.
1 mill.
10
5
50 mill.
100 mill.
100
300
19
2. They realise 43.2 % of all
turnovers subject to VAT.
43,2%
3. 69.7 % of the employees have
their occupation in SMEs.
69,7%
4. SMEs instruct 83.0 % of all
trainees.
83,0%
5. Their share of total gross value
added amounts to 48.8 %.
48,0%
Source: Own graphic. Data: Günterberg/Wolter (2002).
The share of the German Mittelstand regarding economic criteria is significantly
higher compared to other industrial countries
26
and even higher than the average of
all Western European countries together
27
. This circumstance among others can be
related to its historical development.
2.2.1. Historical development of the Mittelstand
At the end the Second World War there was the fear of some large-scale enterprises
taking further political influence, since these according to prevailing opinion had
promoted the development of and power take-over by the National Socialist Party in
Germany. Besides the founders of the German social market economy, among others
Walter Eucken, Franz Boehm, Wilhelm Roepke and Alfred Mueller-Armack, feared
for the dynamics of competition in a market economy.
28
Before this background the government of Konrad Adenauer responded with
"benevolent" behaviour towards the small and medium-sized enterprises.
Nationalization measures on the one hand and the promotion of a small and medium-
sized business culture on the other hand were to counteract an economical power
26
Frenkel/Fendel (1999), p. 7.
27
Cf. Europäische Kommission (1994).
28
Frenkel/Fendel (1999), p. 22.
20
concentration and monopolization and simultaneously stimulate the German
economy.
29
Small and medium-sized enterprises were to guarantee a "healthy"
competition and help to achieve the "objective of a democratic and liberally
pluralistic social order".
30
This development was further more supported by Ludwig
Erhard and his "ordoliberalistischen"
31
policy.
Last but not least the Mittelstand played an especially important role for post-war
Germany's reconstruction and the often quoted "Wirtschaftswunder"
32
. Not the so
often cited factors in the economic literature - currency reform, liberalization
programme of Ludwig Erhard or financial aid by the Marshall Plan were head-
responsible for the economical upswing in post-war Germany. They were merely
purely subjective measures that made the "Wirtschaftswunder" happen. These were
first and foremost the skill and the creative potential of the German workforce and
the mobilization of this potential by certain policies. The mobilization of such
potential finally required the establishment of what is called in German, the
Mittelstand.
33
2.2.2. Economical and social importance of SMEs
As already mentioned above, SMEs fulfil a market-economical order function.
Market economy means competition economy. Competition guarantees highest
efficiency of the market economy. Where there is more market economy, there is
also more prosperity as a rule.
34
Where on the other hand are combines and
administration economy, the prosperity decreases. SMEs safeguard the competition
and antagonise monopolization tendencies. They preserve the freedom of selection of
the consumers and concede room to the sanction mechanism through which efficient
29
Gruhler (1994), pp. 91-93.
30
Wick (2000), p. 22.
31
The "Ordoliberalismus" has no conceptual equivalent outside West Germany. It stands for a
neoliberal economic order as conceived by the Freiburg school of economists. It seeks to uphold
individual freedom, protect private ownership of productive capital and reasonable free competition in
all markets, and to provide a basic "order" in the country's economic affairs. It can be seen as a
middle position between collectivism and unbridled liberalism.
32
The rapid rise in economic development, industrial production, and personal affluence that occurred
in West Germany after Second World War.
33
Komp (1997), pp. 39-43.
34
Hamer (1997), p. 32.
21
enterprises are rewarded and by which inefficient enterprises are eliminated from the
market.
35
The participation of SMEs in the economical process gives a larger number of people
the chance to exert influence on the economy and its development and thus to
guarantee the supply of consumers with a differentiated assortment of products and
services. In this respect one can speak of a "social function of the Mittelstand". The
will power taking risks, creativity and the pursuit of success are only some qualities
that decorate self-employed entrepreneurs. By then they increase the self-
development and self-fulfilment of the economy.
36
Within the context of a commodity supply extension SMEs provide a rich and
differentiated product and service range. Hereby they detect the individual needs of
the consumers and are able to cover it with correspondingly individualised products
or services. Thus they open up differentiated markets and bridge gaps in the market.
In conjunction with large-scale enterprises they enlarge the assortment of goods by
delivering specialized parts for the mass production and by complementing deliveries
to the assortment.
37
It seems plausible that the technical progress is borne by large-scale enterprises at
least regarding basic and large-lot research. On the other side SMEs first and
foremost carry on utilization oriented research and developments: Inventions are
developed further and are led to their technical-economical maturity and therefore
make them usable for the consumers.
38
This might be the reason, that the Mittelstand
is very active in introducing new products to markets. The turnover share of new
products is regularly higher for SMEs than for larger enterprises.
39
As an economically valuable effect can also be seen the fact, "that SMEs in critical
times do not have another chance than to develop new products, [...] against what
large-scale enterprises tend to take the easier way of diversification by taking over
35
Mugler (1995), p .43.
36
Zeitel (1990), pp. 24-42.
37
Mugler (1995), p. 44.
38
Mugler (1995), p. 45.
39
Frenkel/Fendel (1999), p. 20.
22
end producers, what in fact possibly solves their problem, but not that of the
economical changeover."
40
Regarding a diversification of risk SMEs have a crisis-preventing effect in national
economy. It is a mathematical-statistical basic law that the probability of deviating
from the expectation decreases with the number of stochastically independent
variables is increased (law of large numbers). The more independently economic
units and industries are in a national economy, the more stable is the number of
enterprises which fail or are successful.
41
With respect to the labour market 69.7 %
42
of the German workforce was employed
by SMEs in 2000. The reason for this is the production structure of large-scale
enterprises, which is optimized for standard and mass production that can be
accomplished better and more cheaply by machines than by humans. In contrast
SMEs must accomplish a make-to-order production, which in turn would not be
feasible without humans.
43
Figure 5: Balance of jobs created in Western Germany between 1990 and 1994
66
.8
00
26
9.
20
0
11
6.
50
0
34
2.
50
0
-1
8.
60
0
17
1.
90
0
28
0.
30
0
67
.2
00
23
3.
90
0
-1
29
.7
00
53
4.
40
0
-2
77
.1
00
manufacturing industry
trade, transport,
communication
services
2 to 9
10 to 99
100 to 499
500 and more
Source: Own graphic: Data: Hauser (2002), pp. 25-26.
40
Tichy (1984), p. 110, quoted in: Mugler (1995), p. 46.
41
Mugler (1995), pp. 46-47.
42
Günterberg/Wolter (2002), p. 160.
43
Hamer (1997), p. 34.
23
The fact, that the safety of employment is greatest
44
in SMEs especially in times of
economic crisis or slowdowns, underlines their importance for the labour market.
Between 1991 and 1995 enterprises with more than 500 employees laid off 14 % of
their workforce whereas SMEs just laid off 1 %. And even in spite of the currently
tense cyclical climate only every tenth SME intends to lay off employees whereas
large-scale enterprises report mass dismissals almost daily.
45
Furthermore in countries with a dual training system SMEs offer the biggest
contingent of training centres for trainees.
46
In 2000 approx. 1.27 million trainees
were employed be SMEs. This corresponds to 83 % of the total number of all
training places in the German economy.
47
Through the offering of training facilities
SMEs contribute hereby considerably to an increase of the humane capital basis of
the German economy.
48
2.3. Advantages and disadvantages of SMEs
The specific strengths and weaknesses SMEs have compared to large-scale
enterprises can be basically derived from their quantitative and qualitative
characteristics. In the following the most important advantages and disadvantages
shall be described. It remains to be noted, that each individual characteristic on the
one hand can have positive aspects, and on the other hand also have negative aspects
at the same time.
Due to their small size SMEs mostly have a simple enterprise structure and system.
Mintzberg puts it as follows: "The structure of the entrepreneurial organization is
often very simple, characterized above all by what it is not: elaborated. [...] typically
it has little or no staff, a loose division of labor, and a small managerial hierarchy.
Little of its activity is formalized, and it makes minimal use of planning procedures
or training routines. In a sense, it is nonstructure; [...] I called it simple structure."
49
44
Frenkel/Fendel (1999), p. 13.
45
N.n. (2002b), p. 96.
46
Mugler (1995), p. 50.
47
Günterberg/Wolter (2002), p. 176.
48
Frenkel/Fendel (1999), pp. 20-21.
49
Mintzberg (1998), p. 615.
24
Of course this changes when you move from a business with ten employees to one
with hundreds and more. But some of this even apply to large SMEs.
Such simple and centralized systems facilitate a high degree of flexibility and short
reaction times. They provide the base for the ability of many SMEs to adapt quickly
to changing market conditions, which constitutes a decisive advantage in times of an
increasingly dynamic environment.
50
Not for nothing it is common sense, that above
all, the fast-moving and not the large and strong companies will maintain their
position in the market in the long run.
Simultaneously the lean administration results in shorter times required for the pure
self-organization and lower organization costs. The small size also accounts for the
ability to provide individualised and specialized services.
The disadvantage, however, is, that SMEs can hardly realize advantages of mass
production (e.g. economies of scale) due to their individualised products and services
and their lower production output. It is especially profound that some types of costs
are hardly variable in relation to the size of an enterprise. Research and development
costs for example, as a base for innovation and flexibility, must be carried out in a
certain amount in order to generate results. Through the relatively large block of
fixed costs and the size-conditional inability to gain economies of scale, SMEs have
a higher cost burden in comparison with large-scale enterprises.
51
Figure 6: Importance of different funding sources
2,53
2,83
3,24
3,69
4,11
1,48
internal financing
bank credits
partner / familiy loans
means of conveyance
supplier credit
equity financing
1 = high importance
5 = low importance
Source: Own graphic. Data: IfM: KMU-Finanzierung im Wandel, p. 8, http://www.ifm-
bonn.org/presse/kmu.pdf, 10/24/2002.
The small size is also the reason for a limited availability of resources in form of
capital, management, personnel, and know-how.
52
50
Heise (1997), p. 35.
51
Hauser (2000), p. 33.
52
Bamberger/Evers (1997b), p. 109.
25
The inadequate financing potentials result from the preference of the entrepreneurs
regarding their independence and the minimum requirements of stock exchanges (see
Figure 6). Both limit the access to capital markets. The situation of a strong
dependence on bank loans, as the second important source of founding, and an
anyhow higher interest burden compared to large-scale enterprises will be further
intensified. With the international banking guidelines, known as Basel II, and the
related rating requirements it is becoming ever harder to get bank credits in the
future.
53
In the personnel administration resources for the management and other important
functional areas such as marketing, finance, or controlling are missing and thus also
the corresponding expert knowledge. Many enterprises do not have the financial
possibilities to employ external specialists. In addition smaller enterprises do just not
have the demand for a full-time worker in specific functions at all. As a result mostly
other members of the staff or the management take on these tasks, even if they are
not sufficiently qualified for them. Indeed the simple enterprise structures support
such cross-functional areas of responsibility; however, frequently the result is that
the enterprises suffer from inadequate expert knowledge and inadequate staff
capacities. The necessity to win external managers can be particularly troublesome
especially in owner-manager enterprises. Even if the owner is willing to give off
parts of his tasks and competence to a "foreigner", such positions are often not very
attractive for third parties, because of the dominance of the proprietor.
Besides SMEs can withdraw less easily from the competition due to their size than
this is possible for large-scale enterprises.
54
Through their specialization and regional
concentration they do often not have any evasive possibilities at hand.
The simple structures of SMEs are based mostly more on the personal experience of
the proprietor than on objective reasons and thereby are often not changed even if the
circumstances would demand so.
55
In combination with a limited scope and the
53
Cf. Wallau (2002).
54
Albach (1983), p. 872.
55
With the statement "When I ever would be forced to changed my enterprise basically, I would
rather close it." agreed 32.4 % of the questioned persons completely/mainly (1999: 22.2 %). N.n.
(2001), p. 31.
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- , 2002, Small and medium-sized enterprises, globalization and the internet, Hamburg, Bedey Media GmbH, https://www.diplom.de/document/221619
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