Small and Medium Enterprises Essay Example | Topics and Well Written Essays - 3000 words

Small and Medium Enterprises - Essay Example The economic downturn brought about financial difficulties in SMEs and at the same time, lenders could not guarantee access to additional funds. Some of the SMEs were forced to shut due to financial difficulties and bankruptcy. The level of investments in SMEs also declined due to lack of funds for investments (Stokes and Wilson, 2010). One of the factors that limited the ability of SMEs to access credit during the recession was the tight credit controls. The government efforts to control the level of money supply lead to high interest rates. Banks had to raise their lending rates and tighten their credit policies to comply with government regulations. Consequently, the SMEs that could not meet these new credit terms could not access funds from banks to finance their operations. SMEs were more vulnerable to the negative effects of the recession of business operations compared to large firms. This is because SMEs lack resource and market manpower to withstand sudden environmental chan ges. The changes in the global economic environment brought about by the 2008 recession had severe effects on SMEs especially on the young and new business (Stokes and Wilson, 2010). The 2008 recession forced organisations to lay off many employees to survive. The level of production reduced and layoffs were used as a way of reducing the cost of production. SMEs were not spared from this move and they too had to lay off a significant number of their employees. This means that they would later incur additional labour costs of recruiting and training new employees after the economic recovery. The performance of SMEs in terms of output production and revenues was severely affected during the recession. The effects on performance were more severe in high risk SMEs relative to low risk SMEs. High risk organisations tend to have high debt to assets ratios. These organisations were forced to take drastic measures of laying off their employees and reducing the dividends paid to shareholders (Stokes and Wilson, 2010; Richard 2011). The profitability of SMEs reduced during the recession and the level of competition increased as well. The demand for products was low and thus, firms intensified their marketing activities to attract customers. However, the effectiveness of the marketing strategies was limited by the reducing purchasing power of the consumers during the recession. The SMEs across Europe faced excessive regulations administration, lack of skilled human resources and high costs of productions (Richard 2011). Question 2: Reasons why small firms dominate some market structures There are many theories that explain why small firms dominate certain market structure. The technical efficiency theory argues that the existence of small firms in a certain market will depend on economies of scale. Industries with large economies of scale compared to the market size tend to have many small firms and a few large firms that control the market. However, the number of small firms in such markets may increase if the concentration ratios and the economies of decline. The size of a market or its geographical distance has an effect on its composition. A large geographical distance will results in high transportation costs for large firms. Such a market will also have diseconomies of scale. Consequently, there will be more small firms than large firms in the market.