Financiar o Crescimento Das Pequenas Empresas Industriais Nos Países Desenvolvidos e em Desenvolvimento Um Estudo Comparativo Entre o Reino Unido e Malásia

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FINANCING THE GRONNTII OF
SMALL M. A'Nt!F:ACTURIN( FIRMS
IN DEVELOPED -AND DEVELOPING COUNTRIES:
.
A COMPARATIVE STtTDY OF THE [UNITED KINGDOM
kND MALAYSIA
by
IS\1.Ai1.:AI3DUL
AHAH
Doctoral Thesis
Submitted in partial fulfillment of the requirements

for the award of Doctor of Philosophy of the
Loughborough University
Ismail A. \\'ahab 1996

To my parents, my wife and our children
III
ACKNOWLEDGEMENTS
First and foremost, I am forever indebted and thankful to Allah for 1its blessings
without which the whole effort would not have been possible.
I am also grateful to many people without whose support and encouragement this
work would not have been possible. I am indebted to both Mr. Grahame Boocock and 'qtr.
Chris McEvoy (supervisors) for their constructive criticisms and painstaking advice from the
beginning until the completion of the research project. I am also thankful to Professor Peter
Lawrence (Research Director), Mr. J.B. Howcroft
(supervisory panel member) and 'dlr.
J.Finnie (supervisory panel member). Their constructive advice and guidance have added
a significant improvement to this thesis.
I gratefully acknowledge the kindness ofmany U. K. and Malaysian small firm owner-
managers who have participated in this study. The entire project would not have been
completed without the cooperation of the 228 U. K. entrepreneurs and 112 Malaysian
entrepreneurs who have given their time and effort in I
answering my questionnaire. am also
indebted to the sixteen entrepreneurs in both countries who have voluntarily participated in
the follow-up interviews for the case studies.
My grateful thanks to Professor Adnan Alias and Professor Humam Mohamed for
their valuable advice and support. I would also like to extend my gratitude to the following
people for in
assisting me one form or another while conducting this project: Puan Normah
Dali and her staff (Statistic Unit, Institut Teknologi Mara), Encik Wan Ismail Wan Mamat
(Malaysian Entrepreneurship Development Centre, Institut Teknologi Mara), Haji Ahmad
tihohaimi Abd. Wahab and Encik Razali Ismail (Small Industry Di-vision, Ministry of
International Trade and Industry Malaysia). I am also indebted to Encik Illias Md. Salleh for
his valuable comments.
Finally, I am thankful to my wife, Faridah, for all her compassion, patience,

understanding and sacrifices throughout my stay in the U. K.
IN'
ABSTRACT
FINANCING THE GROWTH OF

SMALL MANUFACTURING FIRMS
IN DEVELOPED AND DEVELOPING COUNTRIES:
A COMPARATIVE STUDY OF THE UNITED KINGDOM
AND MALAYSIA
by
Ismail Abdul Wahab
The rationale for this thesis stems from three interlinked issues. First, there is a general
recognition of the importance of the small firm sector and the value of its contribution to the
health of economies acrossthe globe. Second, the provision of external finance for growing
small firms in developed and developing countries has improved significantly over the last
few years in terms of both the total of funds and the range of financial facilities available.
Third, despite this rapid expansion in the range of public and private sector financial
initiatives, there is widespread perception that financing difficulties continue to exist,
difficulties which are perceived to be major obstacles or constraints on small firm growth.
This thesis aims to contribute to a better understanding of the practices and

problems of financing the growth of small firms in developed and developing countries with
particular reference to the United Kingdom (U. K. ) and Malaysia. In pursuing the main l
objective, empirical study attempts to investigate the characteristics of small firms and their
owner-managers,as well as the growth orientation of the firms and the extent to which these
characteristics are associatedwith the need for, and use of, external sources of finance and
with the existence of difficulties in obtaining the finance. Subsequently, comparative
investigation betweenthe two countries explores the similarities and differences with respect
to the sources and patterns of finance as well as the difficulties in raising finance.
Having identified the important variables in the theoretical framework of the study,
the relationships among the variables are establishedand researchhypothesesare generated.
In order to achievethe main objective ofthe study, the empirical investigation was conducted
using two research strategies: questionnaires and case studies. Nonparametric gamma and
chi-square statistics are used in analysing the empirical results.
Two major findings emerge from this study. First, the overall characteristics of
firms and owner-managers have no association with the need for, and sources of external
finance and the existence of difficulties in raising finance; whereas growth of the firms can
be associated with the sources of external finance and the existence of financing difficulties.
Second, whilst there is a significant difference in the need for external finance by growth-
oriented small firms in the U. K. and Malaysia, both the sources/patterns ofexternal finance
and the difficulties by
experienced small firms in the two countries are not markedly different.
V
CONTEN'T'S
Acknowledgement
Abstract V
List of Figures xi
List of Tables xii
Chapter One INTRODUCTION
1.1 SMALL FIRMS IN DEVELOPED AND DEVELOPING

COUNTRIES
1.2 OBJECTIVES OF THE STUDY 3
1.3 RESEARCH QUESTIONS 4
1.4 RATIONALE FOR THE STUDY 7
1.5 LIMITATIONS OF THE STUDY 9
1.6 ORGANISATION OF THE THESIS 11
Chapter Two REVIEW OF THE LITERATURE I:

THE FINANCING OF SMALL FIRMS IN
DEVELOPED AND DEVELOPING COUNTRIES
2.1 INTRODUCTION 14
2.2 THFORY OF THE FIRM AND THE PROVISION OF FI\ANCF. 14
2.2.1 Asymmetric Information 14
2.2.2 Agency Problems 15
2.2.3 Adverse Selection and Moral Hazard 17
2.2.4 Cost of External Finance and The Rate of Return 17
2.3 SOURCES OF FINANCE 19
2.3.1 Debt Finance 19
2 Equity' Finance 21
2.3.3 Government Assistance 23
2.3.4 Financing Patterns 24
2.4 DIFFICULTIES IN RAISING FINANCE 26
2.4.1 Debt Gap 28
2.4.2 Equity Gap 30
2.4.3 Information and Knowledge Gap 32
VI
2.4.4 Technology Gap
2.4.5 financial Skills Gap 3-i
2.4.7 Banks and The Small Firms 15
2.5 THE LITERATURE AND SPECIFIC FACTORS )8

2.5.1 The Characteristics of Small Firm 18
2.5.2 The Characteristics of Owner-Manager 43
2.5.3 The Growth of Small Firm 44
2.6 SUMMARY 40
Chapter Three REVIEW OF THE LITERATURE II:

A COMPARISON OF DEVELOPMENTS IN THE
FINANCING OF SMALL FIRMS IN THE UNITED
KINGDOM AND MALAYSIA
3.1 INTRODUCTION 49
3.2 GOVERNMENT POLICY TOWARDS SMALL FIRMS 50
3.3 GOVERNMENT-BACKED FINANCING SCHEMES
_54
3.4 BANK FUNDING 60
3.5 VENTURE CAPITAL 62
3.6 SECONDARY MARKETS 65
3.7 SUMMARY 68
Chapter Four THEORETICAL FRAMEWORK AND

STATEMENTS OF HYPOTHESES
4.1 INTRODUCTION 71
4.2 CONCEPTUAL FRAMEWORK 71
4.3 I)FFINITIONS 76
4.3.1 Comparative Study 76
4.3.2 'Small Firms' 76
4.3. ' Manufacturing 82
4.3.4 Dependent Variables 92
4.3.5 Independent Variables 84
4.4 STATEMENTS OF HYPOTHESES 98
4.4.1 Need for External Finance 89
4.4.2 Sources of External Finance 90
4.4.3 Difficulties in Raising External Finance 91
4.5 SUMMARY 0
VII
Chapter Five RESEARCH DESIGN AND METHODOLOGY
5.1 INTRODUCTION 94
5.2 RESEARCH STRATEGIES 95
5.2.1 Previous Studies Methodology 95
5.2.2 Present Research Strategy 99
5.3 SURVEY METHOD 102
5.3.1 Types of Survey 102
5.3.2 Total DesignMethod 104
5.4 SAMPLING FRAME 105
5.5 QUESTIONNAIRE DESIGN 107
5.5.1 Contents of The Questionnaire 108
5.5.2 Format of The Questionnaire 112
5.5.3 Pilot Study 113
5.6 CASE STUDIES 116
5.7 STATISTICAL ANALYSIS 118
5.7.1 Nonparametric Test 118
5.7.2 Measurement of Variables 119
5.7.3 Measure of Association and Test of Significance:
The Gamma Statistic (G) 119
5.7.4 Chi-Square Test of Independence 122
5.8 SUMMARY 124
Chapter Six THE U. K. SURVEY: RESULTS AND ANALYSIS
6.1 INTRODUCTION 126

6.2 THE SURVEY 126
6.3 PREPARING THE VARIABLES FOR ANALYSIS 127
6.3.1 IndependentVariables 127
6.3.2 DependentVariables 129
6.4 RESULTS AND ANALYSIS 130
6.4.1 Characteristicsof Respondents 130
6.4.3 Sourcesof External Finance 137
6.4.5 Tests of Hypotheses 140
6.5 SUMMARY 153
vu'
Chapter Seven THE MALAYSIAN SURVEY:
RESULTS AND ANALYSIS

7.2 THE SURVEY 156
7.3 RESULTS AND ANALYSIS 157
7.3.1 Characteristics of Respondents 157
7.3.5 Tests of Hypotheses 167
7.4 SY 181
Chapter Eight CASE STUDIES: DISCUSSION AND ANALYSIS

8.2 THE U. K. CASE STUDIES: RESULTS AND ANALYSIS 184
8.2.1 Growth of The Sample Small Firms 184
8.2.2 Sources of External Finance and Growth of The Firms 188
8.2.3 Financing Difficulties and Growth of The Firms 190
8.3 THE MALAYSIAN CASE STUDIES: RESULTS AND ANALYSIS 193
8.3.1 Growth of The SampleSmall Firms 193
8.3.2 Sources of External Finance and Growth of The Firms 196
8.3.3 Financing Difficulties and Growth of The Firms 198
8.4 OTHER ISSUES (U. K. AND MALAYSIA) 200
8.5 SUMMARY 202
Chapter Nine COMPARATIVE ANALYSIS OF THE SURVEY

FINDINGS

9.2 CHARACTERISTICS OF SMALL FIRMS AND
OWNER-MANAGERS 205
9.3 NEED FOR EXTERNAL FINANCE 210
9.4 SOURCES OF EXTERNAL FINANCE 212
9.4.1 Equity Finance 212
9.4.2 Debt Finance 214
9.4.3 FinancingPatterns 215
ix
9.5 DIFFICULTIES IN RAISING EXTERNAL FINANCE 216
9.5.1 Existence of Difficulties 216
9.5.2 Types of Difficulties " 16
9.5.3 Reasonsfor Failure in Obtaining External Finance 216
9.6 SUMMARY 219
Chapter Ten CONCLUSIONS

10.2 CONCLUSIONS AND IMPLICATIONS 221
10.2.1 Characteristics of Small Finns and Owner-Managers 222
10.3 DIRECTIONS FOR FUTURE RESEARCH 233
10.4 SUMMARY 235
Bibliography 236
Appendices
1 Questionnaires for The Survey 266
2 Case Studies: Invitation Letter and Issues To Be Discussed 315
3 Contingency Tables (United Kingdom) 319
4 Contingency Tables (Malaysia) 338
5 The Case Studies Summary 357
X
LIST OF FIGURES
Figure 1.1 The Research Process 12

Figure 4.1 Financing The Growth of Small Manufacturing Firms:
Schematic Diagram of The Theoretical Framework 73
Figure 5.1 Flow Chart to Illustrate The Design of The Questionnaire 114
xi
LIST OF TABLES
Table 5.1 Small Firm Finance: Summary of Previous Studies

Methodology 97
Table 6.1 Respondent Firm Characteristics (United Kingdom) 131
Table 6.2 Respondent Owner-Manager Characteristics
(United Kingdom) 132
Table 6.3 Sources of External Financial Advice (United Kingdom) 132
Table 6.4 Need For External Finance (United Kingdom) 135
Table 6.5 Reasons for Applying for External Finance (United Kingdom) 135
Table 6.6 Awareness of External Sources of Finance (United Kingdom) 135
Table 6.7 Reasons for Not Applying for External Finance
Table 6.8 Sources of External Finance: Awareness of Respondents
Table 6.9 Sources of External Finance (United Kingdom) 136
Table 6.10 Patterns of External Finance (United Kingdom) 138
Table 6.11 Status of Recent Application for External Finance
Table 6.12 Existence of Difficulties in Obtaining External Finance
Table 6.13 Types of Difficulties in Obtaining External Finance
Table 6.14 Perceived Reasonsfor Failure in Obtaining External Finance
Table 6.15 Need For External Finance and Small Firm Characteristics:
GammaStatistic Coefficients(United Kingdom) 141
Table 6.16 Need For External Finance and Owner-Manager
Characteristics: Gamma Statistic Coefficients
Table 6.17 Sourcesof External Financeand Small Firm Characteristics:
Gamma Statistic Coefficients (United Kingdom) 141
Table 6.18 Sourcesof External Financeand Owner-Manager
Characteristics:GammaStatistic Coefficients
Yid
Table 6.19 Financing Difficulties and Small Firm Characteristics:
Table 6.20 Financing Difficulties and Owner-Manager Characteristics:
Table 6.21 Tests of Hypotheses: Measure of Association
- Survey Results Summary (United Kingdom) 155
Table 7.1 Respondent Firm Characteristics (Malaysia) 158
Table 7.2 Respondent Owner-Manager Characteristics (Malaysia) 159
Table 7.3 Sources of External Financial Advice (Malaysia) 159
Table 7.4 Need For External Finance (Malaysia) 162
Table 7.5 Reasons for Applying for External Finance (Malaysia) 162
Table 7.6 Awareness of External Sources of Finance (Malaysia) 162
Table 7.7 Reasons for Not Applying for External Finance (Malaysia) 162
Table 7.8 Sources of External Finance: Awareness of Respondents
(Malaysia) 163
Table 7.9 Sources of External Finance (Malaysia) 163
Table 7.10 Patterns of External Finance (Malaysia) 165
Table 7.11 Status of Recent Application for External Finance (Malaysia) 165
(Malaysia) 165
Table 7.13 Types of Difficulties in Obtaining External Finance (Malaysia) 166
Table 7.14 Perceived Reasons for Failure in Obtaining External Finance
(Malaysia) 166
Table 7.15 Need For External Finance and Small Firm Characteristics:
Gamma Statistic Coefficients (Malaysia) 168
Table 7.16 Need For External Financeand Owner-Manager
Characteristics:GammaStatistic Coefficients(Malaysia) 168
Table 7.17 Sourcesof External Financeand Small Firm Characteristics:
GammaStatistic Coefficients(Malaysia) 168
Table 7.18 Sourcesof External Financeand Owner-Manager
Characteristics:GammaStatistic Coefficients(Malaysia) 175
Table 7.19 FinancingDifficulties and Small Firm Characteristics:
GammaStatistic Coefficients (Malaysia) 178
Table 7.20 Financing Difficulties and Owner-Manager Characteristics:
GammaStatistic Coefficients (Malaysia) 178
Xlll
Table 7.21 Tests of Hypotheses: Measure of Association
- Survey Results Summary (Malaysia) 183
Table 8.1 Case Studies: Finance and The Growth of Small Firms
Table 8.2 Case Studies: Finance and The Growth of Small Firms
(Malaysia) 194
Table 9.1 Respondent Firm Characteristics (Comparative Analysis) 207
Table 9.2 Respondent Owner-Manager Characteristics
(Comparative Analysis) 208
Table 9.3 Sources of External Financial Advice (Comparative Analysis) 208
Table 9.4 Need For External Finance (Comparative Analysis) 211
Table 9.5 Reasons for Applying for External Finance
Table 9.6 Sources of External Finance (Comparative Analysis) 213
Table 9.7 Patterns of External Finance (Comparative Analysis) 213
Table 9.8 Status of Recent Application for External Finance
Table 9.10 Types of Difficulties in Obtaining External Finance
Table 9.11 Perceived Reasonsfor Failure in Obtaining External Finance
Table 10.1 Summary of Empirical Results: Association Between Firm
and Owner-Manager Characteristics And Need For
External Finance (Test of Hypotheses) 223
Table 10.2 Summary of Empirical Results: Association Between Firm
and Owner-Manager Characteristics And Growth Patterns
and Sourcesof External Finance(Test of Hypotheses) 225
Table 10.3 Summaryof Empirical Results:AssociationBetweenFirm
and Owner-Manager Characteristics And Growth Patterns
and Existence of Financing Difficulties (Test of Hypotheses) 229
xiv
Chapter One
INTRODUCTION
1.1 SMALL FIRMS IN DEVELOPED AND

DEVELOPING COUNTRIES
It has been well documented and acknowledged that small firms form a large
majority in the population of businesses in most developed and developing coun-
tries and they have become increasingly important contributors to the countries'
economies (e. g., Schmitz, 1982; Othman, 1984; Ganguly, 1985; Burns & Dewhurst,
1886; Batchelor, 1988a; ACOST, 1990; Fong, 1990; Md. Salleh, 1990; Stanworth
& Gray, 1991; University of Cambridge, 1992; Keasey & Watson, 1993a). Small
firms have played a significant role in enhancing socio-economic development in
most countries, be it in a developed country like the United Kingdom (U. K. ) or a

developing country like Malaysia, and the vital role of small businesses in society
is recognised more than ever before.
The small firm, according to Bolton Committee (1971, p. 343):
is in many ways a highly efficient organism, better adapted to the exploitation

...
of certain kind of economic opportunities than larger units, and having some
special advantages which derive from the intense commitment of the owner-
manager.
Studies in the U. S. A. and the U. K. have shown the importance of both new
firm births and expansion of existing small firms in creating jobs (Birch, 1979;
Gallagher & Stewart, 1984a, 1984b, 1986; Storey & Johnson, 1986). The U. K.
studies revealed that, between 1985 and 1987, firms employing fewer than twenty
employees made a net contribution to job growth of 290,000 compared with just
20,000 in large firms (Gallagher et al., 1990), and between 1987 to 1989, firms
Introduction
employing fewer than ten employees created more than 500,000 jobs (Daly, 1991 ).
despite employing less than one-fifth of total employment. The most recent results
show that between 1989 to 1991, firms with fewer than twenty employees created
350,000 jobs at a time when private sector employment was failing (United
Kingdom, 1994a).
Other important economic functions and significant roles which the small
firms play in overall economic development of developed and developing countries
can be summarised as follows:
i. Small firms offer a productive outlet to a large number of enterprising and

independent people.
ii. Small firms provide an efficient form of organisation in industries where the
optimum size of the business unit is small.
iii. Small firms supply specialist products or services to large firms for which
high quality personalised service is important, and thereby provide a comple-
mentary role to larger concerns.
iv. Small firms provide competition and some check on monopoly profits.
v. Small firms act as sources of innovation and invention.
vi. The small firm sector serves as a breeding ground for new industries.
vii. Small firms provide the meansof entry for new entrepreneurial talent and the
groundwork for eventual large firms.
The number of small firms in the U. K. is estimated to be around 3.7 million

(Bank of England, 1996)'. In Malaysia, the recent nationwide study on small and
medium-sized industries had shown that there were 10,400 small and 1,708 medium
industries (Malaysia, 1996)2.
Introduction 3
Substantial growth in the small firm sector is desirable as means of reducing
unemployment and improving the health of the economy in general (e. g. Store),
1994a). Growth is also a positive and often necessary move for most businesses in
order to survive. However, there are a number of potential drawbacks and
problems associated with growth. Growth usually requires capital and smaller
firms often require larger amounts of finance to expand, relative to their total value.
than bigger firms (Binks & Coyne, 1983). It has often been suggested that the most
commonly encountered obstacle to expansion is the problem of raising the neces-
sary finance to fund the expansion. Growth of small firms in the U. K. might have
been held back because they did not have access to external funds (e. g. Macmillan
Committee, 1931; Radcliffe Committee, 1959; Bolton Committee, 1971). Similar
trends were also observed in Malaysia (e. g. Mahmud, 1981, Chee 1986a & 1992).
`/
In order to understand the factors which contribute to the financing prob-

lems facing growth-oriented small firms in developed and developing countries,
this study focuses on the financing practices (defined in terms of patterns and
sources of external finance) and financing problems (defined in terms of existence
of difficulties in raising finance) of small firms in the U. K. and Malaysia.
1.2 OBJECTIVES OF THE STUDY
Petty (1991, p. 90) has stressed that:
meaningful research in the area of small-firm or entrepreneurial finance must

...
bring us to a better understanding of the characteristics of the small firm and the
entrepreneur...
The main purpose of this study is therefore to contribute to a better
understanding of the practices and problems of small manufacturing firms in
financing their expansion activities in developed and developing countries, with
particular reference to the United Kingdom and Malaysia respectively. This will be
achieved by examining the need for external finance, identifying the types and
sources of external finance, and examining the incidence of difficulties faced by the
firms in raising finance.
Introduction 4
In particular, the study attempts to examine whether the practices and

problems of financing small firms stem from the characteristics of the firms and
owner-managers and the type of growth strategies adopted. The study also
attempts to examine whether there is a difference in small firm financing practices
and problems experienced in the two countries.
More specifically, the study attempts to examine:
i. The association between characteristics of small firms and the need for
external finance, the sources of external finance utilised and the difficulties
experienced in raising external finance.
ii. The association between characteristics of owner-managers and the need

for external finance, the sources of external finance utilised and the difficul-
ties experienced in raising external finance.
iii. The association between the growth patterns of small firms and the sources
of external finance and the difficulties experienced in raising external

finance.
iv. The similarities and differences in small firm financing practices and prob-
lems between the United Kingdom and Malaysia in terms of the need for
external finance, the patterns and types of finance and the difficulties
experienced in raising finance.
1.3 RESEARCH QUESTIONS
In pursuance of the above objective, the study will attempt to answer the following
questions with regard to the characteristics of small firms, the characteristics of

owner-managers, and the growth patterns of firms in both countries:
Introduction S
Need for External Finance
i. Is there an association between the characteristics of a firm and the needfor

external finance for small firms in the United Kingdom and Malaysia?
ii. Is there an association between the characteristics of the owner-manager of

a firm and the need for external finance for small firms in the United
Kingdom and Malaysia?
Sources of External Finance
i. Is there an association between the characteristics of a firm and the sources

of external finance for small firms in the United Kingdom and Malaysia?

a firm and the sources of external finance for small firms in the United
Kingdom and Malaysia?
iii. Is there an association between the growth patterns of a firm and the sources
of external finance for small firms in the United Kingdom and Malaysia?
Difficulties in Raising External Finance
i. Is there an association between the characteristics of a firm and the

existence of difficulties in raising external finance for small firms in the
United Kingdom and Malaysia?

a firm and the existence of difficulties in raising external finance for small
firms in the United Kingdom and Malaysia?
iii. Is there an association between the growth of patterns a firm and the
existence of difficulties in raising external finance for small firms in the

United Kingdom and Malaysia?
Introduction 6
If the answers to these questions show that these variables are

associated,
then the characteristics of small firms, the characteristics of owner-managers and
the growth of the firms are able to explain the practices and problems of financing
small firms in both countries. Therefore they might suggest that these character-
istics are important in influencing the need for external finance, the use of various
sources of external finance and the existence of difficulties in raising finance.
Finally, the comparative investigation on small firm financing practices and
problems between the two countries will attempt to answer the following questions:
i. Is there a significant difference in the need for external finance by small
manufacturing firms in the United Kingdom and Malaysia?
ii. Is there a significant difference in the sources and patterns of finance used
by small manufacturing firms in the United Kingdom and Malaysia?
iii. Is there a significant difference in the difficulties experienced by the small
manufacturing firms in raising external finance in the United Kingdom and

Malaysia?
If the answers to these questions demonstrate that there is no significant

difference between the two countries, then it may be suggested that there is no
difference between developed and developing countries (the United Kingdom and
Malaysia) with regard to small firm financing practices and problems despite the
existence of social, political, cultural and economic factors in the environment of

the two countries. On the other hand, should the practices and problems of
financing differ between the two countries, then it may be suggested that the real
causes of the differences may be due to the level of economic development of each
country (Peterson & Shulman, 1987), the institutional framework and legal or
fiscal restrictions in a particular economy (Tamari, 1980), or it may be attributed
to the cultural factors and the historical development of financial institution in each
country (Austin et al., 1993).

Introduction 7
1.4 RATIONALE FOR THE STUDY
The main reasons which justify this study to be undertaken are threefold. First, that
there is a general recognition of the importance of the small firm sector and the
value of its contribution to the health of the economies of developed and develop-
ing countries (e. g. Rothwell & Zegveld, 1982; Bolton, 1987; Bannock, 1981;
Othman, 1984; Chee, 1986a & 1986b; Hughes, 1991). Second, that the provision
of external finance for small firms in the U. K. and Malaysia has improved signifi-
cantly over the last few years in terms of both the total of funds and the range of
financial options and instruments available (e. g. Ray & Hutchinson, 1983; Bank of
England, 1985; Woodcock, 1986; NEDC, 1986a; Chee, 1986a & 1986b; Burns,
1987; Boocock, 1994; United Kingdom, 1994b). Third, that despite the rapid
expansion in the range of public and private sector financial initiatives, there is
widespread perception that the financing difficulties continue to exist; the difficul-
ties which are perceived to be the major obstacles or constraints on small firm
growth in both countries (e. g. Chee 1986a & 1986b; Batchelor, 1989b; Md. Salleh,
1990; Mason & Harrison, 1991; University of Cambridge, 1992).
In order to fully understand the practices and problems facing growth-
oriented small manufacturing firms in the United Kingdom and Malaysia, this study
examines the methods used, and the difficulties experienced, by a sample of small
firms in both countries in financing their expansion plans.
It has been established that banks and other lending institutions are reluctant
to lend money to small firms due to the nature and size of their businesses (e. g.
Binks, 1979; Bannock, 1981; Md. Salleh, 1990), and the difficulty in getting access
to finance varies directly with the age and size of the firms (e. g. Chee, 1986a;
Hustedde & Pulver, 1992; Hankinson 1991; Moore, 1994). In addition, the gap in
the provision of equity finance for small firms may continue as most owner-
managers are reluctant to surrender equity to outsiders because of the perceived

loss of independence and control of their businesses (e. g. Bolton Committee, 1971;
Wilson Committee, 1979; Vickery, 1989; Lin, 1992; Boocock & Presley, 1993;
Mason & Harrison, 1993; Tannous & Sarkar, 1993).

Introduction 8
Some researchers believe that small firms do not face difficulties in raising
finance but they may be unfairly penalised, compared to large firms, in the credit
terms (such as interest and security requirements) imposed upon them (e. g. Binks
et at., 1986; Hundsdiek & Albach, 1988). Others observe that there is no 'finance
gap' facing small firms, but the actual problems are 'information and technology'
gaps (e. g. Economists Advisory Group, 1971; Aston Business School, 1991;
Cousins Stephens Associates, 1991) and 'management weaknesses' of the owner-
managers (e. g. Hally, 1982; Othman, 1984) that contribute to the financial prob-
lems of the small firms. There have also been assertions that small firms are well
provided with financing options, but the number of economically viable businesses
is not sufficient (e. g. Burns, 1987; Othman, 1984).
In discussing the arguments put forward in the above debate, an attempt will
be made to assess the theoretical bases underlying the viewpoints expressed and to
examine the extent to which such views are supported empirically. The examina-
tion of the various types and sources of finance and the problems faced in obtaining
outside funds in the two countries will provide the appropriate perspective of the
study and facilitate analysis of the data.
The research undertaken for this study will also examine the similarities and
differences in the financing practices and problems of small firms between the U. K.
and Malaysia. This comparative study is desirable for practical policy consider-
ations (Bean, 1994); this type of study can lead to a greater understanding of the
factors which determine the practices and problems of financing small firms in both
countries since it "leads to questions regarding the reasons for the observed
comparisons and contrasts" (Dunlop, 1958, p. vi). Some researchers have stressed
the importance of cross-national studies in the formulation of general theory to
prevent the misapplication of findings based on single-country studies (Aldrich et
al., 1991; Matsuda et al., 1994).
The methodology used will enable the researcher to achieve the objectives
the The findings will indicate whether the characteristics of small firms
of research.
of the firms as well as the growth potential of the firms are
and owner-managers
associated with the financing practices and problems. The findings will also
Introduction 9
highlight the similarities and differences in financing firms in both countries;

small
therefore the findings should contribute towards a better understanding of financ-
ing small firms in developed and developing countries.
1.5 LIMITATIONS OF THE STUDY
Sectoral Biases
The research is concerned with the financing of small manufacturing firms. It does
not attempt to investigate the financing issues of all types of small firms. It is
possible of course that samples drawn from other industries, such as retail and
service sectors, would produce different results.
Regional Biases
The samples consist of small manufacturing firms based in the East Midlands area
(United Kingdom) and the Klang Valley (Malaysia). Owing to the differences in the
characteristics of firms and owner-managers between regions (Barkham et al.,

1996), it is possible that, because of the localised populations, the findings of the
study may suffer from some regional biases. As such, the findings may not
necessarily be representative of the situation in every part of both countries.
However, evidence from previous studies has indicated that regional and locational
factors are of minimal or no importance in studying the small firms (e. g. Mahmud,
198 1; Hakim, 1989; Storey et al., 1989; Keasey & Watson, 1994). Furthermore,
the selection of localised samples, as against national samples, is justified on the

basis of convenience (proximity to the researcher), time and cost constraints.
Cross-National Biases
Many of the limitations facing researchers in conducting comparative studies
between two or more countries are basically the same as in one-nation studies.
However, at the outset of the research work, the researcher was well aware of other
potential problems which could limit the interpretations of the data. When
conducting interviews for the case studies, for example, cross-national factors such
as racial, cultural and religious differences could influence the outcome of the
interview (Buckley et al., 1976).
Introduction 10
Other problems of cross-national comparative research are well explained

by Hantrais et al. (1985) who highlighted the problem of equivalence of meaning
and concepts. This problem concerns semantic differences, as well as difference in

cultural patterns and in perceptions of social, economic and political situations.
According to May (1993, p. 159):
One of the primary problems with comparative analysis is not only the ability of
a researcher to adequately understand cultures and societies which are different
from their own, but more specifically, to generalize and explain social relations
across societies and social contexts.
Data Comparability
Furthermore, the differences in the social, economic and political conditions in the
U. K. and Malaysia may affect some of the important variables, and it may be
argued, therefore, that they also affect the comparability of the data. However, the
extensive review of the related literature reveals that previous comparative studies
in corporate finance (Samuels et al., 1975; Tamari, 1977; Borio, 1990) have shown
that, despite differences in social, economic and political conditions, the data
gathered from respective countries can be used as a valid basis for the study.
Tamari (1977, p. 147) concluded that the pattern of financial behaviour:
exists independently of the social, political and cultural framework in which the
individual firm operates. Theories and techniques that apply in one economy
may therefore be transferred to companies operating in another economy despite
the socio-political differences.
Another factor that has to be borne in mind in an attempt to make interna-

tional comparison of financing patterns is that statistics in this area are not easily
comparable across countries. There are differences in the accounting standards
and practices in different countries (Nobes & Parker, 1985) and "national flow-of-
funds statistics differ in terms of classification of sectors, degree of consolidation

and treatment of a number of items" (Borio, 1990, p. 8). Whatever their shortcom-
ing, Borio (1990) suggested that there is no alternative but to rely on existing
sources.
Response Biases
The empirical investigation of this study uses two research strategies; mail ques-
tionnaire survey and case study. The biggest administrative disadvantage of mail
Introduction 11
questionnaires is the fact that the researcher has no control over who, in fact, fills
it in and whether the respondent consults with others when completing it. There-
fore, the researcher has to accept the completed questionnaires 'on faith'.
At the outset of the study, the researcher was also aware of the fact that
reliance on interviews for the case studies raises familiar questions relating to the
secrecy of the data. The researcher's own experience in conducting interviews for
a research project in Malaysia (Mohamed et. al, 1992) had shown that some
untruthful answers were given during the interview, particularly related to financial
information. Some owner-managers were found to be more inclined towards
providing answers which they thought the interviewer wished to hear. However,
in spite of this problem, the researcher has reasonable confidence in the accuracy
of the data collected during interviews for this study, since the case studies were
conducted as a follow-up to the questionnaire survey. Therefore, the data
collected during the interview could be cross-checked with the data provided in the
questionnaire.
1.6 ORGANISATION OF THE THESIS
The thesis is organised according to the research process employed in this study
(see Figure 1.1). The objectives, rationale and limitation of the study are discussed
in Chapter One. The chapter also explains the significant role of small firms in
developed and developing countries, with particular reference to the United
Kingdom and Malaysia. Chapter Two and Chapter Three present the extensive
the literature consisting of theoretical, empirical and discursive

review of related
writings.
Chapter Four develops a theoretical framework which provides the concep-

tual foundation of the research. After identifying and defining the important
variables as well as establishing the relationship among the variables, the research
hypotheses are then generated to test the relationships. In order to test the
hypotheses, Chapter Five develops a research design which constitutes a plan of

for data collection. In describing the research design, the chapter
procedures
Introduction 12
TKEORETICAL FRAMEWORK
& GENERATION OF HYPOTHESES
-----_JConceptual framework
Working Definitions
Hypotheses
Chapter 4
/
1
f "v Rcaat, rr Y aJV VlI
& METHODOLOGY
Research Strategy
(Survey & Case Studies)
Questionnaire Design
Statistical Analysis
(Nonparametric Statistics)
Chapter 5
(Mail Questionnaires & Interviews) 1

Data Analysis
Test of Hypotheses
Chapter 10
Chapter 6,7,8,9
Figure 1.1
The Research Process
Adapted and modified from Sekaran (1992)
Introduction 13
begins by reviewing the methodologies employed by previous researchers, follows
with a description of the nature of this study, its data gathering procedures.
questionnaire design and finally the data analysis technique.
The findings derived from the survey and case studies undertaken in both
countries are presented in Chapter Six through Chapter Nine. The results and
analysis of the U. K. and Malaysian surveys are covered in Chapter Six and Chapter
Seven respectively. Chapter Eight presents the case study analysis, and Chapter
Nine discusses the similarities and differences in the sources and patterns of finance
as well as the financing difficulties facing small firms in both countries.
Finally, Chapter Ten deals with the main findings of the research. It includes
the discussion on the potential policy implications and some directions for future
research.
Notes
1 In its latest report on Finance for Small Firms, Bank of England (1996) defines small
firms as those with turnover up to and including I million per year.
2 In Malaysia, small-scale industries are defined as manufacturing establishments with a

paid-up capital of less than RM500,000 and employing between 5 to 50 full-time
workers. Medium-scale industries are manufacturing establishments with a paid-up
capital between RM500,000 and less than RM2.5 million and employing between 51 and
75 full-time workers (Malaysia, 1996).
Chapter Two
REVIEW OF THE LITERATURE I:

THE FINANCING OF SMALL FIRMS
IN DEVELOPED AND DEVELOPING COUNTRIES
2.1 INTRODUCTION
This chapter will review the general literature on small firm financing in both
developed and developing countries, and also look at the literature which identifies
particular firm, owner-manager and industry features which are relevant to the
financing practices and problems of small firms.
2.2 THEORY OF THE FIRM AND THE PROVISION OF FINANCE
An extensive review of the related literature has convinced the researcher of the
importance of reviewing the theoretical literature which might give insight into and
provide an understanding of why small firms differ from their large counterparts
with regard to their financing practices and problems. This section therefore
provides the theoretical underpinning on the financing of small firms. It is then
possible to review and discuss the central issues of the study which involve an
examination of the sources of external finance utilised and the difficulties faced in
raising finance.
2.2.1 Asymmetric Information
In order to provide finance to a small firm the institutional investors will require
certain information about the performance of the firm. The investors must ensure
Literave Review 1 15
that the project is commercially viable before deciding whether or not to grant
finance. However, the information is not readily available to the outsider; "the
small business owner is likely to be significantly better informed about the business
than outsider such as bank. " (Storey, 1994a, p. 205).
According to Binks et al. (1992a, p. 36):
In practice, banks and small firms operate in an uncertain world when informa-
tion is not perfect and is often expensive to obtain. The particular problem is that
the distribution of information between two parties to the contract is asymmet-
ric. That is to say, there are certain pieces of information, having a material
affect on the contract, which are available to one party but not to the other.
The problem of unavailability of information affects the willingness of banks
to supply debt finance to small firms, on the grounds of greater uncertainty. These
problems lead to the existence of'debt gap' where commercially viable projects do
not obtain funding (Binks et al., 1992a).
Leland and Pyle (1977, p. 371) suggest that:
information on project quality may be transferred if the actions of

...
entrepreneurs... can be observed. One such action, observable because of disclo-
sure rules, is the willingness of the person(s) with inside information to invest
in the project or firm. This willingness to invest may serve as a signal to the
lending market of the true quality of the project; lenders will place a value on the
project that reflects the information transferred by the signal.
2.2.2 Agency Problems
An agency relationship is defined as "a contract under which one or more persons
(the principal(s)) engage another person (the agent) to perform some service on
their behalf which involves delegating some decision making authority to the
agent" (Jensen & Meckling, 1976, p. 306).
The owner-manager of a small firm acts as an agent for the lender (principal)
and the task of the lender is to ensure that its agent acts in accordance with the
i. repaying the loan plus interest. The issue for the lender, according
contract, e.
to Storey (1994a, p. 206), is:
Literature Review 1 16
to ensure that a contract, which can be monitored, is drawn

up which pros ides
an incentive for the agent to satisfy the requirements of the principal. The
interests of the two groups principal
- and agent - are therefore not identical.
Agency problems exist as a result of conflicts interest between individuals

of
associated with the firm; in particular whenever the owner-manager (agent) has
an
incentive to take action which would result in a decline in the
worth of the security
or the firm (Jensen & Meckling, 1976). This problem is more severe whenever
(Barnea et al., 1981):
i. The level of asymmetric information is greater in the sense that the firm
(agent) is unable to reveal the exact nature of the firm to the financier
(principal) costlessly.
The agent has the capacity and incentive to affect wealth transfers between
parties or the agent has the capacity and incentive to forgo new profitable
investments when the debt issued is supported by the existing assets.
iii. The partial ownership of the firm by an owner-manager may allow him to
consume the firm's assets beyond that which a manager who is the sole
owner of the firm would consume.
As a result, the lenders may require a greater level of protection from small
firms compared to large firms (Pettit and Singer, 1985)
2.2.3 Adverse Selection and Moral Hazard
The 'debt gap' also exists because the providers of finance to small firms, particu-
larly banks, face the problems of making correct lending decisions (adverse
selection) and appraising and monitoring loans (moral hazard), especially under
conditions of uncertainty and asymmetric information (Stiglitz & Weiss, 1981).

The effect of adverse selection is that, when lenders have less information about
the expected success of projects, they charge higher interest rates to all borrowers
to cover the costs of additional monitoring requirements as well as the likelihood
Literature Review / 17
of bad debts. As a result, low-risk (but low-return) borrowers will not proceed
with their projects because of the higher interest rate. The lender is therefore left
with high-risk (but high-return) borrowers, a portfolio which can result in lower
returns to the lender. Furthermore, the existence of moral hazard will prevent the
lender from monitoring directly all decisions made inside the firm; for the relatively
small amount of finance involved, it is not economic to monitor the firms closely
(United Kingdom, 1994a).
In order to overcome these problems, the banks require personal security or
collateral ensure the owner-manager's commitment to the project (Thornhill, 1989;

Berry et al., 1993b; Deakins & Hussain, 1993). It also "provides an incentive for
the entrepreneur to seek less risky projects, on the grounds that he or she incurs
losses if the project fails. " (Storey, 1994a, p. 213). Furthermore, the willingness
to provide collateral indicates "a signal to the bank that the entrepreneur believes
the project is likely to succeed - otherwise he or she would not commit their
personal resources to it" (Storey, 1994a, p. 210). Unfortunately, not all small firms
have access to collateral, and because of insufficient collateral many small firms fail
to expand (Binks et al., 1986).
2.2.4 Cost of External Finance and the Rate of Return
It has been found that the smaller the firm, the more it pays for external finance,
including external equity (Beedles, 1992) and debt finance (Confederation of
British Industry, 1993). The higher cost of equity capital for small firms is
associated with flotation costs (Archer & Faerber, 1966; Brigham & Smith, 1967;
Day et al., 1985). Furthermore, the presence of asymmetric information will also
contribute to higher costs of external finance (Myers & Majluf, 1984; Keasey &
Watson, 1993b).
The smaller the amount of external funds raised, the higher the cost of
financing (NEDC, 1986a), the higher the required level of collateral and the higher
the cost of finance to the firm (Hutchinson & McKillop, 1992; McKillop &
Hutchinson, 1994). Lenders may also demand high interest rates to compensate for
the possibilities of wealth expropriation by the owner-manager, or for the addi-

tional monitoring costs incurred (Pettit & Singer, 1985).
Since external financing is more expensive, as compared to internal financ-

ing, the required rate of return on new investment will be higher if external
financing is used (Baumol et al., 1970). Baumol et al. also observed that the rate
of return on new equity capital is higher than the rate of return on either retained
earnings or new debts. However, some research findings appear to contrast with
those of Baumol et al. (e. g. Whittington, 1972; Birley & Westhead, 1990).
Whittington (1972) has argued that the additional profits may be obtained from the
better use of existing capital rather than from the new capital raised. The inverse
relationship between the use of outside finance and the profitability of small firms
was also reported by Birley and Westhead (1990).
Keasey and McGuinness (1990) found that, for small firms, bank finance
tends to generate higher rate of return than other sources of finance. They argued
that since external financing is more expensive and incurs significant transaction costs,
the lenders might charge higher interest rates. As a consequence, external finance is
used only for projects that can cover these higher costs (Keasey & Watson, 1993b).
Another reason why bank finance might be associated with higher rate of
returns concerns the investment selection process of the lenders. Keasey and
Watson (1993b, p. 150-15 1) explained:
One would expect that external suppliers would grant finance only to those firms
that are expected to produce high investment returns. If their project evaluation
techniques are even marginally effective, then the rate of return on external
financing will be higher than internal financing simply because, on average,
external financiers will invest in a higher proportion of good projects than firms
which do not use external finance.
2.3 SOURCES OF FINANCE
According to Bates and Hally (1982), the need for finance in a business might arise
on four occasions. The first, and the most usual is the need for start-up capital to
help in the foundation of a new business.
The second occasion is to finance expansion: the purchase of new buildings,
plant, or machinery; to finance working capital by holding more stocks/work-in-

progress and trade debtors. Finance might also be needed for taking over another
existing business.
The third occasion is when 'venture capital' is required. possibly to finance
an innovation. This might coincide with the first or second, or might occur
independently. This type of capital, sometimes known as 'risk capital', has a
significant degree of risk attached, hence it requires a large reward. The venture
capitalist may want to sit on the board and may even seek a controlling interest if
the venture fund feels that this is necessary to protect its investment.
The final occasion is to adjust the existing financial structure of the business,
e. g., changes in the proportion of equity to debt or the proportion of longer-term
to shorter-term debt.
2.3.1 Debt Finance
Debt finance, or debt capital, can be obtained from two sources, i. e. formal and
informal sources. Formal sources are normally regarded as institutional sources,
whereas informal sources refer to family, friends, directors, trade credit, etc.
Most small firms, which require external finance, prefer to use debt as a
source of fin. and lending institutions, particularly banks, are the most
.
popular source of debt finance (Wilson Committee, 1979; Van Auken & Carter,
1989; Carter & Van Auken, 1990; Samuels et al., 1990; University of Cambridge,
1992; Keasey & Watson, 1993a; Confederation of British Industry, 1993; Henderson
et al., 1995). Historically, few institutions have catered for the needs of smaller
firms; as a result such firms have rarely attempted to obtain debt finance from
sources other than the banks. In the U. K. the banks have played a large role in
financing the expansion of small firms; the main clearing banks alone provide
around 90 percent of all small firm lending (Batchelor, 1989a).
Because of the difficulty in raising adequate finance for expansion, Bates
and Hally (1982) discovered that small firms are frequently forced to obtain short-
term and medium-term sources of finance at high costs. Whilst small firms are
found to be shifting from reliance on short-term towards long-term finance
(Boocock, 1990; Hobson, 1994), they are still heavily dependent upon short-term
bank loans and overdrafts to finance their investment requirements (Bolton Com-
mittee, 1971; Stanworth & Gray, 1991; Keasey & Watson, 1993b; Austin et al.,
1993). A survey of debt structures in Europe found that small firms in Great Britain
relied too heavily on overdrafts as a source of financing. Three quarters of the debt
of small British firms was either an overdrafts or other forms of short-term loans,
and overdrafts alone accounted for 58 percent of total debt compared with 35
percent in Italy and just 14 percent in Germany (The Times, 24 August 1993).
In his examination of the sources of finance required by the smaller
companies, Dimson (1978) pointed out that small firms have a significantly higher
proportion of current assets within total assets compared to large firms. His
observation showed that small firms rely heavily on current liabilities, mainly trade
credit. Trade credit was found to be the next major source of debt finance after
overdrafts (Keasey & Watson, 1994). Trade credit is also regularly used as a
source of debt by small firms which experience liquidity problems (Meltzer, 1960;
Tamari, 1972; Chee, 1986a; Hutchinson & Gray, 1986; Walker, 1989).
It has also been found that other non-bank sources of finance such as
factoring, leasing and finance companies are now providing an increasing propor-
tion of the needs of small firms (Woodcock, 1986; University of Cambridge, 1992;
Tannous & Sarker, 1993; United Kingdom, 1994c).
Literature Review 1? 1
2.3.2 Equity Finance
Equity finance, or equity capital, is obtained in return for

a proportional share of
a firm's value. Equity capital can be provided by the owner or by the directors of
the firm, known as internal equity. Internal equity can also be provided through
profits earned and retained by the business. Alternatively, equity can be provided
by third parties, external equity.
The most important source of equity finance for new small firms is the
owner-manager's personal savings (Marcum & Boshell, 1963; Tamari, 1972: Bates
& Hally, 1982; Dunkelberg and Cooper, 1983; Van Auken & Carter, 1989;
Md. Salleh, 1990; Levy, 1993). Other studies, however, showed that internally
generated profits was the most frequently used source of finance, particularly for
mature small firms (Mason, 1984; Lawrence et al., 1985; Oakey et al., 1990:
Roberts, 1991).
Due to the high cost of obtaining external finance, it was found that the
majority of small technology-based firms rely heavily on internal profits as the main
source of investment capital (Oakey, 1984b & 1993; Austin et al., 1993). Oakey
(1993) observed that small firms were reluctant to rely on external funding because
of:
risks associated with the onerous terms demanded by external lenders of money.
Firm owners were generally not averse to external assistance'per se', since it was
clearly a means of expanding their businesses at a faster rate. However, in
practice it was generally believed, both in Britain and the United States, that the
burden of risk was heavily biased in favour of the firm owner, while returns to
the lender (partly due to this unbalanced risk), were excessive.
Although the majority of small businesses rely primarily on personal savings

for start-up, most of them still require access to outside finance (either equity or
loan) in order to survive or grow. As businesses develop they significantly reduce
their reliance on personal savings and diversify their sources of external finance
(Mason, 1989).
Literature Review 122
Venture capital, another source of equity finance,

represents an important
source of externally generated equity for small firms seeking to expand (Oakey,
1984a; Batchelor, 1989b; Boocock, 1989; Hall, 1989). The rapid growth of
venture capital in recent years is due to "tax incentives and interest in the activities
of small dynamic companies which could grow into the giants of tomorrow"
(Wilson, 1992, p. 168). Venture Capital in Great Britain now accounts for
over a
third of all venture capital raised in Europe (The Economist, 1993a). The
emergence of venture capital has allowed small firms to be supported with capital
and skills in order to exploit market opportunities.
U. K. venture capital funds have a high rejection rate. Venture capitalists
only invest in established small firms and only participate in approximately two
percent of the proposals they receive from small firms (Walker, 1989). The initial
screening process is severe. In a survey of thirty London-based firms, Dixon
(1989) found that 75.5 percent of the proposals were rejected at the initial
screening stage, with a further 21.1 percent rejected or withdrawn during the 'due
diligence' process. On average, only 3.4 percent of the total proposals received
obtained investment. Venture capitalists are only interested in firms with potential
for growth and place great emphasis on the quality of management within the firms
(Boocock, 1989; Bannock & Partners, 1991). A recent study has suggested that,
whichever fund is approached, the firms have to satisfy broadly similar selection
criteria (Boocock & Woods, 1996).
Recent international research has demonstrated the importance of informal

investment by private individuals in financing in the start-up and growth of small
firms. Informal investors or'business angels' are not only prepared to inject capital
into business but also to contribute their experience to the business. Gaston and
Bell (1988), as quoted by Walker (1989), surveyed the opportunities for small firms
seeking equity from informal investors, and they found that informal investors
accept 30 percent of the proposals they receive.
Informal investors appear to be spreading in the United Kingdom (Harrison

& Mason, 1993; Confederation of British Industry, 1993). Harrison and Mason
Literature Review 121
(1993) observed that, because of the reluctance of venture capital funds to make
investment of under 250,000, there is an active informal venture capital market
which provides a source of finance for small businesses. In the U. S.A. this type of
capital plays a significant role in filling the equity gap (Mason & Harrison, 1993).
Informal investors provide the largest source of investment for small firms
in the U. S. A. (Harvey, 1992). There is also ample evidence that informal investors
are playing an increasingly important role in the financing of small businesses in the
United Kingdom (Mason et al., 1990; Confederation of British Industry, 1993; The
Times, 20 April 1994). They provide twice as much new capital to small firms as
the formal venture capital industry (Davies, 1993). Informal investors are also
"increasingly becoming a potent source of modest amounts of development capital"
for small firms in the U. K. (The Times, 20 April 1994, p. 20). The advantage of this
source of finance for small firms is that "it avoids the problems associated with
debt-financing and provides the business with a'partner' who is committed to what
the business is doing" (United Kingdom, 1992, p. 27).
2.3.3 Government Assistance
Besides the private sector (which includes banks and private venture capital),
government assistance is also one of the important sources of external finance for
small firms. Government incentives can provide a boost to the overall resources of
the firm especially when the assistance is in the form of grants or low-interest loans
(Oakey, 1984a). Governments in both developed and developing countries have
recognised the fact that small firms, if left to market forces, would have difficulty
in obtaining finance from private sector markets, and have therefore attempted to
introduce measures that would make more finance available both for investment
and working capital for small firms (Levitsky, 1983).
Berry et al. (1993a) identified two major financial problems of small firms
that encourage the government to provide fmancial support to this sector: over-
reliance on clearing banks and high failure rates of small firms.
Literatur, Rev k' 1 24
-,
2.3.4 Financing Patterns
Norton (1990) argues that small firms use internal finance in preference to external
finance. Van Auken and Carter (1989), however, have found that on the composi-
tion of initial capital, the average financing mix of small firms was 45 percent equity
and 55 percent debt. Their survey results indicated that about 3 1.2 percent of the
firms financed their new operations with equity (no debt) and about 30.1 percent
with debt (no equity). Their study in 1990, however, showed that approximately
47 percent of total start-up capital came from equity sources while 53 percent from
debt (Carter & Van Auken, 1990). They also found that additional capital was
commonly acquired for seasonal financing (through short-term borrowing) and for
long-term capital needs, such as to finance business expansion, as business activity
increased (Van Auken & Carter, 1989).
Burns (1987) summarised U. K. research data on financial structures over

the twenty year period from 1962 to 1982, and concluded that:
i. Small firms operate with gearing ratios similar to, or higher than, larger
firms.
ii. The proportion of debt represented by long term loans in small firms is
significantly lower than for large firms.
iii. Small firms are significantly more dependent on creditor finance than large
firms.
His first conclusion is consistent with that of Gupta (1969), Walker and
Petty (1978), Davidson and Dutia (1991), and Stanworth and Gray (1991). Tamari
(1980), however, found that small firms operate with ratios of equity to total
to, or higher than, large firms. He argued that most small firms
sources similar
heavily on short-term funds, primarily non-banking credit. Tamari also
relied
observed that loans made to the firms by the major shareholders comprised a
greater percentage of equity. However, Tamari (1977, p. 53) found that:

small firms will use loan capital extensively if they wish to grow faster than their
ability to increase the owners' participation or to accumulate profits. The cost of
such firms of raising equity in the capital markets will usually be greater than the
cost of raising loan capital.
In their study, Dunkelberg and Cooper (1983) observed the following

patterns:
i. The age of the firm has an impact on the patterns of financing; the oldest
firms depend more highly on savings of the entrepreneur than do the newer firms.
ii. The larger the firm at its start, the greater the dependence on institutional
financing.
iii. The pattern of financing varies by industry classification. Single source

financing is most frequent in construction, financial services and manufac-
turing, and personal savings dominated as the prevalent source. Institu-
tional lenders are also an important source of finance for construction firms
and retailers.
Hutchinson et al. (1988) identified the financial characteristics of small

firms which have achieved quotation on the U. K. Unlisted Securities Market
(USM). They found that small firms which had achieved USM quotation appeared
to have higher growth rate, used more debt financing and invested less in current
assets than small firms which had not achieved USM quotation.
In their study of small firm financial structure in the U. K. in 1990, Keasey
and Watson (1993a) observed that only 8.2 percent of their sample did not have
some form of loan. Their sample of firms had an average of 1.64 loans per firm, with
85 percent having two loans or less, and 91 percent of the loans came from banks.
They also discovered that the balancesheetof the firms indicated that bank finance and
owners' equity provided almost equal contributions to the overall funding structure.
Literaiure Review 1 26
Peterson and Shulman's (1987) international study revealed that small

growing firms are initially very dependent on relatives/friends and personal equit`,
for financial support. As the firms grow in size (or ages) they are able to borrow
more on short-term debt and increase trade credit assistance. Another reason for
relying on the relatives/friends and personal savings could be explained by the
influence of Islamic law in which interest (usury or riba) is strictly prohibited. For
this reason, some strict Muslims entrepreneurs in Malaysia refuse to borrow from
banks (Chee, 1986a). A similar trend was also reported in the U. K. particularly
among ethnic minority entrepreneurs (Jones et al., 1994).
2.4 DIFFICULTIES IN RAISING FINANCE
The difficulty of small firms in obtaining external finance on adequate terms is

familiar to many researchers who have studied it for more than sixty years. The first
important study was made in Great Britain by the Committee of Inquiry on Finance
and Industry which discovered, among other things, that the growth of small firms
in Great Britain may have been held back because they did not have access to some
of the facilities available to larger firms (Macmillan Committee, 1931). The lack
of opportunities to have access to the facilities was later called the'Macmillan Gap'.
The Committee concluded its report by confirming the existence of a long-term
capital gap for small firms, in the sense that they were unable to secure external
finance for longer periods in amounts of less than 200,000. The Committee
recommended that an institution be specially established to provide funds for these

firms. The essence of the Committee's recommendations in connection with the
problem and a statement of the nature of the 'gap' are stated as follows:
It has been represented to us that great difficulty is experienced by the smaller

and medium-sized businesses in raising the capital which they may from time to
time require, even when the security offered is perfectly sound. To provide
adequate machinery for raising long-dated capital in amounts not sufficiently
large for a public issue, i. e. amounts ranging from small sums up to say 200,000
or more, always presents difficulties. The expense of a public issue is too great
in proportion to the capital raised, and therefore it is difficult to interest the
investor by the method; the Investment Trust Companies do not
ordinary usual
look with any great favour on small issues which would have no free market and
issuing house to tie up its funds in
would require closely watching; nor can any
long-dated capital issues of which it cannot dispose. In

general, therefore, these
smaller capital issues are made through brokers or through some private channel
among investors in the locality where the business is situated. This might often
be the most satisfactory method. As we do not think that they
could be handled
as a general rule by a large concern of the character we have outlined above, the
only other alternative would be to form a company to devote itself particularly
to these smaller industrial and commercial issues. (Chapter IV, paragraph 404)
Over the following sixty years the difficulty in obtaining adequate external
finance has still been recognised as a major constraint on small firm start-up and
growth in the United Kingdom (Radcliffe Committee, 1959; Bolton Committee,

1971; Binks & Coyne, 1983; Mason et al., 1988; Dewhurst & Burns, 1989;
Batchelor, 1989b; Caird, 1992; University of Cambridge, 1992; Storey 1994a).
Similar trends were also reported in Malaysia (Mahmud, 1981; Chee, 1986a &
1992; Chee & Jang, 1988; Md. Salleh, 1990) and in other developed and developing
countries (Jen, 1963; Schmitz, 1982; Anderson, 1982; Kee et al., 1986; Peterson &
Shulman, 1987; Patvardhan, 1988; Hajjar, 1989; Ghosh et al., 1992; Levy, 1993).
It has also been recognised that, in comparison to large firms, small firms
were at a considerable disadvantage in the financial markets (Bolton Committee,

1971; Wilson Committee, 1979; Paish & Briston, 1982; Ahmed, 1987). It has been
found that one of the reasons why businesses fail is lack of capital or under-
capitalisation (Stoll & Curleys, 1970; Springman, 1973; Wucinich, 1979; Bank of
America, 1980; Finley, 1984; Flahvin, 1985; Bruno et al., 1987; Peterson et al.,
1983; Smallbone, 1990; Hall & Young, 1991; Hall, 1992). In addition to lack of
start-up capital, small firms also have limited access to capital (Storey, 1983). It
has been stressed that having adequate capital and credit is found to be one of the
prerequisites for business success and survival (Broom & Longenecker, 1975;
Jones, 1979; Stanworth & Gray, 1991; Wilson, 1992). Furthermore businesses
which survived tended to have more capital than those firms which failed (Cooper
et al., 1988).
The small size of the firms is also a factor which contributed to the crucial
inadequacy of financial resources (Binks, 1979; Bannock, 1981; Md. Salleh, 1990).
The general problem, as defined by Binks (1979, p. 34), is that:
the smaller the firm, the larger the proportionate increase in capital base
required to respond to an increase in demand, but the lower its ability to
command loan and equity finance.
Studies have discovered that institutional sources of finance for small firms
in the U. K. were adequate (Burns 1987; Aston Business School, 1991). Only a
small proportion of the firms faced difficulty in raising finance, particularly those
with proposals for innovation (Aston Business School, 1991). In Malaysia, it has
also been suggested that small firms are well provided with sufficient avenues to
funds (Othman, 1984) but the number of firms with viable businesses are not
sufficient. In some cases, the shortage of viable investment opportunities is far
more serious than any shortage of funds to finance them (Harper, 1984).
2.4.1 Debt Gau
Most authors and researchers on this subject mention a 'gap' in the provision of
finance to small firms, "but what precisely is meant by this often varies between
authors and even within different parts of the same publication. " (Hall & Lewis,
1988, p. 1677). 'Gap' is defined by Storey (1994a, p. 239) as:
an unwillingness on the part of suppliers of finance to supply it on the terms and

conditions required by small businesses. Expressed in its most casual form,
indications of a 'gap' include the difficulties of obtaining small sums of equity
capital, or the difficulties which some businesses have in obtaining bank finance.
Many small firms need debt finance in order to grow before they reach the
stage when they become attractive to external investors. This is particular true in
firms. Some firms have their initial

small high-technology of these managed
development almost entirely from loans (Smith, 1990).
Many writers and researchers conclude that the access credit to by small
firms is restricted primarily because of stringent lending conditions imposed by
financial institutions. Loans from banks in the initial years are difficult, as younger
firms are less likely to command bank loans since they have no established track
(Binks, 1979; Bannock, 1981; Oakey, 1984a: Kee et al., 1986; University
records
of Cambridge, 1992).
Most financial institutions

believe that it is risky and administratively
expensive to lend to small firms (Thomas, 1978: Wilson Committee, 1979: de Jong.
1983; Salazar, 1986; Levitsky, 1986) and even if the small firms do get external
finance, they are usually required to pay a higher rate of interest and offer a higher
level of security and collateral (Storey, 1983; Hall, 1989; The Economist, 1993a).
It is believed that, as firms grow in size, they may enjoy less expensive financial
options since "the prospective lenders have a greater degree of trust in large firms,
and accordingly a lower perception of risk" (Peterson and Shulman, 1987, p. 11).
Costs of lending to small firms are bound to be high because of the small
amounts involved in each loan and consequently greater returns are expected by
lending institutions (Binks et al., 1986; Confederation of British Industry, 1993:
United Kingdom, 1994a). The documentation, supervision and collection are also
often more expensive than when loans are made to larger firms.
Bolton (1978, p. 17-18), in support of the conclusion of the Bolton

Committee (1971), maintained that:
although small firms suffer a number of genuine disabilities, by comparison with

larger firms, in seeking finance from external sources, most of these disabilities
reflect the higher costs of lending in small amounts or the higher risk of lending
to small borrowers. They do not result from imperfections in the supply of
finance and, indeed, the ability and readiness of the financial institutions to
exploit every new legitimate demand for funds is one of the greatest strengths of
our financial systems.
Basically, lending to small firms is a high-risk proposition (Allen & Rahman,
1985; Hall, 1989). In contrast, the degree of risk involved in lending to large firms
"is assumed to be lower than that involved in the case of small firms, as large firms
have a more sophisticated management, permit greater access to their financial
known in the financial world" (Tamari, 1978, p. 54).

reporting, and are well
Financial institutions are also unwilling to lend becauseof the high mortality
failure firms (Scarborough & Zimmerer, 1984; Batchelor, 1989a.
and rates of small
Smallbone, 1990). It was shown that "the fundamental characteristic which
distinguishes small firms from large is their relatively high probability of failure"
Li tervl we Review /
-30
(Storey et al., 1987, p. 3). It has been found that the mortality rate of small firms
was high among younger firms. In the United Kingdom, the mortality rate of new
firms can be as high as 33 percent within two years of starting and 60 percent within
five years (Pickering, 1989). Amer and Bain (1990), however, found that mortality
rate of U. S. small firms is 70 percent and most of these failures occur in the first
year of operation. In Malaysia, 48 percent of small firms which failed were
operating less than five years (Mohamed et al., 1992).
Small firms are usually required to meet strict loan requirements. A lack of
material security or collateral is the most serious bottleneck in receiving financial
assistance from financial institutions (Binks et al., 1986, Yoon, 1988). The
necessity to provide collateral against loans has become the inhibiting factor for
small business owners since most businesses are owned by persons with limited
resources. In some cases, small business owners are unable to comply with
collateral requirements because they are unable to present appropriate documents/
certificates of ownership and, furthermore, procedures to obtain such documenta-
tion take an extended period of time (UNIDO, 1986).
2.4.2 Equity Gan
In their study of 86,000 firms in 343 industries over five years, Davidson and Dutia
(1991) found that small firms rely heavily upon debt capital, in the sense that they
have higher debt ratios than larger firms. Their findings are consistent with those
of Gupta (1969), Walker and Petty (1978) and Van Auken and Carter (1989).
These findings show that small firms are highly geared. The problem of high
gearing is regarded to be an evidence of the existence of an 'equity gap' for small

firms.
In the U. K., the existence of an 'equity gap' for small firms was first
identified by the Macmillan Committee (1931) and subsequently by Wilson Com-
(1979). The'gap' later narrowed, if not closed, by the formation of new

mittee was
institutions including Charterhouse Industrial Development and the Industrial and
Commercial Finance Corporation Limited (ICFC) (Bannock & Doran, 1987).
Literature Rev, / 31
Nonetheless, the gap in the provision of equity finance in the U. K. continued to
exist despite the rapid expansion in the public and private sector initiatives over the
past decade (Harrison & Mason, 1991). A testimony to this phenomenon was a
recent study, commissioned by National Westminster Bank (Bannock & Partners,

1991) which concluded that the continuing existence of a gap in the supply of the
external equity finance for small firms seemed to be permanent.
The problems of'equity gap' among small firms, as explained by Mason and
Harrison (1993), reflect both demand and supply factors. On the demand side,
small business owner-managers are reluctant to surrender equity to outsiders

because of the perceived loss of independence, control and freedom of action,
dilution of earnings and the cost involved (Bolton Committee, 1971; Wilson
Committee, 1979; Bannock, 1981; Vickery, 1989; Binks & Vale, 1990, Mason &
Harrison, 1993; Tannous & Sarkar, 1993; Bank of England, 1996). The Wilson
Committee (1979) estimated that 75 percent of firms actively resist external
participation in order to avoid control by outsiders. Vickery (1989) pointed out

that the attitudes in which equity is not seen as an element of business financing,
best be illustrated by reference to a typical family business which has passed

may
to the grandson or great-grandson of the founder and the company is seen as part
of the family estate. Another reason why small business owner-managers are
reluctant to seek external equity is that they "are often unfamiliar with the
investors, with their protocol and criteria and often the implications of an external
equity investment. " (Binks and Vale, 1990, p. 77)
On the supply side, however, Mason and Harrison (1993) pointed out that
the availability of external equity finance for small firms is limited and many
institutional investors find that equity investment in small firms is not attractive
because the risks are not commensurate with the potential returns. Furthermore,
firms and therefore do not have access

the majority of new small are unincorporated
(Binks 1986). The Unlisted Securities Market (USM)
to external equity et al.,
introduced in 1980 to more supply of equity funds for small
which was encourage
firms are only interested in the very large and most dynamic 'small firms'. The
industry has also had a limited impact on the

emergence of a venture capital
availabilityof equity finance for small firms (ACOST, 1990) and moreover the
venture capital funds have very restrictive investment
criteria (Dixon, 1989).
This demand and supply problem is described by the Confederation

of
British Industry (1993, p. 10) as the classic chicken and
egg situation:
if smaller amounts of equity were more readily available

more firms might be
encouraged to make use of equity finance but as long as demand is low there is
little incentive for supply to be increased.
In Malaysia, it was found that there has not been an established culture of
equity-linked funding among small firms; beside having no desire to lose control of
their businesses, they do not have the knowledge and expertise to apply for funds
(Lin, 1992; Boocock & Presley, 1993).
2.4.3 Information and Knowledge Gap
The fact that some firms have difficulty in obtaining finance is not necessarily an
evidence of capital market bias. Some studies found that there was in fact no
evidence of the 'finance gap' for small firms. Economists Advisory Group (1971),
commissioned by the Bolton Committee (1971), observed that there was no finance
gap, but the actual problem was an 'information gap'. In most cases the Group
observed that the reason for not obtaining finance was either the firm was
insufficiently informed or poorly advised about the appropriate sources of finance,
or because it failed to make out a good case to the lending institutions. The Group
recommended that there should be an agency for dissemination of information
about sources of finance available. The Bolton Committee (1971, p. 191) argued
that:
many small firms are prevented by lack of information, by inexperience in

presenting applications for finance and by a formidable barrier of prejudice
against borrowing of all kinds from making use of the full range of facilities
available to them.
Lack of knowledge and the imperfections in the availability of information
were also recognised by Woodcock (1986). Bannock and Partners (1991), and
Harvey (1992) in the sense that the small firms needing

capital may not know whom
to approach and will not know how to present their case for financial support.
However, CPI (1982) observed that the root of the problem from the
stems
owner-managers themselves, such that they tend not to react to information until
the crisis occurs, and then they do not know the appropriate person to turn to.
Bates and Hally (1982, pp. 2-3) argued that:
The remaining gap is really in the entrepreneur, and it is a knowledge and skill
gap with behavioural implications. The knowledge required is of how and where
to get funds, and of what kinds of projects are likely to get funds. The skill
requirement is in management, particularly in financial management, financial
planning and control. The behavioral requirement is that entrepreneurs see
their financial and expansion problems as arising in areas where decision
making require sound analysis of good data, and that the entrepreneur should
base his funding and financing on sound plans and projects and well-thought-
out approaches to properly-identified sources of funds; he must also be realistic
and aware that other people will not necessarily share his views on his projects
and that commercial sense includes an understanding of what potential financial
supporters are looking for.
2.4.4 Technology Gau
Small firms were found to experience greater difficulty than large firms in raising
finance, particularly for high-risk and technology-based firms (Waite, 1973; Barber
et at., 1989; ACOST, 1990; Westhead & Storey, 1994; Moore, 1994). Aston
Business School (1991, p. 13) discovered that "small firms with proposals for
innovations were more likely to experience financial constraints than firms with
other types of investment".
The Radcliffe Committee (1959, p. 328) identified the existence of'techno-

logical gap', and stressed that:
There are certain problems about the provision of finance for the commercial
development by small businesses and private companies of new inventions and
innovations of technique. One problem is that the amount of capital required to
finance a development may be larger in relation to a small company's capital
prospects than the financial institutions would
structure and apparent earning
feel justified in putting up. The other problem is that of risk: the risks
ordinarily
in the commercial exploitation of technical innovation are likely to be greater
than those in expanding an existing line of production or extending into existing
lines of business, and however promising the innovation, the risks are certainly
Literature I I4
more difficult to assess. This makes it more difficult for the company that wants
to develop an invention to convince potential lenders that their
money will be
well invested.
2.4.5 Financial Skills Gap
Today, management weaknesses seem to be one of the problems facing small firms
either in the U. K. (Cousins Stephens Associates, 1991; Davies, 1993) or in

Malaysia (Bador, 1985; Haron & Shanmugam, 1994), and new firms are much more
likely than existing ones to have management deficiencies (Jones & Kohers, 1993).
It has been suggested that the lack of capital among small firms is typically an
indication of poor financial management (Broom and Longenecker, 1975; Bates
and Hally, 1982; Harper, 1984). Even though adequate finance may have been
provided, the owner-managers may misuse it, and the result is still the same -a lack
of capital. Othman (1984, p. 55) observed that:
lt has been the experience of some banks to witness blatant misuse of funds.
Loans approved to some small businessmen have been diverted to support
various non-productive activities like the purchase of stocks and shares; place-
ment made in fixed deposits; purchase of non-business related properties; and
personal consumption.
In Malaysia, the majority of SMEs did not maintain financial records

(Mohayidin et al., 1987; Chee, 1992) and poor financial management is believed to
be a single major problem facing small firms in the country (Bador, 1985; Haron &
Shanmugam, 1994); this factor is found to be one of the leading causes of business
failure (Broom & Longenecker, 1975; Hubbard & Hailes, 1988; Mohamed et
al., 1992; Barclays, 1993).
Poor financing planning also found to be one of the problems of small firms
(Rahardjo & Ali, 1986; Hankinson, 1994). Most of them are unable to "match" the
sources and uses of funds (Binks et al., 1990). For example, a firm may have to
obtain short-term loans and overdrafts to finance the purchase of fixed assets and
other investment requirements (Marina Lee & Teo, 1992; Keasey & Watson,
1993b; Confederation of British Industry, 1993). This short-term source of finance
for a long-term investment may pose excessive financial risk to the firm as the banks
may withdraw the facility at any time.

Many authors and researchers agree that financial planning in small business
is a key to survival (Stoner, 1983; Kee & Chang 1985; Amer & Bain, 1990;
Mohamed et al., 1992). It is important for small business owner-managers to plan
their financial needs before setting out to seek capital. Unfortunately, whilst many
small business owner-managers are aware of the benefits of financial planning, they
fail to pay reasonable attention to these activities and they only plan when they are
already faced with a need for funds.
2.4.6 Banks and The Small Firms
The relationships between small firms and their banks have come into focus in
recent studies and debates (e. g. Hall & Lewis, 1988; Binks, 1991; Hutchinson &
McKillop, 1992; McKillop & Hutchinson, 1994; Keasey & Watson, 1994). Whilst
financial difficulties faced by small firms have produced considerable controversy
over the role of banks, the small business sector has still been considered as an
important market for most banks (Buerger & Ulrich, 1986; Churchill & Lewis,
1986; Batchelor, 1988b; Berry et al., 1993a; Henderson et al., 1995). Berry et al.
identify three reasons why the small business sector is important for banks. Firstly,
small businesses are more reliant on bank lending than any other external sources
of finance. Secondly, competition among banks for small business clients is not so
great. Finally, the small business sector is an important growth area of the
economy.
faced by small firms have raised a number of issues.

The financial difficulties
The main issues centre on the rates of interest (Hall, 1989; Stanworth & Gray,
1991; Financial Times, 18 July 1991; Hutchinson & McKillop, 1992; Bradford,
1993; Keasey & Watson, 1993a), security (Hundsdiek, 1985; Binks et al., 1986;
Storey et al., 1987; Hall, 1989; Hutchinson & McKillop, 1992; Confederation of
British Industry, 1993), and the allocation of finance (Ray & Hutchinson, 1983;
NEDC, 1986b).
Whilst bank finance seems to generate higher rate of return for small firms,
it has been found to be more costly compared to other sources of finance (Keasey
& McGuinness, 1990). High interest rates have been ranked as the most important
problem facing small businesses (Stanworth & Gray, 1991; Bradford, 1993). Hall
(1989, p. 55) concluded that due to "risk inherent in the small firm sector" as well
as "the endemic conservatism of bank managers", small firms are required to pay
higher interest rates and provide a higher level of security. Hutchinson and
McKillop (1992), however, argued that the increased level of risk warrant higher
interest charges and higher collateral ratios for small businesses loans.
Keasey and Watson's (1993a) finding suggested that small firms which
provided security backed by tangible assets were able to obtain reduced interest
charges. However, insufficient collateral was found to be one of the main reasons
for failure to raise finance by small firms. A study by the 3i/Cranfield European
Enterprise Centre (1992), as quoted by the Confederation of British Industry
(1993), showed that 74 percent of small firms had to provide collateral against
borrowing. Some studies have found that banks assess the creditworthiness of new
firms more restrictively than that of established ones (e. g. Hundsdiek, 1985;
Hundsdiek & Albach, 1988). Therefore banks still rely more on the availability of
security/collateral than on the future earning potentials of the firms (Confederation

of British Industry, 1993) or on the quality of the management especially when the
firm has no or shorter track record (Sinks, 1979). Because of insufficient collateral
there was a loss of potentially viable entrants or expansions (Binks et al., 1986).
In Malaysia, a recent pilot study by Haron & Shanmugam (1994) showed

that bank officers did not consider collateral requirement to be the main problem
facing small firms. The study found that the main problem facing small firms was
perceived to be related to the "character" factors (attitude, skill and knowledge) of

the borrower. Their findings appear to contrast with those of Fong (1990) and
Yusof (1992) who observed that the lack of suitable collateral has denied credit
facilities to small firms.
It has been argued that an adequate degree of collateral provided by the

owner-manager will help increase his commitment to the health and survival of the
business. A personal investment (such as collateral) is important because it reflects
Literature Revic- / 37
the owner's commitment (Thornhill, 1989; Berry et al., 1993b: Storey, 1994a), and
the greater this commitment the higher the probability of the firm's success (Van de
Ven et al., 1984; Alias, 1990).
Berry et al. (1993b) explain a model of lending for existing small business
and they suggest that, for existing small businesses, bankers look at profitability,
gearing, security and liquidity. However, they discover that there are some trade-
offs between these financial characteristics and they further suggest that four
factors are likely to have an immediate and significant influence on lending
decisions: the person, the quality of information, the type of proposition, and the
banking environment. For example, whilst profitability is important to measure the
firms' ability to service the debt, and if the profitability is questionable, then
security and gearing become more important. They also found that the liquidity
factor plays a smaller role, it becomes important only when there are problems with
profitability and gearing. Boocock (1989, p. 7) observed that "if profit and
cashflow projections look favourable the security requirements may be reduced or

even waived. "
Whilst the banks have been urged to pay more attention to assessing
management expertise of small firms when considering a loan proposition (The

Times, 14 December 1993), Deakins and Hussain (1993 & 1994) found that the
management skills, abilities and business training of the borrower are discounted
as being of relatively minor importance. The bank officers still place most
importance on a narrow range of financial criteria, particularly on gearing, collateral
and profitability.
A review of the provision of bank lending to small firms, undertaken by the

Economists Advisory Group (NEDC, 1986b), reported that although there was
some improvement in bank's lending policy towards small firms, some of the
attitudes of the bank managers still need to be changed. The report concluded that
there was in fact misallocation of finance to small firms. The misallocation
occurred, according to the report, not only from the constraints faced by lenders
but also from the demand for loans in preference to equity from some firms.
According to Ray and Hutchinson (1983), whilst some firms have been
successful in raising finance, other firms which are more deserving of obtaining
finance, have been unsuccessful. This could be due to the inability of the banks to
fully evaluate and appreciate the potential and viability of small businesses, and
because of this potential viable growth of the firm may be foregone (Binks et al.,
1992).
Much of the above literature serves to draw attention to the financing prob-
lems faced by small firms and indicate its manifestations. It does this primarily by
means of a comparison between large and small firms, for example small firms
rely on trade credit, whereas large firms do not. As a consequence, the literature
considered thus far is useful background material, but it is not a fruitful source of
hypotheses. The next section therefore will examine the literature in this field
with a view to identifying factors related to the ease or difficulty of obtaining

finance.
2.5 THE LITERATURE AND SPECIFIC FACTORS
The literature also serves to identify some particular factors that can be grouped
under the characteristics of the firm and owner-manager, and the growth patterns
of the firm. These groupings will be examined in turn, as a preliminary to formu-
lating some hypotheses.
2.5.1 The Characteristics of Firm
The characteristics which have been found to be associated with the financing
behaviour of the firm can be considered in terms of two groups of factors. The first
group of factors refer explicitly to the characteristics of the firm; i. e. its size and
age. The second group reflect decisions made by the owner-manager; i. e. use of
external advisers, legal status, sector of industry and existence of business plan.
Literature Review1 39
Size and Age of Firm
Problems in raising finance were found to be inversely related to the size and age
of the firms, in that the smaller and/or younger ones face more difficulties
(Bannock, 1981; Chee, 1986a; Hankinson, 1991; Barrow, 1993; Terpstra & Olson,
1993; Moore, 1994). The smaller and/or younger the firms, the lower the value
of their assets which can be used as security (Binks, 1979; Bannock, 1981; Binks
et al., 1992a), and as a consequence, they are more likely to face difficulties in
raising finance. Therefore, they are likely to rely on personal savings of the owner-
managers (Bates & Hally, 1982; Md. Salleh, 1990). As the firms grow larger the
capital required for expansion tend to become less and the range of financial
institutions and sources of equity open to them increases (Bannock, 1981).
The use of bank and other institutional lenders as sources of finance appears
to increase with the size of the firms; the 'larger' the small firms the more they rely
on bank and other institutional lenders (Bolton Committee, 1971; Dunkelberg &
Cooper, 1983; Chee; 1986). The age of the firms also influences the sources of
finance; the younger firms appear to use less bank and institutional finance than
established firms since they have no established track records (Binks, 1979;
Bannock, 1981; Oakey, 1984a; Kee et al., 1986; Peterson & Shulman, 1987; Van
Auken & Doran, 1989; University of Cambridge, 1992).
With regard to trade credit, Freer (1985) and Binks and Vale (1990) found
that smaller and newer firms may be at a particular disadvantage because they lack
an established credit record. As the firms grow (in size and ages) and begin to
establish a sound credit history, they are able to increase trade credit assistance
(Peterson & Shulman, 1987).
With regard to equity finance, Jones and Kohers (1993, p. 59) observed that
"new businesses were twice as likely as existing businesses to have insufficient
equity capital and therefore, too much debt in their capital structures". The
smallest and youngest firms are more dependent upon injection of equity by the
owners, friends, relatives or retained profits because they are not within reach of
equity finance from institutional lenders (Bolton Committee, 1971; Binks, 1979;
Oakey, 1984a; Chuta & Liedholm, 1985; Chee, 1986b; Peterson & Shulman, 1987;
Walker, 1989; Levy, 1993; Tannous & Sarker, 1993). As the firms grow in size and
age, they significantly diversify their sources of external finance (Peterson &
Shulman, 1987; Mason, 1989). Dunkelberg and Cooper (1983), however, found
that the oldest firms depended more on personal savings of the owner-managers
than did the younger ones.
Use of External Advisers
In most cases the reason for the difficulty in obtaining finance is either the small
firms are insufficiently informed or poorly advised about the appropriate sources
of finance (Economists Advisory Group, 1971).
It is widely recognised that accountants and bank manager are important
sources of financial advice for small firms (Lovett, 1980; Smallbone et al., 1990 &
1993a; Curran & Blackburn, 1994; The Times, 6 September 1994). The type of
assistance most commonly received from the bank related to advice on borrowing
(Back, 1977), financial analysis and business planning (Barclays, 1993; Smallbone
et al., 1993), whereas over a third of all the business owner-managers had obtained
advice from their bank managers beyond routine cash transactions (Curran &
Blackburn, 1994).
The bank manager is also in a better position to view the progress and
problems of small businesses. Cousins Stephens Associates (1991), in its report of
a survey of financial institutions and other organisations, pointed out that lending
institutions, particularly the banks, could play a stronger role in encouraging
improvements in firms' management and greater use of external sources of exper-
tise. This relationship is particularly important in the context of finance gap
(Stanworth & Gray, 1991; Binks et al., 1992b) since the availability of finance "may
be vitally dependent upon small firms and banks working more closely together"
(Keasey and Watson, 1993a, p. 40). Furthermore, the close relationship between
the two will enable the bank to assess more accurately the risks involved in any
application for finance by the firm, as explained by Binks (1991, p. 150):
Clearly the closer that relationship and the better informed each party is of the
constraints under which the other operates, then the greater will be the level of
understanding between the two. The higher the quality of information ex-
changed, the more accurate the assessment of risk in the event of any particular
application for funds by the firm.
Legal Status
The choice of legal form of a business has some influence on the level of difficulties
in obtaining external finance. The most common perception of owner-managers
about the factors influencing their choice of legal form has been that limited
company status gives them greater credibility (Freedman & Godwin, 1992), and it
is perceived as a method of solving problems in raising finance (Posner, 1986). In
obtaining finance, firms which are unincorporated are constrained by the availabil-
ity of collateral (Godwin, 1993). However, banks often require personal assets of
owner-managers for collateral purposes (Batstone, 1993) and therefore, even with
limited company status, the personal assets of the owner are typically at risk.
The source of finance used is also influenced by the type of legal form of a
business. Studies in developed and developing countries have shown that incorpo-
rated firms are more likely than unincorporated firms to have access to external
sources of finance (Freedman & Godwin, 1992; Mishra, 1995). It has also been
found that private limited companies are more likely to rely upon bank finance
(Storey, 1994b) and they are more likely than the unincorporated firms to have
access to external equity markets (Binks et al., 1986).
Sector of Industry
It has been acknowledged that the nature of the sectors in which the firms operate
also has an impact on the financial constraints of the firms. However, the review
of the literature reveals that the industry variables used in the analysis vary between
studies. Most studies use two-category sectors such as 'manufacturing' and

'service' firms (e. g. University of Cambridge, 1992) and 'manufacturing' and 'non-
manufacturing' firms (e. g. Storey, 1994b). Small manufacturing firms are more
likely to experience difficulty in obtaining finance since they are more capital
intensive (University of Cambridge, 1992).
With regard to manufacturing firms, the bulk of the studies, however, make
a distinction between 'technology-based' and 'non technology-based' firms or'high-

technology' and 'low-technology' firms (e. g. Oakey, 1984a; Barber et al., 1989;
Austin, 1993; Westhead & Storey, 1994; Moore, 1994). This is because small
technology-based and innovative firms are important to the health of the country's
economy (Rothwell & Zegveld, 1982), and they represent the future growth of the
manufacturing sector (Ives, 1993). Furthermore, "small technology-based firms
are potentially major contributors to the generation of wealth" (Bank of England,

1996, p. 39). The need for sustained innovation in order to permit the growth of
new and existing businesses has been well established (Mansfield, 1968; Thwaites,
1978). However, there is evidence to suggest that many high technology small
firms in the U. K. "are underachieving in terms of innovation... and subsequent
growth. " (Oakey, 1991, p. 132).
Whilst technology-based firms play an important role in the economy, they

find it difficult to obtain appropriate finance (Waite, 1973; Barber et al., 1989;
ACOST, 1990; Westhead & Storey, 1994; Moore, 1994). Therefore, the majority
of them rely heavily on retained profits as the main source of finance (Oakey,
1984a, 1984b, 1993; Austin et al, 1993).
Business Plan
Whilst the preparation of business plan is the most important step in launching a
new venture (Roberts, 1983; Knight & Knight, 1993), it is even more important in
expanding the existing one (Timmons, 1980; Pickering, 1989). The business plan
is the principal tool for raising finance (Timmons et al., 1977). However, it is more
than a financing device (Timmons, 1980); when prepared and used properly, acts it
as a blueprint to guide and control the firm's daily operation (Shuman et al., 1985;
Ives, 1993). In other words, "business plans were written either for external
funding exclusively, or a combination of internal and external

uses" (Shuman et al.,
1985, p. 297).
The need for a good business plan in securing financing has been emphasised
in various studies. Most firms which apply for external finance cannot get access
to the loan due to lack of realistic and workable business plan (Fertuck, 1982;
Roberts, 1983; Salazar, 1986; ACOST, 1990; Barrow, 1993; Boocock & Presley,
1993). In examining various plans of high-technology ventures, Roberts (1983)
observed that the more significant the deficiencies in a business plan, the less likely
is the venture being financed by a venture capitalist. ACOST (1990, p. 31) pointed
out that:
From the investor's viewpoint, the major consideration in deciding whether or

not to supply capital is the quality of the business plan presented by the potential
borrower. If a firm's management cannot formulate a coherent business strategy,
analysing the market opportunity and competitive advantages of its products,
together with a clear implementation plan, it can hardly be expected to induce
an investor to assess accurately, or bear part of, the risks of the business.
2.5.2 The Characteristics of Owner-Manager
Age of Owner-Manager
While age of owner-manager has been found to be positively related to the survival
of a firm (The Sunday Times, 17 December 1995), it is negatively related to the

in
success obtaining finance (Hustedde & Pulver, 1992); older owner-managers are
less likely to obtain finance.
Cressy (1993), however, found that the middle age owners are more likely
to own assets and therefore have more security/collateral than the younger or older
ones; suggesting that the younger and older owner-managers are more likely than
the middle age owners to face difficulty in obtaining finance. Cressy also observed
that middle age owners are more likely to invest personal equity in the business.
Training, Education and Experience of Owner-Manager
Most owner-managers do not have any financial training and, therefore, many
financial difficulties arise because of their inability to forecast financial needs (CPI,
1982) or even to appreciate cash flow requirements (Economists Advisory Group,
1971). Research in Great Britain, commissioned by Barclays Bank, shows that the
majority of small business owners manage their own day-to-day financial affairs
although they have not undertaken any form of financial training (Barclays, 1993).
The implication here is that many small business owner-managers are putting their
businesses at risk by not understanding the key elements of financial management.
The management team of small firms also lacks experience and expertise,
and it has to depend on a few individuals, often without support of a formal
management structure (Keasey & Watson, 1993b). Only 14 percent of small

business owners have any specific financial skills (The Times, 21 October 1994)
and the lack of financial skills and other managerial expertise within the small firms
have also resulted in the lack of access to equity markets (Binks, 1979; Rothwell,
1985; Keasey & Watson, 1993a).
Research has shown that businesses managed by young people have low
survival rate since young owner-managers "do not have the experience and
business knowledge that is needed to survive in a competitive environment" (The
Sunday Times, 17 December 1995). However, it was reported that the more
business experience individuals have, the less likely they are to acquire external
finance (Hustedde & Pulver, 1992)
2.5.3 The Growth of Small Firm
It has been shown that fast or rapid growth firms have contributed to overall
economic growth (Smallbone et al., 1990). In the small firm sector alone fast
growth firms are the major contributors to wealth and job creation (Storey et at.,
1989). It has also been found that firms with growth aspirations are more likely to
survive (Storey et at., 1989; North et al., 1990).

Finance is not just a problem at start-up; it is also required by

growing and
innovating firms. Whilst some studies found that the main constraint facing
small
firms was related to finance for expansion (e. g. Macmillan Committee, 1931;
Radcliffe Committee, 1959; Bolton Committee, 1971; University of Cambridge,
1992), others indicated that finance did not appear to be a major constraint on
growth of small firms (e. g. Aston Business School, 1991). The Aston Study found
that only ten percent of future growth-oriented firms reported that obtaining
finance had been or was expected to be a problem. However, the same Study
observed that firms with proposal for innovations were more likely to experience
difficulties than firms making other types of investment; some of the difficulties
related to the proposals themselves, i. e., with little commercial hope of success, or
poorly presented. Furthermore, it is very risky to lend to fast growth firms since
they "are more likely to be providing a new product for which the demand is
uncertain". (Storey et al., 1989). Smallbone et al. (1990) found that, among the
higher growth firms, finance did not appear to have been a major constraint on their
growth. However, their study as a whole reported that, to some extent, a shortage
of development finance had held back growth for some of their sample firms
(Smallbone et al., 1993b).
It has been shown that the driving force stimulating the growth of small firms
is the availability of finance (Peterson & Shulman, 1987; Binks et al., 1992;
Romano & Ratnatunga, 1994) and growth has been found to be "strongly associ-
ated with a desire to use external capital to finance expansion irrespective of

whether the desire was actually realised" (Barkham et al., 1996, p. 78). Regardless
of how profitable and viable a proposal might be, "its expansion may be limited by
the inability to obtain capital on any terms, and it may never get a chance to put its
plans to the test" (Penrose, 1995, p. 219).
The sources of finance used are likely to have an influence upon the growth
of the firm (Hall, 1989). Because of the constant reinvestment necessary to finance
growth, firms rely to a great extent on borrowed funds (Stanworth & Curran,
1985). In addition to retained profit, the fast growing firms have also relied more
heavily upon bank loans and hire purchase (Storey, 1989). Retained profit is an
important source of finance for growth (internal equity), and it also "acts
as a
magnet for attracting external finance" (Reid, 1993, p. 200). The heavy reliance
on borrowed funds rather than external equity reflects the desire of the growing
firms to retain ownership and control of their businesses (Smallbone et al., 1990).
A reluctance of entrepreneurs to share ownership may affect the growth of their
businesses. Firms which are willing to share equity are more likely to grow than
firms which are reluctant to share equity (Storey, 1994a).
The major emphasis of most literature on small firm growth has been that the
finance obtained by a firm has helped the firm to grow; thus causality is assumed
to run from the former to the latter. But the causality might be reversed, suggesting
that the firm's growth potential or aspirations have a bearing on the ease of
obtaining external finance (Carsberg et al., 1985). It is, of course, the firm which
typically takes the initiative by planning for growth; by presenting a well developed
proposal for innovation and/or investment. If the firm does not take the initiative,
it is doubtful whether the providers of funds would provide the necessary finance,
as Hull and Hjern (1987, p. 174) explained:
Assistance cannot be imposed on firms; they have to want it and to signal their
desire for it.
It would seem more likely that the growth patterns of a firm could influence
the financing practices and problems of the firm. In other words, the firm may not
need external finance if it does not have plans for expansion either in undertaking
product/process innovation or carrying out other investment.
2.6 SUMMARY
This chapter has reviewed the theoretical and empirical literature on the financing
practices and problems of small firms in developed and developing economies. In
an attempt to highlight the key factors which influence the financing practices and
problems of small firms, the literature review has focused on the sources of external
finance utilised and difficulties experienced by small firms in raising finance.
Most small firms use external finance. Debt finance is the most preferred
type of finance and banks are the most popular source of finance. As for equity
finance, the most popular source is personal savings of the owner-manager.
Venture capital and informal investment represent important sources of external
equity for small firm expansion in the U. K. and the United States. Government
assistance is also widely used.
In discussing financing problems of small firms, the difficulties of raising

adequate finance is recognised as a major constraint for start-up and growth. This
inadequacy of finance is due to the nature and size of the firms. Small firms are also
insufficiently informed and poorly advised about appropriate sources of finance.
Small firms are also facing problems of poor financial management and planning.
Banks are the main sources of external finance and also important sources
of financial advice for small firms. However, the difficulties encountered by small
firms in getting bank finance have raised a number of issues: high interest rates,
insufficient collateral, and allocation of finance to small firms. It has also been
suggested in the literature that collateral signals commitment from the borrower
it
and also helps to reduce problems of adverse selection and moral hazard.
Various studies have shown that the characteristics of a firm, the character-
istics of owner-manager and the growth strategies of the firm are the key variables
which affect the availability of external finance. The firm characteristics such as
size, age, use of external advisers, legal status, type of industry and business plan
have been shown to have some influence upon the financing difficulties of small
firms. The owner-manager characteristics such as age, training, education and
previous experience also affect the patterns of financing.
The availability of finance and the sources of finance used are likely to
influence the growth of a firm. Some studies suggest that lack of finance appears
to be factor holding back growth for some small firms. The desire to retain
a major
has in the majority of fast growth firms use either
ownership and control resulted
borrowed funds. However, studies have shown that firms which
retained profits or
Lztr, ieu 1
ifi, r, Rc'v -1
willing to share their equity are more likely to grow than the firms hich are reluctant toi
are
share equity.
Whilst the accessibility to finance can influence pro; th, it has also been
that the growth of the firm has an influence upon the case of obtaining tinance.
suggested
Chapter Three
REVIEW OF THE LITERATURE II:

A COMPARISON OF DEVELOPMENTS IN THE FINANCING
OF SMALL FIRMS IN THE UNITED KINGDOM AND MAL. AVSI. A
3.1 INTRODUCTION
'I he preceding chapter reviewed the literature concerning financing practices and
problems of small firms in both developed and developing countries. This chapter
will discuss the developments in the financing of small firms in both the United
Kingdom and Malaysia.
The Bolton Committee (1971) and the Wilson Committee (1979) reported
that many small firms in the UK experienced difficulties in raising long-term capital
from external sources. As a result of recommendations of those Committees,
Various forms of finance, both private and public, have emerged to assist the
fiOrmation and expansion of small firms. The Government, in particular, has been
keen to support small firms and as a result, a number of policy initiatives have been
introduced to help the small business community.
In Malaysia, recognising the importance of small and medium enterprises

(SMF's) in the country's economic development and the growing financial require-
ments of such firms, the government has established a number of specialised

financial institutions and schemes aimed at ensuring that SMEs have ready access
to credit at reasonable cost, quickly and with a minimum of paperwork.
3.2 GOVERNMENT POLICY TOWARDS SMALL FIRMS
UNITED KINGDOM
Before 1970 there had been no specific government policy towards small firms
although a number of institutions had been set up by the government to help small
businesses. During the 1960s the government recognised that small firms might
face problems and have different needs compared with larger firms. Nevertheless,
government activities and initiatives in the small business sector had been of little
significance. Most of the government measures during that time were aimed at
trying to remove any obstacles which led to discrimination against small busi-
nesses. The setting up of the Bolton Committee in 1967 to investigate the problems
of small firms and to make appropriate recommendations was seen as the beginning
of government intervention in small business affairs.
Although a Small Firm Department was established as a result of the Report
of the Committee of Inquiry in 1971 (Bolton Committee, 1971), policy on small

firms became significant only after 1979 (Bannock & Albach, 1991). Since that
time, the policy of the government towards small firms has been based on the free
market philosophy, in the sense that "any intervention to promote small firms can
be justified only if it is directed at the removal of, or compensation for, market
imperfections" (Bannock & Albach, 1991, p. 31). Government support has
concentrated on improving the provision of training, advice and consultancy rather

than on direct funding (Boocock, 1994).
During the 1980s there was an increase in the formation of small firms, and
government intervention to help small firms also became more prominent. The
government's approach to small firms can be summarised as follows (Bannock &
Albach, 1991):
i. The government's role was to ensure that small businesses can flourish in
conditions of fair competition and to create space and incentives for
enterprise by minimising taxation, regulation, and red tape.

ii. The government strongly supported and reinforced the change to more
positive social attitudes towards the small business sector.
iii. The government helped to fill gaps in the supply side by providing commer-
cial services for small businesses, largely to improve their access to finance,
information, professional advice and training.
MA LA YSIA
Small firms in Malaysia have earned recognition from the government because of
their importance in terms of generating employment opportunities, mobilising the

local resources, creating a balanced and prosperous society, playing an important
complementary role to large firms and, in particular, reinforcing the economic
growth and development of the nation as a whole.
Before independence in 1957 the Malaysian economy was largely dependent
upon the agricultural sector and the production of prime commodities such as tin
and rubber. There were few manufacturing concerns and the existence and
contribution of SMEs were not significant. At that time, the majority of SMEs were
engaged in traditional sectors such as wood-carving, handicrafts and the produc-
tion of batik garments. Since 1957 Malaysia has experienced strong economic
growth, transforming itself from a primarily commodity-producing country to a

significant manufacturing centre.
SMEs received its first attention in Malaysia in the late 1960s. In the First
Malaysia Plan (1966 - 1970), it was mentioned only in relation to the financial
difficulties faced (Malaysia, 1966). The assistance proposed was simply the
provision of more financial facilities and business premises.
Subsequently SMEs was accorded better recognition and more support was
given to the sector. In the Second Malaysia Plan (1971 1975) however, SMEs
-
were mainly identified with the rural areas (Malaysia, 1971). The Plan stated:
Because of the relatively small demand they make on infrastructure facilities,

such small-scale enterprises can be established in rural areas and thus help in the
modernisation of the rural environment.... During the Plan period, a wide range
of management, technical and financial assistance will be provided to encourage
the development of small scale industries and to integrate them into the modern
industrial sector. (p. 154)
During this period, the New Economic Policy (NEP) was promulgated. The
NEP's goal was to achieve national unity through poverty eradication irrespective
of race and inter-ethnic economic parity through a 'restructuring' exercise. Wealth

restructuring through social engineering was the main emphasis of the NEP, and the
government hoped to create a 'viable' Bumiputera3 Business Community and a 30
percent Bumiputera ownership of the corporate sector by 1990 in the Chinese-

dominated economy. A comprehensive effort was made to promote and develop
SMEs especially in creating more Bumiputera enterprises. About RM785.65
million worth of loans was given out to the SMEs over the second five year plan.
In addition to financial assistance, the government also built up the basic infrastruc-
ture to facilitate the growth of SMEs.
Extending to the Third Malaysia Plan (1975 - 1980), the same efforts were
continued but the progress of SMEs was slightly hampered due to some particular
problems. Despite the vigorous efforts made by the government, the SMEs could
not cope up with rising demand for their products, because of the inadequate supply
of raw materials, lack of planning, ineffective marketing and very limited technical
know-how (Malaysia, 1975).
The Fourth Malaysia Plan (1981-1985) confirmed the significant role of

small and industries in entrepreneurship development and in providing inputs and
supportive services for larger firms (Malaysia, 1981).
The Sixth Malaysia Plan (1991 - 1995) (Malaysia, 1991a) emphasised the
importance of SMEs in sustaining the country's industrialisation process, and
focused on supportive industries producing parts and components, mould and die,
high quality casting, forging, and other basic components. Some fiscal and
monetary policies as well as other assistance programmes were reviewed. "In

terms of fiscal incentives, SMEs currently enjoy pioneer status and a host of
accompanying tax exemptions and allowances in addition to double deduction for
training expenses" (Bank Negara Malaysia, 1994, p. 29). Provisions for marketing
incentives include the introduction of a Subcontracting Exchange Scheme to
identify goods and components which can be produced by SMEs for import
substitution purposes. Additional assistance programmes offered include provi-
sion of industrial infrastructure and soft loan schemes to facilitate SMEs expansion
and modernisation. Under the Plan the government allocated RM209 million for
the development of SMEs.
The role of SMEs is now recognised as making an invaluable contribution
towards long-term sustained growth and as having vast potential to create inter-
industry linkages in line with the nation's objective of becoming a fully developed
nation by the year 2020 (Malaysia, 1991 b). The Government has it
made clear that
the SMEs will be one of the primary foundations for Malaysia's future industrial
thrust (Malaysia, 1991c). To this end the Government has set up the Small and
Medium Industries Development Corporation (SMIDEC) to provide advisory
services, guidance and training to the small-scale entrepreneurs (Bank Negara
Malaysia, 1995). The corporation will also become a centre for collection,
reference and dissemination of information and promote mutual cooperation
among SMEs as well as providing technical support and management counselling
services with the cooperation of other agencies involved in the development of
SMEs in the country (The New Strait Times, 17 August 1995).
The launching of the Seventh Malaysia Plan (1996 - 2000) is the latest
attempt by the Government to plan comprehensively for the development and

promotion of SMEs (Malaysia, 1996). At an important phase in the countrys drive
towards becoming a fully industrialised economy, the Seventh Plan emphasises the
importance of the manufacturing sector becoming more dynamic with the focus on
"high value-added, capital-intensive, high-technology as well as skill and knowl-
edge-intensive industries in order to achieve productivity growth and competitive-

ness" (Malaysia, 1996, p. 284).
3.3 GOVERNMENT-BACKED FINANCING SCHEMES
UNITED KINGDOM 3
Enterprise Investment Scheme & Venture Capital Trusts

The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are
tax-based schemes which were set up as successors to the Business Expansion

Scheme (BES). The BES, launched in 1983, was originally designed to make it
easier for outsiders to invest in small firms. The scheme was intended to help in
meeting the particular needs of new and expanding companies for additional equity,
where such companies did not have ready access to other sources of outside capital.
Under the BES, any investor not closely connected with the company could obtain
tax relief on a sum of up to 40,000 per year invested in new ordinary shares of
qualifying unquoted companies.
Harrison and Mason (1988) suggested that the role of the BES in closing the
'equity gap' has been limited, and their findings showed that the original aim of the
scheme to stimulate new venture creation in high risk activities had not been
It was found that the scheme had performed very poorly, in some cases
fulfilled.
investments had lost 85 percent of their original value (Financial Times, 23
September 1995). Because of its poor performance the BES was abandoned at the
end of 1993. The EIS and VCTs were introduced as replacements.
The EIS which was set up in 1994 is intended to encourage investment in

trading companies (as opposed to investment companies) by giving tax breaks to
individual investors. Through this scheme, unquoted companies looking for
finance can raise up to 1 million in equity per tax year. The VCTs, introduced in
1995, are also intended to encourage investment in unquoted companies. It is said
to be a tax-efficient
way of investing in very small unquoted companies (Financial
Times, 23 September 1995). Conceptually, a VCT is a combination of the EIS and
an investment trust. Investors can put up to 100,000 in a VCT in any one tax year.
Income tax is then rebated at 20 percent.
Literaiurc' Review 11 55
Small Firms Loan Guarantee Scheme

For small firms, lack of security to offer against a loan is found to be one of the main
reasons for failure to obtain debt finance (Confederation of British Industry, 1993:
Binks et al., 1986). To help reduce the problems of raising loan capital for small
firms, the government introduced Small Firms Loan Guarantee Scheme (SFLGS)
in June 1981. Its objective is:
to facilitate the supply of finance to viable small firms where conventional loans
are not available, possibly due to lack of security or track record, (and) to give
the lender experience of lending to businesses which have a viable proposal but
do not satisfy normal banking criteria (Barrett et at., 1990, p. 103)
Certain banks and other financial institutions are encouraged to provide

finance up to a maximum of 250,000, where the risks are considered too high to
justify for conventional lending. To counter the risk, the government guarantees
70 percent of any loan approved, and the borrower in return pays interest on the
loan plus a premium of 2.5 percent of the amount guaranteed. Although the scheme
provides quasi-equity loans, it still has the effect of increasing a firm's gearing and
is expensive for the borrower. Whilst the scheme has a significant role to play in
assisting small firms to raise finance (Barrett et al., 1990; Boocock, 1994), it is said
to be the 'last resort finance' for small businesses which are unable to raise finance
from conventional sources (Churchill, 1991). Nevertheless, the scheme "has
reduced financial market imperfections by generating additional bank lending to
viable projects and a number of assisted firms have contributed significant eco-
nomic additionality" (Boocock, 1994, p. 64).
In 1992-93, a total of 52 million worth of loans were guaranteed and by

1995-96 this figure had risen to an estimated 274 million worth of loans (United
Kingdom, 1996b). In order to ensure that the Scheme remains focused on the areas
where it is of maximum benefit, some changes to the Scheme were announced in
March 1996 which include:
simplifying the size-eligibility criteria, enabling more firms in the

-
service sector to participate
more help for businesses with business angel involvement
-
additional capital repayment holiday opportunities
-
- an increase in the maximum loan term from seven to ten years
- additional specialist lenders, particularly those with expertise in lending

to high technology firms
Other Government-Backed Schemes

Other government schemes presented by DTI to help small innovative firms are
known as Small Firms Merit Award for Research and Technology (SMART) and
Support for Products Under Research (SPUR). These schemes encourage and
provide support for the development of innovative products and processes involv-
ing scientific and technological advances.
MA LA YSIA
Funding Schemes Administered by the Central Bank of Malaysia

(Bank Neeara Malaysia)
The Malaysian government, through Bank Negara Malaysia, has established a
number of financing schemes for small firms at concessionary rates. The govern-
ment has also set up various funds offering reasonable cost finance to rehabilitate
ailing business and promote investment in the priority sectors (Bank Negara
Malaysia, 1993,1994 & 1995).
The Enterprise Rehabilitation Fund (ERF) was set up in 1988 with an
allocation of R M500 million to provide seed capital to Bumiputera entrepreneurs

who had been adversely affected by the economic recession during 1985 and 1986.
The New Entrepreneurs Fund (NEF) was launched in 1989 with an allocation of
RM250 to encourage new Bumiputera entrepreneurs to set up businesses in
manufacturing, agriculture, tourism and export oriented industries. In 1993, the
allocation was increased to RM400 million.
The Abandoned Housing Projects Fund (AHPF) was launched in 1990 with
an allocation of RM600 million to revive housing projects that had been abandoned
during the economic recession. The Industrial Adjustment Fund (IAF) was
established in 1991 to facilitate the modernisation and restructuring of selected

industries such as the wood-based, textile, and machinery and engineering indus-
tries, with an initial allocation of RM500 million. The Fund for Food (3F Schemel
aims at promoting investment in new productive capacity for primary food produc-
tion and processing (seafood both fresh and sea water, animal husbandry, veg-
etables and fruits) as well as to encourage the efficient marketing of food and food
products. The scheme was established in 1993 with an allocation of RM300
million.
Special Fund for Tourism (SFT) was established to support the tourism
industry, whereby small and medium-sized investment projects (not exceeding
RM3 million) can be funded. However, projects costing up to RM5 million may be
considered under special circumstances. Eligible projects include improvements to

tourist facilities, the construction and renovation of tourist accommodation,
tourist-related transportation, tourists attractions, facilities for tourists and any
other tourism-related project. The fund was set up in 1993 with an allocation of
RM 120 million. The Bumiputera Industrial Fund (BIF) was established in 1993
with an allocation of RM100 million. The Fund is aimed at stimulating the growth
of small and medium-sized enterprises (with at least 70 percent Bumiputera
management and equity control), improving the design and quality of their prod-
ucts, upgrading the technology, and marketing their products effectively. The
Fund provides a maximum loan of RM2.5 million at an interest rate of 5 percent per
year for a maximum period of eight years.
Soft Loan for Modernisation and Automation

This loan scheme was introduced in 1993 by the Ministry of International Trade and
Industry (MITI) with an allocation of RM50 million. The scheme aims at providing
assistance, through Bank Pembangunan Malaysia Berhad, for modernisation and

automation of small SMEs in order to promote the wider use of modern technology.
The Industrial Technical Assistance Fund (ITA F)

The Industrial Technical Assistance Fund (ITAF) was introduced in 1990 as one of
the measures to support technology development in small and medium industries.
With an initial allocation of RM50 million, ITAF's objective is to enhance growth
in the manufacturing sectors by providing assistance to firms to upgrade their
international competitiveness and viability. Underlying the government decision to
establish this scheme is the notion that the technological competency among small
and medium industries is underdeveloped. It is also felt that small and medium
industries tend not to make use of outside consultants to upgrade their key
management functions. It is intended that the provision of subsidies will encourage

firms to make use of such outside consultants.
The ITAF is available to independent firms operating in the manufacturing
sector with at least 70 percent equity held by Malaysians. The ITAF scheme is
administered by the Ministry of Trade and Industry and managed through three
agencies which are responsible for the processing and approval of the respective
schemes. The agencies are Standards and Industrial Research Institute of Malaysia
(Product Development Scheme and Quality and Productivity Improvement Scheme),
Bank Pembangunan (Feasibility Study Scheme) and Malaysian Export Organisation
(Marketing Development Scheme).
Perbadanan Usahawan Malaysia Berhad (PUNB) Venture Capital Fund

The PUNB Venture Capital Fund4, launched in 1991 with an allocation of RM 100
million, aims at facilitating the entry of Bumiputera entrepreneurs into strategic

industries and commerce. Entrepreneurs with viable projects are eligible to apply
and are expected to contribute at least 20 percent of the total cost of the project.
Priority is given to firms producing high value-added and high-technology prod-
ucts for the export market or with guaranteed markets under the Vendor Develop-
ment Programme5. As at the end of March 1994, PUNB has disbursed a total of
RM 11.7 million involving 13 manufacturing firms producing plastic-based compo-
nents, engineering components, and computer system integration services.
Mailis Amanah Rakyat (MARA) Loans Schemes

Majlis Amanah Rakyat's (MARA) loan division aims at providing credit to small
indigenous commercial and industrial enterprises with net assets of up to RM500,000
or shareholders' funds of up to the same amount. Loans are provided for the
purchase of fixed assets and for working capital needs. The businesses covered by
the loans include manufacturing, trade, services, contracts and transport. In line
with the government's effort to create and develop a viable Bumiputera Commer-
cial and Industrial Community (BCIC), as outlined in the National Development

Policy, MARA is actively involved in the formulation and management of Bumiput-
era industrial and commercial companies.
Credit Guarantee Corporation (CGC)

As a credit supplement institution, the Credit Guarantee Corporation Malaysia
Berhad (CGC) was set up in 1972 to assist SMEs to gain access to institutional
credit at reasonable cost. Its role is to bridge the gap that exists between the SMEs
and the lenders through the provision of a guarantee system that is commercially
viable over the long term. The guarantee system is aimed at assisting SMEs that
have no collateral or lack adequate collateral and have an inadequate track record,
to obtain the required institutional financing at reasonable cost. However, the
overall effectiveness of CGC in meeting the needs of SMEs appears to have been
somewhat limited (Boocock & Mohd Shariff, 1995).
Since its inception, CGC has assisted SMEs through three main facilities:
General Guarantee Scheme (GGS - 1973), Special Loan Scheme (SLS - 1981), and
Principal Guarantee Scheme (PGS - 1989). The GGS and SLS have been phased
out. Other schemes which were aimed at assisting hawkers and petty traders and
had stopped operating were Hawkers and Petty Traders Loan Scheme (1986), Loan
Fund for Hawkers and Petty Traders (1990) and Association Special Loan Scheme
(1990).
Two main schemes which are currently in operation to assist SMEs are the
New Principal Guarantee Scheme (NPGS) and the Tabung Usahawan Baru (TUB)
(New Entrepreneurs Fund). The NPGS was introduced in 1994 to replace the old
scheme, the Principal Guarantee Scheme (PGS). The NPGS is made available
through all commercial banks and licensed finance companies, whereas TUB is
offered by ten commercial banks that are providing the loans.
The NPGS was set up to help SMEs to get access to credit facilities on
reasonable terms from a bank or licensed finance company by providing guarantee
cover to the lending institutions, if the borrower does not have sufficient collateral
or has no collateral at all to offer. Under the scheme, all sectors of business in the
form of either sole proprietorship, partnerships or limited companies are eligible to
apply. However, the scheme was designed to cater for the needs of those
companies engaged in the production of promoted product specified by the
Ministry of International Trade and Industry (MITI) notably the manufacture of
high-technology and resource-based products.
The types of credit facilities that may be provided under the NPGS include
term loans, overdraft, letter of credit, bills purchased, bank guarantees, export
credit refinancing, bankers acceptances, hire purchase, and leasing. The overall
limit on credit facilities eligible for guarantee is RM3 million and for companies
producing promoted products, the limit is RM5 million. The maximum guarantee
cover is RM 1 million, for companies producing promoted products RM 1.5 million.

In 1995, a total of 7,935 loan applications valued at RM 1,758.7 million were
guaranteed by CGC (Bank Negara Malaysia, 1995)
The New Entrepreneurs Fund (NEF) was introduced in 1989 to assist the
growth of small and medium Bumiputera enterprises. Under the scheme, loans of
up to RM2 million may be obtained from either one of the twelve financial
institutions, ten of which are commercial banks. The interest rate is charged at 5
percent per year, and loans granted by the participating commercial banks can be
guaranteed by CGC with a maximum guarantee cover of 50 percent of the loan not
covered by any collateral, over a period not exceeding eight years.
3.4 BANK FUNDING
UNITED KINGDOM
It has been well acknowledged that banks continue to be the most significant source
of external finance for small firms in the U. K. (University of Cambridge, 1992;
Confederation of British Industry, 1993; Keasey & Watson, 1994; Henderson et al.,
1995; Bank of England, 1996). Bank finance to small firms is channelled through
a small number of major banks with a large number of branches throughout the
country. The main banks involved in England are Barclays, Lloyds, Midland and
National Westminster, while in Scotland the main banks are Royal Bank, Bank of
Scotland and the Clydesdale. A total of 35.91 billion of bank finance was
outstanding to small firms in June 1995 (Bank of England, 1996).
In order to meet the needs of small business customers, the banks have
developed a range of financing schemes and packages including specialist business
advisory schemes for small businesses. Most banks now provide start-up service
to small businesses in the hope that they will benefit in the form of long-term
customer loyalty. National Westminster, for example, has been actively involved in
assisting small businesses including start-up loans, free banking for a year for most
start-ups, and interest bearing accounts for surplus funds. Midland Bank operates
around 340 enterprise centres throughout England and Wales providing specialist
advice to small businesses. Lloyds and Barclays have set up small business centres
through their respective branches. While the banks' initiatives to reduce the
reliance of small businesses on short-term sources of funds is to be welcomed, these
do not attack the fundamental need which is for higher proportion of equity funding
(NEDC, 1986b).
MA LA YSIA
The extension of credit facilities to small firms by the core banking system (i. e. the
commercial banks and finance companies) has shown an increasing trend in recent
years. The total amount of loans granted to SMEs as at the end of 1993 was around
RM 10 billion, of which 27 percent was channelled to wholesale and retail trade
sector, 18 percent was channeled to housing, real estate and construction sector,
and 17 percent to manufacturing sector (Lin, 1994).
Besides banks and finance companies, a large number of other financial

institutions also extended credit facilities to SMEs. They include the industrial
finance institutions (mainly Malaysian Industrial Development Finance, Bank
Pembangunan Malaysia Berhad, Bank Industri, and Sabah Development Bank),
Federal Land Development Authority (Felda) and rural credit institutions (mainly
Bank Pertanian and Bank Rakyat), urban credit cooperatives, and private leasing
and factoring companies.

3.5 VENTURE CAPITAL
UNITED KINGDOM
Chilson (1984, p. 207) defined venture capital as an activity in which:
investors support entrepreneurial talent with finance and business skills to

exploit market opportunities, and thus to obtain long-term capital gains.
Venture capital is provided by a range of financial institutions, including

insurance companies, pension funds and banks either directly (through captive
funds) or indirectly (through specialist independent funds). The importance of the
venture capital industry in the U. K. resulted in the creation of the British Venture
Capital Association (BVCA) in 1982. The main objectives of the association were
to identify issues facing the industry and to lobby the government for legislative
change and to provide information and to undertake research on the venture capital
industry in the U. K. (Mason & Harrison, 1991b). A recent report (United
Kingdom, 1996a, p. 61) shows that:
Venture capital investment by BVCA members rose from 139.6m... in 1984 to

1,668m in 1994. Of the 1994 total, 1,1 12m (67%) was accounted for by
management buy-outs and management buy-ins. Of this sub-total, 797m
(71.1 %) was taken up by buy-outs and 315m (28.3%) by buy-ins. The number
of individual UK companies funded by venture capital rose from 350 in 1984 to
1,101 in 1994.
The growth of venture capital industry in the U. K. has occurred as a result
of the following environmental factors which provide a climate favourable to its
development (Dixon, 1989):
i. The growing awareness of the United States venture capital industry which
gave the industry in the U. K. information and a role model.
ii. The support given by the Conservative Government to assist small firms by
the setting up of the Business Expansion Scheme (BES) and the Loan
Guarantee Scheme (LGS).
iii. There was a favourable demand and supply situation. The number of start-
ups and management buy-outs which require finance have increased.
iv. The development in the capital market, with the establishment of the
Unlisted Securities Market and the Over-The-Counter market, which gave
long-term investors new exit routes, and so encouraged the initial invest-
ment.
Another reason for the growth of venture capital industry is that it meets the
capital market gap not previously covered by the more traditional investment
institutions. The growth of venture capital has also been influenced by the tax
incentives (Wilson, 1992), by developments in capital markets and by the industrial
environment (Bank of England, 1984). According to the Bank of England (1984,
p. 207):
Changes in taxation in recent years, the creation of the unlisted securities market
(USM), and the encouragement given by government to smaller companies have
all tended to encourage investors to allocate part of their funds to investment in
riskier but potentially highly profitable businesses.
However, the contribution of the industry in overcoming barriers to growth

in smaller firms remains limited (ACOST, 1990). Generally, venture capitalists are
reluctant to make investments of under 250,000 (Harrison & Mason, 1993), and
therefore small firms may be more keen to turn to informal investors for sources of
external equity.
Evidence shows that informal investors are playing an important role in

financing small firms in the U. K. (Mason et al., 1990; Confederation of British
Industry, 1993; Mason & Harrison, 1994). In fact, private individuals were found
to emerge during the 1980s " as an alternative source of financing in Britain for the
small company which is unable to raise money from more conventional sources. "
(Batchelor, 1988c, p. 9).
Investors in Industry or 3i (formerly known as Industrial and Commercial

Finance Corporation - ICFC) is the most important source of equity finance for
small firms. It was established in 1945 by the Bank of England and the major
clearing banks to provide long-term finance to growing firms (Clarke, 1987). In

1994 3i launched a campaign to invest in'emerging businesses', a programme aimed
at developing investment in younger business without an established track record

and with potential for growth (The Times, 20 September 1995). The minimum level
of investment is 100,000.3i makes by far the largest individual contribution to
venture capital investment in the U. K. with outstanding investments of 2,191 mil-
lion at end of March 1995 (United Kingdom, 1996a). Of the total equity provided
as seed and early stage capital in the U. K., 3i accounts for 55 percent (Financial
Times, 22 September 1995).
MA LA YSIA
Unlike the situation in the U. K. and other developed countries, venture capital
financing in Asean region is still in its infancy. However, it has the potential to
become an important and popular alternative form of financing, aside from tradi-
tional bank borrowing, particularly in financing rapid industrialisation in the Asean
region. A survey by the Industrial Finance Corporation (1986) acknowledged that

Malaysia (together with Korea, Kenya and Argentina) had been identified as having
the potential for a thriving venture capital sector.
Like other countries in the region, Malaysia accords priority to the devel-
opment of a viable venture capital industry. Indeed, Bank Negara itself encouraged
the banks and merchant banks to get directly involved in this industry as far back
as the early 1980s. The first venture capital company (VCC) in Malaysia started
operations only in 1984.
By the end of 1994, there were seventeen VCCs in Malaysia with a total
investment of RM252 million in 67 investee companies (Bank Negara Malaysia,
1994). At the end of 1995 the number of VCCs increased to twenty with a total
investment of RM416 in 71 investee companies (Bank Negara Malaysia, 1995).
The government, for its part, introduced various measures to promote the devel-
opment of the venture capital industry. It has established the Technology Park
Malaysia and introduced tax incentives for venture capital companies. Whilst the
venture capital industry as a whole has great potential for further growth, it has
been found that the Malaysian Government's attempts to promote the industry have
not been a success (Boocock, 1995). There are other impediments facing venture
capitalists which will affect the demand for the funds, notably: the usual reluctance
to dilute ownership, especially by the family-owned business for fear of losing
control; relative ease of obtaining some bank credits; and more importantly, the
lack of awareness of the role of venture capitalists (Lin, 1992; Bank Negara
Malaysia, 1994&1995; Boocock, 1995). Bank Negara Malaysia (1995, p. 163)
suggests that:
The lack of awareness of the availability of venture capital financing and the
reluctance of most of the new companies in accepting venture capitalists as
partners have affected the progress of the industry.
In 1995, the Malaysian Venture Capital Association (MVCA) was estab-

lished in order to promote awareness of the venture capital industry in the country.
The main objectives of MVCA are: to promote and develop a venture capital
industry as a source of equity financing for small and medium-sized industries; to
stimulate the promotion, research and analysis of venture capital; and establish
contact with government agencies, policy makers, research institutions, universi-
ties, trade associations and other relevant institutions for the promotion and
betterment of the venture capital industry in the country.
3.6 SECONDARY MARKETS
UNITED KINGDOM
Junior Stock Markets (1980-1996)

Another source of finance to close the equity gap of small firms is the creation of
junior stock markets with less stringent listing requirements and lower issue costs.
The Unlisted Securities Market (USM), the Third Market and Over-The-Counter
(OTC) Market represented efforts to encourage more equity funding at earlier
stages in a company's life.
The USM was launched by the London Stock Exchange in 1980. This
market was expected to play a crucial role in the development of equity financing
for small firms; with its establishment the proportion of equity that had to be in
public hands was reduced from 25 percent to 10 percent and the trading record
requirement was reduced from five to three years.
The opening up of the USM, according to Bannock and Doran (1987):
has enabled a small number of firms to expand faster than would otherwise have
been possible and has improved incentives for expansion by allowing the owners
to realise some of the value of their capital. This, in turn, has stimulated the
development of other sources of equity capital for firms further down in the size
distribution because it has encouraged financial institutions to lend to unquoted
companies by offering them better prospects for exit.
However, the cost of entry to the USM, although much lower than a full
listing, was still relatively expensive for the smallest companies and it was not an
appropriate vehicle for start-ups. Furthermore, there was also a growing interest
in OTC market trading involving the use of Stock Exchange Rule 163(2). This Rule
allowed specific dealing in unlisted shares with prior approval through the normal
mechanism of the market, but without the company itself having to comply with the
usual listing formalities. Despite the creation of USM, the number of companies
trading on OTC market using Rule 163(2) did not decline. As a result, the Third
Market was introduced in 1987. The Third Market was set up to help younger and
smaller companies which could not access the USM. They were only required to
have a one year trading record and there was no minimum amount of equity
required. The Third Market was a third tier market, similar to the OTC, but with
a proper regulatory framework.
The USM, OTC and Third Markets eventually faced a number of problems
which raised questions as to whether they met the needs of smaller companies. The
effectiveness of the junior stock markets has been the focus of various studies
(Bank ofEngland, 1983; Buckland & Davis, 1984 & 1989; NEDC, 1986b; ACOST,
1990; Wilkinson, 1994). The development of these markets had in fact failed to
close the `equity gap' for small firms. The USM, OTC and Third Market were
effectively closed to all but the most dynamic small firms.

The outcome was that the Third Market was officially closed in 1990. Those
eligible companies listed on the Third Market were transferred to the USM. This
move, combined with the already lax qualifications for an USM listing, affected the
USM's reputation (Lynn, 1992). In any event, the number of firms wishing to join
the USM had declined, with most companies preferring to go for a full listing
(Wilkinson, 1994). As a result of falling in demand both from small companies and
from investors, the Stock Exchange studied the need for an alternative market. It
was decided that a new market, known as the Alternative Investment Market
(AIM), would be created.
Alternative Investment Market (AIM)

The decision to establish AIM was made by the Stock Exchange after it decided to
close the Unlisted Securities Market (USM). It was officially opened by London
Stock Exchange in June 1995 as a market for smaller, growing companies that do
not qualify for, or do not wish to join the, Official List. The creation of AIM
enables small companies to raise new capital, obtain a valuation and allows
shareholders to trade their shares or simply to benefit from the enhanced reputation
of being a publicly quoted company. Unlike the full market, AIM will cater for
firms with little or no track record (The Sunday Times, 26 February 1995).
Some of the key characteristics of AIM, that distinguish it from other
markets, are (Finch, 1995):
i. No eligibility criteria for new entrants whether in size, profitability or length
of track record.
ii. Any type of security can be offered, provided there are no restrictions on
transferability. They need only be attractive to investors.
iii. No Stock Exchange requirements for the percentage of shares in public

hands or the number of shareholders - although if too few shares are freely
available, then there will be no market maker and no realistic market price.
iv. There will be fewer obligation for AIM companies to issue shareholder
circulars;public announcements will generally be sufficient. This will

reduce the costs for companies growing by acquisition.
MA LA YSIA
In order to give small companies the opportunity to earn a public listing, the Kuala
Lumpur Stock Exchange (KLSE) established a Second Board in 1988. At the end
of 1993, the number of companies quoted on the Second Board had reached 84
compared to 413 on the Main Board. During 1994-1995, the number of companies
listed on the Second Board expanded substantially; a total of 80 new companies
were listed on the Second Board and 37 companies on the Main Board. "The large
number of listings was due largely to the greater awareness of the equity market as
an alternative source of funding" (Bank Negara Malaysia, 1994, p. 179). Further-
more, "strong economic fundamentals and corporate earnings enabled both stock
markets to reach record levels of fund mobilisation and market capitalisation over
recent years" (Boocock, 1995, pp. 374-375).
3.7 SUMMARY
Developments in financing of small firms in the U. K. and Malaysia have been the
focus of this chapter. The chapter discusses the various institutions and schemes
that provide finance to small firms in these countries. It is clear that both countries
are well provided with institutional sources of finance for small firms. Further-
more, the governments of both countries have been giving support for the growth
of small firms and have introduced a range of policy initiatives, schemes and
institutions to ensure that small firms have access to finance. U. K. Government
policy towards small firms became important in the late 1970s. In Malaysia the
importance of small firms were acknowledged during the Second Malaysia Plan
(1971
-1975).
The British government policy towards small firms is largely based on free
market philosophy and to ensure that competition between large and small firms is
Lilerature Review 11 69
based on equality. On the other hand, the Malaysian government adopts a proactive
approach which has been influenced by the New Economic Policy, an economic
programme to ensure more participation by Bumiputeras in business activities.

Thus, in Malaysia, the provision of various financing schemes at concessionary
rates is considered as a necessary means of helping the small firms, whereas in the
U. K., the provision of soft loans is regarded as an unwarranted intrusion within the
free-market economy.
Nevertheless, despite the rapid expansion in the range of public and private
sector financial initiatives, there is widespread perception that a 'finance gap'

continues to exist, a gap which is perceived to be a major constraint on small firm
growth in both countries (see Chapter Two).
The growth of venture capital industry and the introduction of government

initiatives such as the Business Expansion Scheme in the U. K. and the PUNB
venture capital scheme in Malaysia have not closed the equity gap. This gap has
stemmed from the existence of information asymmetries as well as the reluctance

of owner-managers to dilute ownership for fear of losing control.
The debt gap also arises from information asymmetries. The providers of
funds, especially the banks, still rely heavily on the availability of collateral rather
than the potential earning capacity of the firms. Despite the availability of
government initiatives, such as the Loan Guarantee Scheme in the U. K. and Credit
Guarantee Corporation Schemes in Malaysia, the debt gap still appears to be in
existence.
Both the U. K. and Malaysia have secondary markets with less stringent
listing requirements and cheaper than the full listings. However, whilst these
markets are important as exit routes for venture capitalist in the U. K. (Bank of
England, 1996), there is still a shortage of exit routes for Malaysian venture
capitalists as the Malaysian Company Act prevents companies from repurchasing

their own shares (Boocock, 1995).
Notes
The term Bumiputera means "son of the soil". Although usually used in reference to the
Malays, the term also encompasses other indigenous community of the country.
2 RM = Malaysian Ringgit. At present the rate of exchange is approximately RM4 =1.
3 To review all financial schemes provided by central or local government in the U. K. is

beyond the scope of this chapter, however, details of some of the schemes are provided
in a report published by Department of Trade and Industry (United Kingdom, 1995).
4 P(JNB was established as a result of the Government's National Development Policy

which was formulated to develop a progressive and dynamic Bum iputera commercial and
industrial community. However, the equity participation scheme operated by PUNB is
only temporary in nature and the shares are automatically sold back to the company after
a specified period. Therefore, whether PUNB's activities can be classed as true venture
capital is questionable (Boocock, 1995).
5 The main objective of the Vendor Development Programme is to promote SMEs through
tie-ups with larger firms of multinational corporations. Schemes which have been
organised under the programme are the electrical and electronics components scheme,
the Proton components scheme for the automotive sector and the furniture components
scheme for the wood-based sector.
Chapter Four
THEORETICAL FRAMEWORK
AND STATEMENTS OF HYPOTHESES
4.1 INTRODUCTION
The purpose of this chapter is to develop working definitions and a theoretical

framework which provides the conceptual foundation upon which this study will be
based. Developing such a conceptual framework will help the researcher to
postulate and test certain relationships so as to improve understanding of the
dynamics of the situation. Having identified the important variables and estab-
lished the relationships among them in the theoretical framework, the hypotheses
are generated to test whether the relationships that are theorised are true. The main
practical advantage of hypothesis testing is that "there is initial clarity about what
is to be investigated, and hence information can be collected speedily and effi-
ciently" (Smith et al., 1991, p. 36).
4.2 CONCEPTUAL FRAMEWORK
The literature review has shown that there are three main factors which influence
the access to external finance and the ease of obtaining finance by small firms.
These factors are categorised as the characteristics of the firm, the characteristics
of the owner-manager and the growth orientation of the firm. Each factor provides
a distinctive contribution to the understanding of the financing practices and
problems of small firms. Therefore, in order to achieve its objective, the study will
investigate and examine the effect of these factors upon the financing practices and
problems of small firms in the United Kingdom and Malaysia. For this purpose, the
study will attempt to answer the research questions which have been described in
Chapter One.
Theoretical Framex, rk & Hypotheses 72
In order to be able to answer the research questions, it is important to

develop a conceptual framework within which the basic variables of this stud}. will
be examined. As in any other field of study, a comparative investigation needs
theories which provide a framework for the systematic analysis and accumulation
of the existing stock of knowledge, as well as to serve a guide for developing
hypotheses (Schollhammer, 1973). It has been agreed that a study is considered as
comparative if it employs concepts that are applicable in more than one country
(Rose, 1991). Rose (1991, p. 447) maintained that:
without concepts, information about different countries may be assembled

together but we have no basis for relating one country to another.
This conceptual framework will be the basis for the investigation of the
practices and problems as they relate to small firm financing in the U. K. and
Malaysia. The schematic diagram of the conceptual framework is depicted in
Figure 4.1. There are three main variables of primary interest to this study: need
for finance, sources of finance; and difficulties in raising finance. These variables
are considered as the 'dependent variables'. Three key 'independent variables' are
used in an attempt to explain the two 'dependent variables' as they relate to the
financing the growth of small firm. The independent variables are grouped as
follows:
i. Characteristics of firm
Size of firm
Age of firm
Use of external advisers
Legal status
Type of industry
Existence of business plan
ii. Characteristics of owner-manager

Age of owner-manager
Level of training
Level of education
Level of experience
Theoretical Framework & ! lvr otheses
------------------------- -1
1 I
1 1
ri SMALL FIRM CHARACTERISTICS
1
I
I i
r OWNER-MANAGER CHARACTERISTICS I
GROWTH PATTERNS
1 r
rI rr
Independent Variables
1
'rr. r-r-rrr-------rrr-rr. rrr7
1 1
k N+NCiNCr rRAC" C :S AtO2 PRQ8U : MS
i 1
1 NEED FOR EXTERNAL k' NANCE 1
SOURCES OF FINANCE
1 DI CULTIES IN RAISING FINANCE 1
1
1
Dependent Variables
f
Figure 4.1
Financing "I'he Growth of Small Manufacturing Firms:
Schematic Diagram of the Theoretical Framework
Theoretical Framexnrk & Hypotheses 74
iii. Growth of the firm

Past growth performance
Growth potential
Firm Characteristics
It has been established that the age and size of small firm have an impact on the
types and sources of finance (e. g: Bannock, 1981; Chee, 1986a; Moore, 1994). The
smaller/younger the firm, the more it depends on internal sources (owner's own
funds or profit retained in the firm) and on loans from relatives, friends or directors.
By the same token, the newer/smaller the firm, the lower its ability to command
loans and external equity. As the small firm grows in size, with a lengthening record
of expansion and profit, the range of financial assistance open to it increases. It is

able to borrow more short-term debt and increase trade credit. Other financing
options, such as venture capital and private equity may also available. The longer
the firm is in the market, the more profit it retains in the business, and the more
attractive it becomes to external financiers. The age and size of firm also influence
the terms imposed by the lenders. The smaller/younger the firm, the greater the
amount of security needed by the lenders. The smaller/younger the firm, the lower
the value of its capital assets which can be used as security for a loan, and the
greater the problem faced by the firm in providing the security.
The use of external financial advisers will influence the ability of owner-
in
managers obtaining information about sources and availability of finance and will
also influence the level of difficulty in raising finance (e. g: Economists Advisory
Group, 1971). The firm which lacks information will not have the opportunity to
make use of the full range of financial facilities available. The more information it
has, the higher the level of awareness about financial services available, and the
lower the degree of difficulty in raising finance. The firm tends to use more
appropriate sources of finance if it obtains more information about financial
services available. The firm which engages business/financial advisers or uses

outside consultants tends to get appropriate type and sources of finance, and finds
less difficulty in raising finance.
Theoretical Framework & Hypotheses 75
The choice of legal form of a business will influence the sources of finance
and the level of difficulty in obtaining finance (e. g: Freedman & Godwin, 1992;
Mishra, 1995). The incorporated firms are more likely than unincorporated firms
to obtain external finance. The latter are more likely to face difficulty in obtaining
finance since they are generally constrained by the availability of collateral.
It has been acknowledged that the type of industry has some influence on the
sources of finance and on the level of financing difficulty (e. g: Md. Salleh, 1990;
Hankinson, 1991). Owing to the high cost of obtaining external finance, technol-
ogy-based firms are more likely than conventional firms to rely on internal source
of finance, particularly retained profits.
The existence ofa business plan is always associated with the use of external
finance since it is considered as a principal tool for raising finance. Firms which do
not have a business plan or lack a realistic business plan are more likely to face
difficulty in obtaining finance (e. g: ACOST; Boocock & Presley, 1993).
Owner-Manager Characteristics
The age of an owner-manager is related to the ease of obtaining external finance.

Some studies found that the older owner-manager is less likely to succeed in
obtaining external finance (e. g: Hustede & Pulver, 1992), whilst others found that
younger and older owner-managers are more likely than middle aged owner-
managers to face difficulty in obtaining finance (e. g: Cressy, 1993).
The level of training, education and experience (particularly in the area of

finance) received by the owner-managers will determine the financial expertise of
the firm, and therefore affect the sources of finance and the level of difficulty in
raising finance (Sinks, 1979; Rothwell, 1985; Keasey & Watson, 1993a). The
higher the level of training they receive, the more skills they have in producing a
businessplan and in preparing cash-flow projections required by the lender in order
to assessthe viability of the proposed plans. The well-trained owner-managers
tend to have more financial management expertise and therefore less difficulty in
getting access to outside finance.

Firm Growth
It has been shown that the driving force behind the growth of small firms is the
availability of finance (e. g: Binks et al., 1992; Romano & Ratnatunga, 1994), and
firm growth has been found to be associated with the desire to use external finance
(e. g: Barkham et at., 1996). Whilst most studies have been concerned with the
assumption that the finance received has helped the firm to grow, it has been shown
that firm's growth orientation can also have a bearing on the ease of obtaining
external finance (Carsberg et al., 1985).
4.3 DEFINITIONS
4.3.1 Comparative Stud
In this study, using the definitions given by previous researchers in another

discipline (i. e. Comparative Industrial Relations), a Comparative Study is defined
as a research which deals with the same (or similar or related) phenomena in
different countries (Sturmthal, 1958) in order to discover similarities and differ-
ences among these phenomena (Warwick & Osherson, 1973).
4.3.2 'Small Firms'
Defining what is meant by a 'small firm' is not only a prerequisite for doing research
but is also required for realistic policy-making by any government. Unfortunately,
there is no universally accepted definition of a small firm, and there is no easy

solution to the problem of deciding what constitutes a small firm (Curran &
Stanworth, 1984). In fact the problem of defining a small business has been
acknowledged by most small business researchers and writers (e. g: Ray &
Hutchinson, 1983; Burns & Dewhurst, 1986; Hakim, 1989; Keeble et al., 1991;
Felstead & Leighton, 1992).
Theoretical Framexnrk & Hypotheses 77
A single working definition of the term 'small firm' is difficult to establish.

According to Keeble et al. (1991), smallness is a relative concept, and what is
regarded as small may vary widely between different industries. Not only is there
no clear-cut accepted definition of a small firm in the United Kingdom, but the
definition adopted also differs from one country to another.
Hakim (1989, p. 30) pointed out that because of the absence of an agreed
definition of small firm:
it is difficult to summarise research results on'small firm'. Studies which appear

to be talking about the same thing, but yield conflicting results, may actually be
talking about firms of quite different size, in different industries and different
part of the country, identified through very different mechanisms.
According to Felstead and Leighton (1992, p. 20):
The most obvious and immediate concern of any comparative work is an

appreciation that what may be measured by one country, or statistical collecting
body, might not necessarily be the same as that measured by another.
Indeed, there is ample evidence of inconsistencies and discrepancies in the

definitions of small firms within a single country, let alone between one country to
another. Austin et al. (1993, p. 10) pointed out that:
the diversity of the UK SMEs sector was acknowledged through different

definitions dependent upon the industry type.. used within the Bolton Report.
.
The diversity amongst SMEs is still evident, when making international com-
parisons matters are further complicated.
The diversity means that definitions in most countries vary according to the
industry in which the small firm is found (Beesley & Wilson, 1984). Burns and
Dewhurst (1986, p. xviii) suggested that:
each country's statistics are available only in the form chosen by that country or
some of its institutions. We cannot change that. We have to make do with what
is there!.
The Bolton Committee (1971) found it impossible to define a small firm
adequately in terms of employment, assets, turnover, or any other single quantita-

tive measure. The committee, however, argued that the essence of "smallness" in
economic terms is threefold:

i. Small firms are those with a relatively small share of the national market.
ii. Small firms are managed by the owners in a personalised way.
iii. Small firms are independently owned with the owner-managers free from
external legal control in taking major decisions.
Those characteristics are used to define a small firm in economic terms. For
practical studies, however, a 'quantitative definition' is required. The Bolton

Committee agreed that for the manufacturing industry, firms employing less than
200 employees seemed to conform with the economic characteristics of small firms.
To some extent, however, the adoption of the 200 employee threshold was
influenced by available statistics, that is by convenience rather than through
conceptual justification. Outside of manufacturing, a series of definitions, based
mainly upon the number of employees or turnover, was adopted by the Committee.
Ganguly (1985) agreed that the definition of 200 employees or less as the
cut-off level for small firms in the manufacturing sector is still valid in the U. K. He
further suggested that the definition could be further refined by adding 'concentra-
tion' of industrial employment by size of firm. This would, in his view, ensure that
within particular areas of manufacturing, the overall share of employment in firms
defined as 'small' would be as close as possible to the overall share of employment
in firms employing 200 employees or less. Curran (1986), however, did not agree
with this approach. He argued that the upper limit of 200 employees to be too high,
and applying the concentration measure would produce odd results in the sense that
some firms in other sectors might have 500 employees and therefore would be
considered as 'small'. This would certainly fail the Bolton's economic characteris-
tics of small firms. Storey (1994a) concludes that both the economic and statistical
definitions employed by the Bolton Committee are no longer relevant.
The Bank of England (1996) defines small firm as those having turnover up
to and including 1 million per year. Other studies have found 500 employees to
be a useful threshold in defining small firm (ACOST, 1990; Pratten, 1991).
Binks (1980), in his examination of the problems of finance for small firm
expansion, restricted his discussion to firms employing less than 30 people, and
this, according to him, "should not be taken as rigid boundary, for it is the nature
of small firms that their wide variation renders rigid thresholds in any one measure
of size both unhelpful and misleading" (p. 27). Ahmed (1987), Hakim (1989),
Aston Business School (1991) and Cousins Stephens Associates (1991) used 50
employees whereas Clifford et al. (1991) used 40 to 50 employees as boundaries

in their studies of small firms. University of Cambridge (1992) characterised small
firms as firms with 10 to 99 employees, firms with less than 10 employees were
considered as micro firms and between 100 to 199 employees were medium firms.
In his international comparative study on the financial structure of the small

firms, Tamari (1980) defined small firms in UK, France, Israel, and Japan as those
firms employing fewer than 200 employees. For the USA, Tamari classified firms
according to their assets. Firms with less than 5 million dollars in total assets were
classified as small in the USA. Walker and Petty (1978) also defined small firms
in the USA as those with less than 5 million dollars in total assets. Droms et al.
(1979), in their study on a financial profile of small retailing firms in the USA however,
defined a 'small retailing firm' as one with total assets of less than 250,000 dollars.
An American study of small firm definition in 1975 (Neck, 1977), as quoted

by Storey (1986, p. 82), identified more than 50 different statistical definitions in
75 countries:
Not surprisingly Neck suggests the criteria for 'small' vary according to the
context, with an upper limit of small for financiers being based on total
employment (including or excluding outworkers), total sales, energy consump-
tion, number of customers, and so on. Clearly firms which are small in some of
these contexts are far from small in others.
In Malaysia, as in other countries, there is no legal and official definition of
small firms. In his study on micro problems of small business in Malaysia, Mahmud
(1981) characterised small businesses by the following features:
" management is independent of outside control and, thus, usually owns the
enterprise;
Theoretical Frame xk & Hypotheses 80
ii. an individual or small group has supplied the capital, and
iii. the operational area is mainly local, although markets can extend beyond the
local area.
The above definition was clearly influenced by the definition given by

American Committee for Economic Development (Kelly et al., 1968). However,
Chee (1986) defined 'small industry' as an establishment which has fixed assets of
less than RM500,000 (approximately 125,000) or employs less than 50 full-time
workers and is in
engaged manufacturing activities. Fong (1990) used the Ministry
of International Trade and Industry's definition of small industry as a manufactur-
ing enterprise which has a shareholders' funds of less than RM500.000 or employs
a full time work force of less than 20 workers. The Coordinating Council for
Development of Small-Scale Industry (CCDSI) defines small industries as those
with fixed assets of less than RM250,000, or in the case of companies, with
shareholders' funds not exceeding RM250,000. This definition is commonly used
by government agencies responsible for assisting small industry (Chee, 1990).
Md. Salleh (1990) classified industrial enterprises in Malaysia into four main
i.
categories, e. tiny, small, medium and large scale industries. Tiny scale industries
are firms employing 4 employees or less while small scale industries are those firms
having employees between 5 to 49. Firms with employees between 50 and 199 are
classified as medium scale industries and firms employing more than 200 employees
are regarded as large scale industries. In other developing countries, in particular
Taiwan, Korea, Philippines, Colombia and India, 'small firms' generally mean those
with less than 50 employees, 'medium-sized firms' employ between 50 to 99
employees, and 'large firms' are those with 100 or more employees (Little et al.,
1987).
Whatever the basis of the definition, it will, to some extent, be unsatisfac-

tory for some purposes. No single definition will be equally applicable or relevant
to the diverse purposes of those wishing to have a definition (Stanworth & Gray,
1991; Keasey & Watson, 1993b). Therefore, researchers are likely to use their own
definitions of small firms which are appropriate to their particular 'target' group
(Storey, 1994a).
Theoretical Framexork & Hypotheses 81
Thus, it can be seen that we are saddled with a problem

of a lack of
consensus in the definition of a small firms among experts. A choice of an
appropriate definition of a small firm is, however, essential on methodological and
practical grounds in order that the purpose of this comparative study can be
achieved. For international comparisons, acceptable and consistent definitions are
needed. Since the small firm sector is heterogeneous:
it is often necessary for these definitions to be modified according to the

particular sectoral, geographic or other contexts in which small firm is being
examined. (Storey, 1994a, p. 47)
In view of the lack of uniformly accepted definition of what constitutes a
small firm, for the purpose of this study, the working definition of'small manufac-
turing firm' will be based on the number of employees. For this comparative study,
a 'small manufacturing firm' is therefore defined as one with less than 50 employ-
ees. Furthermore, the firm should be independent or family-owned, that is, not
be part of a larger enterprise.
The researcher believes that using 'employment' as a measure of firm size is
much more simple and practical (e. g: McKibbin & Gutman, 1986; Chee & Jang,
1988) especially when making international comparisons (e. g: Osaze, 1981; Johns,
1983; Storey & Johnson, 1986). Furthermore, "information about employment is
it
readily available and... may be considered by managers to be less confidential"
(Pratten, 1991).
Clifford et al. (1991, pp. 44-45) argued that:
the essence of the small business is the ability of the founder/owner to adapt (or
not) within the business to meet the demands of the role; overcome the stresses
it creates; and derive the appropriate satisfactions, financial and otherwise. In
this general regard we see the number of people involved as the appropriate
measure of size.
A measure based on'turnover' has been found to vary significantly according

to the type of industry and is less adequate in terms of sampling (McKibbin &
Gutman, 1986) and it is difficult to apply consistently across countries (Johns,
1983). Further weaknesses were also mentioned by Burns (1989) who pointed out
Theoretical Framexmrk & Hypotheses 82
that any quantitative definition,

that is based on turnover or any other measure of
size expressed in financial terms, suffers from severe disadvantages during times of
inflation. During these times:
it becomes necessary to periodically revise the definition and, by so doing, this

it
makes difficult to compare the performance of different sized firms over times.
(Storey & Johnson, 1986, p. 69)
4.3.3 Manufacturing
The definition of 'manufacturing' used in this study follows that of the International
Standard Industrial Classification (ISIC) of All Economic Activities, Third Revi-
sion (United Nations, 1990) as follows:
Manufacturing is defined here as the physical or chemical transformation of materials

or components into new products, whether the work is performed by power-driven
machines or by hand, whether it is done in a factory or in the worker's home, and whether
the products are sold at wholesale or retail.
4.3.4 Dependent Variables
For the purpose of this study the 'need for external finance' is defined as the firm's
desire to use external funds to finance business growth or expansion. A firm is
defined as having a need for external finance if it has approached a financier and
applied for the funds, irrespective of whether the application was successful.
Sources of Finance
Small firms generally start with the owner's funds, though perhaps with the help of
family and friends, and with the support of bank overdraft finance. Thereafter, as
the firms expand, they need additional finance. Finance for expansion can be
broadly classified as either equity finance, debt finance, or government assistance.
Equity Finance
Equity is essentially permanent risk capital, and is not repayable.
Equity finance can be obtained in return for a proportional share
of a firm's value. Internal source of equity finance can be in the

forms of owner-managers' funds, directors' funds, or profits
retained in the firm. Retained profits can be the major type of the
funds needed to finance the expansion. Unless the firms have
been consistently ploughing back adequate profits into the busi-
ness, they need to obtain external source of equity finance,

typically from formal venture capital funds or informal investors
(business angels).
Debt Finance
Debt finance can be obtained from two sources; formal and
informal. Formal sources are normally regarded as institutional
sources and informal sources refer to sources other than institu-

tional sources such as family, friends, directors, and suppliers'.
Debt finance is normally repayable according to an agreed sched-
ule. This type of finance is usually described as short, medium,

or long-term. Sources of debt finance can be in the forms of term
loan, overdraft, bill finance, leasing, hire purchase, factoring,
mortgage, and trade credit.
Government Assistance
This type of finance is usually provided by various government
agencies or local authorities to help small firms in financing their
expansion plans.
Difficulties in Raising Finance
The 'difficulties in raising finance' are defined as the main obstacles or constraints
which the firm perceives to have encountered in the process of obtaining external
finance. There are two main areas of difficulty which the firm might have
experienced in raising external finance. Firstly, the firm might have been refused
finance to support its expansion plans for a variety of reasons as specified in, for
example: Aston Business School (1991) and University of Cambridge (1992).

These factors include:
lack of personal financial contribution

lack of perceived viability of proposed plans or the projects are too risky
lack of success in previous business venture(s)
lack of track record (entrepreneur and/or business)
Inability to produce business plan
lack of security or collateral
the firm has exceeded the limit of its borrowing in the past
too rapid expansion
Secondly, the firm might have been able to raise external finance but might
have encountered some difficulties in the process of raising finance which con-
strained its expansion plans (e. g: Hall & Lewis, 1988; University of Cambridge,
1992). In this situation the 'difficulty in raising finance' does not imply that the firm
was not able to raise funds. In other words, the existence of 'difficulty in raising
finance' is not in itself an indication of 'failure in raising finance'. Difficulty may
occur where an offer of finance is made on terms which are regarded by the firm as
is
more unfavourable than warranted by the degree of risk in the proposals, such as:
insufficient amount of funds offered

high level of security or collateral required
high interest rates
duration of loan offered is too short
4.3.5 Independent Variables
Characteristics of Small Firm
For the purpose of this study, the characteristics of small firm is defined in terms
of two elements relating to the firm itself. First, the elements which refer explicitly
to the characteristics of the firm (size and age). Second, the elements which reflect
Theoretical Frome%ork & Hypotheses 85
decisions made by the owner-manager at the start or during the course of hisher
business (use of advisers, legal status, type of industry, preparation of business
plan).
Age of Firm
Age of firm is measured by the number of years since the firm was established up
to the year of the survey.
Size of Firm
Size of firm is measured in terms of employment size, and the number of'people
involved' is the appropriate measure of size. Therefore, for the purpose of this
study, the number of employees includes full-time and part-time employees.
Use of External Adviser

External advisers refer to the external sources of information regarding financing
which include:
Relatives and friends

Bankers
Accountants and auditors
Local Enterprise Agency
Chambers of Commerce
Legal Status
Since the study is only concerned with the small manufacturing firms which are
independent or family-owned, three main types of legal form are considered; sole
proprietor, partnership, and private limited.
Sector of Industry
In order to ensure international comparability, the types of manufacturing industry
will be based on the International Standard Industrial Classification (divisions 15
37) provided by The Department of International Economic and Social Affairs,

-
United Nations (1990).
Theoretical Framexvrk & Hypotheses 86
Business Plan
For the purpose of this study a business plan is defined as a document which
contains an analysis of the firm's current position and "charts the course and
destination of a company in specific terms for the first twelve months of operations
in
and general terms for at least the second and third years of operations" (Knight
& Knight, 1993, p. 33).
Characteristics of Owner-Manager
For the purpose of this study, the characteristics of owner-manager includes age,
level of training, level of education and previous experience.
The owner-manager is required to indicate his/her age at the time of the survey.
Training, Education and Experience of Owner-Managers

The level of training and education of owner-managers of small firms is measured
in terms of educational background, business training attended and prior employ-
ment history and experience of the owner-managers. In this study, training is

defined as "the process of acquiring the knowledge and skills related to work
requirements by formal, structured or guided means" (Johnson & Gubbins, 1992, p. 29).
Growth of Firm
A range of measures and indicators of small firm growth has been used in previous
studies, such as employment (e. g: Storey et al., 1987; Hull & Hjern, 1987). assets
(e. g: Reid, 1993) and sales (e. g: Robinson, 1983, Bracker, 1986). Both sales and
employment had been used in some studies (e. g: Gray, 1992), and a combination
of profit and sales has also commonly been to
used measure growth (e. g: Smalibone
et al., 1990; Cragg, 1990; Kent, 1994). Other studies have used three measures of
growth: sales, profit and employment (e. g: Birley & Westhead, 1990).
Whilst the most commonly presumed goal of a large firm is to maximise the
value of the firm (Brockington, 1987; Schall & Haley. 1988; Brigham, 1988).
among small firm owner-managers it is generally perceived that the most important
goal is to maximise profit (Cooley & Edwards, 1983). However, for many owner-
managers, growth of their businesses is not an objective. Their motive for doing
business is simply to be their 'own boss' or to own their 'own job' (Curran &
Burrows, 1987a; Bosworth & Jacobs, 1989). Some writers stress 'personal
independence' being the most cited objective of the new entrepreneur (Donckels &
Dupont, 1987; Hakim, 1988). These different motives for starting a business have
been categorised as positive and negative effects; "positive effects which pull
individuals into a particular market or opportunity, and negative aspects of their
current position which push them into entrepreneurship as a preferred alternative"
(Binks & Coyne, 1983, p. 32).
For the purpose of this study, it is assumed that small firm owner-managers
are primarily concerned with profitable expansion of their firm. Therefore, profits
are "treated as a necessary condition of expansion - or growth - and growth,

therefore, (is) a chief reason for the interest in
of managers profits" (Penrose, 1995,
p. xii). From the point of view of long-term growth, profit acts as a means for
obtaining capital needed to finance the expansion plans (Baumol, 1962).
This study will primarily be concerned with the growth or expansion of small
firms in terms of product/process innovation or investment (Aston Business
School, 1991) carried out by the firms with the purpose of maximising profits.
According to Penrose (1995, p. 30):
If profits are a condition of successful growth, but profits are sought primarily
for the sake of the firm, that is, to reinvest in the firm rather than to reimburse
for the their or their 'risk bearing', then, from the point of
owners use of capital
view of investment policy, growth and profits become equivalent as the
criteria for the selection of investment programmes.
For this reason, a three-fold classification of growth-orientations of small

firm introduced by Hakim (1989) will be adapted in this study: fast growth, slow
growth and no growth. Therefore, the past growth performance and growth
potential of small firms in this study are defined as follows:

Theoretical Framewrk & Hypotheses 88
Past Growth Performance

Fast or Rapid Growth the firm has undertaken major product/process
innovation or carried out major investment
over the last three years.

Slow or Steady Growth the firm has carried out moderate innovation or
investment over the last three years.
No Growth : the firm has not undertaken any innovation or
investment over the last three years.
Growth Potential
Fast or Rapid Growth : the firm wishes to introduce major product/
process innovation or to carry out major in-
vestment over the next three years.

Slow or Steady Growth : the firm wishes to carry out moderate innova-
tion or investment over the next three years.
No Growth : the firm may have completed innovation or
investment, but has no plans to do so in the next
three years.
4.4 STATEMENTS OF HYPOTHESES
At this point, the researcher draws on the literature, particularly the research studies
discussed in pp. 38-46, to formulate some testable hypotheses. It is acknowl-
edged that the literature is being used selectively to focus on the issue of most
interest to the researcher, i. e., the ease or difficulty experienced by small firms in
raising finance.
4.4.1 Need for External Finance
Association Between Small Firm Characteristics and Need for

External Finance
i. There is an association between the size of a small manufacturing

firm and the need for external finance in the United Kingdom and
Malaysia.
ii. There is an association between the age of a small manufacturing firm
and the need for external finance in the United Kingdom and Malay-
sia.
iii. There is an association between the use of external advisers by small
manufacturing firm and the need for external finance in the United
iv. There is an association between the legal status of a small manufac-

turing firm and the need for external finance in the United Kingdom
and Malaysia.
v. There is an association between the type of industry of a small
vi. There is an association between the existence of a written business
plan in a small manufacturing firm and the need for external finance
in the United Kingdom and Malaysia.
Association Between Owner-Manager Characteristics and Need for
External Finance
i. There is an association between age of the owner-manager of a small


ii. There is an association between level of training, education and

experience of the owner-manager of a small manufacturing firm and
the need for external finance in the United Kingdom and Malaysia.
4.4.2 Sources of External Finance
Association Between Small Firm Characteristics and Sources of

External Finance
i. There is an association between the size of a small manufacturing

firm and the sources of external finance used by firms in the United
ii. There is an association between the age of a small manufacturing firm
and the sources of external finance used by firms in the United

iii. There is an association between the use of external advisers and the
sources of external finance used by firms in the United Kingdom and

Malaysia.
iv. There is an association between the legal status of a small manufac-

turing firm and the sources of external finance used by firms in the
United Kingdom and Malaysia.
v. There is an association between the type of industry of a small
manufacturing firm and the sources of external finance used by firms

in firm and the sources of external finance
plan a small manufacturing
used by firms in the United Kingdom and Malaysia.
Theoretical Frame%vrk & Hypotheses 91
Association Between Owner-Manager Characteristics and Sources of

External Finance
i. There is an association between age of the owner-manager of a small


experience of the owner-manager of a small manufacturing firm and
the sources of external finance used by firms in the United Kingdom
and Malaysia.
Association Between Growth of Small Firm and Sources of

External Finance
i. There is an association between past growth performance of a small

ii. There is an association between growth potential of a small manufac-

turing firm and the sources of external finance used by firms in the
United Kingdom and Malaysia.
4.4.3 Difficulties in Raising External Finance
Association Between Small Firm Characteristics and

Existence of Difficulties
i. There is an association between the size of a firm and the existence
of difficulties in raising external finance for small manufacturing

firms in the United Kingdom and Malaysia.
ii. There is an association between the age of a firm and the existence

iii. There is an association between the use of external advisers and the
existence of difficulties in raising external finance for small manufac-
turing firms in the United Kingdom and Malaysia.
iv. There is an association between the legal status of a firm and the
v. There is an association between the type of industry of a firm and the
plan in a firm and the existence of difficulties in raising external

finance for small manufacturing firms in the United Kingdom and
Malaysia.
Association Between Owner-Manager Characteristics
and Existence of Difficulties
i. There is an association between age of the owner-manager and the
the and the existence of difficulties in

experience of owner-manager
finance for small manufacturing firms in the United
raising external
Theoretical Framerork & Hypotheses 93
Association Between Growth of Small Firm and

Existence of Difficulties
1. There is an association between past growth performance and the

ii. There is an association between growth potential and the existence

4.5 SUMMARY
This chapter begins with a discussion of the conceptual framework which will help
us to postulate and test the relationship among variables so as to improve our

understanding of the situation. The main variables, which are known as dependent
variables, have been identified as 'need for finance', 'sources of finance' and
'difficulty in raising finance'. In an attempt to explain these variables, three key
independent variables will be used: characteristics of firm, characteristics of
owner-manager and growth strategies of firm.
The second part of the chapter describes the working definitions of small
firm, manufacturing, business expansion, and various variables explained in the
conceptual framework of the study. Having defined the important variables and
established the relationships among them, the chapter concludes with statements of
hypotheses to test whether the relationships that have been theorised are true.
otes
For the purpose of this study, other informal sources of debt finance such as loan sharks,
tontine and other illegal money lenders are not considered. Although these types of
sources remain a popular way of raising money among small business in Malaysia (Chee,
1986; Bidin & Chua, 1992), they are not considered in this study since they do not enjoy
the protection of the law.
Chapter Five
RESEARCH DESIGN AND METHODOLOGY
5.1 INTRODUCTION
In the previous chapter a theoretical framework upon which this study is based was
developed in order to be able to answer the research questions, and the important
variables have also been identified. Having identified the variables and developed
the hypotheses for the study, the next stage is to design a research method that
constitutes the best way of data gathering in order to test the hypotheses. This
chapter will focus on the design of the research. A research design is basically a
plan of procedures for data collection and analysis to evaluate and test the
hypotheses. The research design will offer the researcher a direction to follow from
the beginning to the completion of the study. The importance of research design
is described by Hakim (1987, p. 171) as follows:
Research is in the nature of sailing off to chart unexplored seas or, more
concretely, trudging off to map unexplored territories. Research design is about
aiming in the right direction, getting your bearings right (from previous studies)
and making sure you are adequately equipped to get there and back. Columbus
set sail to find the western route to the East Indies and came across the West
Indies and America instead. Research designs which fail in their original
intentions are not always quite so lucky, but it helps if one is clear that their
original plan made sense, can offer some reasons on why it went awry, and
describes what was discovered instead.
Oppenheim (1992, p. 8) stressed that:
It is the research design which must hold all the parts and phases of the enquiry
together. The design must aim at precision, logic-tightness and efficient use of
resources. A poorly designed survey will fail to provide accurate answers to the
questions under investigation; it will have too many loopholes in the conclu-
it little it will produce much irrelevant
sions; will permit generalization; and
information, thereby wasting case material and resources.
Research Design & Methodology 95
In describing the research design for this study, this chapter begins by
reviewing the past research methodologies, follows with a description of the nature
of this research, its data gathering and sample selection procedures, and the design
of the questionnaire and pilot test. Finally the techniques used for data analysis are
outlined.
5.2 RESEARCH STRATEGIES
5.2.1 Previous Studies Methodology
By reviewing previous studies' methodologies, this section provides a guide to the
research design and methodology employed in this study. Oyen (1990, p. 15)
commented that much research, comparative or otherwise, "is guided by the
principles of least resistance or invitation by opportunity. " One of the central
research strategies, according to Oyen (1990, p. 15):
seems to be the preference given to available data and methodological

tools..... Many comparative projects would never have surfaced, had they not
adopted such a strategy.
The previous studies are therefore reviewed using a five-part classifications
scheme introduced by Paulin et al. (1982) and adopted by Alias (1990). The
classifications are (a) research purpose, (b) research strategy, (c) research design,
(d) data collection technique, and (e) data analysis technique. The review,
however, is constrained by the limited number of methodical research studies
relating to small firm and entrepreneurial finance (Petty, 1991) and the fact that,
with regard to small firm research, "there still seem to be differences of views as
to the kinds of research regarded as proper or of high quality" (Gibb, 1990, p. 48).
In fact, it has been suggested that, with some exceptions, "the general quality of
research in the small business finance area is lacking when compared to other
segments of financial research. " (Petty, 1991, p. 89). Furthermore, most of the
studies on small business finance have been directed towards improving govern-
ment policy making, and as such, "methodological difficulties with the studies have
beendownplayed" (Pettit & Singer, 1985, p. 48). Besides the difficulties discussed
in Chapter Four of defining a 'small firm', there are also problems in assembling
suitably representative samples of small firms (Curran & Blackburn, 1994).
Given the relatively recent emergence of research into entrepreneurship, it

is not surprising that most research on small business finance, as shown in Table
5.1, are exploratory in nature (e. g. Oakey, 1984b; Van Auken and Carter, 1989;
Burns and Walker, 1991; Austin, 1993; Peel and Wilson, 1996). A great deal of
descriptive research during the initial stages of developing a paradigm is also to be
expected (e. g. Tamari, 1980; Osaze, 1981; Dunkelberg & Cooper, 1983; Calof,
1985; Hutchinson et al., 1988; Hajjar, 1989; Jones, 1994; Keasey & Watson, 1994;
McKillop & Hutchinson, 1994). Some researchers were interested in testing
hypotheses to explain the nature of certain relationships or to establish the
differences among groups or the independence of various factors (e. g. Bracker &
Pearson, 1986; Ahmed, 1987; Bracker et al., 1988; Carter & Van Auken, 1990;
Keasey & McGuinness, 1990; Hasan, 1990; McKiernan & Morris, 1994).
Table 5.1 also shows that the most common research strategy employed in
studying small firm finance is a sample survey. Field study has also been adopted
by some researchers (e. g. Osaze, 1981; Oakey, 1984b). Several studies adopted
the case study design (e. g. Binks et al., 1986; Ahmed, 1987; Austin et al., 1993)
which involves an in-depth study of a small number of firms in their natural context.
Questionnaires and interviews have been frequently used to collect data, and
several studies relied upon published data. No studies were found to be using
participant observation or ethnography, a technique which is acknowledged as the
only true way to study the life of a small firm (Curran & Burrows, 1987b; Stockport
& Kakabadse, 1992; Holliday, 1992). Ethnography is a research method which
"provides a detailed insight into the day-to-dayactivities and operations of the
small firms" (Holliday, 1992, p. 176) it

and also "provides a means for generating
better quality information and knowledge of entrepreneurship" (Stockport &
Kakabadse, 1992, p. 188).
Table 5.1
Small Firm Finance: Summary of Previous Studies Methodology
Major Sample Data Gathering Data

Authors Emphasis Population Method Analysis
Dromset at. Financial profile 607 small Published data Percentages

(1979) of small firms retailing firms Ratios
Tamari (1980) Financial structure over 2000 small Mail questionnaire, Percentages
of small firms - manufacturing Published data
an international firms
comparison
Osaze(1981) Financing and 50 small Interview Ratios,

financial control manufacturing questionnaire, Correlation,
characteristics of firms Published data Regression
small firms
Dunkelberg& Patterns of 1805 small firms Published data Percentages,

Cooper(1983) financing for Regression
small firms
Oakey(1984b) Effect of capital 114 small firms Interview Percentages,

investment funding questionnaire Correlation,
patterns on the Chi-square
innovativeness of
small firms
Calof (1985) Financial preference 155 small Mail questionnaire Percentages

of small business businesses
owners
Binks et al. Financial constraints 100 small traders Interviews Percentages

(1986) of new and small
firms
Bracker& Planning and 188 small Mail questionnaire, ANOVA,

Pearson(1986) financial performance mature firms Published data MANOVA,
firms T-test,
of small
F-test
Ahmed(1987) Financing small 45 small firms Interviews Ratios,

development Percentages
enterprise
Brackeret al. Planning and 97 small Mail questionnaire T-test,
(1988) financial performance electronicfirms ANOVA,
firms in MANOVA
among small
a growth industry
Hutchinsonet al. Financial charac- 127 small Published data Ratios,

(1988) MANOVA
teristics of small firms companies
which achieve quota-
tion on USM
TableS.1 (continued)
Van Auken & Capitalisation & 375 small firms Mail questionnaire Correlation,
Carter (1989) financing patterns Chi-square,
of small firms Percentages
Hajjar (1989) Problems and 222 small Mail questionnaire Percentages

provision of finance businesses Interview
for small businesses
Carter & Relationship 132 small firms Mail questionnaire Percentages,

Van Auken (1990) between financial Regression
difficulties and
entrepreneurs'
personal funds
Keasey& Returns to 127 small new Published data Correlation,

McGuinness alternative firms Regression
(1990) source of finance
Hasan(1990) Problems of 81 small Mail questionnaire Percentages

financing small manufacturing interview
firms firms
Aston Business Nature and extent 1095 small firms Telephone interviews Percentages
School(1991) of financial
constraints and
market failure
experienced by
small firms
Burns& Walker Working capital 186 small Mail questionnaire Percentages,

(1991) policy among manufacturing Correlation,
small firms firms Chi-square
Austin et al. Financing 30 small- and Interview Percentages,

(1993) practice of medium-sized Matrices
small firms manufacturing
firms
Joneset al. Raising capital for 316 small firms Interview Percentages
(1994) ethnic minority
small firms
Keasey& Bank financing 110 small firms Published data Percentages,

Watson(1994) of small firms Ratios
McKiatnan & Strategic planning 1380 SMEs Mail questionnaire Correlation,

Morris (1994) financial Historical data Chi-square
and
performance of SMEs Interviews
McKillop & Small firm attitudes 88 small firms Mail questionnaire Percentages
Hutchinson(1994) to bank financing
Peel&Wilson Working capital 84 small firms Mail questionnaire Percentages,

(6) Chi-square,
practicesof small T-test,
firms
With regard to data analysis, all studies reviewed had used

quantitative
techniques. This is consistent with the observations made by Wort man (1987) and
Gibb (1990) regarding the use of statistical methods in small firm research. In line
with Alias's (1990) observations, the use of statistical tools shows significant shifts
from relatively unsophisticated tools, such as percentages and ratios (e. g. Droms
et al., 1979; Tamari, 1980; Bink et al., 1986), to more sophisticated statistical
tools, including the Chi-square test (e. g. McKiernan & Morris, 1994; Peel &
Wilson, 1996), T-test and F-test (e. g. Bracker & Pearson, 1986) and correlation
(e. g. Keasey & McGuinness, 1990).
5.2.2 Present Research Strategy
This study attempts to explain the relationships between dependent and indepen-
dent variables (see Chapter Four); thus the most appropriate technique to engage
is hypothesis testing (Smith et al., 1991; Sekaran, 1992).
With regard to research design, choosing the best approach is a matter of
appropriateness. The "question of research method cannot be answered without

careful consideration of the nature of the objects under study" (Romano, 1989, p. 41).
Furthermore "no single approach is always or necessarily superior; it all depends
on what we need to find out and on the type of question to which we seek an
answer" (Oppenheim (1992, p. 12).
The review of the previous research methodologies in section 5.2.1 above
reveals that the two most popular and regularly adopted approaches in the study of
small firm finance are survey methods and case studies. Romano (1989, p. 41),
however, reminded that:
The choice of our research methodology must not be influenced by more popular
and regularly adopted scientific approaches. Rather consideration should be
given to the relevance or usefulness of research and the researcher must select
the most appropriate methodology to fulfil this goal.
ResearchDesign & Methodology 100
In any research, in order to develop and test theories, there is

a need to
generalise knowledge. Some writers on international studies implied that the only
way to generalise from research findings is to use survey method (Zelditch, 197 1:
Walton, 1973; Warwick, 1973). The advantage of the survey approach in a
comparative study is its ability to collect data from a large number of respondents,
thus allowing quantitative analysis in the testing of inferences and the possibility of
generalization of the findings (Warwick, 1973). A further strength of the survey
method is:
its 'transparency' or 'accountability' the fact that the methods and procedures
-
used can be made visible and accessible to other parties (be they professional
colleagues, clients, or the public audience for the study report), so that the
implementation as well as the overall research design, can be assessed.(Hakim,
,
1987, p. 48)
One of the major weaknesses of the survey method, according to Cragg

(1991), is that the important variables must be known in advance. Otherwise,
exploratory research must be conducted prior to the survey. Another limitation of

the survey research method when it is used in developing countries is that:
the conditions in developing countries do not always facilitate easy and reliable
data collection. Developing countries face many constraints in their environ-
ment compared to advanced countries. The question is how to go about
collecting research data there. (Ramachandran, 1991, p. 302)
The case study approach would be more suitable if the researchers are
concerned with acquiring intimate knowledge of a small business in its natural

context (Romano, 1989). It has been suggested that case studies are a useful design
for research on small firms (Hakim, 1987). Quoting the works of Littler (1982) and
Gospel and Littler (1987), Hakim (1987, p. 71) concluded that "case studies can
also provide the basis for international comparative studies". Whilst the case study
method provides detail and depth, thus maximizing the validity of results, this
approach limits the representativeness and generalisability of the findings (Zelditch,
1971; Walton, 1973).
It has been advised that one of the solutions to the generalisability problem
is to study more than one case (Hakim, 1987, Bryman, 1988). Furthermore, "the
evidence from multiple cases is often considered more compelling, and the overall
study is therefore regarded as being more robust" (Yin, 1984, p. 48). Previous
experiences in studying small firms suggest that multiple case studies are indeed
capable of addressing generality if they are understood in theoretical rather than
statistical terms (e. g. ACOST, 1990; Austin et al., 1993). The researcher's views
on this argument, however, have been influenced by Brannen's (1992, p. 9) remark
that:
issues about the representativeness of the sample and the generalisability of the
findings are not salient; rather it is the issue of establishing a theoretical link
within each case.
It has been suggested that participant observation or ethnography technique
generates better quality information and knowledge of entrepreneurship (Stockport

& Kakabadse, 1992). However, in the context of the present study which involves
two countries, this approach could limit the collection and analysis of the data,
therefore it would not be considered. Besides the difficulty in gaining entry into
the research setting (Hammersley & Atkinson, 1983), this technique is very costly
and time consuming (Stockport & Kakabadse, 1992).
Owing to the nature of the present study which involves both quantitative
variables (firm and owner-manager characteristics) and qualitative variables (past
performance and growth aspirations of the firm), the data collection method has
incorporated two strategies; survey and case study methods. As it has been pointed
out earlier, each of the strategies has its own strengths and weaknesses; "it is these
strengths and weaknesses that lie behind the rationale for integrating them. "
(Bryman, 1992, p. 59).
The combining of the two strategies, described as a multiple research
strategy (Burgess, 1982) or between-methods approach (Braunen, 1992), "can
serve as an exercise in clarification: in particular it can help to clarify the

formulation of the research problem and the most appropriate ways in which
problems may be theorised and studied. " (Brannen, 1992, p. 32).

5.3 SURVEY METHOD
5.3.1 Types of Survey
The research approach using surveys is well described and presented by de Vaus
(1986) and Fowler (1993). The various types of survey which are regularly used
in social research include questionnaires, interviews, observation and content
analysis. The questionnaire is the most widely used data collection technique in
survey research (de Vaus, 1986).
The questionnaire method was chosen in order to obtain data from a large
number of small firms in both Malaysia and the U. K. There are three different ways
in which the questionnaires can be administered: face to face interviews, by
telephone and mail.
Face to face interviews are best suited to the exploratory stages of research
and the main advantage of this is

method that the researcher can adapt the questions
asked as necessary. The researcher can also pick up nonverbal cues from the
respondent. The main disadvantages of face to face interviews are the geographical
limitations they may impose on the surveys and the vast resources needed if such
surveys are carried out nationally or internationally; therefore it is both time

consuming and costly.
Telephone interviews are best suited for asking structured questions where
responses need to be obtained quickly from a geographically spread sample. The
main disadvantage of this method is that the respondent could unilaterally termi-
nate the interview without warning or explanation by hanging up the telephone.
The mail questionnaire survey is best suited when a substantial amount of

information is to be obtained from geographically dispersed sample through
structured questions at minimal costs. However the disadvantage of mail question-

naire is that too many questions which require effort on the part of the respondents
will result in non-response (Jobber, 1991).
In order to facilitate of data from a sample that is widely

the collection
dispersed geographically (U. K. and Malaysia) and to minimise the cost and time
consumed (Miller, 1991; Sekaran, 1992), the researcher decided to employ the mail
questionnaire survey method. Besides having a lower cost and consuming less
time, when the mail questionnaire is used appropriately, it can be expected to
produce results ranging from almost as good as to substantially better than those
that can be obtained by more costly methods (Sudman and Bradburn, 1984).
The strengths of mail questionnaire, according to May (1993). are as

follows:
i. If the study is dealing with sensitive issues, its anonymity may be advanta-
geous.
ii. The respondents can take their own time to fill in the questionnaire and
consider their responses.
iii. Mail questionnaire can lead to less bias (as opposed to face-to-face inter-
view) resulting from the way questions are asked.
iv. It is possible to cover a wider geographical area at a lower cost.
May (1993), however, pointed out the weaknesses of mail questionnaire as

follows:
i. The need to keep questions relatively simple and straightforward as the

has how respondents are interpreting the ques-
researcher no control over
tions once it has been posted.
ii. The possibility of probing beyond the answer that the respondents give is
absent.
iii. There is no control over who answers the questionnaire.

iv. The response rate may be low and it is possible that bias in the final sample
cannot be checked.
5.3.2 Total Design Method
In order to minimise the weaknesses of a mail questionnaire, the survey method
used in this study has adapted the Total Design Method (TDM) developed by
Dillman (1978). The implementation of TDM involves two steps. First, to identify
each aspect of the survey process that may affect either the quality or quantity of
response. This step is guided by a theoretical view about why people respond to
questionnaires. Second, to organise the survey efforts so that the design intentions
are carried out in complete detail. This is

step guided by an administrative plan to
ensure the implementation of the survey is in accordance with design intentions.
This method has been used extensively and has been shown to be capable of
producing high response rates (Dillman et al., 1984; Cragg, 1990; McKiernan &
Morris, 1994).
The implementation of TDM suggested that the mail survey method should
adhere to the following procedure:
i. Letters are individually printed with individual names and addresses at the
top of the letters.
ii. The mailout date is included on the letter, and each letter is individually
signed with a blue fountain pen.
iii. A stamped return (rather than business reply) envelope is included with the
mailing.
iv. A booklet type questionnaire is used with an attractive cover and no
questions on the front and back covers.
V. The individually addressed envelopes are posted first class.

vi. A follow-up postcard is sent one week after the first mailout, with a date and
signature in blue fountain pen.
vii. A second follow-up is sent to all non-respondents three weeks after the
initial mailout.
viii. A third follow-up is sent to all non-respondents, seven weeks after the initial
mailout.
Due to cost and time constraints, however, the researcher was not able to
to
adhere procedure (v), (vii) and (viii). Self-adhesive address labels were used in
order to avoid delays in the posting of the questionnaires, and follow-up postcards
were only sent once, i. e. one week after the first mailout.
5.4 SAMPLING FRAME
A sampling frame is a list from which a sample can be taken and which leads
ultimately to the sample of units about which information are to be obtained.

According to Moser and Kalton (1985), there are several advantages of sampling.
First, in contrast to a complete coverage of the population, the information is
cheaper to collect. Second, sampling saves labour since it requires fewer people
to collect and analyse the data. Third, sampling saves time as a sample is faster to
analyse and process. Fourth, sampling often permits a higher level of accuracy than
a full enumeration.
A suitable and good sampling frame for the population being sampled should
have the following characteristics (Hague and Harris, 1993):
i. The frame should contain a list of members of the defined population.
ii. The frame should be a complete, up-to-date list of the population.
iii. No population member should be listed more than once.

iv. The list should contain information about each individual that could be
used
for stratifying the sample.
However, the researcher has anticipated that there would be problems of

identifying the sampling frame since there is no convenient source which lists all
small manufacturing firms in both the U. K. and Malaysia.
The problem of an ill-defined sampling frame in the U. K. was pointed out by

Curran (1986, pp. 5-6):
There are no national sampling frames for small business research in Britain in
any strict sense, that is, lists of enterprises defined in some broadly acceptable
way as 'small' from which statistically adequate samples might be drawn.
Indeed, such lists do not exist even for particular types of small enterprise or
even for the small enterprise populations of defined geographical areas - towns,
districts, borough etc. - and, in practice, researchers have continued to resort to
less satisfactory alternatives.
Hague and Harris (1993) confirmed that there is no single listing of all
business establishments in the U. K. The Business Statistics Office's list, known as
'U. K. Directory of Manufacturing Business', is not comprehensive and contains
companies making returns to the 'Business Monitor'. Those companies making
returns, however, have to elect to be in the list and only a minority do so. Some
researchers consider British Telecom's list as an up-to-date reference source
(Hakim, 1989; Cragg, 1990). However, Curran and Blackburn (1994) consider
published lists of any kind would not provide sufficient information to be able to
construct a good sampling frame; "even when complete, such source(s) date
quickly, because small enterprises are very far from a static population. " (Curran,
1986, p. 6). By its nature, the small firm sector tends to be heterogeneous and
difficult to track. However, the coverage of data is generally better for small
manufacturing firms than for other industries (Midland Bank, 1987).
In Malaysia, data collected by the Registrar of Companies and the Registrar
of Business Records are not only out-of-date and incomplete, but cumbersome to
handle because one has to deal with individual files (Mahmud, 1981) and records
are not kept according to industrial sector of the businesses.
In the absence of any official lists and in an attempt to minimise the

problem
of obtaining an appropriate and up-to-date list of manufacturing firms, the U. K.
samples have been limitedto the East Midlands area; encompassing the five
counties of Derbyshire, Nottinghamshire, Lincolnshire, Leicestershire and

Northamptonshire. The Dun and Bradstreet (D & B) data base was selected as a
reliable source of information on Britain's small firm population (Gallagher and

Doyle, 1986). The D& B's data base has been used in important studies on small
firm job generation by Gallagher and Stewart (1984a, 1984b, 1986). As with other
secondary data bases, this data base has its limitations (Storey & Johnson, 1986);
Doyle and Gallagher (1986) agree that there will always be some level of error in
all data bases, but they maintain that their research indicated that error in D&B
files was minimal. However the researcher has reasons to believe the completeness
of the D&B files especially those of manufacturing firmst.
For the Malaysian sample, due to the unavailability of reliable lists of small
firms, the sampling frame for this study has been developed using lists of small
manufacturing firms obtained from Ministry of International Trade and Industry

(MITI) and from Malaysian Entrepreneurship Development Centre (MEDEC)2.
MITI and MEDEC are two agencies charged with the development of small and
medium sized enterprises in Malaysia; as such, their lists would have a high
probability of being current and up-to-date. The criteria of a good sampling frame
suggested by Hague and Harris (1993) were used in developing the data base. After
getting assistance from two senior officers in both agencies [Assistant Director of
Small Enterprise Division (MITI) and Head of Enterprise Development Depart-
ment (MEDEC)), the researcher has compiled a list of 5,110 small manufacturing
firms. A total of 520 small firms were selected at random (about 10 percent) from
the list to be the sample in the present study.
5.5 QUESTIONNAIRE DESIGN
Having decided that a questionnaire is the most suitable method for gathering data
for this study, the next step is to focus on designing the questionnaire. The way in
which questions are presented in the questionnaire will affect the quality of
responses and therefore it is important to ensure not only that the right questions
are asked, but also that they are understood and asked in the right way. A poor
questionnaire will result in errors and biases and will tend to increase the amount
of non-response in a survey.
In this study, the purpose of the questionnaire is to elicit basically two

different types of information: first, descriptive data such as the characteristics of
owner manager and business organisation; second, data of a subjective nature such
as the respondents' beliefs, opinions and attitudes. After the information and data
are analysed, generalisation can then take place from the sample of respondents to
the population as a whole.
In preparing the questionnaire, some of the questions utilised in the previous
works especially by Boswell (1973), Mahmud (1981), Pratten (1991), Reid (1993)
and Austin et al. (1 993) have been adapted; supplemented by items representing the
research concerns. The rationale for basing the questionnaire on these studies is
that these writers have developed some items which have been demonstrated to be
reliable and valid for measuring certain variables that the researcher is directly
concerned with in this study. In the process of preparing the questionnaire, the
principles and procedures suggested by Dillman (1978), Sudman and Bradburn

(1982) and Oppenheim (1992) have been employed.
5.5.1 Contents of the Questionnaire
The contents of the questionnaire (see Appendix I) incorporate all variables

developed in Chapter Four, as follows:
Background of Firm (Questions 1- 8)
Ll Status
Since the study is only concerned with small manufacturing firms which are
independentor family-owned, the respondents are required to state the legal status
of their firms; whether sole proprietorship, partnership or private limited company.

Age of Firm
The age of firm is measured by the number of years since it was established up to
the year of the survey. For this purpose, the respondents were asked to indicate the
in
year which the firms were established.
Size of Firm
The size of firm has been defined in terms of employment size and independence
(see Chapter Four), and according to Clifford et al. (1991) the number of'people
involved' is the appropriate measure of size. In order to determine the size of the
firms based on the 'number of people' involved, information about the number of
full-time (including working owner-manager) and part-time employees is needed.
The respondents have also been asked to indicate whether the firm is a subsidiary
of another firm or an independent firm.
Use of External Financial Advisers

The respondents were asked to state whether they sought financial advice regard-
ing sources of funds from the following sources:
Family/Friends
Banks/Financial Institutions
Accountants
Government Agencies/Authority
Enterprise Trust
Other
BusinessPlan
The respondents were asked whether they have prepared a business plan; a
document which contains an analysis of the firm's current position, where it would
like to be in the future and how it plans to get there.
Indus rial Sector

The respondents were required to indicate the type of manufacturing sectors they
are involved in. The list of the industrial sectors are based on the International
Standard Industrial Classification ISIC (United Nations, 1990) as follows:
-
Manufacture of food products and beverages

Manufacture of tobacco products
Manufacture of textiles
Manufacture of leather and leather products
Manufacture of wood and wood products
Manufacture of paper and paper products
Publishing, printing and reproduction of recorded media
Manufacture of chemicals and chemical products
Manufacture of rubber and plastics products
Manufacture of other non-metallic mineral products
Manufacture of basic metals
Manufacture of fabricated metal products
Manufacture of office, accounting and computing machinery
Manufacture of electrical machinery
Manufacture of motor vehicles and parts thereof
Manufacture of other transport equipment
Other manufacturing industry
Background of Owner-Manager (Questions 27-30)
The respondents were required to indicate their age according to the following age
groups: below 20, between 20 29, between 30 39, between 40 - 49, between 50
- -
- 59, or 60 and above.
Training. Education and Experience

In order to obtain the level of training, education and experience of the owner-
managers, the respondents were required to state their:
Educational background/academic qualifications

Business training
Prior employment history and experience
Need for External Finance (Question 9,11)

The respondents were asked to indicate whether they had approached external
sources for financing expansion. They were also required to indicate the main
purpose(s) of their recent application for external finance.
Sources of Finance (Questions 10,18-22,23.26)

The respondents were asked to indicate the types and sources of finance used for
business expansion, as follows:
Type of finance Equity

Debt (term loans, overdraft, hire-pur-
chase, bill finance, leasing, factoring,
mortgage, trade credit)

Other (such as grants, etc. )
Sources of Equity Finance : Retained Profits
Personal, Families, Friends
Shareholders/Partners
Banks/Financial Institutions
Formal Venture Capitalists
Informal Venture Capitalists
Other
Sources of Debt Finance Banks/Financial Institutions
Insurance Companies
Trade Suppliers
Government Agencies
Other
Difficulties in Raising Finance (Questions 12-17)
The'level of difficulty' involves two main questions. Firstly, respondents who have
finance indicate they have

approached external sources of were asked to whether
they (successful respondents) had
succeededin getting finance. Secondly, whether
encountered problems in the process of obtaining finance, such as:
Whether they were limited in amount of funds that could be raised
Whether they were unfairly penalised in terms of :
high level of security
high interest rates
duration of loan offered was too short
5.5.2 Format of the Questionnaire
As suggested by Dillman (1978) and Sudman and Bradburn (1982), a booklet type
questionnaire is used. There are three obvious reasons why the use of booklet
format in questionnaire is desirable (Sudman & Bradburn, 1982):
i. It prevents pages from being lost or misplaced.

ii. A booklet makes it easier for the respondent to turn the pages.
iii. A booklet looks more professional and is easier to follow.
In order to reduce mailing cost and to conserve paper as well as to make the
questionnaire looks smaller, the questionnaire is printed on both sides of the pages.
Most of the questions are closed-ended and scaled. As suggested by Dillman
(1978) and Sudman and Bradburn (1982), the questionnaire starts with salient and
non-threatening questions. Threatening questions are asked towards the end of the
questionnaire. Space is provided at the end of the questionnaire for respondents
to make any comments they wish; since this is optional, it is not perceived as
threatening (Sudman & Bradburn, 1982).
The questionnaire is divided into four sections:
Section A: Background of firm

Section B: Firm which has approached external sources of finance
Section C: Firm which has never approached external sources of finance
Section D: Background of owner-manager
The quality of responses requires careful wording and sequencing (Kalton

& Schuman, 1981), and therefore the researcher developed a flowchart for filter
questions, as suggested by Sirken (1972) (see Figure 5.1), to ensure that the
questionnaire covers all contingencies and reduces the possibility of respondent

error. Sudman and Bradburn (1982, p. 224) suggested that:
As skip patterns become more complicated and depend on the answers to several
questions instead of just one, it becomes more difficult to keep all the possible
contingencies in mind. A simple procedure suggested by Sirken (1972) is to
make a flowchart of the logical possibilities and then to prepare the filter
questions and instructions to follow the flowchart.
5.5.3 Pilot Study
Oppenheim (1992, p. 47) stated that:
Questionnaires do not emerge fully-fledged; they have to be created or adapted,

fashioned and developed to maturity after many abortive test flights. In fact,
every aspect of a survey has to be tried out beforehand to make sure that it works
as intended.
Every effort has been made to produce a questionnaire according to the
principles suggested by Dillman (1978), Sudman and Bradburn (1982) and

Oppenheim (1992). As suggested by Diliman (1978), the questionnaire should be
pre-tested by three different groups: colleagues, potential 'users' of the data, and
small manufacturing firms drawn from the sample frame.
After the questionnaire was pre-tested on the three groups, it was revised
basedon the feedback received from them. After some revisions, a proper pilot test
was conducted by sending the questionnaire to a number of respondents drawn

from the sample frame. The purpose of the pilot test is to see how the survey works
and whether changes are necessary before the full-scale study begins.
Pilot Test in The United Kingdom
In the United Kingdom, the questionnaire was pre-tested by four lecturers in
Loughborough University Business School, two research students and one re-
searcher from Business Enterprise Centre. They provided some appropriate and
constructive comments which have helped the researcher to revise questionnaire

before conducting the pilot test. Among the comments given by the colleagues
Research Design ccAfethodolug' 1 14
START
SECTION A BACKGROUND OF FIRM Q 1-d
FINANCE FOR EXPANSION
SECTION B
0.1O& 11
Q.: r
Not
Aware of
. are of
External External
Sounxt Sou rocs`
Reasons for
Q. JS
Not Appl}ing
Sourcts of
:j Internal Finance
SECTION D BACKGROUND OF OWNER-MANAGER Q"27.38
END
Figure 5.1
Flow Chart to Illustrate the Design of the Questionnaire
Adapted and modified from Sirken (/ 972)
were the length of time needed to answer the questionnaire, the layout of the
questions, the arrangement of various sections, and the contents of the cover letter.
It was clear that the questionnaire was too long. As pointed out by one of
the colleagues, in order to increase the response rate, it might be helpful to make
clear at the outset of the questionnaire that some respondents will only need to
answer a few questions since the questionnaire was designed in such a way that no
one will need to answer all questions. The next important feedback was on the
design of the specific questions. It was pointed out that an important element in
the questionnaire design was the individual question format that must produce data
suitable to be analysed by the Statistical Package for the Social Science (SPSS).
Thus certain questions had to be reformulated to bring them in line with the
computer requirements.
After making the necessary modifications, a proper pilot test was conducted
by sending the questionnaire to fifty respondents drawn from the sample frame. A
total of fourteen completed questionnaires (28%) were returned and one was
returned due to change of address for the respondent. Using SPSS For MS
Windows, the data was analysed to produce the results for each question. This
exercise was then used to form the basis of further changes. In particular, it was
found that the questionnaire was still too long, thus the questions considered less
pertinent to the study were omitted.
Pilot Test in Malaysia
After some modification the questionnaire was then translated into two languages
i. e. Malay and Mandarin (see Appendix 1.2 & 1.3). The translation was done by
a team language from the Centre of Languages, Selangor, Malaysia.

of specialists
The researcher has anticipated some difficulties in translating certain questions. As
The
suggested by Casley and Lury (1981), a'reverse translation method' was used.
translated version of the questionnaire was translated back into English by another
person. When the translation did the original language, further attempts
not match
were made until a better translation was achieved. The final version of the
questionnaire was then pre-tested by four lecturers from the Malaysian Entrepre-
Research Design & rfethodology 116
neurship Development Center (MEDEC), a lecturer from the School of Computer

Studies at Mara Institute of Technology, a bank officer and a business consultant.
After making some necessary modifications, a pilot test was conducted. A

total of fifty questionnaires were sent to respondents drawn from the sample.
Twelve completed questionnaire (24%) were received and analysed using SPSS for
MS Windows. As a result of the pilot test it was found that all the questions Yielded
data in line with the objectives of the study.
5.6 CASE STUDIES
As a follow-up to the questionnaire survey, the researcher found it necessary to
conduct case studies on selected firms in both countries in order to generate more
information on the past performance and growth potential of the firms. Whilst the
questionnaire survey analysis revealed some relationships among variables, the

results yielded little information on the dynamics of the firms. It is important to
recognise the fact that the questions related to growth aspirations or potential of
the firms are difficult to assess empirically. However the researcher believes that,
using the case study approach, in-depth interviews with the owner-managers can
provide some impressions on these aspects. Therefore the case study analysis will
provide some elements of dynamism into the empirical work, linking the firm
performance and subsequent growth to the financing issues.
A case study is generally defined as "a description of a management

situation" (Bonoma, 1985, p. 203). Like other qualitative methods, case study:
is concerned basically with the researcher's interpretation of management's

signification of events, informations, and reality that is, it depends on the
-
researcher's perception about management's meanings, not on some 'objective
reality'. (Bonoma, 1985, p. 204)
Using the survey respondents as a sampling frame, sixteen firms were

selected to participate in the follow-up study; eight firms in respective countries.
The review of the literature did not specify the ideal number of cases that should
be developed. Most writers agreed that one of the solutions to the generalisabilit",
problem is to study more than one case (Yin, 1984; Hakim, 1987; Bryman, 1988).
In deciding the number of cases to be developed, however, the researcher is aware
of the contradicting statement made by Romano (1989, p. 36) that the researcher:
should not be influenced by the view that the more case studies one consults the
greater it will increase generalisability and validity.
On the basis of convenience and cost, the firms to be included in the case
studies were chosen in the county of Leicestershire and Derbyshire (U. K. sample)
and the state of Selangor and Melaka (Malaysian sample). The selected firms were
contacted initially by letters together with lists of issues to be discussed (refer
Appendix 2). The owner-managers were asked whether they would be prepared to
participate in the study. A few wrote back indicating that they were unwilling to
participate and a number of them did not reply. For the owner-managers in the U. K.
who agreed to participate, follow-up telephone calls were made and appointments
were arranged for the interviews. The Malaysian counterparts were contacted
through letters to arrange for the interviews.
The interviews were of an open-ended nature, and on the average, each

interview lasted about forty minutes. With the agreement of the owner-managers
the conversations were tape recorded, on the understanding that the information
provided was to be treated as confidential. In addition to discussing the issues
which arose from the examination of the questionnaire survey data, the semi-
structured interviews also probed the following issues:
i. Past Growth Performance of The Firm

Whether the firm has carried out major innovation or investment over the
-
last three years (fast/rapid growth), or
Whether the firm has carried out moderate innovation or investment over
-
the last three years (slow/steady growth), or
Whether the firm has not carried out any innovation or investment over
-
the last three years (no growth).
ii. Growth Potential of The Firm

Whether the firm wishes to carry innovation
- out major or investment over
the next three years (fast/rapid growth), or
Whether the firm wishes to innovation
- carry out moderate or investment
over the next three years (slow/steady growth), or
- Whether the firm has completed innovation or investment, but has no

plans to do so in the next three years (no growth).
iii. Financing Issues
- Sources of External Finance for Innovation or Investment
- Sources of Financial Advice
- Financing Difficulties
5.7 STATISTICAL ANALYSIS
5.7.1 Nonparametric Test
In analysing the data for this study, the researcher has deliberately chosen a
nonparametric statistical test rather than a parametric test. The choice between the
two tests depends upon the level of measurement achieved in the study and on the
researcher's knowledge of the population from which the research sample was
drawn. The data gathered in this study was not appropriate for a parametric test
which assumes the following conditions (Siegel & Castellan, 1988):
i. The variables must have been measured on at least an interval scale.

ii. The observations must be drawn from some specified population.
The variables used in this study were measured using ordinal scale which is
weakerthan an interval scale (Siegel & Castellan, 1988), and the researcher has no
knowledge about the exact population parameters. Since the observations and the
variablesof this study did not meet the above conditions, the researcher decided to
usea nonparametric statistical test method. A nonparametric statistical test does
not make stringent assumptions about the population from which the data have
been sampled. One of the advantages of a nonparametric test is that it often

involves less computational work and therefore is easier and quicker to apply
(Conover, 1980), and its interpretation is often more direct than a parametric test
(Siegel & Castellan, 1988).
5.7.2 Measurement of Variables
In order to come up with a meaningful interpretation, it is important to understand
the measurement requirements of the chosen statistical test. There are at least four
levels of measurement of variables: nominal, ordinal, interval, and ratio. The
in
variables this study were measured using an ordinal scale. The variables such as
size of firm, age of firm, and age of owner-manager, are usually known as interval
or ratio variables since the difference between the categories is identical. How-
ever, when these variables are grouped into categories, they become ordinal
variables (e. g. Siegel & Castellan, 1988; Bryman & Cramer, 1990). According to
Bryman and Cramer (1990, p. 65):
We cannot really say that the difference between someone in the 40-49 group
and someone in the 50-59 group is the same as the difference between someone
in the 20-29 group and someone in the 30-39 group, since we no longer know
the points within the groupings at which people are located.
Other important variables of this study are grouped into two-category
variables, such as 'approached external source' and 'did not approach external
source'; 'use external adviser' and 'did not use external adviser'; 'technology-based'
and 'non technology-based', 'had a business plan' and 'did not have a business plan',
'successful' and 'not successful'; and 'some difficulties' and 'no difficulty'. These
dichotomous variables are usually known as ordinal variables (Siegel & Castellan,
1988).
5.7.3 Measure of Association and Test of Significance :

The Gamma Statistic (G)
Establishing a correlation or an association between two variables is often consid-
Bred as the ultimate aim of any research work. No single measure adequately
summarisesall possible types of association (Norusis, 1993). There are, however,
three measures of association that are specifically designed to measure the exist-
ence and degree of association for ordinal variables, namely Kendall's tau, Somer's
d, and Goodman and Kruskal's gamma (G) statistics.
There are three different versions of Kendall's tau: tau-a, tau-b and tau c.
These statistics are measures of agreement between assignments to ordered
categories. The main problem with Kendall's tau measures is that "they have no
obvious probabilistic interpretation, and consequently the meaning of a value of
(tau-a) of 0.7 or (tau-b) of 0.6, say, cannot be expressed in words in terms of
probabilities or errors in prediction. " (Everitt, 1977, p. 63). Somer's d statistic is
an asymmetrical index of relation between two ordered variables and therefore its
is
measure often confusing and difficult to interpret (Siegel & Castellan, 1988).
In this analysis the researcher has used the Gamma coefficient (G) which
was developed by Goodman and Kruskal (1954,1959). It is an appropriate
measure of association between two ordered variables and is relatively easy to

compute (Siegel & Castellan, 1988; de Vaus, 1990). It has the considerable
advantage of having direct probabilistic interpretation.
From two sets of ordinal variables, the gamma statistic (G) can be computed
using a contingency table. Suppose there are two ordered variables: A, which takes
the value of A, A2 Ak, and B, which takes the value of B, B2 B,, The
, '... , ,... .
frequencies of variables A and B are arranged in a contingency table:
Al A2 Ak Total
...
B, nll n!, n1k R,
...
B2 n21 n22 n2k R2
...
B nrl nr2 nrk R

r r
Total cl C2 Ck N
...
The number of agreements and the number of disagreements in ordering for
each observation can be counted. The gamma statistic (G) is defined as follows:
G= number of agreements - number of disagreements

number of agreements + number of disagreements
I h-1 rt
number of agreements 2n
= n..
'J p-;. 1 q-j +I P1
_ n.. N+ r- i= 1,2,..., I
2,..., k-1
where N,, is the sum of all of the frequencies below and to the right
of the ijth cell in the contingency table
r-1 kr j-1
E 2: 2:
number of disagreements=Ei1 j-2
n..
'J p-i+1 q-1
nDV
2: i1,2,...,
i. j nN
ii IJ r-1
j=2,..., k
where Nip is the sum of all of the frequencies below and to the left of
the ijth cell in the contingency table
G is equal to +1 if the frequencies in the contingency table are concentrated
on the diagonal from the upper left to the lower right of the table. G equals -1 if
the frequencies lie on the diagonal from upper right corner to the lower left corner
of the contingency table.
It is important to determine whether the association that exists between the
two variables indicates that an association exists in the population by testing the
"significance" of the association. According to Siegel and Castellan (1988, p. 229):
In testing the significance of a measure of association, we are testing the null

hypothesis that there is no correlation in the population, i. e., that the observed
value of the measure of association in the sample could have arisen by chance in
a random sample from a population in which the two variables are independent,
i. e., uncorrelated. The alternative hypothesis is that the variables are not
independent.
For all variables tested in this study, the researcher has no a priori
hypothesesabout the direction of the association. It has been suggested that two-
tailed significance levels are required to test the significance of the non-directional
hypotheses(Bryman & Cramer, 1990). The significance level of 0.05 has been
used. To test the significance of G, the procedure suggested by Siegel and

Castellan (1988) is employed; using an approximation which requires large
If N is relatively large, the sampling distribution of G is approximately
samples.
normal with mean y. The upper limit for the variance is calculated as follows:
N(1 - G2)
var(G) <_
no. of agreements + no. of disagreements
no of agreements + no. of disagreements

z value = (G - y)
N(1 - G2)
x
Using the above equation, the value of z is approximately normally distrib-

0
uted with mean and standard deviation 1. It is inferred that the "true" significance
level is at least that obtained by the equation using the normal distribution table.
5.7.4 Chi-Square Test of Independence
The comparative analysis of the sources of external finance obtained by the small
firms in the U. K. and Malaysia has mostly been described using percentages.
However, the chi-square (X2) test has also been used to assess whether the need for
external finance, the pattern of financing practices and the incidence of financing
difficulties among small firms between the two countries are significantly different.
The test has been performed at the significance level of 0.05. Most of the data on
the financing practices and difficulties in both countries are gathered using
categorical data, therefore the use of chi-square test is considered appropriate
(Siegel & Castellan, 1988). By comparing observed frequencies against expected
frequencies, the chi-square statistic tests the null hypothesis (Hp) that the financing
practices and difficulties of small firms are independent of the countries.
The chi-squared value can only be computed after the data are arranged into
in
a contingency table which the columns represent groups and each row represents
a category of the measured variable:
Group
. Variable 12 Combined
nil nl2 RI
2 n21 n22 R2
3 n. n32 R3
l
Total Cl C2 N
In the 3x2 contingency table depicted above, there is one column for each
group and the measured variable contains three values. The test starts by
calculating the number of observations that would have been expected in each
if
category the row characteristic and the column characteristic of the table were
acting independently. The observed frequency of occurrence of the ith value or
category for thejth group is denoted by ny. The distance between what would have
been expected and what have been observed is then measured. If the distance
between the two is too large, then the hypothesis that the row characteristic and the
column characteristic of the table act independently is rejected. The null hypoth-
esis (H0) that the characteristics are independent of the group may be tested by
(Siegel & Castellan, 1988):
rc (nri E d2
- (I..
X2 $-I J-I
Eta
where ny = observed number of cases categorised in the ith row of thejth column
EIS= number of cases expected in the ith row of the jth column when Ho is true
If the row characteristics and column characteristics are acting independently as
a whole, then X2 has a standard sampling distribution known as the chi-squared

distribution,the precise distribution depending on the degreeof freedom (dn = (r-1) x
(c-1), where r and c refer to the number of rows and columns in the table respectively.
If theobservedvalue ofX2 is equal to or greater than the critical value of the distribution
for a particular level of significance, at a particular df, then Ho may be rejected at that
levelof significance.
5.8 SUMMARY
In this chapter the importance of a research design has been stressed in order to
undertake the study successfully. In selecting the most suitable method for this
study, the researcher has extensively and critically reviewed the research strategies
employed in the previous studies. The researcher has chosen both the mail
questionnaire survey and case study methods for this study. In view of the
difficulties in getting official lists of the population, the researcher has decided to
limit the U. K. samples in the East Midlands using Dun and Bradstreet lists. The
Malaysian sample, however, is based on lists of small and medium manufacturing
firms obtained from Ministry of International Trade and Industry (MITI) and
Malaysian Entrepreneurship Development Centre (MEDEC).
This chapter has also discussed the design of the questionnaire for the
survey in order to elicit descriptive and subjective data from the samples. This
study has critically reviewed and adapted some of the questions used in the
previous studies of small firms. A booklet format questionnaire is used in order to
achieve a good response. To ensure that all contingencies are covered, a flowchart
for filter questions was developed. In order to determine the potential effective-
ness of the questionnaire and to evaluate whether it meets the objective of the
study, a pre-test and pilot study of the questionnaire was conducted before the full
scale study.
The case study method is used in order to obtain more information on the
past performance and growth potential of the firms. Using the survey respondents
as a sampling frame, sixteen firms have been selected in both countries to
participate in the study.
The data collected through the questionnaire survey have been processed
using SPSS for windows. Owing to the nature of the observations and variables of
the study, the analysis utilises nonparametric statistical tests. In establishing the
associations between variables, the Gamma statistic (G) has been used, whereas
the percentages and the chi-square test have been used to determine the signifi-
cance of differences between the two countries.

Research Design & Methodology 12-5
Notes
See Gallagher and Doyle (1986) for the defence of the criticism against the Dun and
Bradstreet data base as a source on information on Britain's small firm population.
2. MEDEC was established at MARA Institute of Technology in 1974 with the purpose of
developing indigenous entrepreneurs. As of December 1995, MEDEC has trained a total
of 2886 participants through various entrepreneurship training programmes. A total of
1520 participants (53%) are actively involved in manufacturing, ser'. ices and trading
businesses.
Chapter Six
THE U.K. SURVEY:

6.1 INTRODUCTION
After gathering the required data through the questionnaire survey, as discussed in
the preceding chapter, the results and analysis of the U. K. survey are presented in
this chapter. This chapter begins with an explanation of the preparation of
variables before they can be analysed. In preparing the variables for analysis the
researcher performed data editing and cleaning in order to eliminate errors and
inconsistencies in the data list. The cleaning task mainly utilised the output
generated from the "Frequencies" procedure of the Statistical Package for the
Social Sciences (SPSS) for MS Windows.
6.2 THE SURVEY
A total of 1,000 questionnaires were sent to small manufacturing firms throughout

the East Midlands, taken from a mailing list provided by an international business
databasecompany, Dun and Bradstreet Limited. One week after the initial posting
of the questionnaires, follow-up postcards were sent to non-respondents. A total
of 272 questionnaires (27.2 percent) were returned. However, 36 of the question-
naires were returned unopened with a note on the envelope that the addressee "has
gone away". A further 8 questionnaires had to be discarded for the following
reasons:
UK. Sio-vey: Results & Analysis 127
Subsidiary firms (5)

Firms employing more than 50 employees (2)
The questionnaire was not completely answered (1)
A total of 228 questionnaires were therefore usable for analysis, represent-

ing a response rate of 22.8 percent.
6.3 PREPARING THE VARIABLES FOR ANALYSIS
Having selected the important variables to be used in this study, as discussed in

Chapter Four, it was necessary to arrange the variables so that the analysis of the
data could easily be done and that the presentation of the results could be in a form
which could be easily understood.
6.3.1 Independent Variables
The preparation of the independent variables such as 'size of firm', 'legal status',
'business plan', 'age category of the owner-manager', and 'level of training and
education' was relatively straightforward. They were measured using separate
questions which simply asked the respondents to indicate in which category they
belong.
Further modifications relating to 'age of firm', 'level of experience', 'use of

external advisers' and 'sector of industry' had to be made. The variables'age of firm'
and 'level of experience of owner-manager' were originally collected using a single

question for each variable, thus producing interval scales. These scales were then
converted to ordinal scales by grouping the'age of firm' and 'experience of owner-
manager' variables. Thus the age of firm (which was originally stated in terms of
number of years of establishment) is '4

grouped as years & below', '5 to 9 years', '10
to 14 '20 The level of experience (in

years', ' 15 to 19 years', and years and above'.
terms of number of years of working experience) is grouped as 'no working
experience', '4 years & below', '5 9

to years', '10 to 14 years', '15 to 19 years', and
'20 years and above'.
U. K Survey: Results & Analt-sis 128
The variable on the 'use of external advisers' was originally collected using
two similar questions, one for those respondents who had approached external
sources of finance and another for those who had never done so. In order to gather
additional information about this variable, two new variables had to be created.
One new variable concerning the use of external advisers (used/did no use), and
another concerning the type of advisers used, that is, 'relatives or friends', bankers',
'accountant/auditors', 'local authority', and 'chambers of commerce'. The 'type of
advisers' variable was coded as 'used' and 'did not use'.
The variable on 'sector of industry' was gathered using the International

Standard Industrial Classification (ISIC) list issued by the United Nations (1990).
To make the sectoral analysis more coherent, an additional variable was created.
The various types of manufacturing industry are grouped into two main groups:
technology-based and non technology-based. This classification is used because
small technology-based and innovative firms have been found to face difficulties in
raising appropriate finance (Waite, 1973; Barber et al., 1989; ACOST, 1990;
Westhead & Storey, 1994; Moore, 1994), despite their importance to the health
of the country's economy in opening up new investment opportunities vital for

future growth and employment (Rothwell & Zegveld, 1982). Unfortunately, for
comparative purposes, the researcher faces difficulty in identifying technology-

based firms. To date, there has been no universally accepted definition of
technology-based firms. Therefore, in the absence of standard definition, the term
'technology' used in this analysis will adapt the definition employed by Arthur D.
Little (1977). A firm is classified as technology-based if either the business is based
on a patented product or the business has substantial technological in

risks addition
to the normal commercial risks. Furthermore, the firm must have been set up for
the purpose of exploiting an invention or technological innovation.
Based on the responses gathered through the questionnaire, the following

industrial sectors are grouped accordingly as technology-based and non technol-
ogy-based sectors:
UK. Su : Results & Analysis 129
Technology-based
Manufacture of paper and paper products
Publishing, printing and reproduction of recorded media
Manufacture of chemicals and chemical products
Manufacture of rubber and plastics products
Manufacture of office, accounting and computing machinery
Manufacture of electrical machinery
Manufacture of motor vehicles and parts thereof
Manufacture of other transport equipment
Other industries (such as electronic equipment, scientific equipment,
pharmaceutical products, medical and surgical equipment)
Non Technology-based
Manufacture of food products and beverages
Manufacture of tobacco products
Manufacture of textiles
Manufacture of leather and leather products
Manufacture of wood and wood products
Manufacture of other non-metallic mineral products
Manufacture of basic metals
Manufacture of fabricated metal products
Other industries (such as packaging, adhesive labels, jewellery, concrete,
upholstered furniture, p. v. c. windows)
6.3.2 Dependent Variables
't'hree dependent variables which are of primary interest to this study are 'need for
external finance', 'sources of external finance' and 'existence of difficulties in
raising external finance' (see Chapter Four). Like the independent variables, the
preparation of these variables is relatively straightforward. The 'need for external

finance' variable was collected by asking all respondents to indicate whether they
had approached external sources of finance (filter question). The 'sources of
finance' involved a list of sources of finance from which the respondents were asked
to indicate the sources they had used. The use of each 'source of finance' variable
is coded as 'yes' and 'no'.
(I. K. Survey: Results, (- Anal'. 130
c,s
The'existence of difficulties' variable involves three

measurements. Firstly,
for those respondents who have approached external sources, they
were asked to
indicate the status of their most recent application ('successful' or'not
successful').
Secondly, for those who have successfully obtained external finance, they
were
asked to indicate the existence of difficulties in the process of applying and
obtaining the finance ('some difficulties' or 'no difficulty'). Thirdly, for each type
of difficulty the respondents (who indicated that they faced some difficulties) were
asked to state whether they 'strongly agree', 'agree', 'uncertain', 'disagree', and
'strongly disagree'.
6.4 RESULTS AND ANALYSIS
6.4.1 Characteristics of Respondents
Table 6.1,6.2 and 6.3 provide the following characteristics of the respondents:
i. Size of Firms
Over one-half of the respondent firms (64.1 percent) employ less than 20
employees; 36.0 percent of them employing less than 10 employees and 28.1
percent employing between 10 to 19 employees. The remaining firms
employ between 20 to 29 employees (11.4 percent), between 30 to 39
employees (10.5 percent) and between 40 to 49 employees (14.0 percent).
ii. Age of Firms

The majority of the firms (66.0 percent) have been in business for 10 or more
years; and most of them (28.9 percent) have been operating for more than
20 years.
iii. Use of External Advisers

The majority of the firms (77.2 percent) have used external financial
advisers. Consistent with Curran and Blackburn's (1994) observation,

the prominent source of advice (71.1 percent). The
accountants are most
is bankers (41.4 percent). Relatives and friends,
next major source of advice
UK. Survey: Results & Analysis 131
Table 6.1
Respondent Firm Characteristics
(United Kingdom)
Cumulative
Characteristics Frequency Percent Percent
EmploymentSize
I-9 employees 82 36.0 36.1
10 - 19 employees 64 28.1 64.3
20 - 29 employees 26 11.4 75.3
30 - 39 employees 24 10.5 85.9
40 - 49 employees 32 14.0 100.0
228 100.0
Age of Firm
4 years& below 28 12.7 12.7
5-9 years 47 21.3 34.0
10 - 14 years 52 23.5 57.5
15 - 19 years 30 13.6 71.1
20 years & above 64 28.9 100.0
221' 100.0
Useof External Financial Adviser
Did not use external adviser 52 22.8 22.8
Usedexternal adviser 176 77.2 100.0
228 100.0
Legal Status
Sole Proprietorship 23 10.1 10.1
Partnership 35 15.4 25.5
Private Limited 170 74.5 100.0
228 100.0
Sectorof Industry (1)
FabricatedMetal Products 48 21.1 21.1
Textiles 43 18.9 40.0
Publishing, Printing & Reproduction of

RecordedMedia 20 8.8 48.8
Rubber& Plastic Products 15 6.6 55.4
Wood & Wood Products 15 6.6 62.0
10 4.4 66.4
Paper& Paper Products
Electrical Machinery 10 4.4 70.8
Chemical & Chemical Products 8 3.5 74.3
Basic Metals 6 2.6 76.9
Food Products & Beverages 4 1.7 78.6
Motor Vehicles & Parts 4 1.7 80.3
Other Manufacturing Industry 45 19.7 100.0

228 100.0
Sectorof Industry (ii)
143 62.7 62.7
Technology-based 85 37.3 100.0
228 100.0
UK Survey: Results & Analysis 132
Table61 (cond.)
BusinessPlan
Did not have a written businessplan 154 67.5 67.5
Had a written businessplan 74 32.5 100.0
228 -- -- 100.0
a Number Missing Cases
of =7
Table 6.2
Respondent Owner-Manager Characteristics
(United Kingdom)
Cumulative
Age Group
20 - 29 years 4 1.8 1.8
30-39 years 38 16.7 18.5
40 - 49 years 87 38.1 56.6
50 - 59 years 67 29.4 86.0
60 years& above 32 14.0 100.0
228 100.0
7iaining in Business& Management
No Training 135 59.2 59.2
SomeTraining 93 40.8 100.0
228 100.0
Levelof Education
Primary/SecondaryEducation 81 35.5 35.5
Post-SecondaryEducation 65 28.5 64.0
Degreeor Equivalent 82 36.0 100.0
228 100.0
Levelof Experience
No Working Experience 21 9.2 9.2
4 years& below 53 23.2 32.4
5-9 years 61 26.8 59.2
10 - 14 years 41 18.0 77.2
15- 19 years 21 9.2 86.4
20 years & above 31 13.6 100.0
228 100.0
Table 6.3
Sources of External Financial Advice
(United Kingdom)
Soges No. of Responses Percent
Accountants 162 71.1

Bankas 94 41.4
Relatives/Friends 26 11.5
LocalAuthority II4.8
Chambers 1 0.4
of Commerce
and local authority sources are used by only 11.5 percent and 4.8 percent of
the firms respectively. It is observed that the U. K. respondent firms
rarely
refer to chambers of commerce as a source of financial advice; this obser-
vation is consistent with the findings of Smallbone et al. (1993a) who found
no evidence to show that these organisations are being used as a significant
source of advice by small firms.
iv. Legal Status

The majority of the respondent firms (75.4 percent) are incorporated;
unincorporated firms consist of partnership (15.4 percent) and sole propri-
etor (10.1 percent).
V. Sector of Industry
Most respondent firms are involved in the fabricated metal products,
textiles, publishing/printing, rubber and plastic, and wood and wood prod-
ucts sectors (62.0 percent). The remaining firms (38.0 percent) operate in
other industrial sectors such as paper and paper products, basic metals, food
and beverages, and motor vehicles and parts. The majority of the respon-
dent firms (62.7 percent) are categorised as non technology-based firms.
Only 37.3 percent of the respondent firms are technology-based.
vi. Business Plan

The majority of the respondent firms (67.5 percent) do not have any business
plan.
vii Age of Owner-Managers

More than one-half (54.8 percent) of the owner-managers are between 30 to
49 years of age. The remainder are between 50 - 59 (29.4 percent) or above
60 years of age (14.0 percent). Only 1.8 percent of the owner-managers are
below 30.
viii. of Training. Education and Experience of Owner-Managers

_Level
Many owner-managers (59.2 percent) had not undergone any training in
business and management. The highest level of education of owner-
U.K. survey: Results & Analysis 134
managers was as follows: primary/secondary education (35.5 percent),

post-secondary education (28.5 percent) and degree or equivalent (36.0
percent). Most of the owner-managers (90.8 percent) had some working
experience before operating their present businesses. Exactly one-half

(50.0 percent) had less than 10 years working experience. The remaining
owner-managers had between 10 - 14 years experience (18.0 percent), 15 -

19 years (9.2 percent), and 20 and more years (13.6 percent).
i. Out of 228 respondents, 139 (61.0 percent) had approached external
sources to finance business expansion (Table 6.4). Table 6.5 indicates that
the most commonly cited reason for applying for external finance is to
increase sales/share of the existing market (71.2 percent). Other reasons
include: to introduce new products to the existing market (16.5 percent); to
expand into new market with the existing products (15.8 percent); to expand
overseas (7.9 percent); to acquire another firm (5.8 to
percent); and go into
an entirely new market (3.6 percent).
ii. The total of 89 respondents who had not approached external sources can
be divided into two groups. The first group did not know where to obtain the
finance; they were not aware of the various sources available (28.1 percent)
(Table 6.6). The second group consists of respondents who were aware of
the external sources available (71.9 percent) but did not want to use external
finance for various reasons. The main reasons for not applying, ranked in
order of importance, were as follows (Table 6.7) :
a. External finance is not required at the moment

b. Do not like to be in debt
c. Do not want to lose control and independence
d. External finance is too costly
e. External finance is too risky
However, "difficulty in finance" is not perceived to be an

obtaining external
important factor in deciding whether or not to apply for external finance.
Table 6.4
(United Kingdom)
External Finance No. of Responses Percent
ApproachedExternal Source 139 61.0

Did Na Approach External Source 89 39.0
228 100.0
Table 6.5
Reasons for Applying for External Finance
(United Kingdom)
Reasons No. of Responses Percent
To increasesales/shareof existing market 99 71.2

To introduce new products to the existing market 23 16.5
To expand into new market with the existing products 22 15.8
To expandoverseas 11 7.9
To acquire another firm 8 5.8
To go into an entirely new market 5 3.6
Numberof observations(n) - 139
Table 6.6
Awareness of External Sources of Finance
(United Kingdom)
Awareness No. of Responses Percent
Aware 64 71.9
Not Aware 25 28.1

89 100.0
Table 6.7
Reasons for Not Applying for External Finance
(United Kingdom)
Reasons Mean Standard Deviation Variance
External finance is not required at the moment 4.45 0.78 0.60

Do not like to be in debt 4.00 1.14 1.30
Do not want to losecontrol and independence 3.98 1.12 1.25
External finance is too costly 3.75 1.07 1.14
Externalfinanceis too risky 3.13 0.97 0.94
External finance is difficult to obtain 2.72 0.88 0.78
I Numberof observations(n) - 64
ii. 77mmeanstuns for the variables rest on a five-point Likert-type scale, with "1 " denoting strongly disagreeand "S"
strongly agree on the variables

UK. Survey Results & Anal sis 136
Table 6.8
Sources of External Finance: Awareness of Respondents
(United Kingdom)
Sources No. of Responses Percent
Bank/Financial Institutions 63 98.4

Factoring 50 78.1
Leasing 48 75.0
Hire-Purchase 45 70.3
GovernmentSchemes/Incentives 34 53.1
VentureCapital 28 43.8
Trade Suppliers 22 34.4
Table 6.9
(United Kingdom)
Sourcesof Number of
External Finance Responses Percent
Equity
Venture Capital 17 12.2
Government-backed Scheme (BES) 11 7.9
Q&
Bank Overdraft 110 79.1

Bank Loan (5 yrs or less) 45 32.4
Leasing 41 29.5
Trade Supplier 37 26.6
Bank Loan (above 5 yrs) 26 18.7
Factoring 11 7.9
GovernmentLoan Scheme(LGS) 9 6.5
Numberof obserwtions (n) - 139

jii. Table 6.8 shows that most of the respondents (98.4 percent) were aware of
the existence of the external finance provided by banks and other lending
institutions (Table 6.7). Other sources of which they were aware are
factoring (78.1 percent), leasing (75.0 percent), hire-purchase (70.3 per-
cent), government schemes (53.1 percent), venture capital (43.8 percent)

and trade suppliers (34.4 percent).
i. The majority of the small firms surveyed (79.1 percent) had used bank
overdrafts as a source of external finance. Other external sources of debt

finance used were hire-purchase (46.0 percent), bank loan - less than 5 years
(32.4 percent), leasing (29.5 percent), trade supplier (26.6 percent), bank
loan - above 5 years (18.7 percent), factoring (7.9 percent), and government
loan scheme - Loan Guarantee Scheme (LGS) (6.5 percent). Sources of
external equity were relatives and friends (13.0 percent), venture capital
(12.2 percent) and Business Expansion Scheme (7.9 percent) (Table 6.9).
ii. Table 6.10 shows information regarding the composition of external equity
and debt finance. A significant overall majority of the firms (69.8 percent)
do not use external equity. Where equity is used, 25.9 percent of the firms
rely upon a single source. More than one source of equity is used by only
4.3 percent of the firms. With regard to debt finance, about 47 percent of
the firms obtain debt from more than two sources. Only a small percentage
of the firms (0.7 percent) do not use some form of debt finance.
i. Out of 139 respondents who had approached external sources of finance,

118 firms (84.9 percent) had been in
successful their recent application for
external finance (Table 6.11).
ii. Out of 118 respondents who had been successful in getting external finance,
52 firms (44.1 percent) had stated that they had faced some difficulties in the
and obtaining the finance (Table 6.12).

process of applying
Table 6.10
Patterns of External Finance
(United Kingdom)
Financing Pattern No. of Responses Percent
FdyLty
None 97 69.8
One Source 36 25.9
Two Sources 6 4.3
Total 139 100.0
D
None 1 0.7
One Source 32 23.0
Two Sources 40 28.8
ThreeSources 39 28.1
Fouror More Sources 27 19.4
Total 139 100.0
Table 6.11
Status of Recent Application for External Finance
(United Kingdom)
Status No. of Responses Percent
Not Successful 21 15.1

Successful 118 84.9
139 100.0
Table 6.12
Existence of Difficulties in Obtaining External Finance
(United Kingdom)
DIfflculty in Obtaining Finance No. of Responses Percent
No Difficulty 66 55.9
SomeDifficulties 52 44.1
118 100.0
UK. Swve' : Results & Anah"sis 139
Table 6.13
Types of Difficulties in Obtaining External Finance
(United Kingdom)
Variables Mean Standard Deviation Variance
insufficient amount of loan 4.14 1.21 1.45

Unreasonablelevel of collateral 3.98 1.16 1.35
High interest rate 3.87 1.05 1.10
Duration of loan offered was too short 2.65 1.05 1.09
ii. The mean scoresfor the variables rest on alive-point Likert-type scale, with denoting strongly disagree and "5
Table 6.14
Perceived Reasons for Failure in Obtaining External Finance
(United Kingdom)
Reasons Mean Standard Deviation Variance
Lack of collateral 3.95 1.32 1.75

Lack of track record 2.95 1.24 1.58
Lack of personal financial input 2.76 1.41 1.99
Lack of project viability 2.67 1.02 1.03
Hadexceededborrowing limit 2.62 1.20 1.45
Too rapid expansion 2.29 1.10 1.21
Inadequatesource of repayment 2.24 1.14 1.29
Lack of adequatebusinessplan 2.10 1.04 1.09
Lack of successin previous businessventure 2.00 0.95 0.90
Lack of managementcompetency 1.91 0.83 0.69
i Numberof observations(n) - 21
ii. Themean scoresfor the variables rest on a five-point Likert-typt scale, with 'vimdenoting strongly disagree
and "S" strongly agree on the variables
U K. Survey: Results & Analysis 140
iii. Table 6.13 reveals that the main difficulties facing small firms were
(a) Insufficient
finance (b) a perceived unreasonable collateral
requirement
and (c) high interest rate. The respondents however did not face any
difficulty with regard to duration of loans.
iv. Table 6.14 shows that 'lack of collateral' was perceived by

respondents as
the main reason for failure in obtaining external finance.
6.4.5 Tests of Hypotheses:

External Finance.
i. Hypothesis : There is an association between the size of

a small manufac-
turing firm and the need for external finance.
Table 6.15 provides gamma coefficient indices to measure the association

between the need for external finance and small firm characteristics (refer
contingency tables in Appendix 3). The analysis of firm size involves two
stages. First, the employment size is split into five size groups (i. e. 1-9,10-
19,20-29,30-39 and 40-49). The result shows a moderate positive
association between firm size and the need for external finance. Second, in
order to see whether the result might be different for different size groups,
the employment size is split into firms with 'below 20 employees' and firms
with '20 employees and above'. The result still shows a moderate positive
association between these variables. Although the association is insignifi-
cant, the result suggests that the larger the firm the more likely it will seek
external finance. This moderate positive association provides evidence to
support the previous findings which showed that the smallest firms were
more dependent upon personal sources than the larger firms (e. g. Binks,
1979; Oakey, 1984a; Chuta & Liedholm, 1985). Therefore, the hypothesis is
substantiated.
Table 6.15
Need for External Finance and Small Firm Characteristics:
Gamma Statistic Coefficients
(United Kingdom)
Size of Size of Age of Use of Legal Sector of Business
External Finance Firm(i) Firm(ii) Firm Advisers Status Industry Plan
Need for External Finance 205 201 077 330 132 007 332
. . -. . . . .
N Numberof observations= 228
Table 6.16
Need for External Finance and Owner-Manager Characteristics:
(United Kingdom)
Age of Level of Training in Level of
External Finance Owner-Manager Education Business Experience
Need for External Finance 016 236 164 -. 117

. . .
Numberof observations = 228

,V
Table 6.17
Sources of External Finance and Small Firm Characteristics:
(United Kingdom)
Sourcesof Size of Size of Age of Use of Legal Sector of Business

External Finance Firm(i) Firm(1) Firm Advisers Status Industry Plan
EQurty
VentureCapital 247 038 167 271 697" -. 052 882"
. . -. . . .
Government-BackedScheme(BES) 338 319 376 489 206 363 333
. . . -. . . .
Relatives/Friends 185 157 024 305 -. 496 -. 102 132
-. -. . . .
Qf&
Overdraft 011 043 193 451 061 080 118
-. . . . . . .
Bank Loan (Syrs or less) 052 081 039 368 078 -. 059 299
. . -. . -. .
Bank Loan (above 5 yrs) 204 165 407 299 580 220 274
. . . . . . .
TradeSupplier 102 128 094 159 -. 047 166 198
-. . -. -. . .
Government-BackedScheme(LGS) 183 701 " 493 1.000" 451 -. 095 721"'
-. -. -. . .
Hire-Purchase 105 041 102 331 330 126 -. 053
. . -. -. . .
Leasing 219 196 189 282 694" 325 410
. . -. -. . . .
Factoring 125 319 161 395 1.0000 363 652"'
. . -. . . .
' Significant at 0 01 signifkance k W4 a two-tailed test

.
Sign cant at 0.05 signf nce level, a two-tailed test
N Numberof obsenwations- 139
UK, Survey: Results & Analysis 142
ii. Hypothesis : There is an association between the age of a small manufac-

Table 6.15 shows no clear association between the'age of firm' and the need
for external finance. The results indicate that, irrespective of the size of the
firms, they are likely to seek external finance. Therefore, the hypothesis is
not substantiated.
iii. Hypothesis : There is an association between the use of external advisers

by small manufacturing firm and the need for external fi-
nance.
Table 6.15 displays a positive association between the use of external advisers
and financing behaviour; those firms which use external advisers are more likely
to approach external sources of finance than firms which do not use external
advisers. This moderate positive association shows that the hypothesis is
substantiated.
iv. Hypothesis : There is an association between the legal status of a small

manufacturing firm and the need for external finance.
Table 6.15 shows no clear association between'legal status' ofa firm and the need
for external finance. Thus, the hypothesis is not substantiated.
v. Hypothesis : There is an association between the sector of industry of a

small manufacturing firm and the need for external finance.
The analysis ofthese variables involves two stages(refer Table A3.1 in Appendix
3). First, using ISIC sectoral list, the results show that the majority of the sectors
had approached external sources. However, exactly one-half (50 percent) of the
and chemical/chemical products firms had approached

paper/paper products
the majority (75.0 percent) of the firms in food and
external sources, whereas
beverages sector had not approached any external source of finance. Since this
is the most appropriate test of association is the

variable not an ordinal variable,
(X2) test (Siegel & Castellan, 1988). Because of the problem of small
chi-square
frequencies the researcher is unable to test the significance of the
expected
However, the table shows no clear association between these
association.
U. K Sirvev: Results & Analysis 143
variables. Next, the sectoral distinction between technology- and non technol-
ogy-based firms is crosstabulated with the need for external finance. The results
show that, contrary to the results of previous studies (Oakey, 1993; Austin et.
al, 1993), this study shows that the majority of technology-based firms (61.2
percent) rely heavily on external finance. However, the association between
these variables is insignificant (Table 6.15). The overall results suggest that the
hypothesis is not substantiated.
vi. Hypothesis : There is an association between the existence of a written

businessplan in a small manufacturing firm and the needfor
external finance.
A moderate positive association is observed between the existence of business
plan and the of

use external finance, suggesting that firms with businessplans are
more likely to seek external finance (Timmons et at., 1977; Schuman et al.,
1985). Hence, the hypothesis is substantiated.

External Finance.
i. Hypothesis : There is an association between age of the owner-manager of

firm and the need for external fi-
a small manufacturing
nance.
Table 6.16 provides no evidence of association between 'age of owner-
the for external finance. Therefore, the hypothesis is not

manager' and need
substantiated.
ii. Hypothesis There is an association between level of training, education

:
and experience of the owner-manager of a small manufactur-
ing firm and the need for external finance.
Table 6.16 shows that, whilst there is a moderate positive association

for external finance, the level
between the level of education and the need
owner-manager has no association with the
of training and experience of
for Overall, the hypothesis is not substantiated.
need external sources.
UK. Survey: Results &A na/vs is 144

External Finance.
. Hypothesis : There is an association between the size of a small manufac-

turing firm and the sources of external finance used by the
firm.
between various sources of external finance and small firm characteristics

(refer contingency tables in Appendix 3). Most of the associations between
'size of firm' and 'sources of external finance' are insignificant. However,
when the employment size is split into two groups - below 20 and 20 and
above, government-backed loan scheme (LGS) is significantly and nega-
tively associated with this particular group, suggesting that the smaller the
firm the more likely it will use this source of finance. Another government-
backed scheme, BES, is moderately and positively associated with the size
of firms. That is, the larger the firm, the more likely it will approach this
source of equity finance. All other sources seem to be weakly associated
with the size of firms. In general, it is not apparent that there is a significant
between firm size and the sources of external finance. There-
relationship
fore, the results fail to support the findings of previous studies (e. g. Bolton
Committee, 1971). However, the results should be interpreted with some

they could be influenced by the differences in the criteria used
caution since
to define 'size' of firms. Nonetheless, the overall results of this study
the between variables. Thus, in general,

provide no evidence of relationship
the hypothesis is not substantiated.

firm finance used by the
turing and the sources of external
firm.
of external finance is significantly

Table 6.17 also shows that no source
firms. There are however some moderate
associated with the age of
between the variables: The BES (government-backed
associations some of
long-term bank loans are positively associated with the
equity scheme) and
is with the age of firms.
age of firms and the LGS negatively associated
U. K. Survey- Results & Anahvsis 14-S
Other sources are not associated with the age of firms and thus, the
hypothesis is not substantiated.

and the sources of external finance used by the firm.
Table 6.17 provides evidence that only the government-backed LOS is

significantly associated with the 'use of external advisers'. There is a
positive association between the two variables, hence, respondents who use
external advisers are more likely to use government-backed loans as a
source of external debt. However, it is surprising to find that the govern-
ment-backed equity scheme (BES) is negatively associated with the use of
external advisers, implying that respondents who do not use external
advisers are more likely to acquire this source of external equity. Other
sources such as relatives and friends, bank overdrafts and loans, and leasing
are moderately associated with the use of external advisers. Although most
of the associations are insignificant, the overall results show that the
hypothesis is substantiated.

manufacturing f rm and the sources of external finance used
by the firm.
The results in Table 6.17 suggest that the use of most sources of external
finance is associated with the legal status of the firm. Venture capital,
leasing and factoring are significantly associated with the legal status; a
limited is more likely than an unincorporated firm to use
private company
these sources. There is also a positive correlation between legal status and
the use of long-term bank loans and the government-backed loan scheme
(Loan Guarantee Scheme); the private limited company is more likely to
finance. The negative association between
obtain these sources of external
the use of external sources from relatives/ friends and the legal status shows
firms likely than the private limited
that the unincorporated are more
finance from relatives/friends. The results shows an
companies to obtain
between the of external finance and the legal
overall association sources
U K. Sw-wv. RResults& Analysis 146
status of the firm. This finding reflects the influence of private limited
company status in giving credibility to the business (Freedman & Godwin,

1992; Storey, 1994b). Therefore, the hypothesis is substantiated.

small manufacturingfirm and the sources of external finance
used by the firm.
Using ISIC sectoral list, the results show no clear association between the
various sectors of industry and the sources of external finance (refer Table
A3.7(i) in Appendix 3). However, the table provides evidence of the importance
of overdraft finance for almost all sectors (except for firms in basic metals sector
where the majority do not use overdrafts). The majority of firms in wood and
wood products, electrical machinery and basic metals use short-term bank loans.
Trade credit is only important for wood and wood products sector, whereas hire-
purchase is important for publishing and printing, wood and wood products,
chemical and chemical products, and basic metals sectors. Leasing is being used
by the majority of firms in the following sectors: publishing and printing, paper
and paper products, and motor vehicles and parts. The following sources,
however, are not used by the majority of the firms in all sectors: venture capital,
BES, long-term bank loans, LGS and factoring. Table 6.17 indicates that there
is little evidence to suggest that accessing particular types of external
sources of finance is related to the sectoral distinction between technology-

firms. However, to what might have been
and non technology-based contrary
expected, the technology-based firms which have approached external
finance do not consider venture capital as their major source of external
finance. Instead, it is clear from the table that a significantly higher number
of technology-based firms used bank overdrafts as their main source of

finance. It is perhaps odd that the technology-based firms rarely use venture
firms investment and have a high degree of
capital since these need more
is firms from the sample do not
risk. It possible that the technology-based
because of the perceived loss of independence
want to use venture capital
businesses. A positive association is however
and control of the moderate
between the the BES, leasing and factoring and the sector
observed use of
industry. This that technology-based firms are slightly more
of suggests
UK- Survey: Results & Analysis 147
likely than non technology-based firms to use these

sources of external
finance, in line with ACOST (1990) and University
of Cambridge (199")
which suggested an increasing tendency for small firms to spread their
funding sources. Overall, the results shows that the hypothesis
is not
substantiated.
vi. Hypothesis : There is an association between the

existence of a written
business plan in a small manufacturing firm
and the sources
of external finance used by the firm.
Table 6.17 shows that, whilst the existence of business is

plan significantly
(and positively) associated with the use of venture capital, LGS
and
factoring, only moderate positive associations are observed for the BES,
bank term loans and leasing. The results indicate the importance of the
business plan in utilising the sources of external finance. Thus, the hypoth-
esis is substantiated.

External Finance.

a small manufacturing firm and the sources of external
finance used by the firm.
Table 6.18 does not provide any evidence of a significant relationship

between 'sources of external finance' and 'age of owner-managers'. How-
ever, there are moderate relationships between the age of owner-managers

and some sources of finance, such as long-term bank loans and factoring.
Long-term bank loans are positively associated, whereas leasing is nega-
tively associated with the age of owner-managers. The overall results show
that the hypothesis is not substantiated.
ii. Hypothesis : There is an association between level of training, education

ing firm and the sources of external finance used by the firm.
Table 6.18 also shows no significant association between the 'sources of
external finance' and the 'level of education and experience' of owner-

UK Survey: Results& Analysis 148
Table 6.18
Sources of External Finance and Owner-Manager Characteristics:
(United Kingdom)
Sourcesof Age of Level of Training in Level of

u6
Venture Capital 029 407 563* -. 217
. . .
Government-Backed Scheme (BES) -. 011 279 229 -. 176
. .
Relatives/Friends 082 140 -. 250 054
. . .
Debt
Overdraft 134 036 065 -. 129
. . .
Bank Loan (Syrs or less) 085 147 213 -. 017
. . .
Bank Loan (above Syrs) 397 -. 252 -. 234 035
. .
TradeSupplier -- 065 188 273 -. 136
-. . .
Government-BackedScheme(LGS) 052 142 246 -. 003
. . .
Hire-Purchase 043 016 -. 122 078
-. . .
Leasing 011 196 515" -. 143
. . .
Factoring 401 587 034 -. 200
-. . .
" Significant at 0.01 significance level, a two-tailed test

N Numberof observations a 139
managers. The table does however show a moderate association between
venture capital (equity) and the level of education as well as between

factoring (debt) and the 'level of education'. With regard to the training of
owner-managers, The table also indicates that venture capital (equity) and
leasing (debt) are significantly associated (positive) with the training re-
ceived. Other sources of external finance are not associated with the
training of owner-managers. In conclusion, the results do not provide
evidence of any significant association between the sources of external

finance and the level of education, training and experience of owner-
managers and therefore, the hypothesis is not substantiated.
Association Between Small Firm Characteristics and Existence of

Difficulties
i. Hypothesis : There is an association between the size of a small manufac-

turing firm and the existence of difficulties in raising exter-
nal finance.

between the existence of financing difficulties and small firm characteristics
(refer contingency tables in Appendix 3). The table does not indicate any
between the size of firms and the status of application for finance
association
between the size of firms and the existence of difficulties in
as well as
obtaining finance. Thus, the hypothesis is not substantiated.

f
turing rm and the existence of difficulties in raising exter-
nal finance.
With regard to the size of firms, this variable does not have any association
difficulties in external finance as shown in
with the existence of obtaining
Tables 6.19. Therefore, the hypothesis is not substantiated.
UK. Sw-vey: Results & Aru! 150
vnS
Table 6.19
Financing Difficulties and Small Firm Characteristics:
(United Kingdom)
Application for Size of Size of Age of Use of Legal Sector of Business

External Finance Firm(i) Firm(ii) Firm Advisers Status Industry Plan
Statusof RecentApplication a 087 157 195 042 498

. . 104 -.098
b . . . .
Existenceof Financing Difficulties 126 130 063 149 -. 339 227 -. 133
. . . . .
Notes-
a. Number of observations (N) 139
b. Numberof firms which were successfulin the application for externalfinance = 118
Table 6.20
Financing Difficulties and Owner-Manager Characteristics:
(United Kingdom)
Application for Age of Level of Training in Level of

Statusof Recent Application a 006 373 406 282

. -. -. .
Existenceof Financing Diffcultiesb 086 189 200 -. 084
-. . .
Naves.
a. Numberof observations(n) - 139
b. Number of firms which were successfulin the application for externalfun"" - 118
UK Survey: Results &A nalvsis 151
iii. Hypothesis : There is an association between the use

of external advisers
and the existence of difficulties in raising external finance.
Table 6.19 also indicates that there is no association between the

use of
external financial advisers and the status of application for finance, and also
no association between the use of external advisers and the existence of
difficulties. Contrary to expectations,
the results suggest that, on the
whole, external advice received does not have any significant relationship
with the ease of obtaining external finance. This raises the question of
whether or not the use of external advisers by small firms is effective. It is
possible that the expertise of the advisers is inadequate, that the firms are
poorly advised about the appropriate sources of finance available, or small
firms are reluctant to accept advice. The hypothesis is not substantiated.

manufacturing firm and the existence of difficulties in rais-
ing external finance.
Table 6.19 does show a positive association between 'legal status' and
'status of recent application for external finance'; a private limited company
is more likely than an unincorporated firm to be successful in obtaining
external finance. The negative association between 'existence of difficulties'
and 'legal status' indicates that the unincorporated firm, particularly sole
proprietor, is more likely to encounter difficulty in obtaining external

finance. This finding is consistent with the result of previous studies
(Freedman & Godwin, 1992; Storey, 1994b; Mishra, 1995). In general,
therefore, the hypothesis is substantiated.
V. Hypothesis : There is an association between the sector of industry of a

small manufacturing firm and the existence of difficulties in
raising external finance.
Status of recent application for external finance was crosstabulated with

industrial (refer Table A3.13 in Appendix 3). The results
various sectors
firms (100 percent) in the following sectors have
show that all respondent
been successful in obtaining finance: rubber and plastic products. wood and
UK. Survey: Results &A nalvsis 152
wood products, paper and paper products, chemical and chemical products,
basic metals, food products and beverages, and motor vehicles and parts.
However, some firms in the following sectors have been refused finance:
fabricated products (31 percent), publishing and printing (16.7 percent),
electrical machinery (16.7 percent) and other industries (25 percent). With
regard to existence of financing difficulties, the majority of respondent firms
in the following industrial sectors have reported some difficulties in raising
finance (refer Table A3.14 in Appendix 3): food products and beverages
(100 percent), chemical and chemical products (75 percent), motor vehicles
and parts (74 percent) and publishing and printing (70 percent). When the
firms are grouped into technology- and non technology-based, Table 6.19
however shows a very weak positive association between'sector of industry'
and 'existence of difficulties' in obtaining external finance. The results
provide little evidence to suggest that the sector of industry (technology or

non technology-based) is associated with the existence of difficulties in
obtaining external finance. Overall results suggest that the hypothesis is not
substantiated.

business plan in a small manufacturing firm and the exist-
ence of difficulties in raising external finance.
Table 6.19 does not show any association between the existence of a
business plan and the status of application for external finance as well as the
financing difficulties. The results imply that the business plan

existence of
is not necessarily related to the ease of obtaining external finance. There-
fore, the hypothesis is not substantiated.

UK. Survey: Results &A nih-s, 153
s
Association Between Owner-Manager Characteristics

and Existence of Difficulties
i. Hypothesis : There is an association between age

of the owner-manager
and the existence of difficulties in raising external. finance.
Table 6.20 provides evidence that the age of owner-managers does

not have
any association with either the status of application for finance or the
existence of difficulty in obtaining finance. Therefore, the hypothesis is not
substantiated.

and experience of owner-manager and existence of di j/icul-
ties in raising external finance.
Table 6.20 does not reveal any significant association between the level of
education, training and experience of owner-managers and the existence of

difficulty in obtaining finance. These findings are very much consistent with
the findings of Hustedde and Pulver (1992) and Deakins and Hussain
(1994). Their findings
show that education, experience and business
training of the owner-managers would not necessarily make external finance
more easily available. The result implies that the hypothesis is not substan-
tiated.
6.5 SUMMARY
This chapter has analysed the data derived from the U. K. study by relating the
characteristics of firms and owner-managers (independent variables) to the sources
of external finance difficulties experienced by the firms in

and the existence of
securing external finance for business expansion (dependent variables). In order to
facilitate the analysis of the data, some relevant variables were modified. combined
and recoded.
The presentation of the results of the study began with the summary of the
U. K. Survey: Results & Analysis 154
respondents' characteristics. Next, the independent (firm and owner-manager
characteristics) and dependent variables (need for external finance, sources of

external finance and difficulty in obtaining finance) were crosstabulated and the
hypotheses were tested. A summary of the results is shown in Table 6.21.
Provided that the statistical test used was appropriate and the measurement
requirement was satisfied, then it was shown that most of the characteristics have
no association with dependent variables. In particular, none of the owner-manager
characteristics can be associated with the need for external finance, the sources of
external finance utilised and the existence of difficulties in obtaining finance.
With regard to firm characteristics, the size of firm is only associated with
the need for external finance, suggesting that the larger the firm the more likely it
will approach external sources of finance and the smaller the firm the more likely
it will depend on internal finance. The use of external advisers is found to be
associated with the need for external finance and the sources of finance, illustrating
the importance of the external advisers in influencing the financing behaviour of the
firm. The preparation of a business plan is also associated with the need for
external finance and the sources of finance, showing that such a plan is important
in determining the financing opportunities available to the firm.
It was shown that the legal status of the firm is associated with the sources
of external finance and the existence of difficulties in obtaining finance. The results
reflect the impact of private limited company status in giving credibility to the firm
in obtaining external finance.

UK. Survev Results & 4nah"sis 1
.
Table 6.21
Tests of Hypotheses:
Measure of Association Survey Results Summary
-
(United Kingdom)
DependentVariables Independent Variables Results

Need for External Finance Firm Characteristics
size of firm substantiated
age of firm not substantiated
use of external adviser substantiated
legal status not substantiated
sector of industry not substantiated
business plan substantiated
age of owner-manager not substantiated
education/training/experience not substantiated
Sourcesof External Finance Firm Characteristics

size of firm not substantiated
legal status substantiated
businessplan substantiated
FinancingDifficulties Firm Characteristics

size of firm not substantiated
use of external adviser not substantiated
businessplan not substantiated
Chapter Seven
THE MALAYSIAN SURVEY:

7.1 INTRODUCTION
The preceding chapter has presented the results and analysis of the U. K. data. The
data collected during the Malaysian survey is analysed in this chapter. As with the
U. K. data, the researcher performed data editing and cleaning using "Frequencies"
procedures generated from the SPSS for MS Windows, to ensure that there will be
no errors and inconsistencies in the Malaysian data list.
7.2 THE SURVEY
Based on a sampling frame of 5,110 small manufacturing firms, a total of 520
manufacturers were selected at random to be the sample for the study. From the
list, 50 respondents were initially selected to participate in the pilot test, and the
remainder in the full survey. One week after the questionnaires were posted,
postcards were sent to those who did not respond, seeking their cooperation in
filling and returning the completed questionnaire immediately. A total of 151

(29 returned of which a total of 112 of them (22
questionnaires percent) were
percent) were usable. However, 39 of the questionnaires (8 percent) were unusable
mainly because the respondents could not be traced or have changed addresses
(36), and three respondents employ more than 50 employees and were therefore
excluded from the analysis.

Malaysian Survey: Results & Analysis 157
7.3 RESULTS AND ANALYSIS
7.3.1 Characteristics of Respondents
Summary data on respondents' characteristics indicates that (Tables 7.1,7.2 and 7.3) :
i. Size of Firms
Over one-half (58.0 percent) of the respondent firms employ less than 20
employees; 37.5 percent employ less than 10 employees and 20.5 percent
employ between 10 to 19 employees. The remaining firms employ between
20 to 29 employees (12.5 percent), between 30 to 39 employees (11.6
percent) and between 40 to 49 employees (17.9 percent).
ii. Age of Firms

Over one-half (55.6 percent) of the respondent firms have been in business
for less than 10 years; and most of them (28.6 percent) have been operating
between 5 to 9 years.
iii. Use of External Advisers

The majority of the respondent firms (82 percent) engage external advisers
to advise on matters pertaining to their financial affairs. The most prominent
sources of advice are relatives and friends (42.9 percent) and bankers (40.2
Accountants, chambers of commerce, and local authority are

percent).
being used as sources of advice by 25.9 percent, 17.0 percent and 9.8
percent of the respondent firms respectively.
iv. Legal Status

The majority of the respondent firms (75.9 percent) are incorporated; the
firms consist of sole proprietor (14.3 percent) and partner-
unincorporated
ship (9.8 percent).
w" Sector o Industry

located in the following
Most of the respondent firms (64.3 percent) are
fabricated metal products, foods and
sectors: wood and wood products,
Table 7.1
(Malaysia)
Cwnulative
EmploymentSize
I-9 employees 42 37.5 37.5
10 - 19 employees 23 20.5 58.0
20 - 29 employees 14 12.5 70.5
30 - 39 employees 13 11.6 82.1
40 - 49 employees 20 17.9 100.0
112 100.0
Age of Firm
4 years& below 29 26.9 26.9
5-9 years 31 28.7 55.6
10 - 14 years 26 24.1 79.6
15- 19 years 9 8.3 88.0
20 years & above 13 12.0 100.0
108' 100.0
Did not use external adviser 30 26.8 26.8
Usedexternal adviser 82 73.2 100.0
112 100.0
Legal Status
Sole Proprietorship 16 14.3 14.3
Partnership 11 9.8 24.1
Limited Company 85 75.9 100.0
112 100.0
Sectorof Industry (i)
Wood & Wood Products 28 25.0 25.0
FabricatedMetal Products 17 15.2 40.2
Food Products& Beverages 14 12.5 52.7
Rubber& Plastic Products 13 11.6 64.3
Basic Metals 6 5.4 69.7
Motor Vehicle Parts 4 3.6 73.3
Textiles 3 2.7 75.9
Leather & Leather Products 3 2.7 78.6
Paper.& Paper Products 3 2.7 81.3
Publishing, Printing & Reproduction of
RecordedMedia 3 2.7 84.0
Chemicals& ChemicalProducts 3 2.7 86.7

Other Transport Equipments 3 2.7 89.3
2 1.8 91.1
Electrical Machinery
Other Manufacturing Industry 10 8.9 100.0
112 100.0
Sectorof Industry (ii)
80 71.4 71.4
32 28.6 100.0
Technology-based
11? 100.0
Table7.1 (contd.)
BusinessPlan
Did not have a written businessplan 54 48.2 48.2
Had a written businessplan 58 51.8 100.0
Total 112 100.0
Numberof Missing Cases =4
Table 7.2
Cumulative
Age Group
20 - 29 years 17 15.2 15.2
30 - 39 years 38 33.9 49.1
40 - 49 years 32 28.6 77.7
50 - 59 years 23 20.5 98.2
60 years & above 2 1.8 100.0
112 100.0
Training in Business & Management
No Training 24 21.4 21.4
SomeTraining - 88 78.6 100.0
112 100.0
Level of Education
Primary School 18 16.1 16.1
Secondary/HighSchool 55 49.1 65.2
College/University 39 34.8 100.0
112 100.0
Levelof Experience
No Working Experience 24 21.4 21.4
4 years & below 35 31.3 52.7
5-9 years 30 26.8 79.5
10 - 14 years 15 13.4 92.9
15 - 19 years 6 5.4 98.2
20 years & above 2 1.8 100.0
112 100.0
Table 7.3
(Malaysia)
Relativesand friends 48 42.9

Bankers 45 40.2
Accountants 29 25.9
Chambersof Commerce 19 17.0
Local Authority 11 9.8
Malaysian Suwvey.Results & Analysis 160
beverages, or rubber and plastic products. The remaining firms (35.7
percent) are in other industrial sectors such as basic metals, motor vehicle
parts, textiles, leather and leather products, paper and paper products,
publishing and printing, chemical and chemical products, other transport
equipments, and electrical machinery. The majority of the respondent firms
(71.4 percent) are categorised as non technology-based firms. Only 28.6
percent of the respondent firms are technology-based.
vi. Business Plan

Over one-half (51.2 percent) of the respondent firms do not have any written
business plan.
vii. Age of Owner-Managers

Nearly one-half (49.1 percent) of the owner-managers are between 20 to 39
years of age. The remainders are in either 40 to 49 (28.6 percent) or 50 to

59 (20.5 percent age brackets. Only 1.8 percent of the owner-managers are
above 60.
viii. Level of Training, Education and Experience of Owner-Managers

Most of the owner-managers (78.6 percent) had undergone some training in
business and management. Nearly one-half (49.1 percent) of the owner-
managers are secondary or high school educated. The remaining owner-

managers are either college or university graduates (34.8 percent) or
primary school educated (16.1 percent). In terms of working experience,
most of the owner-managers (78.6 percent) had prior working experience
before operating their present businesses. Over one-half (58.1 percent) had
9 years or less working experience. The period of working experience for
the remaining owner-managers were 10 to 14 years (13.4 percent), 15 to 19
years (5.4 percent), and 20 years and above (1.8 percent).

Table 7.4 indicates that, out of 112 respondents, 88 (78.6 percent) had
approached external sources for financing business expansion. Table 7.5

indicates that the most commonly cited reason for applying for external
finance is to increase sales/share of the existing market (69.3 percent).
Other reasons include: to expand into new market with the existing products
(60.2 percent); to go into an entirely new market (22.7 percent); to expand
overseas (22.7 percent); to introduce new products to the existing market

(13.6 percent); and to acquire another firm (4.5 percent).
ii. A total of 24 respondents who had not approached external sources can be
divided into two groups. The first group consists of a small number of
respondents (8.3 percent) who were not aware of the various sources
available (Table 7.6). The second group consists of the respondents who
were aware of the external sources available (91.7 percent) but did not want
to use external finance for various reasons. The main reasons for not
applying, ranked in order of importance, were as follows (Table 7.7) :
a. External finance is too costly

b. External finance is too risky
c. External finance is difficult to obtain

d. Do not like to be in debt
e. Do not want to lose control and independence

f. External finance is not required at the moment
iii. Table 7.8 shows that most of the respondents (95.5 percent) who had never
approached external sources were aware of the existence of the external

finance provided by banks and other lending institutions, as well as: govern-
(54.5 hire-purchase (54.5 percent); leasing
ment-backed schemes percent),
(54.5 percent); trade suppliers (45.5 percent); factoring (22.7 percent); and
venture capital (22.7 percent).

Table 7.4
(Makysia)
&ternal Finance No. of Responses Percent
Approached ExternalSource 139 78.6
Did Not ApproachExternalSource 24 21.4
Table 7.5
(Malaysia)
Reasons No. of Responses Percent
To increasesales/shareof existing market 61 69.3
To expandinto new market with the existing products 53 60.2
To go into entirely new market 20 22.7
To expandoverseas 20 22.7
To introduce new products to the existing market 12 13.6
To acquireanother firm 4 4.5
Table 7.6
Awareness of External Sources of Finance
(Malaysia)
Awareness No. of Responses Percent
Aware 22 91.7
Not Aware 2 8.3
24 100.0
Table 7.7
Reasons For Not Applying For External Finance
(Malaysia)
Reasons Mean StandardDeviation Variance
External finance is too costly 3.73 0.94 0.87

External finance is too risky 3.64 0.90 0.81
Externalfinanceis difficult to obtain 3.59 1.01 1.02
Donot like to be in debt 3.32 1.04 1.08
Do not want to lose control and independence 3.18 1.01 1.01
Externalfinanceis not requiredat the moment 3.09 1.31 1.71
ii. Themeanscoresfor the variables rest on a five-point Likert-type scak, with "I " denoting strongly disagree
MalaysianSurvey:Results& Analysis 163
Table 7.8
Sources of External Finance: Awareness of Respondents
(Malaysia)
Bank/Financial Institutions 21 95.5

Leasing 12 54.5
GovernmentSchemes/Incentives 12 54.5
TradeSuppliers 10 45.5
Factoring 5 22.7
Table 7.9
(Malaysia)
Sourcesof Number of
External Finance Responses Percent
Equity
Government-backedScheme(PUNB) 7 8.0
Qfk
BankOverdrafts 51 58.0
TradeSupplier 38 43.2
Bank Loan (Syrs or less) 35 39.8
Leasing 17 19.3
Bank Loan (above S)rs) 14 15.9
Government-backed
Scheme(CGC) 13 14.8
Factoring 2 2.3
NWpbe, of (M) - 88
obwrvations
,
i. Bank overdrafts and hire-purchase were the most popular sources of debt
finance, used by 58.0 percent and 51.0 percent of the respondent firms
respectively (Table 7.9). Other sources of debt finance used for business
expansion include trade suppliers (43.2 percent), bank loans - less than five
years (39.8 percent), leasing (19.3 percent), bank loan - more than five years
(15.9 percent) and government-backed loans under Credit Guarantee Cor-
poration(CGC) scheme (14.8 percent). Only 2.3 percent of the respondents

indicated they had used factoring as a source of external finance. The most
widely-used source of external equity finance was relatives and friends; used
by 13.6 percent of the respondents. Another source of equity finance for
business expansion was the government-backed Perbadanan Usahawan
Nasional Berhad(PUNB) equity participation programme (8.0 percent). As
for venture capital finance, only 2.3 percent of the respondent firms had
resorted to using this option.
ii. Table 7.10 presents information regarding the composition of external

equity and debt finance. A significant overall majority of the firms (76.1
percent) do not use external equity. Where equity is used, 21.6 percent of
the firms rely upon a single source. More than one source of equity is used
by only 2.3 percent of the firms. With regard to debt finance, about 47
percent of the firms obtain debt from more than two sources. Only a small
percentage of the firms (2.3 percent) do not use some form of debt finance.
i. Respondents were asked the status of recent applications for external
finance. Out of 88 firms which had approached external sources, 71 firms
(80.7 percent) had been successful in gaining finance (Table 7.11).
ii" Out of 71 respondents who had been successful in getting external finance,
half (49.3 stated that they had encountered some

almost of them percent)
difficulties in the process of applying for and obtaining the finance (Table 7.12).
Table 7.10
(Malaysia)
FinancingPattern No. of Responses Percent
il/tY
None 67 76.1
One Source 19 21.6
Two Sources 2 2.3
Total 88 100.0
2&
None 2 2.3
OneSource 25 28.4
Two Sources 27 30.7
ThreeSources 11 12.5
Fouror More Sources 23 26.1
Total 88 100.0
Table 7.11
(Malaysia)
Status No. of Responses Percent
Not Successful 17 19.3

Successful 71 80.7
88 100.0
Table 7.12
(Malaysia)
Difficulties No. of Responses Percent
No Difficulty 36 50.7
SomeDifficulties 35 49.3
_ 100.0
71
Malaysian Su vey: Results& Analysis 166
Table 7.13
(Malaysia)
Variables Mean StandardDeviation Variance
Insufficient amount of loan 3.74 1.07 1.14

Durationof loan offered was too short 3.37 0.88 0.77
High interestrate 3.29 1.13 1.27
level of collateral
Unreasonable 3.26 1.25 1.55
ii Themean scoresfor the variables rest on a five point Llkert-type scale, with "I" denoting strongly disagree and "S"
Table 7.14
(Malaysia)
Variables Mean Standard Deviation Variance
Lackof collateral 4.35 1.00 0.99

Lackof personal financial input 3.59 1.18 1.38
Lackof managementcompetency 2.94 1.14 1.31
Inadequatesourceof repayment 2.41 1.06 1.13
Lackof adequatebusinessplan 2.29 1.05 1.10
Too rapid expansion 2.24 1.20 1.44
Lackof successin previous businessventure 2.18 0.95 0.90
Lackof track record 1.77 0.83 0.69
Lackof project viability 1.94 0.97 0.93
Hadexceededborrowing limit 1.59 0.87 0.76
"I " denoting strongly disagree
ii Themeanscoresfor the variables rest on a five-point Likert-t e scaole,with
iii. Table 7.13 presents the means of the four types of difficulties encountered
by the respondents. The results show that four types of difficulties (insuf-
ficient amount of finance, duration, high interest rate and collateral require-
ments) were the main factors that contribute towards the difficulties facing
small firms in securing external finance for business expansion.
iv. Table 7.14 lists the reasons for failure indicated by 17 respondents who had
failed to obtain external finance. Overall, a lack of collateral and a lack of
personal input are generally perceived to be the main obstacles in raising

finance.
7.3.5 Tests of Hypotheses:

External Finance.


between the need for finance and characteristics of small firm (refer
external
contingency tables in Appendix 4). The results provide evidence on the
between the'size of firms' and the need for finance to
significant association
business There is a positive association between the size
support expansion.
of the firms and the financing decision whether or not to approach external
sources. That is, the larger the firms the more likely they are to approach
It indicates that smaller firms rely more on internal

external sources. either
finance, therefore external finance is not needed at the moment, or they do
finance because insufficient assets that can be

not want to obtain external of
(Bannock, 1981; Binks et al., 1992a). Therefore, the
used as collateral
Malaysian Survey. Results & Ana! 168
"sis
Table 7.15
Need for External Finance and Small Firm Characteristics:
(Malaysia)
Size of Size of Age of Useof Legal Sector of Business
&ternal Finance Firm(i) Firm(1i) Firm Advisers Status Industry Plan
Need for External Finance 715" 840' 080 059 460 018 704
. . . -. . -. .
" Significant at 0.01 significance level, a two-tailed test

h' Numberof observations- 112
Table 7.16
Need for External Finance and Owner-Manager Characteristics:
(Malaysia)
Age of Level of Training in Level of
ExternalFinance Owner-Manager Education Business Experience
Needfor External Finance 010 161 660" -. 163

-. .
V Numberof observations-_l12
Table 7.17
Sources of External Finance and Small Firm Characteristics:
(Malaysia)
Soiuresof Sizeof Sizeof Ageof Useof Legal Sectorof Business
ExternalFinance Firm(E) Firm(ii) Firm Advisers Status Industry Plan
LHiy
Venture Capital 732" 1.000" 263 1.000" 1.000" 442 -. 209
. -. .
Government-Backed Scheme (PUNB) 297 027 124 1.000" 1.000" 286
. -. . -1.00010 .
Relatives(Friends 542'" 561** 352 301 680"' 369 -. 333
-. -. -. . -. -.
Qrk 508 028

Overdraft 577"' 710' 393 219 711"
. . . . . . .
BankLoan (Syrs or less) 156 198 197 187 448 338 -. 106
. . . . . .
BankLoan (above S)rs) 551"' 624"" 152 435 580 200 473
. . . . . . .
TradeSupplier 133 053 058 043 275 -.091 011
. . -. . . .
Government-BackedScheme(CGC) 192 064 416 129 488 264 425
. . -. . . . .
H'ir'e-Purchase 398 432 204 465 637"' 136 179
. . . . . . .
Leasing 577** 822' 137 769' 610 198 -.036
. . . . . .
Factoring 732' 1.000' 271 1.0000 1.0000 442 1.000'
. -. .
' Sign{ cant at 0.01 sign ecelevel, a two-taited tut

Slgn(aont at 0.05 sfgn$cance lcweLa two-toiled test
N Numberof observations- 88
Malaysian Survey Results& Analysis 169
ji. Hypothesis : There is an association between the age al a small

manufac-
Contrary to what might have been expected, Table 7.15 does not show an),
association between the age of firm and the need for external finance.
Hence, the hypothesis is not substantiated.

by small manufacturing firm and the need for
external
finance.
Table 7.15 also shows no clear association between the use of external
advisers and the need for external finance. Therefore, the hypothesis is not
substantiated.

manufacturing firm and the need for external finance.
Table 7.15 shows a moderate positive association between legal status of

the firm and the need for external finance, suggesting that a private limited
company is more likely than an unincorporated firm to approach external
source of finance for financing expansion. Thus, the hypothesis is substan-

tiated.
V. Hypothesis : There is an association between the sector of industry of a

small manufacturing firm and the need for external finance.
Using ISIC list, the results do not show any clear association between the
sector of industry and the need for external finance (refer Appendix A4.1 in
Appendix 4). In almost all sectors, the majority of respondent firms had
approached external sources for financing business expansion. However,
the majority of firms in textiles and publishing and printing did not apply for
external finance. It is also observed that the majority of both technology-

based and non technology-based firms rely heavily on external sources. In
summary, there is between the 'sector of industry' and the

no association
financing need of the firms (Table 7.15); irrespective of the sector of the
industry, they are likely to approach external finance. Thus, the hypothesis
is not substantiated.
vi. Hypothesis : There is an association between the existence of a

written
business plan in a small manufacturing firm
and the needfor
external finance.
As expected, Table 7.15 shows that a business plan is significantly associ-
ated with the decision whether or not to apply for external finance, suggest-
ing that a firm which has prepared a business plan is more likely to apply for
external finance. The results imply that business plan is principally used as
a tool for raising finance (Timmons et al., 1977; Schuman et al., 1985).
Therefore, the hypothesis is substantiated.

External Finance.

a small manufacturing firm and the need for external finance.
Table 7.16 provides evidence of no association between'age of owner-manager'
and the need for external finance. Therefore, the hypothesis is not substantiated.

ing firm and the need for external finance.
Table 6.16 shows that, whilst there is a weak positive association between
the level of education and the need for external finance, the business and
management training received by owner-manager is significantly associated
with the need for external finance. The results suggest that an owner-
manager who is highly educated and has undergone training is more likely
to apply for external finance. The results also confirm the importance of the
training and education level of the owner-manager in influencing the need

for external finance. Better qualified owner-managers are likely to own fast
firms (Storey 1989), therefore they are more likely to make

growth et al.,
finance (Barkham al., 1996). On the other hand, the level
use of external et
of work experience of an owner-manager is weakly and negatively associ-
ated with the need for external sources, suggesting that an owner-manager
has is less likely to approach external

who more years of work experience
finance. The results is in line with the findings of Hustedde and Pulver
(1992). Overall, the results indicate that the hypothesis is substantiated.

External Finance.
i, Hypothesis : There is an association between the size of a small manufac-

turing firm and the sources of external f nance used by the
firm.

between various sources of external finance and small firm characteristics
(refer contingency tables in Appendix 4). Before proceeding with the
analysis, it is important to note that the number of respondents who had used
venture capital and factoring was too small (see Table 7.9). Therefore it is
not possible to draw any conclusions about whether these statistics provide
any significant results. The table, however, indicates a significant associa-
tion between the size of firm and equity finance obtained from both venture
funds and relatives and friends. The equity from relatives and friends is
negatively associated with size of firms. The inverse relationship between
the size of firm and the reliance on relatives and friends for finance shows
that the smaller the firm the more likely it will rely on relatives and friends.
This result is consistent with the findings of Chee (1986). Three sources of
debt finance, namely overdrafts, long-term bank loans and leasing are
significantly and positively associated with the size of firm. That is, the
larger the firm, the more likely it will use these sources of finance. This
finding is also consistent with the findings of Chee (1986). The results also
reveal a moderate positive association between hire-purchase and size of

firm. Overall, the results indicate that there is an association between 'size
of firm' 'sources of external finance' used by the firm in financing

and
business expansion. Therefore, the hypothesis is substantiated.
" Hypothesis : There is an association between the age of a small manufac-

turing firm the sources of external finance used by the
and
firm.
Table 7.17 indicates that, although the statistical tests do not show- any
significant association, overdraft finance is, to some extent, positively,

associated with the age of a firm. 'Older' firms are more likely to reis on
overdrafts. The implication is that 'younger' firms are less likely to obtain
finance since they have no established track record (Binks, 1979; Bannock,
1981; Oakey, 1984a; Kee et al., 1986; University of Cambridge. 1992).
There is a moderate negative association between the use of the government
loan scheme and the age of firm, with older firms being less likely to use
government loans. Other sources of finance, however, do not show any
association with the age of firms. Thus, the hypothesis is not substantiated.

and the sources of external finance used by the firm.
Table 7.17 shows that the use of government-backed equity participation

schemes (PUNB) and leasing is significantly associated with the use of
external financial advisers. Small firms which had engaged external finan-
cial advisers are more likely to use government-backed equity schemes and
leasing facilities. Hire-purchase and long-term bank loans are moderately
and positively associated with the use of external advisers, and a moderate
negative association is observed between equity sources from relatives/
friends and the use of external advisers. Overall, there is a significant
association between 'sources of external finance' and 'use of external

advisers'. This implies that the hypothesis is substantiated.

manufacturing firm and the sources of external finance used
by the firm.
The results in Table 7.17 suggest that the use of most sources of external
finance is associated with the legal status of the firm. Not surprisingly, all
firms which use government-backed PUNB scheme are incorporated firms.
The firms which are not incorporated (sole trader or partnership) are less
likely to use this source of finance. It is also observed that, although the
is firms which use venture capital and factoring
number not significant, all
are incorporated firms. There is also a significant positive association
Malaysian Survey: Results& Analysis 173
between the use of overdrafts and hire-purchase and the legal status of the
firm; a private limited company is more likely than sole proprietorships and
partnerships to use these sources of external finance. On the contrary, a

significant negative association is observed between the use of finance from
relatives/friends and the status of the firm; firms which are unincorporated
are more likely than the private limited companies to obtain finance from
relatives/friends. Other sources such as bank loans (intermediate and long-

term), government loan schemes (CGC facilities) and leasing are moderately
associated with the status of the firm; an incorporated firm is slightly more
likely than a sole proprietor or partnership to obtain external finance from
these sources. In general, therefore, the hypothesis is substantiated.

small manufacturingfirm and the sources of external finance
used by the firm.
Table A4.7(i) in Appendix 4 provides crosstabulation analysis between
various sectors of industry and various sources of external finance. The
results show no clear association between these variables. Nevertheless, the

table provides evidence of the importance of overdrafts and short-term bank
finance for almost all sectors, except for the food and leather industries. The
majority of firms in the food industry use trade credit, whereas the majority
of firms in the leather and leather products industry use both trade credit and
hire-purchase. Trade credit is also important for firms in the motor vehicle
parts, and paper and paper products industries. Hire-purchase is also used
by the majority of firms in the wood and wood products, rubber and plastics
products, and basic metals industries. Relatives and friends are considered
to be the most important sources of equity finance especially among firms
in the following sectors: fabricated metal products, foods and beverages,
leather and leather products, and paper and paper products. The table
the firms in all sectors, the

reveals that, among the majority of respondent
following sources are not important for financing business expansion:
loan schemes, long-term bank loan, and
government-backed equity and
leasing. With regard to the sectoral distinction between technology and non
Table 7.17 indicates that there is little evidence to

technology sectors,
types of external sources of finance is
suggest that accessing particular
significantly associated with technology or non technology-based firms.

The use of the government-backed PUNB equity participation scheme is
however perfectly and negatively associated with the sector of industry;
all
firms which use this source of finance are non technology-based firms
producing furniture under the Vendor Development Programme. Whilst the

use of PUNB equity scheme by firms under the Vendor Development
Programme is to be expected (see Chapter Three), it is quite surprising to
see that none of the technology-based firms consider this scheme. It is
possible that the technology-based firms from the sample refuse to use this
scheme because of the perceived loss of independence of the business.
However, a moderate positive association is observed between overdrafts
and the sector of industry; technology-based firms are slightly more likely
than non technology-based firms to obtain overdraft finance. In general
however, the results reveal that the hypothesis is not substantiated.

business plan in a small manufacturing f rm and the sources
of external finance used by the firm.
Table 7.17 shows that the preparation of business plan is not significantly
associated with the sources of external finance. Some moderate and
positive associations are observed between the business plan and long-term
bank loans and the CGC loans. Overall, the results imply that the hypothesis
is not substantiated.

External Finance.
" Hypothesis : There is an association between the age of owner-manager of

a small manufacturing firm and the sources of external
finance used by the firm.
Table 7.18 does not provide evidence of significant association between
'sources of external finance' and 'age of owner-managers'. A moderate

is however observed between the use of CGC loans and
negative association
the age of owner-managers; older owner-managers are less likely to use this
Table 7.18
Sources of External Finance and Owner-Manager Characteristics:
(Malaysia)
Sources of Age of Level of Training in Level of

External Finance Owner-Manager Education Business Erperience
quite
VentureCapital -. 049 374 -. 721 516
. .
Government-BackedScheme(PUNB) 450 -. 483 1.000" 086
. .
Relatives/Friends 365 062 -. 375 -. 079
-. .
Q&
Overdraft 392 387 -. 277 100
. . .
Bank Loan (5 yrs or less) 305 193 624 -. 099
. . .
Bank Loan (above 5 yrs) 119 432 486 023
. . -. .
Trade Supplier 012 121 -. 071 062
. . .
Government-BackedScheme(CGC) 535 027 1.0000 077
-. . .
Hire-Purchase 065 373 461 -. 059
. . .
Leasing 135 402 158 -. 334
-. . .
Factoring 817 1.000" 1.000" 083
-. .
' Signjj%bntat 0.01 significance level, a two-tailed test

' Numberof observations- 88
source of external finance. Overall, the results show that the hypothesis is
not substantiated.
ii. Hypothesis : There is an association between the level of training,

educa-
tion and experience of owner-manager of a small manufac-
turing firm and the sources of external finance used by the
firm.
Whilst there is no significant association between 'sources of external

finance' used by the firms and level of'education and experience' of
owner-
managers, Table 7.18 shows some moderate relationships between these
variables. Overdrafts, bank loans (above five years) and leasing are posi-
tively associated with the level of education, whereas the government-
backed PUNB equity participation is
scheme negatively associated with the
education level of owner-managers. The table demonstrates that the level
of training received by owner-managers is significantly associated with

government-backed schemes (both equity and debt). Owner-managers with
no training in business and management did not consider government
schemes as sources of financing. Since most of the training programmes for
small business are organised through government agencies (such as MARA,
MEDEC, PUNB), owner-managers are likely to obtain information on
government-backed sources from the training programmes. There are some
moderate positive associations between the training of owner-managers and
the use of some sources of finance, particularly bank loans (five years or
less) and hire-purchase. Some moderate negative associations are observed
between the training of owner-managers and finance from relatives/friends
and bank loan (above five years). The table, however, does not indicate any
significant association between the level of experience of owner-managers
and the sources of finance. There is also an inverse relationship between
leasing and the level of experience. Overall, the results indicate that there
is a moderate association between'sources of external finance' and 'level of
training, education and experience' of owner-managers. Hence the hypoth-
esis is substantiated.
Association Between Small Firm Characteristics and Existence of

Difficulties

nal finance.

between the existence of financing difficulties and small firm characteristics
(refer contingency tables in Appendix 4). The results indicate a significant
positive association between 'size of firm' and 'status of recent application

for external finance'; that is, the larger the firm the more likely it will be
successful in getting external finance. The table also indicates a moderate

negative association between'size of firms' and the'existence of difficulties'
in the process of obtaining external finance; with smaller firms being more
likely to face difficulty in obtaining finance. The smaller the firms the more
likely they are to face difficulty in raising material security or collateral
(Binks et al., 1986; Yoon, 1988). The inverse relationship between the size
of firms and the existence of difficulty in obtaining finance is also observed

in other studies (e. g. Binks, 1979; Chee, 1986; Terpstra & Olson, 1993;
Moore, 1994). In general, there is an association between'size of firms' and
'existence of difficulties' in getting external finance. Thus, the hypothesis is
substantiated.

nalfinance.
Table 7.19 shows a weak association between 'age of firms' and 'status of
for external finance'. It does not indicate any association
recent application
between 'age of firms' and 'existence of difficulties'. Therefore, the hypoth-
esis is not substantiated.

Table 7.19
Financing Difficulties and Small Firm Characteristics:
(Malaysia)
Application for Size of Age of Use of Legal Sector of Business

External Finance Firm Firm Advisers Status Industry Plan
Statusof RecentApplication a 546* 234 ` 233 633* 154 036

. . . . . .
Existenceof Financing Difficultiesb -. 252 -. 1614 275 -. 458 020 095
. . .
0 Significant at 0.01 sign'if'icancelevel, a two-tailed test
,:
a. Number of observations (n) = 88
b. Numberof firms which were successfulin the application for externalfinance = 71
c. Numberof missing cases -3
d. Number of missing cases -I
Table 7.20
Financing Difficulties and Owner-Manager Characteristics:
(Afalavsia)
Application for Age of Level of Training in Level of

Statusof RecentApplication a 483 427 133 280

. . . .
Existenceof Financing Difficulties b 186 441 223
-. 172 -.
. .
YM:
a. Numberof observations(n) - 88
b. Numberof f rms which were successfulin the application for externalfaance - 7l

Table 7.19 does indicate some degree of positive association between 'use
of external advisers' and 'status of application' as well as between 'use of

external advisers' and 'existence of difficulties' in raising external finance.
Both associations are, however, statistically insignificant. Contrary to
expectations, the results suggest that, on the whole, the receipt of external
advice does not have any significant relationship with the ease of obtaining
external finance. As with the U. K. results, the Malaysian results also raise
the question of whether or not the use of external advisers by small firms is
effective. It is also possible that the expertise of the advisers is inadequate
or that the firms are poorly advised about the appropriate sources of finance
available. Therefore, the hypothesis is not substantiated.

manufacturing firm and the existence of difficulties in rais-
ing external finance.
Table 7.19 shows that there is a significant positive association between
'legal status' and 'status of recent application' for external finance. It
suggests that a private limited company is more likely than an unincorpo-

firm to be in obtaining external finance. There is a negative
rated successful
relationship between the 'existence of difficulties' in obtaining finance and
the 'legal status' of the firm. This suggests that an unincorporated firm is
likely than limited company to face difficulties in obtaining

more a private
finance. This finding reflects the influence of private limited
external
in to the business (Freedman & Godwin,
company status giving credibility
1992; Storey, 1994b; Mishra, 1995). A sole proprietor or partnership may
it
be at a significant disadvantage when seeks external finance (Chesterman,
1982). Therefore, the hypothesis is substantiated.


small manufacturing firm and the existence of difficulties in
The status of a recent application for external finance was crosstabulated
with various industrial sectors (refer Table A4.13 in Appendix 4). There is
no clear association between these variables. The majority of firms in all
sectors have been successful in obtaining finance. The finding raises a
question of whether or not a'finance gap' really exists. The majority of the
firms rely heavily on overdrafts and other short-term finance, suggests the
existence of along-term finance gap'. With regard to existence of financing

difficulties,
the majority of respondent firms in the following sectors have
reported some difficulties (refer Table A4.14 in Appendix 4): wood and
wood products, basic metals, motor vehicle parts and other transport
equipment. When the firms are grouped into technology and non technology
firms, Table 7.19 does not show any association between sector of industry
and existence of difficulties in obtaining external finance. The results

indicate that, irrespective of the sector of industry in which they operate,
small manufacturing firms in Malaysia still face some difficulties in obtain-

ing external finance. Therefore, the hypothesis is not substantiated.

business plan in a small manufacturing firm and the exist-
ence of difficulties in raising external finance.
Both 'status of application' for external finance and the 'existence of

in obtaining external finance, as shown in Table 7.19, are not
difficulties'
associated with the 'existence of a business plan'. The results imply that the
existence of a business plan is not necessarily related to the ease of obtaining
external finance. Thus, the hypothesis is not substantiated.

Association Between Owner-Manager Characteristics and Existence

of Difficulties
i. Hypothesis : There is an association between age of the owner-manager

Table 7.20 shows a moderate association between 'age of owner-manager'
and 'status of application' of external finance, however, the association is

not significant. The table, however, indicates no association between'age of
owner-manager' and the 'existence of difficulties' in obtaining external
finance. Therefore, the hypothesis is not substantiated.

and experience of the owner-manager and the existence of
difficulties in raising external finance.
Table 7.20 reveals that, whilst only 'level of education' and 'training' are
moderately and positively associated with 'status of application' and 'exist-
ence of difficulties' respectively, the associations are statistically insignifi-
cant. The level of training and experience is not associated with the status
of application for external finance, nor is it associated with the existence of
difficultiesin obtaining finance. These findings are very much consistent
with the findings of Hustedde and Pulver (1992) and Deakins and Hussain
(1994). The results imply that the hypothesis is not substantiated.
7.4 SUMMARY
This chapter has provided the analysis of the data derived from this study by
relating the characteristics of firms and owner-managers (independent variables) to
the need for external finance, the sources of external finance used and the
difficulties experienced by the firms in securing external finance for business
expansion (dependent variables).

Malaysian Survey: Results& Analysis 182
The presentation of the results of the study began with a summary of the
characteristics. Next, the independent and dependent variables were

respondents'
and the hypotheses were tested. The summary of the results is
crosstabulated
shown in Table 7.21. If the statistical test used was appropriate and if the
requirement was satisfied, then it was apparent that some of the

measurement
characteristics have no association with the dependent variables.
The size and legal status of firm are associated with all dependent variables;
suggesting that size and legal status can explain the financing practices and
problems for small firms in Malaysia. However the dependent variables are not
associated with age of firm, sector of industry and age of owner-manager are not
associated with all dependent variable.

Table 7.21
Measure of Association - Survey Results Summary
(Malaysia)

Needfor External Finance Firm Characteristics
businessplan substantiated
education/training/experience substantiated
Sourcesof External Finance Firm Characteristics

education/training/experience substantiated
FinancingDifficulties Firm Characteristics

Owner-ManagerCharacteristics
ChapterEight
CASE STUDIES: DISCUSSION AND ANALYSIS
8.1 INTRODUCTION
The results and analysis of the survey data have been presented in Chapter 6 and
7 for the U. K. and the Malaysian studies respectively. This chapter describes the
results and analysis derived from the case studies in the two countries. The analysis
is based on the summary in Appendix 5. In total sixteen firms were visited; eight
from each country. Whilst the questionnaire survey provides quantitative data on
the characteristics of the firms and owner-managers, the case studies provide
qualitative data on the past performance and growth potential of the firms. It was
recognised that the growth orientation or aspirations of the owner-managers could
not easily be assessed using the questionnaire survey. The in-depth interviews with
the owner-managers provided the researcher with valuable information on these
qualitative elements. Other interesting aspects of small firms and owner-managers
have emerged from these interviews, which are also relevant to the financing
problems of small firms. These aspects include the attitude of owner-managers

towards independence of their businesses and the financing practices in innovating
and non-innovating firms.
8.2 THE U. K. CASE STUDIES: RESULTS AND ANALYSIS
8.2.1 Growth of The Sample Small Firms
Thesecase studies are primarily concerned with growth or expansion in terms of
product/processinnovation or investment carried out with the purpose of maximising

profits.
CaseStudies:Discussion& Anah'sis 185
The growth of the small firms interviewed can be classified into three
rapid or fast growth, steady or slow growth, and no growth. During the
categories-
interviews the owner-managers were asked whether their firms had been growing
over the last three years and wished to grow in the next three years in terms of
product/process innovation or carrying out major investment.
The key information about the sample firms is provided in Table 8.1. Of the
eight firms interviewed, two firms indicated that they had carried out major
investment over the last three years and wished to grow rapidly in the next three
years:
Firm F
This machine tools manufacturing company has increased production ca-
pacity after moving to its present building, which is three times the size of
the previous premises. The company plans to carry out major investment
in new product development, and it is currently conducting market research
to assessthe feasibility of its plans. If the research shows that the investment
will yield benefits, the company will start to design and then manufacture the
new product.
Firm
The company has been appointed as a sole supplier to JCB, therefore it has
invested heavily in raw materials and employed more staff. The company
has also purchased more machines and equipment in order to increase
production. Although the company does not intend to expand beyond the
capacity of its present factory, it is currently engaged in designing a new

it For this purpose, its application for
product which will soon manufacture.
an innovation grant has been approved. The company also wishes to expand
into the leisure industry from the automotive industry.
One firm had carried out major investment during the last three years but
Plannedto grow steadily over the next three years:

Case Studies: Discussion & 4nalysis 186
.
Table 8. I
Case Studies: Finance and the Growth of Small Fran
(United Kingdom)
Producer Past Growth Sources of Sowrca of Enenw/ Fb. awct F%mcbW

fbm Maiwf Groh Potential Internal FTnonci Eq, Dodo
Dek
A Textiles Steady Steady Retained profits None Bank overdraft No ditTicuky

Personal savings Bank term ban
H ire purchase
Leasing
B Leather Steady Steady Retained profits None Bank overdraft No difficulty

Bank term loan
C Medical Rapid Steady Retained profits None Bank overdraft Unreasonable

Equipment Director's loan Hire purchase security/
col lateral
D Textiles Rapid No growth Retained profits None Bank overdraft No difficuhr

Bank term ban
Hire purchase
t: Publishing Steady Steady Retained profits None Leasing Insufficient

finance
available
F Machine Rapid Rapid Retained profits None Bank overdraft Unreasonable

Tools Bank term loan security/
Government- collateral
backed(LGS)
British Coal
Hm punk
G Rubber Rapid Rapid Retained profits Government- Bank overdraft Lack of

backed (BES) Bank term loan mlIatcral, high
Relatives Hire purchase interest rate
Leasing & insufficient
finance avail-
able
H Industrial Steady No growth Retained profits None Bank overdraft No difficulty

Design Personal savings Trade Credit
Directors loan Hire purchase
Case Studies: Discussion & Analysis 187
Firm C
The company has been expanding very rapidly, designing
and producing
intensive care beams, ceiling and wall-mounted medical
gas pendants and
surgeon's control panels. At present, besides the U. K., the companyI is
supplying its products to Hong Kong, China and Gulf Countries. The
company is also in the process of negotiating a joint venture project with a
firm in Malaysia, to manufacture and supply medical equipment for hospitals
in that country.
Three firms had carried out moderate investment over the last three years
and planned to grow moderately in the next three years:
Firm A
This textile company plans to increase its production and it is currently
negotiating a leasing facility for equipment and machinery. To cope with the
planned increase in production, the company is investing in the
computerisation of its office.
Firm B
This footwear company has been expanding into related markets by acquir-
ing an elastic agency in Italy and a buckle and trim agency in Spain. In order
to improve sales in its leather markets in the U. S. A., France, Sweden,

Germany, Italy and Spain, the firm is currently setting up a holding company
to look after these overseas markets.
Firm E
This publishing company expanded moderately in 1995 by purchasing
machines and taking on more employees. As a result, the company had

increased its sales to around 800,000. It plans to undertake a number of
large contracts and is planning to move to a new building which is much
bigger than its present accommodation.
One firm had carried out major investment over the last three years but
would not consider any further growth in the next three years:
Case Studies: Discussion &cAnalysis 188
Firm D
This textile company has recently completed a major expansion programme.
Its strategy for the time being is to maintain growth and it has no intention
to expand beyond its present capacity.
One firm had carried out moderate investment over the last three years but
had no plan for further growth in the next three years:
Firm H
This company is involved in the designing of dust control unit. The company
has been growing steadily in the last two years and plans no further growth
over the next three years.
8.2.2 Sources of External Finance And Growth of The Firms
Sources of Finance
-
Contrary to what might have been suggested in earlier studies, these U. K. case
studies demonstrate that both internally generated profits and external funds are
important in financing the growth of the firms. Previous studies suggested that
internally generated profits are the most frequently used sources of finance for
growing firms (e. g. Lawrence et al., 1985; Oakey et al., 1990), whereas other
studies show that growing firms rely heavily on borrowed funds (e. g. Stanworth &
Curran, 1981). The use of both retained profits and external finance is not
surprising since this is in line with the suggestion made by Reid (1993) about the
importance of internally generated profits in attracting external finance.
All sample firms in this study use retained profits. Other sources of internal
finance are personal savings of the owner-managers (Firm A and Firm H) and
directors' loans (Firm C and Firm H). With regard to external sources of finance,
this study shows that bank overdrafts and term loans are the most important
sourcesused by the majority of the firms. The heavy reliance on banks by most of
the firms has been attributed to successful track records as well as good relations
with the bankers (Firm A, Firm B and Firm Q. One of the directors pointed out:
It is a waste of time asking somebody else to finance the expansion since we have
a very good relationship with the bank. (Firm A)
Only one firm does not use any bank finance (Firm E). In general, this firm
suspicious of the financial community. None of the sample firms, however,

appears
use venture capital finance; suggesting either a reluctance to dilute ownership or
a lack of awareness of the availability and benefits of this source of equity finance.
With regard to government-backed finance, only two firm have benefited from
these schemes; Firm F (LGS) and Firm G (BES). However, one firm has a major
complaint about the bank and LGS:
They always take a short-term view on a project. They will lend the money
today and want the money back tomorrow. They are not prepared to go along
with investment. If you don't have security or don't put in your money, the
bank will not finance even under LGS. Banks should not administer LGS. No
bank operates it correctly. They look at proposition as bankers and apply pure
banking criteria, not as development funding which must be of a higher risk
than banks like to take. (Firm H)
Past Growth Performance of The Firms

This section attempts to test the following hypothesis:
Hypothesis : There is an association between past growth performance of a small

manufacturing firm and the sources of external finance used by the
firm.
When the respondent owner-managers were asked to indicate the growth
orientation of their firms over the last three years, four of the eight respondents
described their firms as rapid-growth firms and the remainder as moderate-growth
firms. It is also observed that rapid growth firms have used more sources of
external finance compared to non-rapid growth firms. The government-backed

financing schemes (such as LGS and BES) are more likely to be used by rapid
growth firms. This implies that a willingness to use more sources of external
finance is more likely to influence the growth orientation of the firms, and non-
firms likely fewer of external finance. The non-

rapid growth are to use sources
found be internal sources of finance
rapid growth firms are also to relying on
especially on personal savings of the owner-managers. The results therefore
is
suggestthat, to some extent, there an association between past growth of a small
firm in the U. K. and the sources of external finance used by the firm. Thus, the
hypothesisis
substantiated.
Case Studies* Discussion & Analysis 190
Growth Potential of The Firms

Hypothesis : There is an association between the growth potential of a small

manufacturing firm and the sources of external finance used by thefirm.
The potentially fast growing firms are found to be using more

sources of
external finance and do not normally rely on personal savings of the owner-
manager. This finding seems to support the work of Reid (1991) who found a
negative relationship between firm growth (survival) and the use of personal
savings. The two rapidly growing firms (Firm F and Firm G) in the study had each
been using at least five sources of external finance. Bank loans (overdrafts and
term loans) and hire purchase are widely used by such firms; these results are also
in line with Storey et al. 's (1989) findings which show that these two sources of
external finance are important for the fast growing firms.
It is observed that the firms with the potential for rapid growth are more
likely to have used government-backed schemes such as LGS and BES. It is also
found that the firms with growth potential are more likely than the non-growth
firms to obtain bank term loans and leasing facilities.
The results overall suggest that, to some extent, the growth potential of
small firms in the U. K. is associated with the sources of external finance used.
Therefore, the hypothesis is substantiated.
8.2.3 Financing Difficulties And Growth of The Firms
Post Growth Performance of The Firm

Hypothesis : There is an association betweenpast growth performance of a small

firm and the existence of difficulties in raising
manufacturing
external finance.
When the respondent owner-managers were asked whether they had faced
dancing difficulties, three of the four owner-managers of rapid-growth firms
(Firm C, Firm F and Firm G) said that they had faced some difficulties. The most
frequently mentioned difficulty related to collateral. Of the four steady-growth
firms, three firms (Firm A, Firm B, Firm H) indicated that they had never faced any
difficulty in obtaining external finance. These findings imply that rapid-growth
firms are more likely to experience difficulties than non-rapid growth firms in
Of the three owner-managers who are reluctant to share control of their

businesses,two indicated that they face no difficulty in obtaining external finance.
This is not surprising since these firms are not rapidly growing firms. It was shown
in this study that firms which are reluctant to dilute control are likely to seek non-
rapid growth, therefore they are likely to face less difficulty in obtaining external
finance. The findings suggest that the hypothesis is substantiated.
Growth Potential of the Firms

Hypothesis : There is an association between growth potential of a small manu-

facturing firm and the existence of difficulties in raising external
finance.
Of the six firms with growth potential, four firms have experienced some
difficulties in the course of obtaining external finance for their expansion plans.
The most frequently cited difficulty relates to demands for an unreasonable level of
security/collateral (Firm C, Firm F and Firm G). Other difficulties include
insufficient finance available (Firm E and Firm G) and high interest rate (Firm G).
Only two firms with growth potential (both slow growth firms) have not anticipated
anydifficulty (Firm A and Firm B).
Table 8.1 demonstrates that growth-oriented firms tend to face some

difficulties in raising external finance particularly relating to insufficient collateral
imposed them by the financial institu-
or an unreasonable level of collateral upon
Lions,
Case Studies: Discussion & Anah"sis 192
Two firms (Firm C and Firm F), however, have good relations with the banks
and therefore the availability of finance will not affect their expansion plans. The
major complaint of these firms concerned the heavy reliance on security/collateral

by the banks. Despite the relative ease of obtaining external finance, Firm F has to
provide excessive security/collateral. The entrepreneur has to provide a personal

guarantee, life insurance policies as well as charges on personal and company
properties. Besides collateral, another major problem which disturbs one of the
owner-managers is his company's debt-equity ratio:
It is always very tempting to accept money from the bank but it is the worst
thing you can do if the debt to equity ratio goes wrong. I'm gradually
improving the ratio and I want to keep that going. (Firm C)
One of the directors (Firm G) claims to have had no difficulty in obtaining
external finance, and attributes his financial success to his technical background
and product knowledge. However this firm, which plans to develop a new product,
anticipates some difficulties concerning insufficient collateral, high interest rate
and insufficient finance: According to the owner, growth requires a more competi-
tive product range, yet the cost of financing the growth is quite high. Despite the
relative ease of obtaining finance, he has had to pay high interest rates and provide
excessive collateral for loans in the past.
Another firm (Firm E) whose sales depend largely on contracts is facing

difficulty in obtaining sufficient finance for its future expansion. This firm is
suspicious of the financial community, therefore it will never consider any bank
finance. This firm enjoys a very strong cash flow. The firm is lucky in the sense
its
that clients are good payers and the payment for the work completed is normally
received four to five days after completion; therefore it does not need any external
finance.
Two steady growth firms (Firm A and B), which claim to have good track
face difficulties in
records and well developed business plans, do not expect to any
The results suggest that firms with growth potential or plan to grow are
more likely face difficulties in finance. In the researcher's

to obtaining external
Case Studies- Discussion & Analysis 193
view, problems are associated with the type and quality of proposition. Fast
firms are more likely to develop new products for which the demand is
growth
uncertain and therefore it is risky to lend to them. Some of the difficulties are
related to the proposals themselves; they are poorly presented. These observations
are in line with the findings of previous studies (e. g. Storey et al., 1989; Aston
BusinessSchool, 1991).
From the above analysis it is suggested that growth potential is associated
with the existence of difficulties in obtaining external finance. Therefore, the

8.3 THE MALAYSIAN CASE STUDIES: RESULTS AND ANALYSIS
8.3.1 Growth of The Sample Small Firms
The key information about the firms is provided in Table 8.2. Of the eight firms
interviewed, three firms indicated that they had carried out major investment over
the last three years and wished to grow rapidly in the next three years:
Firm I
In order to increase its paint production, the company purchased a new
factory. With an increase in demand for its products, the company plans to
increase its production within the next few years. The production is
to increase from 4,000 litres per day to 20,000 litres per day. As
expected
a consequence, it is currently planning to build an additional plant and to
purchase additional machines and equipment.
irrer J
At present the company is producing and supplying wire products. Two
factory. additional machines and

years ago the company purchased a new
The plans to build a new factory 30
employed more workers. company
kilometres away from its It also plans to export 50 percent of
present site.
its products in the near future.
Table8.2
Case Studies: Finance and the Growth of Small Firms
(Afalaysia)
Product Past Growth Source of Source, of Euenmd Fbuw r FL"Ki v

Firm Mw N(f. e urea Growrh Potential /n "d Finance ofa
EqD
Chemicals Rapid Rapid Directors loan None Bank overdraft lnsufficicnt

Bank term ban finance avail-
Hire purchase able & high
interest rate
1 Wire Rapid Rapid Retained profits None Relatives Insufficient

Government- finance
backed (ITAF) available
Bank term loan
leasing
K Fabricated Steady Steady Retained profits Relatives Trade credit Insufticnt

Steel Personal savings Hire purchase finance
available
I, leather Steady Steady Retained profits None Bank overdraft No difficulty

Government-
backed (ERF)
M Electronic Rapid No growth Retained profits None Bank term loan No difficulty
Components Personal savings Hine purchase
N Staples/ Steady Rapid Retained profits None Bank overdraft High interest
Paper clips Bank term ban rate & lade of
Hire purchase collateral
Leasing
0 Plastics Rapid Retained profits Governmen t- Bank overdraft No difficulty

Rapid
backed Bank term loan
(PUNB) Hie purchase
Trade credit
Governmcnt-
ba ked (COC &
frAF)
P None Bank overdraft No difficult

Plastics Steady No growth Retained profits
Hirt purchase
Trade credit
Case Studies: Discussion & Anah'sis 195
Firm 0
The firm, a plastic injection moulding company, has purchased two addi-
tional factories in the last few years. It now has two major aims over the next
three years. Firstly, it plans to expand its production lines to manufacture
new component for the car industry. Secondly, it plans to build a new plant
in the northern region of the country.
One firm had undertaken major investment over the last three years and
planned to grow steadily in the next three years:
Firm L
This leather company has ventured into other leather related products. As
a result, the company has increased its workforce. It plans to expand
moderately in the near future in terms of increasing production and taking

on more employees.
One rapidly growing firm was not considering any further growth in the next
three year:
Firm
This company produces computer and audio components. The company has
been growing very fast over the last four years. In order not to over-expand,
the owner-manager has decided not to expand further at least over the next
three years. Over-expansion, according to the owner, could jeopardise the
company's survival.
One firm had undertaken moderate growth over the last three years and
plannedto grow rapidly in the next three years:
Firm N
The company is one of the leading manufacturers of staples and paper clips
in Malaysia. Because of the firm's market potential, it plans to expand
beyond its present product lines. The owner has already given a careful
thought to designing and manufacturing two new products: punchers and
staplers.
Case Studies.- Discussion & Anal vsis 196
One firm had undertaken moderate growth over the last three years
and
Plannedto grow moderately in the next three years:
Firm K
This engineering firm has undertaken a moderate expansion and is involved
in the manufacture of a range of products. In the near future it plans to
specialise in designing and manufacturing a single product: industrial ma-

chinery.
One firm had undertaken moderate growth over the last three years and is
planning not to grow in the next three years:
Firm P
The firm, which produces plastic-based products, has been growing steadily
over the last two years, and the owner-manager is now satisfied with the
present position. Therefore, he does not plan to grow further in the next
three years.
8.3.2 Sources of External Finance Growth of The Firms
Sources of Finance
As with the U. K. study, the results of Malaysian study show that both internally
generated profits and external funds are important in financing the growth of the
firms. The most widely used source of internal finance is retained profits. Personal
savingsof the owner-managers are also important in financing expansion (Firms K,

L, M and P).
This study also shows that bank overdrafts and term loans are considered to
bethe most important sources of external finance among the majority of the sample
firms. One firm, however, has not used any finance from banks and has no intention
to apply for bank/institutional finance in the future (Firm K). The owner refuses
to borrow from banks because the payment of interest (usury is
or riba) prohibited
underIslamic law.
Case Studies: Discussion & inalysis 197
.
With regard to government-backed finance, three firms have benefited from
these schemes; Firm J (Industrial Technical Assistance Funds ITAF). Firm L

-
(Entrepreneur Rehabilitation Funds - ERF) and Firm 0 (PUNB, CGC and ITAF).
As with the U. K. firms, none of the Malaysian firms from the sample use
venture capital finance. Again, this might suggest that either they are reluctant to
dilute ownership or there is a lack of awareness of the availability and benefits of
this sources of equity finance. When asked about the possibility of using venture
capital finance, one of the directors (Firm I) stressed that the company might decide
to go for this source if his recent application for government-backed loan is turned
down. Two firms (Firm J and Firm L) stressed the importance of retaining the
family ownership in their businesses, therefore they have no plans to share the firms'
equity with venture capitalists.
Past Growth Performance of The Firm

Hypothesis : There is an association betweenpast growth performance of a small

manufacturing firm and the sources of external finance used by the
firm.
When the respondent owner-managers are asked to indicate the growth
orientation of their firms over the last three years, five of the eight respondents
describe their firms as rapidly growing firms and the remainder as moderately
growing firms. Table 8.2 that bank overdraft and bank term loans are the
shows
important finance for all firms regardless of their level of
most sources of external
however, all three firms
pastgrowth. With regard to government-backed schemes,
which have benefited from these schemes have grown rapidly over the last three
(Firm J, Firm L Firm 0). All steady-growth firms appear to use hire
years and
purchase whereas among the rapid growth firms, three firms have resorted to this
With two the three steady growth forms have used

source. regard to trade credit, of
this source whereas only one rapid growth firm has used this source of external
finance. The results show that there is an association between past growth of a
firm finance used by the firm. Thus,

small in Malaysia and the sources of external
the hypothesis is substantiated.


facturing firm and the sources of external finance used by the firm.
In line with the U. K. study, the potentially fast growing firms in Malaysia are
found to be using more sources of external finance. The non-reliance on the
personal savings by fast growth firms is also consistent with the work of Reid
(1991) who found a negative relationship between firm growth (survival) and the
useof personal savings. Two rapidly growing firms (Firm J and Firm N) have used
four sources of external finance and the other two firms (Firm I and Firm 0) have
usedthree and six sources respectively. Bank loans (overdrafts and term loans) and
hire purchase are widely used by such firms; these results are consistent with Storey
et al. 's (1989) findings.
It is observed that the firms with the potential for rapid growth are more
likely to have used government-backed schemes such as the Perbadanan Usahawan
Nasional Berhad venture capital scheme (PUNB), the Credit Guarantee Scheme
(CGC), Industrial Technical Assistance Fund (ITAF) and Entrepreneur Rehabilita-
tion Fund (ERF). It is also found that the firms with growth potential are more
likely than the non-growth firms to use leasing facilities.
The overall results suggest that, to some extent, the growth potential of the
firm is associated with the sources of external finance used by small firms in
Malaysia. Therefore the hypothesis is substantiated.
8.3.3 Financing Difficulties And Growth of The Firms
Past Growth Performance of The Firm

Hypothesis : There is an association between past growth performance of a small

firm and the existence of difficulties in raising
manufacturing
external finance.
Of the eight firms interviewed, four firms have indicated that they have faced
some difficulties in obtaining finance. The most commonly cited difficulties are
those of an insufficient amount of finance (Firms I, J and K) and the high interest
rate charged (Firms I and N). Difficulty in obtaining collateral was mentioned by
one firm (Firm N). It is clear that financing difficulties are not only encountered
by fast growth firms (Firm I and Firm J), they are also encountered by steady
growth firms (Firm K and Firm N). Of the five firms which have undertaken rapid
growth over the last three years, three firms (Firm L, Firm M and Firm 0) have not
faced any difficulty in obtaining external finance. Only one of the three steady
growth firms has no financing difficulties. The results imply that there is no
evidence of an association between the past growth performance and the financing
difficulties for small firms in Malaysia. Therefore, the hypothesis is not substan-
tiated.


facturing firm and the existence of difficulties in raising external
finance.
Of the six firms with growth potential, four firms are likely to be facing some
difficulties in raising the external finance required for their expansion plans (Firm
I, Firm J, Firm K and Firm N). Two growth oriented firms (Firm L and 0), however,
havenot faced and will not expect to face any difficulty in raising finance since they
have strong reputation and good relations with the banks.
Table 8.2 reasonably demonstrates that, for the sample firms, the future
growth-oriented firms likely to face difficulty in raising external finance,

are more
particularly relating to the amount of finance available, the high interest rate
imposedby the financial institutions and the lack of collateral. In consistent with
the U.K. study, the Malaysian evidence also suggests that firms with potential for
likely difficulties in raising external finance.

rapid growth are more to experience
From the analysis it is suggested that there is an association between the
growth potential of the firms and the existence of difficulties in obtaining external
finance. Therefore, the hypothesis is substantiated.
8.4 OTHER ISSUES (U. K. AND MALAYSIA)
The interviews with the owner-managers also gathered information on the follow-
ing issues which are relevant to the financing of small firms.
Owner-Managers' Attitude Towards Financing

A number of owner-managers were committed to retaining ownership of their
firms, therefore, they were reluctant to surrender equity to outsiders because of the
perceived loss of independence. These firms were classed as moderately growing

firms [Firms B, E, H (U. K) and Firm P (Malaysia)]. Owner-managers willing to
share control of their-firms were found to be using government-backed equity

schemes,and these firms fell into the rapidly growing category [Firm G (U. K. ) and
Firm 0 (Malaysia)]. Another observation which is noteworthy is the influence of
religious beliefs, notably Islam, by a Malaysian owner-manager (Firm K). His firm
was classed as moderately growing firm. He refused to borrow from the banks
since the payment of interest is prohibited under Islamic law. Besides internal
finance (personal savings and retained profits), his main sources of external finance
were trade credit and hire-purchase, whereas his main financing difficulty was
related to an insufficient amount of finance.
Innovating and Non-Innovating Small Firms

Other information gathered during the interviews concerned the financing of two
types of growth firms: firms which were undertaking an innovation, and firms
which were investing to increase production capacity for their existing products.
It has been suggested that innovating firms are more likely to apply for
external finance (e. Oakey, 1984a; Hall, 1984). The present

than non-innovators g.
study, however, little difference between innovating and non-
shows that there was
innovating firms in the need for external finance. Nevertheless, it was noticed that
innovating firms in both countries were likely to use more sources of finance
compared to non-innovating firms [Firm F and Firm G (U. K) and Firm 0 (Malaysia)).
They were also more likely to use government-backed financing schemes
such as
BES and LGS (U. K) and PUNB and CGC (Malaysia).
Sources and uses of external finance by the innovating firms

are summarised
as follows:
UnitedKingdom Firm F: Bank Term Loan (raw materials)

Hire-Purchase (machines)
Loan Guarantee Scheme(LGS) (new building)
Overdrafts & British Coal (other working capital)
Firm G: Bank Term Loan (raw materials)

Business Expansion Scheme(BES) (raw materials)
Leasing & Hire-Purchase (machines& equipment)
Overdrafts (other working capital)
Malaysia Firm 0: Government-backed PUNB (new buildings)

Government-backed CGC (machines& equipment)
Bank Term Loan (machines& equipment)
Hire-Purchase (machines& equipment)
Trade Credit (raw materials)
Overdrafts (working capital)
Sources and uses of external finance by non-innovating firms are sum-

marisedas follows:
UnitedKingdom Firm A: Bank Term Loan & Overdrafts (working capital)

Hire-Purchase & Leasing (machines)
Firm B: Bank Term Loan (overseasexpansion)

Firm C: Overdrafts (working capital)

Hire-Purchase (luipment)
Firm D: Bank Term Loan (building)

Hire-Purchase (machines)
Firm E: Leasing (machines)
Firm H: Overdrafts (working capital)

Trade Credit (materials)
Hire-Purchase (machines& equipment)
Case Studies: Discussion & Anaivsis 202
Maw Firm I: Bank Term Loan (new building)

Hire-Purchase (machines & equipment)
Firm J: Government-backedITAF (building & machines)

Leasing (machines)
Relatives (working capital)
Firm K: Hire-Purchase (materials)

Trade Credit (materials)
Relatives (other working capital)
Firm L: Overdrafts (other working capital)

Government-backedERF (raw materials)
Firm M: Bank Term Loan (new building)

Hire-Purchase (machines & equipment)
Firm N: Bank Term Loan & Overdrafts (working capital)

Hire-Purchase & Leasing (machines& equipment)
Firm P: Bank Term Loan (machines)

Hire Purchase& Trade Credit (raw materials)
8.5 SUMMARY
This chapter has analysed the case studies of sixteen selected small firms in
Malaysia and the U. K. Through the case study method, in-depth interviews with
the owner-managers have provided valuable qualitative data on the past growth
performance and growth potential of the firms. The purpose of the case studies is
to test four hypotheses: (1) the association between past growth performance and
sources of external finance; (2) the association between growth potential and
sources of external finance; (3) the association between past growth performance
and existence of financing difficulties; and (4) the association between growth
financing difficulties. The results are summarised in
potential and existence of
Table 8.3.
The results have shown that hypotheses (1), (2) and (4) are substantiated in
in
both countries. Hypothesis (3) has been substantiated the U. K. but rejected in
Malaysia.
.
In both countries, growing firms are more likely to rely on various sources
of external finance: with bank overdrafts, bank term loans and hire purchase being
the most important sources. The fast growth firms are more likely than the slow
or no growth firms to benefit from the government loan and equity schemes.
The study also reveals that, across the two countries, firms with growth
potential are more likely to face difficulties in obtaining finance. The most
commonly cited financing problem facing the firms in both countries relates to an
insufficient amount of finance available for their investment plans.
The interviews with the owner-managers also reveal that the firms who are
reluctant to share control with outsiders are more likely to be non-rapid growth
firms. Owner-managers who are willing to share control of their firms are more
likely to be rapid growth firms, they more likely to use government-backed equity
schemes.
Finally, the interviews also provide information on the financing practices

of innovating and non-innovating firms. Innovating firms in both countries are
more likely than non-innovating firms to resort to more sources of finance, and they
are more likely to benefit from the government-backed financing schemes.

Case Studies: Discussion & 4nalvsis
. 204
Table 8.3
Measure of Association - Summary of Case Study Results
UnitedKingdom
Sourcesof External Finance Growth of The Finn
past growth performance substantiated
growth potential substantiated
FinancingDifficulties Growth of The Firm

Malaysia
Sourcesof External Finance Growth of The Firm
FinancingDifficulties Growth of The Firm

past growth performance not substantiated
ChapterNine
COMPARATIVE ANALYSIS OF THE SURVEY FINDINGS
9.1 INTRODUCTION
This chapter will present a comparative analysis of the questionnaire survey results
between the two countries, focusing on the small firm and owner-manager charac-
teristics, sources and patterns of finance and difficulties facing small firms in
financing expansion. After noting the variations in the characteristics of the firms
and owner-managers in the U. K. and Malaysia, similarities and differences in the

sources and patterns of finance as well as the existence of difficulties in obtaining
finance will be described and analysed. The comparative analysis will then attempt
to answer the following questions:
i. Is there a significant difference in the need for external finance by small

manufacturing firms in the United Kingdom and Malaysia?
ii. Is there a significant difference in the sources and patterns of finance used
by small manufacturing firms in the United Kingdom and Malaysia?
iii. Is there a significant difference in the difficulties experienced by the small
manufacturing firms in raising external finance in the United Kingdom and

Malaysia?
9.2 CHARACTERISTICS OF SMALL FIRMS AND OWNER-MANAGERS
Summaryinformation regarding the characteristics of respondent small firms and

Owner-managers, in Tables 9.1,9.2 and 9.3. provides the following results:
as shown
Comparative Analysis 206
Size of Firms
More than one-half of the small manufacturing firms in the U. K. (64.1
percent) and in Malaysia (58.0 percent) employ less than 20 employees and
most of the U. K. (36.0 percent) as well as Malaysian firms (37.5 percent)
employ less than 10 employees.
ii. Age of Firms

The highest frequency category in the U. K. (28.9 percent) comprises firms
which had been in operation for more than 20 years, while the equivalent in
Malaysia (28.7 percent) was firms which had been in business between 5 to
9 years. More than one-half of the small firms in Malaysia (55.6 percent) are
less than 10 years old, while small firms which are less than 10 years old
account for only 34.0 in

percent the U. K. sample. It would thus appear that small
manufacturing firms in Malaysia are younger than their counterparts in the U. K.
iii. Use of External-Advisers

Table 9.1 also shows that, in both countries, small manufacturing firms use
external advisers. However, Malaysian firms rely more on relatives and

friends (42.9 percent) whereas the U. K. firms rely heavily on accountants
(71.1 percent) for financial advice (Table 9.3). Only 11.5 percent of the
U. K. firms have obtained financial advice from relatives and friends. Ac-
countants are not considered as an important source of advice by the

Malaysian firms. One reason why so many small firms in Malaysia do not use
accountants for financial advice could be the lack of knowledge among
owner-managers about the role of accountants. Accountants are generally

linked with large firms and their main roles are always associated with the
preparation of financial statements for tax purposes. Banks are used

by firms in both countries for financial advice. Whilst
regularly small
a source of financial advice in
chambers of commerce are considered as
Malaysia (17.0 percent), they are rarely considered in the U. K.; only one
(0.4 from that source in the U. K. Local

respondent percent) obtained advice
be important source of financial advice
authorities are not considered to an
by the majority of the small firms in either of the countries.
Comparative Anohvsis 207
Table 9.1
(Comparative Analysis)
United Kingdom Malaysia

Characteristics (Percent) (Percent)
(N = 228) (N - 112)
EmploymentCategory
I-9 employees 36.0 37.5
10- 19 employees 28.1 20.5
20 - 29 employees 11.4 12.5
30 - 39 employees 10.5 11.6
40 - 49 employees 14.0 17.9
Total 100.0 100.0
Ageof Firm
4 years& below 12.7 26.9
5-9 21.3 28.7
years
10 - 14 years 23.5 24.1
15 - 19 years 13.6 8.3
20 years& above 28.9 12.0
Total 100.0 100.0
Useof Eiern! Financial Adviser
Did not use external adviser 22.8 26.8
Usedexternal adviser 77.2 73.2
- Total 100.0 100.0
LegalStatus
SoleProprietorship 10.1 14.3
Partnership 15.4 9.8
74.5 75.9
Limited Company
Total 100.0 100.0
Sectorof Industry (i)
(i) FabricatedMetal Products 21.1 15.2
Textiles 18.9 2.7
Publishing & Printing 8.8 2.7
Rubber& Plastic Products 6.6 11.6
Wood& Wood Products 6.6 25.0
4.4 2.7
Paper& PaperProducts
4.4 1.8
3.5 2.7
Chemical & Chemical Products
2.6 5.4
Basic Metals
1.7 12.5
FoodProducts& Beverages
1.7 3.6
Motor Vehicles & Parts
19.7 14.1
Other Manufacturing Industry
100,0 1000
.
62.7 71.4
(ii) Nontechnology-based
37.3 28.6
Technology-based
Total 100.0 100.0
BusinessPlan
67.5 48.2
Did not have a written businessplan
32.5 51.8
Had a written businessplan
Total 100 0 100.0
Table 9.2

Characteristics (Percent) (Percent)
(N = 228) (N = 112)
AgeGroup
20 - 29 years 1.8 15.2
30 - 39 years 16.7 33.9
40 - 49 years 38.1 28.6
50 - 59 years 29.4 20.5
Total 100.0 100.0
Trainingin Business& Management
No Training 59.2 21.4
SomeTraining 40.8 78.6
Total 100,0 100.0
Levelof Education
Primary (and Secondary)Education 35.5 16.1
Secondary(Post-Secondary)Education 28.5 49.1
Degreeor Equivalent 36.0 34.8
Total 100.0 100.0
Levelof Experience
No Working Experience 9.2 21.4
4 years& below 23.2 31.3
5-9 years 26.8 26.8
I0- 14years 18.0 13.4
15-l9 years 9.2 5.4
Total 100.0 100.0
Table 9.3

Saarresof Advice = 2n8(NV
= 112)
Accountants 71.1 25.9

Bankars 41.4 40.2
Relatives/Friends 11.5 42.9

LocalAuthority 4.8 9.8
Chambers 0.4 17.0

of Commerce
Comparative Anal sis 209
iv. Legal Status

The majority of the respondent firms in the U. K. and Malaysia are private
limited companies. The firms which are not incorporated accounted for 25.5
percent and 24.1 percent in the U. K. and Malaysia respectively.
v. Sector of Industry
The majority (21.1 percent) of the respondent firms in the U. K. are involved
in fabricated metal products sector whereas the majority (25.0 percent) of
the Malaysian respondent firms are in wood and wood products sector. The
sectoral distinction between technology- and non technology-based shows
that the majority of the respondent firms in the U. K. (62.7 percent) and
Malaysia (71.4 percent) are in the non technology-based sectors.
vi. Business Plans

More than half of the firms in Malaysia (51.8 percent) claim that they have
prepared business plans, whereas the majority of the respondent firms (67.5
percent) in the U. K. do not have any written business plans. The importance
of business plans for business expansion has been widely acknowledged
(e. g. Timmons, 1980; Pickering, 1989). The absence of these plans among
the majority of the sample firms in the U. K. probably reflects time pressures
faced by owner-managers and a lack of expertise in the preparation of plans.
Furthermore, the use of formal written plans has also been linked to the
characteristics of the owner-managers (Carland et al., 1989); innovative
owner-managers are more likely to use written business plans. Since the
majority of the U. K. sample firms are in the non technology-based sector

(see Chapter Six), they are less likely to use business plans.
Vii. Age of Owner-Managers

Table 9.2 indicates that the most frequent age category of the owner-
managers in Malaysia is the 30 39 age bracket (33.9 percent), and almost

-
half of them (49.1 percent) are below 40 years old. In the U. K., the
is for between 40 - 49 years of age;
equivalent category owner-managers
18.5 below 40 years old. This shows that the owner-
only percent of them are
in Malaysia than their counterparts in the U. K.
managers are much younger
viii. Training. Education and Experience of Owner-Managers

With regard to academic qualifications, Table 9.2 indicates that many of the
owner-managers (36.0 percent) of small manufacturing firms in the U. K.

have some degree or equivalent, whereas in Malaysia the owner-managers
tend to have been educated at secondary/high school level (49.1 percent).

Most of the Malaysian owner-managers (78.6 percent), however, have
undergone some business and management training, whereas a majority of

the U. K. owner-managers (59.2 percent) have not undergone any training in
this area. This might suggest that most of the U. K. owner-managers are
insufficiently informed about the availability of the training programmes
that suit their needs, or they might have "serious reservations about the
ability of training to provide solutions to their problems" (Mahmood, 1993,
p. 71). The table also shows that Malaysian owner-managers are less
experienced compared to their U. K. counterparts, and a high percentage of

them (21.4 percent) had no experience whatsoever before running their
present businesses, compared to only 9.2 percent in the U. K. The majority
of the owner-managers in the U. K. (67.6 percent) have more than 5 years of
compared to only 47.4 percent of the owner-managers in

work experience
Malaysia with similar experience. Overall the U. K. owner-managers of
firms have more work experience than those in Malaysia.
small manufacturing
9.3 NEED FOR EXTERNAL FINANCE
Table 9.4 shows that the majority of small manufacturing firms in the U. K. (61.0
Malaysia (78.6 external sources of finance to

percent) and percent) approach
business In line the studies (e. g. Aston Business
support growth. with previous
School, 1991; University of Cambridge, 1992) the results suggest that external
finance is important to support the growth of small firms.
for for external finance by small

The most frequently cited reason applying
firms in the U. K. (71.2 percent) and Malaysia (69.2 percent) is to increase sales and
9.5). The need for external finance to expand

shareof the existing market (Table
important for Malaysian firms (60.2
into new markets with existing products is also
Table 9.4
F.rterna! Finance United Kingdom Malaysia
Did Not Approach External Finance 89 (39.0%) 24(21.4%)
ApproachedExternal Finance 119 (F 1 00 RR (7R 60J1
Total 228 (100%) 11 ') (l AAL 1
X2 10.49
Table 9.5
Reasons (Percent) (Percent)
(N= 139) (N=88)
To increasesales/shareof existing market 71.2 69.3
To introducenew products to the existing market 16.5 13.6

To expandinto new market with the existing products 15.8 60.2
To expandoverseas 7.9 22.7
To acquireanother firm 5.8 4.5
To go into entirely new market 3.6 22.7

Comparative Arwlvsis 212
however, it is less significant in the U. K. (15.8 percent). A greater

percent);
of Malaysian firms (22.7 percent) than the U. K. firms (7.9 percent) need
percentage
finance to expand into overseas market. The results also indicate that a
external
greater percentage of Malaysian (22.7 percent) than U. K. firms (3.6 percent) need
external finance for expansion into entirely new markets. More firms in the U. K.
(16.5 percent) than in Malaysia (13.6 percent) use external finance to introduce
new products to their existing markets. Generally, however, a small number of

firms in the U. K. and Malaysia (5.8 percent and 4.5 percent respectively) need
external finance for acquisition purposes.
In order to assess whether the need for external finance in both countries is
significantly different, the chi-square (XI) test of independence was performed at

the 5 percent significance level. The computed chi-square value of 10.49 suggests
that the null hypothesis that the need for external finance is independent of the
is
countries rejected. Therefore, there is a significant difference in the need for
external finance by small manufacturing firms in both countries.
9.4 SOURCES OF EXTERNAL FINANCE
9.4.1 Equity Finance
Fable 9.6 shows that external equity finance is still not widely used by small
manufacturing firms in both Malaysia and the U. K. This finding seems to suggest
that the majority of small firms prefer to use internal equity, particularly personal
savings (e. g. Bates & Hally, 1982; Md. Salleh, 1990; Ghosh et al., 1992; Levy,
1993)and retained profits (e. g. Mason, 1984; Lawrence et al., 1985: Oakey et al., 1990).
Small firms in both countries rely primarily on relatives and friends for
external equity; 13.0 percent and 13.6 percent in the U. K. and Malaysia respec-
tively. With regard to other sources of equity finance, more small firms in the U. K.
BES (7.9 percent). Small firms in

rely on venture capital (12.2 percent) than the
Malaysia, however, rely more on the government-backed PUNB scheme (8.0
percent) than venture capital (2.3 percent). Compared to the U. K. small firms,
Table 9.6

Sources (Percent) (Percent)
(N= 139) (N=88)
ui
Venture Capital 12.2 2.3
Government-backedScheme 7.9 8.0
Relatives/Friends 13.0 13.6
2&
BankOverdraft 79.1 58.0

BankLoan (< 5 years) 32.4 39.8
BankLoan(> 5 Years) 18.7 15.9
TradeCredit 26.6 43.2
Government-backed Scheme 6.5 14.8
Hire-Purchase 46.0 51.1
Leasing 29.5 19.3
Factoring 7.9 2.3
Table 9.7
FinancingPattern United Kingdom Malaysia
Fay&
None 97 (69.86) 67(76.1%)
One Source 36 (25.9/.) 19 (21.6%)
TwoSources 6 (4.3%) 2 (2.3%)
Total 139 (100'% 88 (100%)
X! 1.08
Agfk
None 1(0.7'/. ) 2( 2.3%)
OneSource 32 (23.0%) 25 (28.4%)
TwoSources 40 (28.8/.) 27 (30.7%)
T1uveSources 39(28.1%) 11(12.5%)
Fouror More Sources 27(19.4%) 23(26.1%)
Total 139(100%) 88 (100%)
X2 8.70
therefore, Malaysian small firms do not consider venture capital as an important
of external finance. This might be due to the fact that the venture capital
source
in the country is still not well developed. It has also been suggested that
market
of the Malaysian small firms are still reluctant to dilute ownership for fear of
most
losing control (e. g. Lin, 1992; Boocock, 1995). Furthermore, "the lack of
awareness of the availability of venture capital financing (has) affected the

...
progress of the industry. " (Bank Negara Malaysia, 1995, p. 163).
9.4.2 Debt Finance
Table 9.6 also reveals that a large percentage of both Malaysian and the U. K. firms
obtained the bulk of their debt financing from the banks; the overall importance of
banksand lending institutions as the principal providers of external debt finance is
consistent with the findings of previous studies (e. g. Jones, 1979; Van Auken &
Doran, 1989; Batchelor, 1989a; University of Cambridge, 1992; Confederation of
British Industry, 1993; -Henderson et al., 1995). Small firms in both countries rely
heavily on short and medium-term debt finance; overdraft finance is the most
widely used source of external finance by firms in Malaysia (58.0 percent) and in
the U. K. (79.1 percent). This finding appears to confirm previous studies (e. g.
Stanworth & Gray, 1991; Keasey & Watson, 1993b; Austin et al., 1993). Whilst
it reflects the perceived flexibility
of the overdraft finance and its lower cost in both
countries, it can also be associated with poor business planning and a lack of
financial control (Confederation of British Industry, 1993). For example, some
firms may have obtained short-term loans (such as overdrafts) to finance the
purchase of fixed assets or other long-term requirements.
Besides bank finance, other non-bank sources are also used. Hire-purchase
is the most popular non-bank source, used by small firms in Malaysia (51.1 percent)
andthe U. K. (46.0 percent). A greater percentage of Malaysian (43.2 percent) than
U.K. firms (26.6 percent) use trade credit as a source of debt finance. Leasing.
however, is more widely used by small firms in the U. K. (29.5 percent) than in
Malaysia (19.3 percent). A smaller percentage of U. K. (6.5 percent) than Malay-
loan scheme (LGS in the

sian firms (14.8 percent) have used a government-backed
U.K. compared to CGC in Malaysia). A small percentage of firms in both Malaysia
Comparative 4rw1"sis 215
.
(2.3 percent) and the U. K. (7.9 percent) make use of factoring. Unlike leasing,
is
factoring not considered as an important source of external finance, particularly
by small manufacturing firms in Malaysia.
Overall, the results show that the sources of external finance used by the
small firms in both countries are not markedly different.
9.4.3 Financing Patterns
Table 9.7 presents information regarding the composition of external equity and
debt finance. The table clearly shows that a significant overall majority of the firms
in Malaysia (76.1 percent) and the U. K. (69.8 percent) do not use external equity
as part of their expansion finance. Where equity is used, firms in Malaysia (21.6
percent) and the U. K. (25.9 percent) tend to rely upon a single source. More than
one source of equity is used by only 2.3 percent and 4.3 percent of the small firms
in Malaysia and the U. K. respectively.
The pattern of debt finance is distinctly different from that of equity finance.
Small firms in both countries have obtained debt finance from several sources.
Approximately 39 percent of Malaysian small firms and 47 percent of the U. K.
small firms obtain debt finance from more than two sources. Only a small
percentage of Malaysian (2.3 percent) and U. K. firms (0.7 percent) do not have
some form of debt finance.
To assess whether the pattern of external finance used by the respondent

firms in both countries is significantly different, the chi-square (X') test was
performed at 5 percent significance level. For the purpose of the test for equity
finance, the 'one source' and 'two sources' categories were combined to avoid the
problem of small expected frequencies (Siegel & Castellan, 1988). The computed
chi-square values of 1.08 for the equity pattern and 8.70 for the debt pattern shown
in the table are not significant.
Therefore, the results fail to reject the null hypothesis that the financing
patternof the firms is independent of the countries. Hence, there is no significant

differencein the pattern of external finance used by the small firms in both countries.
Comparative Anal"sis 216
9.5 DIFFICULTIES IN RAISING EXTERNAL FINANCE
9.5.1 Existence of Difficulties
Whilst the majority of small manufacturing firms in Malaysia (80.7 percent) and in
the U. K. (84.9 percent) had succeeded in a recent application for external finance
(Table 9.8), a greater percentage of Malaysian firms (49.3 percent) than the U. K.
firms (44.1 percent) had encountered some difficulties (Table 9.9). However, the
computed chi-square values shown in the tables are very small and therefore
insignificant. The results fail to reject the null hypothesis that the incidence of
financing difficulties facing small firms is independent of the countries. Thus the
results imply that there is no significant difference in the financing difficulties

faced by the small firms in both countries.
9.5.2 Tyres of Difficulties
Table 9.10 shows that the main financing difficulties facing small firms in both
countries relate to insufficient finance, high interest rate and insufficient collateral.
The U. K. small firms, however, did not face any difficulty with regard to the
duration of loan, while this problem is considered one of the major obstacles facing
Malaysian firms. In both countries, therefore, insufficient finance, interest rates
and collateral requirements are considered to be the important problems facing
small firms. This finding is consistent with that of Chee (1986a), Binks et al.
(1986), Chee and Jang (1988), Stanworth and Gray (1991) and Bradford (1993).
9.5.3 Reasons for Failure in Obtaining External Finance
The owner-managers who failed to raise external finance were also asked what they
perceived as the reasons for this failure. Table 9.11 shows that, in both countries,
lack of collateral is cited to be the main reason. This problem has previously been
cited as the most serious bottleneck facing small firms in getting finance from banks
and other financial institutions (e. Binks 1986, Yoon, 1988). Lack of
g. et al..
personal financial input is by the Malaysian small firms to be the next
perceived
failure in finance. In the U. K., however, this factor is
main reason for obtaining
considered to be less of a problem in obtaining finance.
Comparative Anah'sts 217
Table 9.8
Status United Kingdom Malaysia
Na Successful 21 (15.1%) 17 (19.3: )

Successful 118 (84.9%) 71 (80.70)
Total 139(1000/o) 88(100%)
X2 0.69
Table 9.9
Existenceof Difficulties United Kingdom Malaysia
No Difficulty 66 (55.9%) 36 (50.7%)

SomeDifficulties 52 (44.1%) 35 (49.3%)
Total 118 (100%) 71 (100%)
X2 0.49
Table 9.10

ljpes of Difficulties (Mean) (Mean)
(N=52) (N=35)
Insufficient amount of finance 4.14 3.75

Unreasonablelevel of collateral 3.98 3.26
I figh interest rate 3.87 3.29
Duration of loan offered was too short 2.65 3.37
N meanscoresfor the variables rest on a five point Liken-type scale, with "I " denoting strong/v
e and "S" strongly agree on the variables
Comparative Arrahsrs 218
Table 9.11

Perceived Reasons (Mean) (Mean)
(N= 21) (N =1 ')
Lackof Collateral 3.95 4.35

Lackof personal financial input 2.76 3.59
Lackof managementcompetency 1.91 2.94
Inadequatesourceof repayment 2.24 2.41
Lackof adequatebusinessplan 2.10 2.29
Toorapid expansion 2.29 2.24
Lackof successin previous businessventure 2.00 2.18
Lachof track record 2.95 1.77
Lackof project viability 2.67 1.94
Hadexceededborrowing limit 2.62 1.59
Themeanscoresfor the variables rest on alive-point Likert-type scale, with "1 "denoting strongly
disagreeand "5"strongly agree on the variables
9.6 SUMMARY
This chapter has presented a comparative analysis of the survey data. The
percentages and the chi-square (X2) test have been used to assess whether the need
for external finance, sources and patterns of external finance, and the incidence of
financing difficulties facing small firms in both countries are significantly different.
The tests are conducted at the 5 percent significance level. The analysis shows that,
whilst there is a significant difference in the need for external finance by small
manufacturing firms in both countries, both the sources/patterns of external
finance and the difficulties experienced by small manufacturing firms in raising
external finance in the U. K. and Malaysia are not markedly different.
The striking difference in the need for external finance can largely be
explained by the different stages of economic development and cultures pertaining

to the U. K. and Malaysia. The stage of economic development of Malaysia means
that, for example: the-Government is prepared to take a proactive approach to
business support, a consequence of late industrialisation; the sample firms are
newer, and their activities reflect the continuing dependence of the economy on
commodities such as wood rather than metal products; and, the economy lacks an
intellectual infrastructure, typified by the minor role given to accountants by small
firms.
Turning to the cultural differences, the ethos in Malaysia is `collective'
rather than `individualistic', as per a key dimension identified by Hofstede (1980).

In such an environment, there is less emphasis on objective rationality and more
reliance on such factors as the character and contacts of borrowers.
Chapter Ten
CONCLUSIONS
10.1 INTRODUCTION
The rationale for this study stems from three interlinked issues. First, that the
provision of external finance for growing small firms in developed and developing
countries has improved significantly over the last few years in terms of both the
total of funds and the range of financial facilities available. Second, that there is
a general recognition of the importance of the small firm sector and the value of its
contribution to the health of the countries' economies. Third, that, despite the rapid
expansion in the range of public and private sector financial initiatives, there is
widespread perception that financing difficulties continue to exist; the difficulties
are perceived to be major obstacles or constraints on small firm growth in both
economies.
The main objective of this research is to contribute to a better understand-

ing of the practices and problems of financing the growth of small firms in
developed and developing countries with particular reference to the United King-
dom (U. K. ) and Malaysia respectively. In pursuing this main objective, the study
attempts to explore the variables that explain the practices and problems of
financing the growth of small firms. The study also attempts to explain whether
is
there a difference in small firm financing practices and problems in two distinctly
different economies. The selected variables were based on a survey of the literature
(Chapters Two & Three). The variables were then grouped into three categories:
firm characteristics, owner-manager characteristics, and growth orientation of the
firm. Having identified the important variables in the theoretical framework of the
study, the relationships among the variables were established and the research
hypotheseswere generated (Chapter Four). Overall, these factors were hypothesised
as being financing practices (defined in terms of the patterns and

able to explain the
Conclusions 221
sourcesof external finance used) and problems (defined in terms of the existence
of difficulties in raising finance) of small firms.
In order to achieve the main objective of the study, the empirical investi-
gation was conducted using two research strategies: questionnaire survey and case
studies (Chapter Five). The questionnaire survey provides quantitative data on the
small firm and owner-manager characteristics, whereas the case studies provide
more dynamic qualitative data on the growth orientation of the firms.
The empirical data collected in the U. K. and Malaysia were analysed in

Chapters Six and Seven respectively. Chapter Eight described the results and
analysis derived from the case studies. A comparative analysis of the findings
between the countries was then presented in Chapter Nine. The present chapter
summarises the main findings and implications of the study.
10.2 CONCLUSIONS AND IMPLICATIONS
Before interpreting the data and analysing the findings of this research, it
is important to bear in mind several limitations of the study as explained in Chapter
One. These limitations can be traced back to difficulties relating to sectoral,
regional and cross-national biases. Besides the methodological difficulties in
defining 'small firm', the differences in the social, economic and political conditions
in both countries may also affect the comparability of the data.
Two major findings have emerged from this study with regard to financing
the growth of small firms. First, the overall majority of the characteristics of firms
andowner-managers do not have any association with the need for external finance,
sources of finance and the existence of difficulties in raising finance; whereas

growth orientation of the firms can be associated with the need for external finance,
sourcesof external finance used and the existence of financing difficulties. Second,
whilst there is difference in the need for external finance, neither the
a significant
sources/patterns of external finance nor the difficulties experienced by small firms
in the U. K. Malaysia are significantly different.
and
Conclusions 22
10.2.1 Characteristics of the Small Firms and Owner-Managers
The majority of sample small firms in the U. K. and Malaysia are private limited
companies, operating in non technology-based sectors and employing less than

twenty employees. However, the U. K. firms and their owner-managers are much
older than their Malaysian counterparts.
The majority of small firms in both countries use external advisers for
financial advice. The majority of the U. K. small firms rely more on accountants,
whereas the Malaysian firms rely heavily on relatives/friends for financial advice.
Accountants are not considered an important source of advice by small firms in
Malaysia, probably because the majority of Malaysian firms are insufficiently
informed or poorly advised about the role of accountants. Accountants are
generally linked with large firms and their role is generally associated with the
preparation of financial statements for tax purposes.
The majority of the U. K. small firms do not have written business plans.
This might reflect a lack of time or expertise among the U. K. owner-managers in
the preparation of plans. Among the Malaysian small firms, the opposite is true.
This finding is not surprising as it is in line with another finding which shows that
the majority of Malaysian owner-managers have more training in business and

managementthan their U. K. counterparts. Generally, the entrepreneurship train-
ing programmes in Malaysia emphasise the preparation of business plans. How-
ever, the majority of the U. K. owner-managers are university educated whereas the
majority of Malaysian owner-managers are educated at secondary/high school
level. Furthermore, the U. K. owner-managers are more experienced than those in
Malaysia before operating their present businesses.
The results, therefore, show that whilst there is no difference between the
U.K. and Malaysian small firms with regard to legal status, type of industry and size
of the firms, there are some marked differences with regard to age of firms, age of
owner-managers, use of external advisers, existence of business plans, and level of
education, training and experience of owner-managers.

Conclusions 223
Oneof the aims of the is

study to establish the association of the firm and owner-
manager characteristics with the need of the small firms for external finance in
order to support business expansion. Table 10.1 shows the summary of the
empirical results from the surveys conducted in both countries.
Table 10.1
Summary of Empirical Results:
Association Between Firm and Owner-Manager Characteristics
And Need for External Finance
(Test of Hypotheses)
United Kinedom Malaysia

Size of firm substantiated substantiated
Age of firm not substantiated not substantiated
Use of external advisers substantiated not substantiated
Legal status not substantiated substantiated
sector of industry not substantiated not substantiated
Existence of business plan substantiated substantiated
Age of owner-manager not substantiated not substantiated
Level of training/education/experience not substantiated substantiated
The study provides evidence that, in addition to retained profits, the
majority of small firms in the U. K. and Malaysia approach external sources to

financeexpansion. It was observed that some of the characteristics of the firm are
associated with the choice of external finance. The size of the firm is positively
associated with the financing behaviour of the firms; the 'larger' small firms are
more likely than the smaller ones to approach external sources. The results also
suggestthat the smallest firms are highly dependent upon the personal savings of
the owner-managers. The over-dependence of the smallest firms on the personal
savingsmight also indicate either that they do not need additional finance or they
expect to face difficulties in applying for external finance as a result of their size,
particularly relating to insufficient security/collateral.

Conclusions 224
As expected, the existence of a business plan is positively associated with
the decision whether or not to approach external sources; this confirms that
businessplans are mainly used as a tool for obtaining finance by small firms in both
countries. As for legal status of the firm, whilst a weak positive association is
observed among Malaysian firms, there is no association between this variable and
the use of external finance among the U. K. firms. On the other hand, the use of
external advisers is associated with the use of external finance in the U. K. whereas
is
this variable not relevant among the Malaysian firms. In both countries, the'age
of firms' and 'type of industry' variables do not have any association with the
financing behaviour of the firms.
On the characteristics of the owner manager, with the exception of

'training' variable which is significantly associated with the choice of external
financefor Malaysian firms, all other variables do not have any association with the
financing behaviour of the firm. The rejection of most of the hypotheses for this
group of factors implies that the results are inconclusive.
It was shown that the majority of small firms in both countries used external
finance. However, the statistical analysis reveals that the need for external finance
among small firms between both countries is significantly different. The results
show that small firms in the U. K. are less likely than their counterparts in Malaysia
to turn to external finance. This difference can largely be explained by the different
stagesof economic development and cultures of the two countries.
Thestudy attempts to establish the association between the firm characteristics,

owner-managercharacteristics and growth orientation of the firm and the pattern
The study data tested
andsourcesof finance used. questionnaire survey and case
a numberof hypotheses to establish possible relationships. Table 10.2 shows a
summaryof the empirical results

Conclusions 225
Table 10.2
and Growth Patterns And Sources of External Finance

Size of firm not substantiated substantiated
Use of external advisers substantiated substantiated
Legal status substantiated substantiated
Sector of industry not substantiated not substantiated
Existence of business plan substantiated not substantiated
Level of training/education/experience not substantiated substantiated
Growth Orientation
Past Growth Performance substantiated substantiated
Growth Potential substantiated substantiated
Of the various characteristics of the firm and its owner-manager, only the
hypothesis on the association of the use of external advisers and the legal status
of the firm with the sources of external finance were substantiated in both
countries. The study provides evidence regarding the roles of external advisers in
influencing the use of various sources of external finance. There is a clear
association between the use of external advisers and the use of government-backed
financing schemes in both countries. In the U. K. the association is positively
significant with regard to the use of the LGS, whereas in Malaysia a positive and
significant association is observed with regard to the use of the PUNB equity
scheme. However, the use of the BES is negatively associated; suggesting that
firms which do not use external advisers are more likely to benefit from this scheme.
Whilst overdraft and short-term bank loans are moderately associated with the use
of external advisers in U. K., they are weakly associated in Malaysia. The use
the
in
of leasing facilities is significantly associated with the use of external advisers
Malaysia whereas this source of finance is weakly associated in the U. K.
Conclusions 226
The study also shows that, in both countries, most of the sources
of
external finance, other than relatives/friends, are positively associated with the
legal status of the firm. The private limited companies are more likely than
unincorporated firms to use various sources of finance particularly venture capital,

government-backed financing schemes, banks, hire purchase, factoring and leas-
ing. The inverse association between the use of funds from relatives/friends and the
legal status of the firm suggests that unincorporated firms are more likely than
private limited companies to obtain finance from this source. Therefore, the study
provides conclusive evidence to support the influence of the use of external
advisers and the choice of legal form on the sources of external finance among small
firms in both countries.
Another hypothesis, confirmed in the Malaysian study only, is concerned
with the'size of firm'. The Malaysian study reveals clearly that there is a positive
relationship between size of the firm and access to various sources of external
finance particularly venture capital, bank overdrafts, bank term loans, leasing and
hire purchase. The findings suggest that the 'larger' small firms are more likely to
usethese sources of finance. On the other hand, the inverse relationship between
size of the firm and access to finance from relatives/friends suggests that the
'smaller' small firms are more likely to rely on relatives/friends for external finance.
The hypotheses on'business plan' was confirmed in the U. K. study only. The U. K.
study reveals a positive relationship between the existence of business plan and
sourcesof external finance utilised, confirming the importance of a business plan
in obtaining finance in the U. K.
Therefore, with regard to the characteristics of the firm, the findings
provideinconclusive the association between the size of firm, the use

evidence of
of external advisers and the existence of business plan, and the use of external
sourcesof finance.
In terms of owner-manager whilst the hypothesis on the

characteristics,
'level of training, was not substan-
education and experience' of owner-managers
tiated in the U. K. study, the hypothesis was confirmed in the Malaysian study. The
finding provides to Malaysian small firms, the level of

evidence that, with regard
Corw1uioru 227
training and education of owner-managers is associated with access to external

finance. In particular, owner-managers who are highly educated are less likely to
use government-backed financing schemes. On the other hand, owner-managers

who have undergone some training programmes are more likely to use this type of
finance. This finding is not surprising since most of the training programmes for
the owner-managers in Malaysia are organised by various government agencies,

therefore they are more exposed to various financing schemes provided by the
government. The fact that this hypothesis was disproved in the U. K. study shows
that the relationship between the 'level of training, education and experience' of
owner-managers and the financing practices and problems of small firms remains
inconclusive.
The most unexpected findings emerging from the questionnaire surveys in

both countries are that some of the hypotheses have been disproved. The results
therefore challenge the established contentions in the literature relating to the

relationship between some of the characteristics of the firm and owner-manager
(i. e. age of firm, type of industry and age of owner-manager) and the utilisation of
external finance. The evidence suggests that these characteristics do not seem to
be important factors. Whilst some of the characteristics of firm and owner-
managerwere found to be associated with the sources of finance, the majority of

the variables were found to have no association, hence the results are not conclusive.
Based on the sixteen case studies in the two countries, however, the
hypotheseson the growth of the small firms have been confirmed. Growing firms
are more likely than non-growth firms to rely on various sources of external
finance,with banks and hire purchase being the most widely used sources. The fast
growth firms found to have benefited from the government loan and equity
are
schemes. This study, therefore, shows that the growth potential of the small firm
is found to be a critical factor in explaining the sources of external finance used by
the firms.
Among the small firms which have finance, banks are

obtained external
found to be the important of external finance in both countries,
most sources
confirming that banks and lending institutions are the main providers of funds for
C'onc/unions 228
small firms. This study also confirms previous studies in showing that short-term
finance, particularly overdraft, is the most widely used source of external finance.
Other non-bank sources are also used, with hire purchase being the most popular
source. However, a greater percentage of Malaysian than U. K. firms use trade

credit. Leasing is more widely used in the U. K. than in Malaysia. Factoring is not
important in financing the growth of sample small firms in both countries. To some
extent, government-backed financing schemes in Malaysia appear to play an

important role. In the U. K. however, it is evident that only a small percentage of
the sample firms resorted to such schemes. The overall results show that small
firms in both countries obtain debt finance from various sources. Only a small
percentage of the firms do not have some form of debt finance.
With regard to equity, this type of finance is still not widely used in both
countries. The vast majority of the small firms do not use external equity as part
of their expansion finance. Where external equity is used, the firms in both
countries tend to rely upon a single source, with relatives/friends being the most
widely used source of equity. This suggests that the majority of small firms prefer
to use internal equity particularly personal savings of the owner-managers and
retained profits of the firms. Whilst a number of the U. K. small firms are aware of
venture capital, this type of finance is rarely considered by Malaysian firms, since
the venture capital market is still not well developed. Furthermore, most of the
Malaysian small firms are reluctant to dilute ownership and there is a lack of
awarenessof the availability and benefits of this source of finance. Government-

backedequity schemes, although the numbers are insignificant, are used by almost
anequal percentage of small firms in both countries. This study also indicates that
banksremain the most important sources of external finance for growing small
firms. Taken overall, this study shows that the pattern and sources of external
financeused by the small firms in the U. K. and Malaysia are not markedly different
despite the existence of social, political, and economic factors in the
cultural
environment of the two countries.
Conclusions 229
10.2.4 Difficulties in Raising. External Finance
The study also attempts to establish the association between the firm characteris-
tics, owner-manager characteristics and growth orientation of the firm and the
existence of financing difficulties. The questionnaire survey and case study data
tested a number of hypotheses to establish possible relationships. Table 10.3 shows
the summary of the empirical results from the surveys and case studies which test
whether these hypotheses are substantiated.
Table 10.3
and Growth Patterns And Existence of Financing Difficulties

Size of firm not substantiated substantiated
Use of external advisers not substantiated not substantiated
Legal status substantiated substantiated
Sector of industry not substantiated not substantiated
Existence of business plan not substantiated not substantiated
Level of training/education/experience not substantiated not substantiated
Growth Orientation
Past Growth Performance substantiated not substantiated
Growth Potential substantiated substantiated
It was shown in the two-country survey that the legal status of the small
firm is associated with financing problems. The positive association between the
legal status and the status of the recent application for finance implies that a private
limited company is more likely than the unincorporated firm to obtain external
finance. Whereas the inverse relationship between the legal status and the
firm is more likely than the
existence of difficulties implies that the unincorporated
Conclusions 230
private limited company to face difficulty in obtaining external finance. This

evidence supports the findings in the existing literature which suggest that the
limited company status gives the firm greater credibility, therefore it helps to solve
the financing difficulties of the firm. Furthermore, firms which are unincorporated
are constrained by the limited amount of collateral, usually restricted to the

personal assets of the owner-manager.
With regard to the size of the firm, whilst there is no evidence of any
relationship between this variable and financing difficulties in the U. K. study, the
Malaysian study shows that the two variables are associated. The significant
positive association between the size of the firm and the success of obtaining
financeindicates that the 'larger' small firms are more likely to succeed in obtaining
external finance. The study also shows a negative relationship between the size of
firm and the existence of difficulties; suggesting that the 'smaller' small firms are
more likely to face financing difficulties. This difficulty is generally related to the
difficulty of the smaller firm in providing collateral.
Again, some unexpected findings have emerged from the analysis of the
financing difficulties. Most of the characteristics of the firms (i. e. age, use of
external advisers, type of industry, existence of business plan) and the character-
istics of owner-manager (i. e. age, level or training, education and experience) were
not able to explain the existence of financing difficulties. These findings do not
support the established contentions in the literature relating to the relationship
betweenthese variables. Therefore, the evidence suggests that these characteris-
tics do not seem to be important in influencing the difficulties of small firms in
obtaining external finance. Again, the overall association of the firm and owner-
managercharacteristics with the financing difficulties remains inconclusive.
be
The sixteen case studies showed that the growth patterns can associated
with the financing the firm in both countries. The firms with growth
problems of
potential are more likely to face difficulties in obtaining finance. This is not
unexpected,since fast growth firms are more likely to be high-risk or technology-
basedfirms. Among the growth firms, the existence of 'difficulties' in obtaining
financedoes indicate 'failure' in obtaining finance. It was shown that the
not
Conclusions 231
growing firms have, in fact, been able to obtain external finance from various
sources. The providers of funds are, however, unwilling to offer finance on the
terms and conditions required by the firms. Some firms are not getting the amount
they are asking for. Some are required to pay high interest rates and to provide high
levels of security because the financiers believe that the returns do not justify the
risks and appraisal costs involved in lending.
Therefore, in explaining the financing practices and problems of small firms

in both countries, taken overall, this study provides inconclusive evidence on the
association of firm and owner-manager characteristics with the use of external

finance and with the existence of financing difficulties. However, the major
contribution of this study to the body of knowledge is that the growth potential of
the firms is found to be important in explaining the sources of external finance used
by small firms and the extent of difficulties in obtaining finance.
Nonetheless, the insignificance of the firm and owner-manager character-

istics in explaining the financing practices and problems of a small firm should be
interpreted with caution. The results may suffer from some sectoral biases. The
is
study only concerned with small manufacturing firms. It is possible that samples
drawn from other sectors, such as retail or service, would produce different results.
It was discovered that the majority of small firms in the U. K. and Malaysia
had succeeded in their most recent application for external finance. Whilst the
majority of such firms have not encountered any financing difficulty, there are still
a significant number of firms which indicated that they had faced some difficulties.
Whilst small firms in both countries were well provided with various sources of
external finance, some firms still encountered financing difficulties; either they
failed to obtain finance (15% and 19% in U. K. and Malaysia respectively) or they
faceddifficulties in the the finance (44% and 49% in U. K. and
course-of obtaining
Malaysia respectively).
Insufficient finance was found to be the main problem facing small firms in
bothcountries, factor identified the main factor which held back
and this was as
growth for the majority of the firms. Other commonly cited financing problems
Conclusions 232
facing small firms related to a high interest rates and a lack of suitable collateral.
These phenomena were also confirmed in the case studies. This raises a question
of whether or not a 'finance gap' exists. Due to the fact that small firms in both
countries relied heavily on overdraft finance for business expansion (79% and 58%
in U. K. and Malaysia respectively), it is suggested that the'medium- and long-term
finance gap' exists in both countries.
The unwillingness on the part of the financiers to provide finance to small

firms might be due to the cost and risk involved in lending to such firms; therefore
this will cause greater reliance on short-term sources such as overdrafts. On the
other hand, the heavy reliance on short-term finance might indicate a lack of
understanding on the part of the owner-managers of the danger of relying heavily
on short-term loans especially when it was used to finance long-term commitments.
Furthermore, the relative importance of non-bank sources, particularly hire pur-
chase,for financing small firm expansion in both countries might suggest that, for
the acquisition of new machines and equipment, small firms were more willing to
use them despite the higher interest rates charged. It might also imply that the
amount of finance available from banks was insufficient so the firms were forced
to use hire purchase or other non-bank sources if they wished to make new
investment.
Another observation from this study is the fact that the heavy reliance on
debt finance by small firms in both countries might provide an evidence of the
existence of an 'equity gap'; a gap which has existed since 1931 when the
'MacMillan gap' was first identified. Therefore, this study shows that there is no
significant difference in the existence of equity gap facing small firms in the U. K.
and Malaysia.
Based on the survey and case study evidence, this study concludes that,
whilst the effect of the characteristics of small firm and owner-manager upon the
sourcesof external finance and the existence of difficulties in obtaining finance is

inconclusive,the the firm is found to be associated with the
growth potential of
sourcesof finance and the existence of difficulties. This study also concludes that
Growingsmall firms in the U. K. and Malaysia are well provided with external
Conclusions 233
of finance, and banks are considered to be the most important

sources sources of
finance. However, small firms in both countries do
external encounter some
difficulties in obtaining external finance. The most common financing problems
facing growing small firms in both countries are: insufficient finance available, high
interest rate and lack of suitable collateral.
The implications of these findings are set out below:
The small firm sector continues to be important to the economy of the

developed and developing countries. As the sector remains an important market
for most banks, it is important for the banks to improve the availability of finance
for these firms. The 'growth' small firms should be differentiated from the 'non-
growth' small firm. In providing the finance, the banks should therefore be more
flexible towards the growth firms. The bank should take into consideration the
dynamicsof the business by paying more attention to the cashflow position of the
firms rather than relyirjg on property-based security.
Another implication is-that the over-dependence on debt finance will affect

the gearing ratios of the small firms. The need for external equity is vitally
important, especially for rapidly growing firms. The governments of both coun-
tries together with the Venture Capital Associations should consider ways of
encouraging small firms particularly technology-based firms to accept venture
capitalists as partners.
The conclusions of the study also have implications for current and perhaps
future training programmes for owner-managers. The programmes should place
emphasison improving the financial skills of the owner-managers focussing on

financialplanning and management.
10.3 DIRECTIONS FOR FUTURE RESEARCH
No research or otherwise, is really complete or will provide

work, comparative
answersto all questions. "This stems from the fact that research is a continuous
Cowl usions 2 34
and a logical and scholarly answer to a research question is

process, a stimulus to
problems" (Ahmed, p. 430). The
other research present research, therefore, opens
for further research in the field of small business finance.
manyopportunities
The inconclusiveness of the results associated with small firm and owner-
manager characteristics in both countries should not be viewed as constituting a

total rejection of such variables in explaining the practices and problems of
financing the growth of small firms. These variables should be subject to further
research. The present research may serve as a point of departure for a more in-
depth study encompassing a larger sample of small firms. If possible, further
investigation of the financing issues of small firms in the two countries should
include all types of firms so that the results may be generalised to all industrial
sectors. More importantly, the study should also investigate the selection criteria
employed by banks/financial institutions in making funding decisions to small

firms.
Studying the extent of the influence of the characteristics of small firm and
owner-manager towards the financing practices and problems internationally is still

very much at an exploratory stage. Consequently, there is substantial scope for
further research which could cover, for example, the relationship between psycho-
logical traits of the owner-managers and the financing of the firms. The similarities
or dissimilarities of the firms' financing structure between the countries could be
the result of the owner-managers' attitudes, including their willingness to assume

risk, which might have a significant impact on the financial profiles of the firms.
The growth of small firm have been examined in this

characteristics
research. Little is known of the impact of other financial characteristics upon the
financing behaviour of the firm. Such characteristics as liquidity, profitability,
gearing and asset base of firm could be examined to discover whether any
significant difference exists between these groups of firms with regard to their
financialpractices and problems. Based on the literature review, the U. K. study by
Berry et al. (1993b) seems to be the most comprehensive. Future research should
considerBerry's et al. framework. particularly in international comparison, this
be
would a valuable contribution to the body of knowledge.
Conclusions 235
This research has focused on the interest-based financing mechanism.

is
There now a move by the Central Bank of Malaysia to create a fully-fledged
Islamic banking system to function in parallel with the conventional banking
system; this would involve an Interest-free Banking Scheme (Bank Negara Malay-
sia, 1995). It would be very interesting to explore the problems and potential of
this scheme in financing small firms. Eventually,
a comparative examination
between Islamic and conventional schemes in financing the growth of small firms
could add significantly to the body of knowledge and provide some policy impli-
cations for the policy makers.
Finally, another important issue emerging from this study is the role of
government in helping small firms. It was observed that the approach used by the
British and Malaysian governments is different. It would be a valuable type of
insight if the influence of these policies on the financing behaviour of small firms
be
could studied. In particular, a research effort to explore and examine the impact
of government policy between developed and developing countries would help
contribute to an understanding of how a country's policy could influence the

financing practices and problems of the firms.
10.4 SUMMARY
This chapter has summarised the main findings of the study. Based on the findings,
the study has concluded that the overall association of the characteristics of small
firms and their owner-managers with the sources of finance and difficulties in
obtaining finance is inconclusive and therefore should be investigated further. The
growth aspirations of the firms, however, was found to be associated with the
sourceof finance financing difficulties. Another conclusion

and the existence of
derived from this study is that, whilst the need for external finance among small
firms in the U. K. Malaysia is significantly different, the sources of external
and
financeutilised financing difficulties by small firms in the two
and the experienced
countriesare not markedly different.
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Manufacturing Enterprises, in Robertson, M.; Chell, E. and Mason, C. (eds.), Towards
The
Twenty-First Century: The Challenge for Small Business, Nadmal Books, Cheshire,
pp. 209-
234. a
Smallbone, D.; North, D. and Leigh, R. (1993a), The Use of External Assistance by Mature SMEs in
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Smallbone, D.; North, D. and Leigh, R.(1993b), Support for Mature SMEs: Developing a Polic`
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Recovery, Paul Chapman Publishing, London, pp. 216-228.
Smith, John G.(1990), Business Strategy, Basil Blackwell, Oxford.
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AppendLY 1
QUESTIONNAIRES
FOR THE SURVEY
ir,, 'ni. r 1. / 267,
Appendix 1.1
QUESTIONNAIRE
Business Enterprise Centre

Loughborough University Business School
Loughborough
Leicestershire, LE 11 3TU
Telephone: 0509 223110
Fax: 0509 210232
THE FINANCING OF
SMALL MANUFACTURING FIRMS
QUESTIONNAIRE
The purpose of the study is to gain better understanding

of the problems and practices of financing small manufacturing
firms in Britain.
Appendix1.1 268
Loughborough1 University
`
! BrrtililL', School
+ c
Ashby Road, Loughborough

Leicestershire.LE I 13TU
Telephone: 01509 2631'1
Facsimile: 01509 210232
DearSir,
Overthepastten years in Britain there hasbeena significant growth in thenumberof small andmediumsized
(SMEs)
enterprises and it has been well establishedthat SMEs make a major contribution to job creation
andeconomicgrowth.
Duringthat time also the British governmenthas provided somesupport for SM Es, but that support is small
compared with what is provided in many other countries. Consequently,a lot of people feel that our
governmenteconomic policy should be much more supportive towards smaller firms than it is at present.
However,one of the difficulties in persuading government to change its policy is that there has been
insufficientresearchinto the problems and needsof SMEs.
Weareconductinga survey into the financial needsof SMEs and for this we needyour help. We would ask
youto give us a small amount of your time to completethe questionnairewhich is enclosedwith this letter.
Theutmostconfidentiality will be observedin using the information you give us; we will not useyour name
or thenameof your company when we compile our report on the researchfindings.
Whenthestudyhasbeencompleteda copy of the report canbe madeavailableto you; if you wouldlike to

havea copy pleasewrite "copy of results requested"on the back of the return envelopeand print your
company nameand address below it.
If youshouldhavequestionsregardingour study pleasecontact:
Mr. Chris McEvoy

Director, BusinessEnterpriseCentre
LoughboroughUniversity BusinessSchool
Ashby Road, Loughborough
LeicestershireLEI I 3TU
TelephoneNo: 0509 223122
Murrythanksin anticipationof your assistance.
Yawssincerely,
b MU A Wabab
Rcxamher
Appendix I. 1 269
Please tick (, /J or write your answer as appropriate
Your answers are very important to the accuracyof our study.

Pleasereturn the completed questionnaire at your earliest convenience.
Thank you for your cooperation.
Appendix 1.1 270
SECTION A
(BACKGROUNDOF FIRM)
1. What is the legal status of your firm? for office we ooh
II
Sokproprietorship
F-I
El
Partnership
Private Limited Company
Other (please specify)

a
0
2. In which year was the firm established? Year
3. Is the firm a subsidiary

4E
of another firm or an independent firm?
Q
A subsidiary fun
Q
An independentfirm
4. How many people are presently working in your firm?

(including owners and employees- full-time and part-time)
1-9Q
5 r-I
Q
10 - 19
Q
20 - 29
Q
30 - 39
Q
40 - 49
Q
50 & above
2
Appendix 1.1 271
S. What external source(s) of financial advice have you used?

for office ow onh"
(You may tick more than one, if applicable)
None LI 6
.
Relatives/Friends
F-I 8
Bank Manager 9;
F-I Io _J
Accountant/Auditor
F-I /11
Local EnterpriseAgency
F-I
Chamberof Commerce
Other (pleasespecify)
6. Does the firm have a written business plan?

(A document which contains an analysis of the firm's current position,
it
where would like to be in the future, and how it plans to get there)
Yes
F-I
13a
No
F-I
7. What source(s) of finance did you use when you first started/
operated your business? &u may tick more than one, if applicable)
El
Personal savings 14
El 13
Borrowing from friends or/and relatives
16
LI
Borrowing from benk/financial institution 17
18M
Government initiatives/schemes
H ire-purchase
F-1 19
20
21
Leasing
Venture capital
El
F71
Other (pleasespecify)
0
3
Appendix 1.1 272
8. In what industrial sector is your business? (pleasetick one)

for officeuseDaly
Manufacture of food products Q Manufacture of other non-

LI 22
and beverages metallic mineral products
Manufactureof tobacco products Manufacture of basic met
Manufacture of textiles Manufacture of fabricated

0
metal products
Manufactureof leather and
leather products F-I Manufacture of office,
accounting and computing
Manufactureof wood and wood a machinery
products
Manufacture of ebcuical
Manufacture of paper and paper
products
-i machinery
F1
Manufacture motor vehicles
Q
Publishing, printing and a and parts thereof
reproduction of recorded media
Manufacture of other
Manufacture of chemicalsand transport equipment
chemical products
Other manufacturing industry
Manufactureof rubber and (please specify)
plastics products F-I
9. Have you ever approached external sources for financing your

business expansion?
Q yct, goW
Yes Owtsdon I on page 5
23,
l#no, goso
No L Qyesdon21 on page II
_'
4
4ppendsx 1.1 273
SECTION B
(FIRM WHICH HAS APPROACHED EXTERNAL SOURCESOF FINANCE)
for office use onh
10. a. In what year did you last apply for external finance? Year
24L i_
b. What source of external finance did you apply?
Venture Capital 25
GovernmentLoan Scheme
Bank Overdraft
Bank Loan (5 years or less)

F-I
Bank Loan (more than 5 years)
F-I
7
Trade Suppliers
Hire-Purchase
F-I
Leasing Q
11. What was the main purpose of your last application for external
finance? (you may tick more than one, if applicable)
F-I 26
To increasesales/shareof existing market
27
To expand into new market with the existing r--, 281
product 29
30
To introduce new product to the existing market F-I 31
To go into entirely new market 32
U
To expand overseas
To acquire/takeover another existing fine F-I

Other (please specj(y) E]
5
Appendix 1. I 274
12. Was your last application for external finance successfulor not
for office use owh
successful?
Q yn cca#K to to
Successful Oma*n 14 ORpage 7
Not successful a if nor mcceufu4go to

31
Uwudo., 13
13. Do you think your application for external finance was not successfil
becauseof the following reasons?
(Pleasetick the appropriate box for each reason)
Key: 54321
Strongly Agree Uncertain Disagree Strongly
Agree Disagree
lack of personal financial input 4 D 34

35
lack of viability of proposed s1 3-1
-A 36
planstp%!ects are too risk' 37
S 4 32
lack of successin previous Q Q 38
businessventure(s) 39
4 p.
5 l I 40
Q Q Q
lack of track record
al
5 2 42
lack of managementcompe- r1
tence and commitment 43
44

unaooeptable/lackof securities
or collateral F F
lack of adequatebusinessplan
--- n Li
S 3 ^
had exceededthe borrowing Q
limit
3 Z.
Inadequate source of repayment
_
too rapid expansion

?
other (please specify) Q it
Now, please proceed to QUESTION 18 on page 8
6
Appendix 1.1 275
14. If your application was successful, did you accept or reject the offer? for office we (Y
If "c`xe4 a to
Accepted
n6
Rejected If r4 do to 45
Question1S
15. If an offer of external finance was made why did you reject the offer?
(Please tick the appropriate box for each reason)
Key :54321
Strongly Agree Uncertain Disagree Strongly
Agree Disagree
5 4i
Rate of interest was too high 46

47
Unreasonablelevel of
48
security/collateral required
S 4 49
Insufficient amount of finance 50
51
Duration of loan offered was
too short lJ
Supplying institution wanted

some equity participation L-J
i.
Other (please speed)
16. In the process of applying and obtaining the external finance,

did you face:
Some difficulties
Illy
go so QHCSd#R I% on pe
a
5.
f If no d(OladV,
No difficulty SOlP 18
go to
7
Appendix 1.1 276
17. When attempting to raise external finance did you face any of
the following difficulties?: (Pleasetick the appropriate box) office um weh.
Key :5432
Strongly Agree Uncertain Disagree Stroagly
Agree D ree
51)
higher interest rates QQQ
S4'- 14
unreasonablelevel of 1-1
securities/collateral required 55
54
56
QQQQ
insufficient amount of fmance
S13
Q
shorter loan durations
5
other (please specify)
18. What source(s) of external equity have you used for business
expansion? (You may tick more than one, if applicable)
Formal Venture Capital

58
Informal Venture Capital 59
60
Government-BackedSchemes(please specify)
61,
Q
1. 67_
Q 63
2.
64,E
Q
Relatives/Friends
Other (please specify) Q
f ROOK
Soto
None J owenleff QewPaco
8
Appendix 1.1 277
19. What source(s) of external debt have you used for businesseipansioo' fw fftc, fr owh.
(You may tick more than one, if applicable)
Q
Bank Overdraft
63r__]
Q j
Bank Loan (5 years or less) 66.
Q 6'1
Bank Loan (more than 5 years)
m
Q 69
Trade Suppliers
70-
vovernment-csacKea xncmes Qj
(please specify) J.
73.
2. n
I
74
Hire-Purchase
5J
Factoring
Leasing

a
Q #'none. go to
None Ouatlon 21 on pag 10
20. What sort of security did you have to provide in seeking the
external finance?
r-
None '6
Q
Personal guarantee/otherguarantors
Life policies
80
Stock exchange securities --' 81
n
Mortgage on properties
Q
Other (please spec)
9
Appendix II 278
21 Approximately what is the current mix between equity

and for
office ase ^..
debt in your firm? (to the nearest 10010)
71
Total Equity %
Total Debt %
tote!
-J&_x
22. Are you aware or not aware of the existence of the following
government-backed initiatives/schemes?
Aware No t awa e
Loan Guarantee Scheme

F F-1 .rz
BusinessExpansion Scheme F7 S4
Enterprise Allowance Scheme tin

,
DTI Enterprise Initiative
o0
23. Did you use internal finance for business expansion, as well?
Yes (] Y
.
No 171
If NO, please proceed to QUESTION 27 on page 13
If YES, which of the following sources did you use?

(you may tick more than one, if applicable)
Qi
Personal savings Y9
.
Q 90
Partners/directors
Q
Profit retained in the business
10
4pfw kx 1.1 27k)
.
SECTION C
(FIRM WH-ACHHAS NEVER APPROACHED EXTERNAL SOURCESOF FINAN CF)
24. Are you aware of the sources of external finance available for your pr Ofif ff n
business expansion?
No
Yes E
If NO, please proceed to QUESTION 26 on page 12
If YES, which of the following sources of finance are you aware or.
E 93I
Banks/financial institution
94
F
Trade suppliers 95
Q 96
Government schemes/incentives
Q UN i
Formal venture capital
99----j
L
Informal venture capital /00
fl 101
H ire-Purchase
Q
Factoring
El
Leasing
Q
11
4pperzdcr J. 1 280
25. If you are aware of the sources of external finance available,

what are the reasons for not applying? (Please tick the appropriate OrOfieMJ(OIth
box for each reason)

Key :5432I
StroogIy Agree Uecertai" Disagree Strogty
Agree Disagree
Do not want to lose control 4 i i

Q
and independence U /0:
/ni
Do not like to be in debt 104
s
L
4 3
) U 105
External finance is too risky Li
4 7 106
External finance is too costly L /07
External finance is difficult ' / 0.S

to obtain
s 4 3 '
External finance is not rj Q
L
required at the moment
s 3 2
F] Q
26. Which of the following sources of internal finance have you used
for business expansion?
r ,.
71 109
None
110
71
Personal savings 111 .
112
Partners/directors 1
Profit retained in the business
Now, please proceed to OUESTION 27 on page 13
12
Appendix 1.1 281
SECTION D
(BACKGROUND OF OWNER-MANAGER)
27. Could you please tell us your highest academic qualicatiom for office loot "MA
Primary/SecondaryEducation 1-1
113
Post-SecondaryEducation
Degreeor Equivalent F1
Other (please specify) D
28. Have you ever attended any business/management training courses

organised by government or private sector?
a 114
Yes
No
29. Were you employed prior to becoming full-time owner of

present business?
LI
Yes
No
If YES, please specify:

7
Nature of Employers Business Iii
Position
Length of Service YCM
13
Appendix 1. ! 282
30. To help us analyse the answer to this questionnaire,

could you please
indicate your age group:
ftw office Ott,,
n!
Under 20
20 - 29 116
30 39 M
-
40 - 49
50 - 59
60 & above
F-I
Please use this spacefor any commentsyou wish to make
Thank you for your cooperation. Your contribution to this study is highly appreciated.
Please return this questionnaire using the FREEPOST ENVELOPE provided.
Address for correspondence:
Mr. I. A. Wahab
BusinessEnterprise Centre
Loughborough University BusinessSchool
Loughborough
Leicestershire
LEI I OBR
14
4, JLx
:, !. 2 K
Appendix 1.2
QUESTIONNAIRE
(TRANSLATION
-MALAY)
(Malaysian Entrepreneurship Development Centre)

Pusat Pembangunan Usahawan Malaysia
ITM, 40450 Shah Alam
Selangor Darul Ehsan
Telefon : 03-5564114
PEMBIAYAAN KEWANGAN
PERUSAHAAN KECIL
SOAL SELIDIK
Penyelidikan ini bertujuan untuk mengenal pasti amalan dan

masalah yang dihadapi oleh perusahaan kecil dalam
membiayai pengembangan perniagaan
Appendix /. 2 284
MALAYSIAN ENTREPRENEURSHIP
N"
M.. N .NM.. N. NN
N. M
. .N.. N Ni.
. .
N. ..
....... N.
N. "
DEVELOPMENT CENTRE
."
.N. N.....
N.. M.. N" H
.N"N.
11M 40450 SHAH AIAM SE:(ANGOR M.

Date -MAYSI -\
Tel. No.: 03-5508566Fax No.: 03-559892
Your Ref.
Our Ref.
Tuan,
Penyelidikan Mengenei Pembiayaan Kewangan IKS
Bertambahnya bilangan pengusaha dalam sektor industri kecil clan sederhana (IKS) di Malaysia sejak
kebelakangan ini telah dapat mewujudkan lebih banyak peluang pekerjaan di samping dapat membantu
meningkatkan pertumbuhan ekonomi negara. Walaupun pihak berkuasa telah banyak menyediakan
kemudahan dan bantuan untuk IKS, namun masih ramai pengusaha dalam sektor IKS merasakan
kemudahandan bantuan yang disediakan am at sedikit jika dibandingkan dengan negara-negara membangun
yang lain. Lantaran itu mereka berpendapat bahawa Basar ekonomi negara sepatutnya memberi penekanan
yang lebih kepada pembangunan IKS. Bagaimana pun salah satu daripada kesukaran bagi mempengaruhi
pihak berkuasa dalam perkara ini ialah kurangnya kajian terhadap masalah clan keperluan IKS.
Kami sedangmengendalikan suatupenyelidikan mengenai keperluan kewanganoleh IKSdalam membiayai

pengembanganperniagaan. Oleh yang demikian kami memohon kerjasamatuan meluangkan sedikit masa
untuk mengisi borang soal-selikik yang dilampirkan. Segala maklumat yang tuan kemukakan akan
dirahsiakan dan kami tidak akan mendedahkan samasekali nama tuan atau nama syarikat tuan semasa
menyediakan laporan ini. Nombor pengenalan yang tertera pada muka hadapan borang soal-selidik akan
hanya digunakan untuk mengeluarkan nama tuan darf senarai kami sebaik sahaja borang yang telah diisi
dikembalikan kepada kami.
Tuan boleh mendapatkan satu salinan laporan tersebut dengan menulis "salinan laporan diperlukan" di
sebelahbelakang sampul surat jawapan berserta dengan nama dan alamat syarikat di bawahnya.
Jika tuan mempunyai pertanyaan mengenai penyelidikan ini sila kemukakan kepada:
Dr. Humam Hj. Mohamed

Ketua
Pusat PembangunanUsahawan Malaysia (MEDEC)
Institut Teknologi MARA
40450 Shah Alam
Telefon :03-5508566
Fax: 03-5598922
Sekian,terima kasih.
Yang benar,
Ismail A. Wahab
Penyelidik
Appendix 12285
Sila tandakan (-/) atau tul iskanjawnpan di tempatyang sesuai
Jawapan ikhlas anda terhadap soal-selidik ini adalah sangatpenting.

Sila kembalikan borang soal selidik yang telah dipenuhi pads kadar yang segera.
Terima kasih kerana kerjasamaands.
Appendix 1.: 286
BAHAGIAN A
(LATARBELAKANG FIRMA)
1. Apakah status firma ands?

krgwtaan p holt
Jal hjju
Ptrscorangan
Perkongsian
a 2,1
Syarikat Sendirian Berhad

Li
Lain-lain (sila nyratakan)_
0
0
2. Dalam tahun berapakah firma ands ditubuhkan? Tahun
LL IU
3. Adakah firma anda anak syarikat kepada firma lain stau milik
sendiri?
Anak syarikat r-I
Milk F-I
sendiri/keluarga
4. Berapa ramaikah kakitangan dalam firma anda pads mass sekarang'

(termasuk pemilik dan pekerja - sepenuh dan separuh mesa)
s, --]
1-9
Q
10 - 19
Q
20 - 29
Q
30 - 39
40 - 49
LI
50 & kc alas
2
Appendix 1.= 287
S. Dari manakab ands memperolehi khidmat

nasihat dalam membost
kepatnsan berkaitan dengan kewangan perniagaan?
(anda boleh menjawab lebih darf satu, jika berkaitan)
AeKwWun pwpb u
tahap
Tiada
6 L
Ahl Keluarga/Rakan
Pegawai Bank LI 9
I0
Akauntan/Auditor
11
Pihak Bericuasa Tempatan 12
Dewan Perniagaan/Persatuan Perniagaan
Lain-Lain (sila nyatakan)
6. Adakah firma anda memiliki dokumen Rancangan Perniagaan'

(Suatu dokumen yang mengandungi analisis kedudukan perniagaan
masa kini dan perancangan masa hadapan)
LI
Ada
13r1
Tiada U
7. Apakah sumber pembiayaan yang digunakan semasaands mule

menjalankan perniagaan stau mule beroperasi?
C
Wang simpanan sendiri
/4
Pinjaman darf nakanatau/dan ahli keluarga
15'-
Q 16
Pinjaman dari bank/institusi kewangan
IT
Q
Sekim pinjaman/bantuan kcuajaan /8
Q 19
Sewa beli
20
CQ
Sewa pajak 21
Q
Modal teroka (venture capital)
Lain-lain (silo nyatakan)

_Q
3
Appendix l.? 288
8. Apakah Sektor perindustrian peroiagaan soda?

(sita landakan sau sahaja)
Arguou iw fwAsbar
3-
Pcngeluaran barengen makanan Q Pengeluaran lain-lain galian den
din minuman barengen gaiian buken {ogam
22
Pengeluaran barangan tembakau Pengeluaran k gam asas
Pengeluaran tckstil Ell, Pengelanin barangan bgam

yang dimka
Pengeluaran kalif den barengen F-I
darf kulit Pcngcluaran mesin pejabet,
perakaunan dan peng raan.
Pengeluaran kayu dan barangan F]
darf kayu Pengeluaran mesin-mesin f-I I
elektrik
Pengeluaran kertas dan barangan
darf kertas
dari L--J Pengeluaran alat-
alai-ganti
kendetaan F711
Penerbitanclan percdakan
percetakan F71Pengeluaran lain-
lain-lain peralatan
Pengeluaran kimia clan barangan (-1
(l pengangkutan
kimia t
Lain-lain industri
1--1
Pengeluaran batangan getan
dan
aen plastdc
Wiact
(silo mntakan)

9. Pernahkah ands menemui/menghobungi mans-nuns somber luaran

bags membiayai pengembangan perniagaan ands?
f pesnah, sia)dw b
(
Pernah l_ Soalaa 14 6nwS 23
-- ft" aast per"& Su.

Tidak Pemah U tentsetcSoala4B
di errat 12
4
appendix I. 289
.
BAHAGIAN B
(BAGI FIRMA YANG PERNAH MENGHUBUNGI SUMBER PEMBIAYAAN LUARAN)
kegwtaan ptptwl
10. a. Tabun bilakah ands membaat permohanao terbaharu bagi io/op
membiayai pengembangan firma ands? Tabun 1l

24L.
b. Silo nyatakan somber pembiayaan yang dipobon
Modal Teroka (venture capital)

: 5[--!
Sekim Pinjaman Kerajaan
Overdraf Bank
Pinjaman Bank (5 tahun atau kureng)
Pinjaman Bank (5 lebih daripada 5 tahun) 0
PembekalBareng Niaga
[11
Sewa Beli
Sewa Pajak El
Lain-Lain (silo nyalakan) 11
11. Apakah tujuan utama ands memohon pembiayaan tersebut?

(anda boleh menjawab lebih darf sate, jika berkaitan)
Q
Bagi meningkatkan jualan/sycr pasaran sckarang --I
2
Bagi meluaskanpasaranterhadap
barangan keluaran sekarang 28
29
Bagi memperkenalkanbaranganbare kepda Q
30
Pasamnyang so" ada
31
Q
Bagi memasuki pasaranbare kescluruhannya 32 j
[ _I
Bagi mengeksponke luar negara
[I]
Bagi mengambil aith pemisgaan lain
Q
5
Appendix 12 290
12. Adakab permohonan pembiaysan tersebut berjaya' i'eN&jt
[:: frri
Berjaya j, * Sodas 14 & rirnr 1
. 7 33
Tidak Berjaya Q d&* berjem dm
i)ad
W" SO" 13
13. Pada pendapat anda adakah permohooan anda antuk mendapatkan

pembiayaan luaran tidak berjaya disebabkan oleh keadun berikat?
(Sila landakan kotak yang berkenaanbagi setiap keadaan)
Petunjuk :5432
Sangat Setaju Tidak Tidak Sagat
Seteja Pasti Setuj Tidak Sehj"
4 2
kekurangan sumbangan iU
34r__,
kewangan sendiri
35
S1 36
projek yang dirancang tidak
berdaya maju/berisiko tinggi U U 37
I 38
4 il
pemiagaan
berjaya
sebelum ini kurang is
ll
Li (_ 39
40
4
tidak ada kemajuan yang
dicapai sebelum ini
,s
u
Li 41
42,
43
kelemahan pengwusan
U 44
kekurangan cagaran/sandaran
J-
, Hi
[j 4 3
tiada rancangan perniagaan
kngkap L_ J
Li L
yang
. Li
telah mencapai had pinjaman i
maksimum
. i
s
kekurangan sumber bayaran-
U _j
L U
batik pinjaman
I
terlalu cepat berkembang U

a 3
lain-lain (sila nyatakan) [j
[ , i
i
18 di surot 8
Sekamng, sila terns ke SOALAN muka
6
Appendix /2 291
14. Jika permohonan ands berjaya, adaka6 ende menerima stau

menolak tawaran tersebut? pejabci
Menerima Tawaran C JlA """"ima tQ1H0JQR

silo f rvs kt soakx 4$
Menolak Tawaran II a "e"

silo jawob Soalan 1S
15. Setelah permohonan ands berjaya, mengapa ands menolak tawaran

pembiayaan tersebut?
(sila tandakan kotak yang berkenaan bagi setiap alasan)
Pctunjuk :54321
Saogat Setoja Tidak Tidsk Saaltat
Setujo Pasti Setuja TidakSetaju
46
Kadar faedah terlalu tinggi 4'
48
Tahap cagaran yang tidak
bcrpatutan 49
50
1) 1
Jumlah pembiayaanyang S Li Lu
S/1
ditawarkan tidak mencukupi
43 Li
Tempoh pinjaman terlalu
singkat
Institusi yang menawarican 421

pembiayaan mahu berkongsi (i U
ekuiti
1_ 1
lain-lain (silo nyalakan)
UU
Sekarang, silo terns ke SOALAN 19 di muka surat 8
E1
5.
16. Delam proses memohon dan mendepatkan pembiayaan kewangan,
adakab anda:
.Ilka mwnenqmkAm
Qa L
Menempuh kesukaren mil" it
A" kcssdt. ras
"IN
keS*Wm
Tidak menempuh scbsrmg kesukaran rew
a m'tw t 8
7
Appendix 1.2 292
17. Adakah soda menempuh kesukaran berikut semass memoboa dan

htgrnaan pgaabat
mendapatkan pembisyaan kewangan?:
sohaw
(sila landakan kolak yang berkenaan)
Petunjuk :54321
Sangst Setuju Tidak Tidak Saagat
Setuj Pasti Setilla Tidak Setai
543
Kadar faedahyang tinggi
Tahap cagaranyang tidak

J oa r1 53,
SI
berpatutan
13 i 55
56
513
Jumlah pembiayaan yang QQ LJ
57
ditawarkan tidak mencukupi
S 1_ 3
Tempoh pinjaman terlalu Q1
LJ
singkat
S432{
Lain-lain (sila nyatakan)
18. Sejak mengendalikan perniagaan sekarang, apakah sumber ekniti

luaran yang telah ands gunakan untuk pengembangan perniagaan?
(ands boleh menjawab lebih darf satu, jika berkaitan)
Modal Teroka (venture capital) 58fl

59
Sekim Kerajaan (sila nyatakan)
60
1. 61
62
2.
Ahli Keluarga/Rakan
a
Ei
63
64
Lain-lain (sila nyatakan)

Tiada (_.
8
Appendix I. 2 293
19. Sejak mengendalkan perniagaan sekarang, apakah somber

piajamasi/
hutang yang telah ands gunakan untuk pengembangan *sgwiaam pejabu:
perniagaa?
(ands boleti menjawab lebih darf satu, jika berkaitan) mhap
Overdraf Bank 65,

66
Pinjaman Bank (5 tahun atau kureng)
h'
Pinjaman Bank (lebih daripada 5 tahun) Q
68
69
PembekalBarang Niaga
F-I 70
Sekim Pinjaman Kerajaan (sila nyatakan) 71

7'
a 73
a 7
2.
7
Sewa Beli
F-I
Pemfaktoran(Factoring)
Sewa Pajak
Lain-lain (silo nyatakan) El
Tiada F-I
20. Sila nyatakan jenia sandaran yang ands telab ands kemukakan
semasa mendapatkan pembiayaan.
Tiada
Penjamin
a 76'
77
'. Y
Polisi Insuran F-I 79,
80
Sijil saham 81
Cagaran terhadap harta F-I

LI
Lain-lain (silo nyalakan)
9
Appendix 1.2 294
21. Daripada jumlah pembiayaan dalam firma anda, berapakah

ktgwtaaw
anggaran nisbah antara ekuiti dan hutang?
Jumlah Ekuiti
Jumlah Hutang "/.
jumlah 100 %
22. Adakah ands menyedari kewujudan sekim pembisyaan yang

disediaksn oleh kerajasn seperti berikut?
Tidak
Mengetahui Mcngcahui
Sekim Jaminan Kredit ` -1 Q
ur 831
Tabung Bantuan Teknikal Perindustrian 81 '-`

Kecil dan Sederhana(ITAF) UQ
RS
j
Tabung UsahawanBaru 86,
F-I 1-1 87'--
23. Adakah anda jugs menggunakan sumber dalaman bagi membiayai

pengembangan perniagaan?
Q
Ya
88
Q
Tidak
Jika TIDAK, sila terus ke SOALAN 27 di muka surat 13
Jika YA, sila nystakan sumber dalaman yang telah gunakan

(anda boleh menjawab lebih darf saht jika berkaitan)
Q
Wang simpanan sendiri
Q r-'
Rakan Kongsi/Pengarah Syarikat 89
Q 90
Keuntungan pemiagaan
9/L
Sekarowg, sila terns kt SOA LA N 27 di muka sarat 13
10
Appendix 1.2 29i
.
BAHAGIAN C
(BAGI FIRMA YANG TIDAK PERNAH MENGHUBUNGI
SUMBER KEWANGAN LUARAN)
24. Adskah ands menyedari kewujudan somber kewangan bagi

membisysi pengembangan perniagaan? AeKwvaan Delay
saha,w
Tidak 921-1
Ya
Jika TIDAK, silo terns ke SOALAN 26 di muka surat 13
Jika YA, yang manakah cumber berikut yang ands ketahui

kewujudannya?
V3
LI
Bank/Institusi Kewangan 94
95
PembekalBareng Niaga
Sekim Kerajaan
a 96
9'
Modal Teroka (venture capital)

a 98
0 /00
99
Sewa Beli
0 /Oll
Pemfaktoran
a
Sewa Pajak
LI
Lain-lain (silo nyalakan)
0
11
Appendix 12 ? 96
25. Jika ands menyedari kewnjudan cumber pembiayaan kewangan,

mengapaka6 ands tidak memohon? ktgtinaan pe)alwt
(Sila tandakan kotak yang berkenaan bagi setiap alasan) iaha0a
Petunjuk :54321
Sangat Seteje Tidak Tidak Saatat
Seteje Pasti Set je Tidak Setaje
' 3 2
T" mahu Mang kawalan
],
dan kebebasan 102
/03;
Tidak suka bcrhutang 4 104
Risiko pembiayaan luaran /05

5, 4 rU
Q
terlalu ti nggi I /06
107
Kos pembiayaanluaran Q is
terlalu tinggi U
Pembiayaanluaran sukar s , F]
diperolehi
4 3 2
Pembiayeanluaran tidak Q Q 1 Q
diperlukan setakat ini LJ
S ,
Lain-lain (sila nyatakan) j1 Q
26. Apakah somber dalaman yang telah ands gunakan bagi

pembesaran perniagaan?
(anda boleh menjawab lebih darf sate, jika berkaitan)
109
Q 110
Tiada
Ill.
Wang Simpanan Scndiri 112' 1
Q
Rakan Kongsi/PengarahSyanicat
Q
Keuntungan Pemiagaan
Sekarang, silo tents kc SOALAN 27 di muka sarot 13
12
Appendix 12 297
BAHAGIAN D
(LATARBELAKANG PEMILIK)
27. Sila nystakan tahap kelayakan akademik ands yang tertinggi

krgawan pep bat
sahn 2
Sekolah Rendah
113
Sekolah Menengah
Ijazah atau setaraf - Sains/I'eknikal
Ijazah atau setaraf - Pemiagaan/Pengurusan
Kelayakan Profesional
Lain-Lain (silo nyalakan)
28. Pernahkah ands menghadiri kursus atau latihan dalam bidang

perniagaan/pengurusan yang dianjurkan oleh agensi kerajaan
stau pihak swasta?
n
Q 1/4
Pernah
Tidak Pemeh Q
29. Pernahkah ands bekerja sebelum mengusahakan perniagaan

sekarang?
Pernah
Tidak Pemah
Li
Jiks PERNAH, siln nystakan:
Jcnis Pemipan Majikan 115
Jawatan
Tempoh Mcmegang Jawatan tahun
13
Appendix I. 2 298
30. Sila nystakan kategori umur ands:

keguAaan pgtiba:
Bawah 20 tahun U sahilj7
Q
20 - 29 tahun
116
30 39 tahun Q
-
40 49 tahun Q
-
50 59 tahun Q
-
Q
60 tahun & ke atas
Jika anda ingin memberi sebarang komen sila gunakan ruang ini
Terima kasih kerana kerjassma anda. Sumbangan ands terhadap kajian ini sangst dibargai. Sila kembalikan
borang soal selidik ini menggunakan sampul surat bersetem
yang dilampirkan
Alamat perhubungan:
Ketua
Pusat Pembangunan UsahavxznMalaysia
ffM, 40450 Shah Alam
Selangor
14
t> ,.hx 13 2()(l
Appendix 1.3
I'IONN AIRF
(TRANSLATION MANDARIN)
-
........................ .......
....................................... .....
.......................................
............ .........
................................... ......
................................
...................................
....................................
.....................................
(Malaysian Entrepreneurship Development Centre)
Pusat Pembangunan Usahawan Malaysia
ITM, 40450 Shah Alam
Selangor Darul Ehsan
Telefon : 03-5564 114
PEMBIAYAAN KEWANGAN
PERUSAHAAN KECIL
SOAL SELIDIK
' 17i.
1 .: TY .. 7 ii ;n r7
"f
i!:1 G
Penyelidikan ini bertujuan untuk mengenal pasti amalan dan

masalah yang dihadapi oleh perusahaan kecil dalam
membiayai pengembangan perniagaan
I J 1i ')' BAI 1 fN /. ! 1, '" "' T: (Z. T. -'i (f J I` ; .. v' U!
6 111"'. f't 11Jii
Appendix 1.3 300
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Date Tel. No.: 03-5508566 Fax No.: 03-5598922
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404 fl folAU19411 AIf rr P-13E "A 9199

-
Dr. Humam Hj. Mohamed

Head
MalaysianEntrepreneurshipDevelopmentCentre(MEDEC)
40450 ShahAlam
Selangor
Tel. No. 03-5508566

Fax No. 03-5598922
hl i
c
WI 7b
1i
on, sl1L.
Appendix I. 3 301
Please tick [, /J or write your answer as appropriate
Your answersare very important to the accuracy of our study.

Pleasereturn the completed questionnaire at your earliest convenience.
Thank you for your cooperation.
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Address for correspondcncc:
Head
Malaysian Entrcprencurship Development Centre
40450 ITM Shah Alam
Selangor
(A(tcntion: En. Ismail A. Wahab)
14
Appendix 2
CASE STUDIES:
INVITATION LETTER
AND ISSUES TO BE DISCUSSED
Appendix' 316
Loughborough
Busitlc'SSSchool
Ashby Road, [A*Jghborough
Leicestershire.LEI 1 3TU
Telephone:01509 263171
Facsimile: 01509 210232
DearSir,
Withreferenceto my survey on the financing of small manufacturing firms, I haverecentlysentyou a copy

of the summary report on the findings of the survey. I hope you have found it useful and informative.
At this stagein the researchproject, I am very keen to conduct a short follow-up study on selectedfirms.
I very much hope that you or one of your colleagueswould be preparedto participate in this study. Your
company hasbeen selected becausethe financing concernsof growing businessessuchas(company'sname)
area particular concern ofthe research.I can assureyou that all information will bekeptstrictly confidential,
the
and results will only be presentedin aggregateform.
In thesecircumstances,I would be very grateful if you could spareme half an hour of your valuabletime
to discussthe issuesset out on the attachedsheet.I havemadea provisional timetablefor the proposedvisit
I
and wonder if it would be possible for me to visit your company on:
Date
Time
MayI askyou to fill in the enclosedform to indicatewhetheryou arepreparedto help.A pre-paidenvelope

isenclosed.
If you would like any further information regarding this request, my researchsupervisor, Mr. Grahame
Boocock,would be very pleasedto discuss the researchwith you. His phone number is 01509 223117.
Manythanks in anticipation of your assistance.
Yourssincerely,
IsmailA Wahab
Researcher
Appendix 2 317
Follow-uy Study on The Financing of Small and Medium Sized Firms
Pleasetick the appropriate box:
I agree to participate in the study on the proposed

date and time.
I agree to participate in the study but will only be

available on the following date and time:
Date:
Time:
El I do not agree to participate in the study
Name
Position in the company
Company's name
& Address
TelephoneNo.
Please return this form using the pre-paid envelopeprovided

Appenda 2 318
Case Studies
(Issues to be discussed)
A. BackEround
- main products and market served
- type of ownership
- number of employees (full- and part-time)
B. Firm Growth
Fast/Rapid Growth
- whether you wish to carry out major innovation or
investment over the next three years.
or
Slow/Steady Growth whether you wish to carry out moderate innovation
- or
investment over the next three years.
or
No Growth whether you have completed innovation or investment,
-
but have no plans to do so in the next three years.
C. Financine
- Sources of External Finance for Innovation or Investment

debt only, equity only or both debt and equity?
which are the most important - why are they preferred to others?
is the source of finance affected by the type of innovation/investment?
.
. role of security/personal guarantee
- Sources of Financial Advice
what external sources of advice are used in making financing decision?
.
e.g. banks, accountants, chambers of commerce
- Financing Difficulties
has the firm been refused funding for a proposal for innovation/invest-
ment?
if yes, what was the reason for therefusal?
was the refusal reasonable?
has your firm experienced any problems in obtaining finance
in relation to equity - why?
in relation to debt - why?
Appendix 3
CONTINGENCY TABLES
(United Kingdom)
Appendix 3 320
Table A3.1
Need for External Finance by Small Firm Characteristics
(Percentage of Response by Firm Characteristics)
(United Kingdom)
Finance for L passion
Characteristics Did Not Approach Approached
External Finance External Finance
Size
Employment
(i) I-9 employees 48.8 51.2 82
10 - 19 employees 34.4 65.6 64
20 - 29 employees 26.9 73.1 26
30 - 39 employees 45.8 54.2 24
40 - 49 employees 28.1 71.9 32
N 89 139 228
Gamma Coefficient (G) 205
.
(ii) Below 20 employees 42.5 57.5 146
20 employees& above 32.9 67.1 82
N 89 139 228
GammaCoefficient (G) 201
.
Ageof Firm
4 years& below 39.3 60.7 29
5-9 years 27.7 72.3 47
10 - 14 years 40.4 59.6 S_'
15 - 19 years 43.3 56.7 30
20 years& above 39.1 60.9 64
N 83 138 "I
-.
Useof ExternalAdviser
Did not use external adviser 51.9 48.1 52
Used External Adviser 35.2 64.8 176
N 89 139 228
.
Legal Status
Sole Proprietorship 39.1 60.9 23
Partnership 48.6 51.4 35
Private Limited 37.1 62.9 170
N 89 139 228
.
Sectorof Industry
(1) FabricatedMetal Products 39.6 60.4 48
Textiles 34.9 65.1 43
Publishing,Printing & Recorded Media 40.0 60.0 20
Rubber& Plastic Products 26.7 73.3 15
Wood& Wood Products 53.3 46.7 15
Paper& Paper Products 50.0 50.0 10
Electrical Machinery 40.0 60.0 10
Chemical& Chemical Products 50.0 50.0 8
Basic Metals 16.7 83.3 6
Food Products& Beverages 75.0 25.0 4
25.0 75.0 4
Other Industries 37.8 62.2 45
89 139 228
N
(ii) Non Technology-based 39.2 60.8 143
38.8 61.2 85
Technology-based
89 139 228
N
.
Business
Plan
44.2 55.8 154
Did not have a written businessplan
28 71.6 14
Had a written businessplan .4
89 139
,ti' _228
.
Numberof Missing Cases 61
Appendix 3 321
TableA3.2
Need for External Finance by Owner-Manager Characteristics
(Percentage of Response by Owner-Manager Characteristics)
(United Kingdom)
Financefor Expansion
Characteristics Did Not Approach Approached _
Ageof Owner-Manager
20 - 29 50.0 50.0 4
30 - 39 44.7 55.3 38
40 - 49 35.6 64.4 87
50 - 59 37.3 62.7 67
60 & above 43.8 56.3 32
N 89 139 228
.
Levelof Education
Primary/SecondaryEducation 45.7 54.3 81
Post-SecondaryEducation 43.1 56.9 65
Degreeor Equivalent 29.3 70.7 82
N 89 139 228
.

No Training 42.2 57.8 135
SomeTraining 34.4 65.6 93
N 89 139 228
.
Levelof Experience
No Working Experience 47.6 52.4 21
4 years& below 22.6 77.4 53
5-9 44.3 55.7 61
years
43.9 56.1 41
10- 14 years
42.9 57.1 21
15- 19 years
41.9 58.1 31
20 years& above
89 139 228
N
Gamma Coefficient (G) -. 117
Appendix33 22
Table A3.3(i)
Sources of External Finance by Size of Firms
(Percentage of Response by Employment Size)
(United Kingdom)
Sourcesof Employment Size

External Gamma
Finance 1-9 10-19 20-29 30-39 40-49 Coefcit"nri(; )
JV
ui
Venture no 92.9 83.3 100 92.3 73.9 122

Capital yes 7.1 16.7 0 7.7 26.1 17 247
.
Government no 97.6 90.5 89.5 92.3 87.0 128
Scheme(BES) yes 2.4 9.5 10.5 7.7 13.0 11 338
.
Relatives/ no 81.0 90.5 94.7 76.9 91.3 121
Friends yes 19.0 10.5 5.3 23.1 8.7 18 -. 185
Overdraft no 19.0 23.8 21.1 15.4 21.7 29

yes 81.0 76.2 78.9 84.6 78.3 110 -.011
BankLoan no 66.7 71.4 73.7 61.5 60.9 94

(5yrs or less) yes 33.3 28.6 26.3 38.5 39.1 45 052
.
BankLoan no 90.5 76.2 68.4 100 73.9 113

(above5 yrs) 9.5 23.8 31.6 0 26.1 26 204
yes .
Trade no 66.7 76.2 84.2 76.9 69.6 102

Supplier 33.3 23.8 15.8 23.1 30.4 37 -. 102
yes
Government 95.2 85.7 100 100 95.7 130

no
Scheme(LGS) 4.8 14.3 0 0 4.3 9 -. 183
yes
Hire-Purchase 61.9 47.6 52.6 61.5 47.8 75

no
38.1 52.4 47.4 38.5 52.2 64 105
yes .
Leasing 78.6 69.0 68.4 84.6 52.2 98

no 219
21.4 31.0 31.6 15.4 47.8 41
yes .
Factoring 92.9 95.2 84.2 92.3 91.3 128

no
7.1 4.8 15.8 7.7 8.7 11 125
yes .
42 42 19 13 23 139
N
Appendix3 323
Table A3.3(11)
(Percentage of Response by Employment Size)
(United Kingdom)
Sources of Employment Size

External Gamma
Finance Below 20 20 & above N Coefficient(G)
ui
Venture no 88.1 87.3 122

Capital yes 11.9 12.7 17 038
.
Government no 94.0 89.1 128

Scheme(BES) yes 6.0 10.9 11 319
.
Relatives/ no 85.7 89.1 121

Friends yes 14.3 10.9 18 -. 153
Q&
Overdraft no 21.4 20.0 29

yes 78.6 80.0 110 043
.
BankLoan no 69.0 65.5 94

(Syrs or less) 31.0 34.5 45 081
yes .

(above5 yrs) 16.7 21.8 26 165
yes .
Trade 71.4 76.4 102

no
Supplier 28.6 23.6 37 -. 128
yes
Government 90.5 98.2 130

no
Scheme(LOS) 9.5 1.8 9 -.701
yes
Hire-purchase 54.8 52.7 75

no
45.2 47.3 64 041
yes .
Leasing 73.8 65.5 98

no
26.2 34.5 41 196
yes .
Factoring 94.0 89.1 128

no 319
6.0 10.9 11
yes .
N 84 55 139
Appendix 33 24
Table A3.4
Sources of External Finance by Age of Firms
(Percentage of Response by Age Category)
(United Kingdom)
Sourcesof Age of Firms (years)

External Gamma
Finance <5 5-9 10-14 15-19 > 19 Coefficient(G)
.V
ui
Venture no 88.2 88.2 77.4 88.2 94.9 121

Capital yes 11.8 11.8 22.6 11.8 5.1 17 167
-.
Government no 100 97.1 83.9 100 87.2 127

Scheme(BES) yes 0 2.9 16.1 0 12.8 11 376
.
Relatives/ no 88.2 82.4 90.3 94.1 84.6 120
Friends yes 11.8 17.6 9.7 5.9 15.4 18 024
-.
PELI
Overdraft no 35.3 20.6 19.4 11.8 17.9 28

yes 64.7 79.4 80.6 88.2 82.1 110 193
.
BankLoan no 52.9 76.5 61.3 76.5 66.7 93
(Syrs or less) yes 47.1 23.5 38.7 23.5 33.3 45 -.039
BankLoan no 100 82.4 87.1 76.5 69.2 112

(above5 yrs) yes 0 17.6 12.9 23.5 30.8 26 407
.
Trade no 76.5 79.4 48.4 88.2 82.1 102

Supplier yes 23.5 20.6 51.6 11.8 17.9 36 -. 094
Government no 76.5 97.1 90.3 100 97.4 129

Scheme(LGS) yes 23.5 2.9 9.7 0 2.6 9 -.493
Hire-Purchase no 52.9 55.9 41.9 52.9 64.1 75

47.1 44.1 58.1 47.1 35.9 63 -. 102
yes
Leasing 64.7 67.6 61.3 76.5 79.5 97

no
35.3 32.4 38.7 23.5 20.5 41 -. 189
yes
Factoring 94.1 88.2 90.3 94.1 94.9 127

no
5.9 11.8 9.7 5.9 5.1 11 -. 161
yes
N 17 34 31 17 39 138'
a Number
of Missing Cases
Appendix 3325
Table A3.5
Sources of External Finance by Use of External Advisers
(Percentage of Response by Use of Advisers)
(United Kingdom)
Use of External Advisers

Sources
of
E.rternal Gamma
Finance Did Not Use Used Coefficient
External Advisers External Advisers N ((i)
WI
Venture no 92.0 86.8 122

Capital yes 8.0 13.2 17 271

Scheme(BES) 16.0 6.1 11 -. 489
yes

Friends yes 8.0 14.0 18 305
.
Debt

64.0 82.5 110 451
yes
Bank Loan 80.0 64.9 94

no
(5yrs or less) 20.0 35.1 45 368
yes
BankLoan 88.0 79.8 113

no
12.0 20.2 26 299
(above5 yrs) yes
Trade 68.0 74.6 102

no
Supplier 32.0 25.4 37 -. 159
yes
Government 100 92.1 130

no
Scheme(LOS) 0 7.9 9 1.00'
yes
Hire-Purchase 40.0 57.0 75

no 331
60.0 43.0 64 -.
yes
Lasing 60.0 72.8 98

no 282
40.0 27.2 41 -.
yes
Factoring 96.0 91.2 128

no 395
4.0 8.8 11 .
yes
25 114 139
N
' Stgn#ioun/of 0.01 significance level, a two-tailed test

Appendix 33 26
Table A3.6
Sources of External Finance by Legal Status
(Percentage of Response by Legal Status)
(United Kingdom)
Sourcesof Legal Status

External Sole Private Gamma
Finance Proprietorship Partnership Limited N Coef cient(G)
ait
Venture no 100 94.4 85.0 122

Capital yes 0 5.6 15.0 17 697"
Government no 100 88.9 91.6 128

Scheme(BES) yes 0 11.1 8.4 11 206
Relatives/ no 71.4 77.8 90.7 121

Friends yes 28.6 22.2 9.3 18 -. 496
DOI
Overdraft no 28.6 16.7 20.6 29

yes 71.4 83.3 79.4 110 061
BankLoan no 57.1 72.2 68.2 94

(Syrs or less) 42.9 27.8 31.8 45 -. 078
yes
BankLoan no 85.7 88.9 79.4 113

(above5 yrs) 14.3 11.1 20.6 26 580
yes .
Trade no 71.4 72.2 73.8 102

Supplier 28.6 27.8 26.2 37 -. 047
yes
Government no 100 94.4 92.5 130

Scheme(LGS) 0 5.6 7.5 9 451
yes
Hire-Purchase 57.1 77.8 49.5 75

no
42.9 22.2 50.5 64 330
yes
Leasing 100 83.3 64.5 98

no
0 16.7 35.5 41 694'
yes .
Factoring 100 100 89.7 128

no
0 0 10.3 11 1.004
yes
N 14 18 107 139
Sign nt at 0.01 sign nce level a two-tailed test

Appendix 3 327
Table A3.7(i)
Sources of External Finance by Sector of Industry
(Percentage of Response by Sector of Industry)
(United Kingdom)
Sowces
of Sector of Industry
External
Finance FMP TEA' PPR RPP WWP PPP ELM CCP BAT FPB MIT OTH
.v
famuia
Venture no 82.8 100 91.7 81.8 85.7 100 83.3 75.0 100 100 100 78.6 122
Capital yes 17.2 0 8.3 18.2 14.3 0 16.7 25.0 0 0 0 21.4 17
Government no 89.7 96.4 83.3 81.8 100 80.0 100 100 80.0 100 100 96.4 128
Scheme(BES) yes 10.3 3.6 16.7 18.2 0 20.0 0 0 20.0 0 0 3.6 1
Relatives/ no 89.7 89.3 91.7 81.8 85.7 100 100 100 80.0 0 66.7 82.1 121
Friends yes 10.3 10.7 8.3 18.2 14.3 0 0 0 20.0 100 33.3 17.9 18
Overdraft no 17.2 17.9 41.7 0 14.3 0 16.7 25.0 80.0 0 0 25.0 29

yes 82.8 82.1 58.3 100 85.7 100 83.3 75.0 20.0 100 100 75.0 110
BankLoan no 82.8 60.7 91.7 63.6 42.9 60.0 33.3 50.0 20.0 100 100 71.4 94
(5 yrs or less) yes 17.2 39.3 8.3 36.4 57.1 40.0 66.7 50.0 80.0 0 0 28.6 45
BankLoan no 82.8 85.7 75.0 72.7 100 80.0 83.3 75.0 80.0 100 100 75.0 113
(above5 yrs) yes 17.2 14.3 25.0 27.3 0 20.0 16.7 25.0 20.0 0 0 25.0 26
Trade no 75.9 82.1 75.0 72.7 42.9 60.0 50.0 50.0 60.0 100 100 78.6 102
Supplier yes 24.1 17.9 25.0 27.3 57.1 40.0 50.0 50.0 40.0 0 0 21.4 37
Government no 96.6 100 100 90.9 100 100 83.3 100 80.0 100 100 82.1 130
Scheme(LOS) yes 3.4 0 0 9.1 0 0 16.7 0 20.0 0 0 17.9 9
Hire-Purchase no 58.6 57.1 41.7 54.5 42.9 60.0 50.0 25.0 20.0 100 66.7 60.7 75
41.4 42.9 58.3 45.5 57.1 40.0 50.0 75.0 80.0 0 33.3 39.3 64
yes
Leasing 72.4 75.0 41.7 90.9 100 20.0 50.0 75.0 60.0 100 33.3 78.6 98
no
27.6 25.0 58.3 9.1 0 80.0 50.0 25.0 40.0 0 66.7 21.4 41
yes
Factoring 96.6 89.3 91.7 100 100 80.0 100 75.0 100 100 66.7 89.3 128
yes
3.4 10.7 8.3 0 0 20.0 0 25.0 0 0 33.3 10.7 11
no
N 29 28 12 11 7 5 6 4 5 1 3 28 139
a EL.1f Electrical Machinery

FMP Fabricated Metal Products
TER' Textiles CCP Chemical & Chemical Products
PPR Publishing, Printing & Reproduction of Recordedmedia BMT
RPP Rubber & Plastic Products FPB Food Products & Beverages
WRP Woodd Wood Products A0 ,P Motor Vehicles& Parts
PPP Paper & Paper Products OTH Other Industries
Appendix 3 328
Table A3.7(ii)
(United Kingdom)
Sourcesof Sector of Industry Gamma

External Coefficient
Finance Non Technology-based Technology-based N (G)
ui
Venture no 87.4 88.5 122

Capital yes 12.6 11.5 17 052
-.

Scheme(BES) yes 5.7 11.5 11 363
.

Friends yes 13.8 11.5 18 102
-.

yes 78.2 80.8 110 080
.

(5yrs or less) yes 33.3 30.8 45 -.059

(above5 yrs) yes 16.1 23.1 26 220
.
Trade no 75.9 69.2 102

Supplier 24.1 30.8 37 166
yes .

Scheme(LGS) 6.9 5.8 9 -.095
yes

no
43.7 50.0 64 126
yes .
Leasing 75.9 61.5 98

no
24.1 38.5 41 325
yes .
Factoring 94.3 88.5 128

no 363
5.7 11.5 11
yes .
N 87 52 139
Appendix 3 329
Table A3.8
Sources of External Finance by Business Plan
(Percentage of Response by Business Plan)
(United Kingdom)
Sourcesof BusinessPlan Gamma

External - Coefficient
Did not have a written Had a written
Finance business plan business plan N (G)
ui
Venture no 97.6 72.2 122

Capital yes 2.4 27.8 17 882'
.
Scheme(BES) yes 5.9 11.1 11 333
.

Friends yes 11.8 14.8 18 132
.
D&

yes 77.6 81.5 110 118
.

(5yrs or less) yes 27.1 40.7 45 299
.

(above5 yrs) yes 15.3 24.1 26 274
.
Trade no 76.5 68.5 102

Supplier yes 23.5 31.5 37 198
.

Scheme(LGS) 2.4 13.0 9 "
yes "721

no
47.1 44.4 64 -.053
yes
Leasing 77.6 59.3 98

no
22.4 40.7 41 410
yes .
Factoring 96.5 85.2 128

no
3.5 14.8 11 652**
yes .
N 85 54 139
' Significant at 0.01 significance level, a two-tailed test

Significant at 0.05 significance level, a two-tailed test
Appendix 33 1_)
TableA3.9
Sources of External Finance by Age of Owner-Managers
(United Kingdom)
Sourcesof Age Category (years)

External Gamma
Finance 20-29 30-39 40-49 50-59 >59 N Coefficient(G)
ui
Venture no 100 95.2 83.9 85.7 94.4 122

Capital yes 0 4.8 16.1 14.3 5.6 17 029
.
Government no 100 90.5 92.9 90.5 94.4 128
Scheme(BES) yes 0 9.5 7.1 9.5 5.6 11 011
-.
Relatives/ no 100 95.2 82.1 90.5 83.3 121

Friends yes 0 4.8 17.9 9.5 16.7 18 082
.
Debt
Overdraft no 0 23.8 25.0 16.7 16.7 29

yes 100 76.2 75.0 83.3 83.3 110 134
.
BankLoan no 100 66.7 66.1 78.6 44.4 94
(Syrs or less) yes 0 33.3 33.9 21.4 55.6 45 085
.
BankLoan no 100 95.2 83.9 73.8 72.2 113

(aboveSyrs) yes 0 4.8 16.1 26.2 27.8 26 397
.
Trade no 50.0 66.7 75.0 78.6 66.7 102

Supplier yes 50.0 33.3 25.0 21.4 33.3 37 -.065
Government no 100 95.2 92.9 92.9 94.4 130

Scheme(LGS) 0 4.8 7.1 7.1 5.6 9 052
yes .
Hire-Purchase no 50.0 42.9 57.1 59.5 44.4 75

50.0 57.1 42.9 40.5 55.6 64 -.043
yes
Leasing 50.0 71.4 67.9 81.0 55.6 98

no
50.0 28.6 32.1 19.0 44.4 41 011
yes .
Factoring 50.0 90.5 89.3 97.6 94.4 128

no
50.0 9.5 10.7 2.4 5.6 11 -.401
yes
N 2 21 56 42 18 139
Appendix3 331
Table A3.10
Sources of External Finance by Level of Education of Owner-Managers
(Percentage of Response by Level of Education)
(United Kingdom)
Sourcesof Level of Education

External Primary/ Post- Degree or Gamma
Finance Secondary Secondary Equivalent Coefficient(G)
.V
Eou-i-ty
Venture no 95.5 86.5 82.8 122

Capital yes 4.5 13.5 17.2 17 407
.
Government no 95.5 91.9 89.7 128

Scheme(BES) yes 4.5 8.1 10.3 11 279
.
Relatives/ no 88.6 89.2 84.5 121
Friends yes 11.4 10.8 15.5 18 140
.
Qf&
Overdraft no 22.7 18.9 20.7 29

yes 77.3 81.1 79.3 110 036
.
Bankloan no 70.5 73.0 62.1 94

(5yrs or less) yes 29.5 27.0 37.9 45 147
.
BankLoan no 75.0 81.1 86.2 113

(above5 yrs) yes 25.0 18.9 13.8 26 -.252
Trade no 79.5 73.0 69.0 102

Supplier 20.5 27.0 31.0 37 188
yes .
Government no 93.2 97.3 91.4 130

Scheme(LGS) 6.8 2.7 8.6 9 142
yes .
Hire-Purchase 54.5 54.1 53.4 75

no
45.5 45.9 46.6 64 016
yes .
Leasing 77.3 70.3 65.5 98

no
22.7 29.7 34.5 41 196
yes .
Factoring 97.7 94.6 86.2 128

no
2.3 5.4 13.8 11 587
yes .
N 44 37 58 139
Appendix 3 13
Table A3.11
Sources of External Finance by Training of Owner-Managers
(Percentage of Response by Training)
(United Kingdom)
Sourcesof Training in Business/Management Gamma

Finance No Training Some Training ti" ((; )
.
Eaai
Venture no 93.6 80.3 122

Capital yes 6.4 19.7 17 563"

Scheme(BES) yes 6.4 9.8 11 229
.
Friends yes 15.4 9.8 18 -.250
2&

yes 78.2 80.3 110 065

(Syrs or less) 28.2 37.7 45 213
yes

(above5 yrs) yes 21.8 14.8 26 -.234
Trade no 78.2 67.2 102

Supplier 21.8 32.8 37 273
yes .

Scheme(LGS) 5.1 8.2 9 246
yes .

no
48.7 42.6 64 -. 122
yes
Leasing 80.8 57.4 98

no
19.2 42.6 41 515"
yes
Factoring 92.3 91.8 128

no
7.7 8.2 11 034
yes .
N 78 61 139
0 S4gn ant at 0.05 significance level, a two-tailed test

Appendix 3 333
Table A3.12
Sources of External Finance by Level of Experience of Owner-Managers
(Percentage of Response by Level of Experience)
(United Kingdom)
Sourcesof Level oL&perience (years)

Extol No Gamma
Finance Experience <5 5-9 10-14 15-19 >19 Coefctent((; )
"V
ui
Venture no 90.9 80.5 88.2 95.7 91.7 88.9 122

Capital yes 9.1 19.5 11.8 4.3 8.3 11.1 17 -. 217
Government no 81.8 90.2 97.1 95.7 83.3 94.4 128

Scheme(BES) yes 18.2 9.8 2.9 4.3 16.7 5.6 11 -. 176
Relatives/ no 81.8 87.8 94.1 78.3 91.7 83.3 121

Friends yes 18.2 12.2 5.9 21.7 8.3 16.7 18 054
.
2&
Overdraft no 27.3 14.6 17.6 30.4 16.7 27.8 29

yes 72.7 85.4 82.4 69.6 83.3 72.2 110 -. 129
BankLoan no 72.7 68.3 64.7 65.2 41.7 88.9 94

(5yrs or less) 27.3 31.7 35.3 34.8 58.3 11.1 45 -.017
yes
BankLoan no 72.7 87.8 76.5 78.3 91.7 77.8 113

(above5 yrs) 27.3 12.2 23.5 21.7 8.3 22.2 26 035
yes .
Trade 81.8 65.9 67.6 87.0 75.0 77.8 102

no
Supplier 18.2 34.1 32.4 13.0 25.0 22.2 37 -. 136
yes
Government 90.9 92.7 97.1 91.3 100 88.9 130

no
Scheme(LGS) 9.1 7.3 2.9 8.7 0 11.1 9 -. 003
yes
Hire-Purchase 63.6 58.5 50.0 43.5 50.0 61.1 75

no
36.4 41.5 50.0 56.5 50.0 38.9 64 078
yes .
Leasing 63.6 65.9 70.6 78.3 66.7 77.8 98

no
36.4 34.1 29.4 21.7 33.3 22.2 41 -. 143
yes
Factoring 100 87.8 91.2 87.0 100 100 128

yes
12.2 8.8 13.0 0 0 11 -.200
no 0
N 11 41 34 23 12 18 139
Appendix 3 334
Table A3.13
by Small Firm Characteristics
(United
Kingdom)
Status of Application
Characteristics Not Successful mss I--_
Size
Employment
(I) I-9 employees 16.7 83.3 42
10 - 19 employees 16.7 83.3 42
20 - 29 employees 15.8 84.2 19
30 - 39 employees 0.0 100.0 13
40 - 49 employees 17.4 82.6 23
N 21 118 _ 139
.
() Below 20 employees 16.7 83.3 84
20 employees & above 12.7 87.3 55
N 21 118 139
.
Ageof Firm
4 years & below 11.8 88.2 17
5- 9years 17.6 82.4 34
10-14 years 25.8 74.2 31
15-19 years 5.9 94.1 17
20 years & above 7.7 92.3 39
N 20 118-- - 138 a
.
Useof External Adviser
N 21 118 139
.
LegalStatus
N 21 118____ 139
.
Sectorof Industry
(i) FabricatedMetal Products 31.0 69.0 29
Textiles 7.1 92.9 28
Publishing, Printing & Recorded Media 16.7 83.3 12
Rubber & Plastic Products 0.0 100.0 11
Wood & Wood Products 0.0 100.0 7
Paper& Paper Products 0.0 100.0 5
Electrical Machinery 16.7 83.3 6
Chemical& Chemical Products 0.0 100.0 4
Motor Vehicles & Parts 0.0 100.0 3
Other Industries 25.0 75.0 28
N 21 118 139
00 Non Technology-based 16.1 83.9 87
Technology-based 13.5 86.5 52
N 21 118 139
.
Bsines Plan
Did not have a written businessPlan 14.1 85.9 85
Had a written businessplan 16.7 83.3 54
N 21 118 139
098 i
Gamma Coefficient (G) -.
a
Np. i .._ -rr`., m
Appendix 3 335
Table A3.14
Existence of Financing Difficulty
(Percentage of Responseby Firm Characteristics)
(United Kingdom)
Existence of Difficulty
characteristics No Difficulty Some Difficulties A.
Size
Employment
(1) I-9 employees 60.0 40.0 35
10 - 19 employees 57.1 42.9 35
20 - 29 employees 50.0 50.0 16
30 - 39 employees 76.9 23.1 13
40 - 49 employees 36.8 63.2 19
N 66 52 118
Gamma Coefficient (Q) 126
66 52 118
_
Gamma Coefficient (Q) 130
Ageof Firm
4 years& below 73.3 26.7 15
5- 9years 53.6 46.4 28
10 - 14 years 47.8 52.2 23
15 - 19 years 50.0 50.0 16
20 years& above 58.3 41.7 36
N 66 52 118
.
Useof ExternalAdviser
N 66 52 118
.
LegalStatus
N 66 52 118
Gamma Coefficient (G) 33 9
-.
Sectorof Industry
60.0 40.0 20
(i) FabricatedMetal Products
53.8 46.2 26
Textiles
30.0 70.0 10
Publishing,Printing & Recorded Media
72.7 27.3 11
Rubber& Plastic Products
85.7 14.3 7
Wood& Wood Products
60.0 40.0 5
Paper& Paper Products
60.0 40.0 5
25.0 75.0 4
Chemical& Chemical Products
60.0 40.0 5
Basic Metals
0.0 100.0 1
FoodProducts& Beverages
25.0 75.0 4
60.0 40.0 20
Other Industries
66 52 118
N
60.3 39.7 73
f+) Non Technology-based
48.9 31.1 45
Technology-based
66 52 118
N
.
BkcinessPlan
53.4 46.6 73
Did not have a written businessPlan 45
60.0 40.0
Had a written businessplan ll8
66 52
N
Appendix 3 336
Table A3.15
by Owner-Manager Characteristics
(United Kingdom)
Characteristics Not Successful Successfid N
Ageof O*mr-Manager
20-29 0.0 100.0 2
30 - 39 4.8 95.2 21
40 - 49 21.4 78.6 56
50-59 16.7 83.3 42
60 & above 5.6 94.4 18
N 21 118 139
.
Levelof Education
N 21 118 139

N 21 118 139
Levelof Experience
4 years& less 19.5 80.5 41
5-9 20.6 79.4 34
years
10 - 14 years 8.7 91.3 23
15- 19 years 8.3 91.7 12
5.6 94.4 18
20 years & over
N 21 118 139
.
Appendix 3 337
TableA3.16
(United Kingdom)
Existenceof Difficulty
Characteristics No D fcuhy SomeDifficulties
,
Ageof Owner-Manager
20 - 29 0.0 100.0 2
30 - 39 50.0 50.0 20
40 - 49 63.6 36.4 44
50-59 45.7 54.3 35
60 & above 70.6 29.4 17
N 66 52 118
Levelof Education
N 66 52 118
.
Tiaining in Business& Management
N 66 52 118
.
Levelof Experience
4 years& less 51.5 48.5 33
5-9 years 55.6 44.4 27
10- 14 years 66.7 33.3 21
15- 19 years 36.4 63.6 11
20 years& over 52.9 47.1 17
66 52 ____ 118
N
.
Appendix 4
CONTINGENCY TABLES
(Malaysia)
Appel 4 339
Table A4.1
Need for External Finance by Small Firm Characteristics
(Percentage of Response by Respondent Category)
(Malaysia)
Finance for Fxpansion
EmploymentSize
(i) I-9 employees 40.5 59.5 42
10 - 19 employees 21.7 78.3 23
20 - 29 employes 7.1 92.9 14
30 - 39 employees 7.7 92.3 13
40 - 49 employees 4.0 100,Q
N 24 88 112
Gamma Coefficient (G) 7/5"
.
N 24 88 112
Gamma Coefficient (G) 840*
.
Ageof Firm
4 years& below 31.0 69.0 29
S-9 years 9.7 90.3 31
10 - 14 years 26.9 73.1 26
1S- 19 years 0.0 100.0 9
20 years & above 30.8 69.2 13
N 23 85 108 a
.
N 24 88 112
Legal Status
N 24 88 112
.
Sectorof Industry
Wood& Wood Products 10.7 89.3 2S
FabricatedMetal Products 23.5 76.5 17
Motor Vehicles & Parts 25.0 75.0 4
Textiles 66.7 33.3 3
leather & Leather Products 0.0 100.0 3
Paper& Products 0.0 100.0 3
Publishing & Printing 66.7 33.3 3
33.3 66.7 3
Chemical & Chemical Products
33.3 66.7 3
Other Transport Equipment
25.0 75.0 12
Other Industries _ 112
N 24 88
21.3 78.8 80
(ii) Non Technology-based
21.9 78.1 32
Technology-based
24 88 112
N
Gamma Coefficient (G) -.018
BwsinusPlan
64.8 54
Did not have a written businessplan 35.2
91.4 58
Had a written bush s plan 8.6
?4 88 112
N
.
Significant at 0.01 sjV#k once level. a two-tailed test
Appendix 4 340
.
TableA4.2
Need for External Finance by Owner-Manager Characteristics
(Percentage of Response by Respondent Category)
(Malaysia)
Finance for Expansion
External Finance External Finance N
Ageof Owner-Manager
20 - 29 23.5 76.5 17
30 - 39 21.1 78.9 38
40-49 18.8 81.3 32
50 - 59 21.7 78.3 23
60 & above 50.0 50.0 2
N 24 88 112
Levelof Education
Primary School 27.8 72.2 18
Secondary/HighSchool 21.8 78.2 55
College/University 17.9 82.1 39
N 24 88 112
.
Training in Business& Management

N 24 88 11-)
Gamma Coefficient (G) 660*
.
Levelof Experience
4 years & below 17.1 82.9 35
5-9 16.7 83.3 30
years
10 - 14 years 40.0 60.0 15
15 - 19 years 0.0 100.0 6
20 years & above 100.0 0.0 2
N 24 88 112
Signjcant at 0.01 significance level, a two-tailed test

Appendix 43 41
TableA4.3(i)
Sources of External Finance by Size Firms
of
(Percentage of Response by Employment Size
(Malaysia)
Sourcesof Employment Size

&iernal c:vmnw
Finance 1-9 10-19 20-29 30-39 40-49 N ('ot fcien! (G)
uity
Venture no 100 100 100 91.7 95.0 86

Capital yes 0 0 0 8.3 5.0 2 732
.
Government no 96.0 94.4 92.3 83.3 90.0 81
Scheme(PUNB) yes 4.0 5.6 7.7 16.7 10.0 7 297
.
Relatives/ no 80.0 72.3 84.6 100 100 76
Friends yes 20.0 27.8 15.4 0 0 12 S420"
-.
Q&
Overdraft no 64.0 61.1 38.5 16.7 15.0 37

yes 36.0 38.9 61.5 83.3 85.0 51 577"
.
BankLoan no 64.0 66.7 61.5 58.3 50.0 53
(Syrs or less) yes 36.0 33.3 38.5 41.7 50.0 35 156
.
BankLoan no 96.0 88.9 84.6 83.3 65.0 74

(above5 yrs) yes 4.0 11.1 15.4 16.7 35.0 14 551**
.
Trade no 64.0 50.0 61.5 66.7 45.0 50

Supplier yes 36.0 50.0 38.5 33.3 55.0 38 133
.
Government no 92.0 77.8 92.3 83.3 80.0 75

Scheme(CGC) 8.0 22.2 7.7 16.7 20.0 13 192
yes .
Hire-Purchase 60.0 61.1 61.5 41.7 20.0 43

no
40.0 38.9 38.5 58.3 80.0 45 398
yes .
Leasing 96.0 94.4 69.2 66.7 65.0 71

no
5.6 30.8 33.3 35.0 17 577""
yes 4.0 .
Factoring 100 100 100 91.7 95.0 86

no 732"
0 0 8.3 5.0 2
yes 0 .
N 25 18 13 12 20 88
' SignOcant at 0.01 significance level, a two-tailed test

S,gn at at 0.05 significance /evil. a two-tailed test
4ppendu 4 342
Table A4.3(ii)
(Percentage of Response by Employment Size
(Malaysia)
Sources of Employment Size
External Gamma
Finance Below 20 Above 20 N Coefficient(G)
ui
Venture no 100 95.6 86

Capital yes 0 4.4 2 1.00

Scheme(PUNB) yes 16.3 15.6 14 -.027

Friends yes 53.5 24.4 34 -. 561
Debt

yes 37.2 77.8 51 710
.

(5 yrs or less) yes 34.9 44.4 35 198
.

(above 5 yrs) 7.0 24.4 14 624
yes .
Trade 58.1 55.6 50

no
Supplier 41.9 44.4 38 053
yes .
Government 86.0 84.4 75

no
Scheme(CGC) 14.0 15.6 13 064
yes .

no 432
39.5 62.2 45
yes .
Leasing 95.3 66.7 71

no 8"
4.7 33.3 17
yes .
100 95.6 86
Factoring no
4.4 2 1 00
%'es 0 .
45 88
N 43
Appendix 4 343
TableA 4.4
Sources of External Finance by Age of Firms
(Malaysia)
Sourcesof Age of Firms (years)

Extern! - Gamma
Finance <5 5-9 10-14 15-19 >19 N Coefficient(G)
ui
Venture no 95.5 100 94.7 100 100 86

Capital yes 4.5 0 5.3 0 0 2 263
-.
Government no 95.5 89.3 94.7 88.9 90.0 81

Scheme(PUNB) yes 4.5 10.7 5.3 11.1 10.0 7 124
.
Relatives/ no 68.2 100 78.9 100 90.0 76
Friends yes 31.8 0 21.1 0 10.0 12 -.352
Debt
Overdraft no 55.0 53.6 26.3 11.1 33.3 35

yes 45.0 46.4 73.7 88.9 66.7 50 393
.
BankLoan no 65.0 64.3 57.9 33.3 55.6 50

(5yrs or less) yes 35.0 35.7 42.1 66.7 44.4 35 197
.
BankLoan no 80.0 96.4 73.7 66.7 88.9 71

(above5 yrs) yes 20.0 3.6 26.3 33.3 11.1 14 152
.
Trade 65.0 53.6 42.1 77.8 77.8 50

no
Supplier 35.0 46.4 57.9 22.2 32.2 35 -. 058
yes
Government no 80.0 75.0 94.7 88.9 100 72

Scheme(CGC) 20.0 25.0 5.3 11.1 0 13 -.416
yes
Hire-Purchase 65.0 42.9 36.8 33.3 55.6 40

no
35.0 57.1 63.2 66.7 44.4 45 204
yes .
Leasing 90.0 78.6 68.4 66.7 100 68

no
21.4 31.6 33.3 0 17 137
yes 10.0 .
Factoring 100 94.7 100 100 83

no 95.0
5.3 0 0 2 -.271
yes 5.0 0
19 9 9 858
N 20 28
a Number MissingCasts
of -3
Appendix 4 344
Table A4.5
Sources of External Finance by Use of External Financial Advisers
(Percentage of Response by Use of Advisers)
(Malaysia)
Sourcesof Use of External Advisers

External Gamma
Finance Did Not Use Used Coefficient
External Advisers External Advisers N V)
&ui
Venture no 100 97.4 86

Capital yes 0 2.6 2 1.000
Government no 100 90.8 81

Scheme(PUNB) yes 0 9.2 7 I. 00"

Friends 8.3 14.5 12 301
yes .
Debt
Overdraft 50.0 39.1 37

no
50.0 60.9 51 219
yes .
BankLoan 66.7 57.8 53

no
33.3 42.2 35 187
(5yrs or less) yes .
91.7 81.3 74
BankLoan no
8.3 18.8 14 435
(above5 yrs) yes .
58.3 56.3 50
Trade no
43.8 38 043
Supplier yes 41.7 "
87.5 84.4 75
Government no
15.6 13 129
Scheme(CGC) yes 12.5 .
66.7 42.2 43
Hire-Purchase no 465
33.3 57.8 45 .
yes
75.0 1
Leasing no 95.8 769 "
4.2 25.0
yes
97 44 86
Factoring no 100 .
7 2 1 000
0 . .
yes
64 88
N 24
' Sign 0.01 significance level, a two-railed test

nt at
Appendix 4 345
Table A4.6
Sources of External Finance by Legal Status
(Percentage of Response by Legal Status)
(Malaysia)
Sourcesof Legal Status

External Sole Private Gamma
Finance Proprietorship Partnership Limited N Coefficient(G)
ui
Venture no 100 100 97.2 86

Capital yes 0 0 2.8 2 1.000
Government no 100 100 90.1 81

Scheme(PUNB) yes 0 0 9.9 7 1.00
Relatives/ no 60.0 71.4 91.5 76

Friends yes 40.0 28.6 8.5 12 -. 680**
2&
Overdraft no 80.0 71.4 33.8 37

yes 20.0 28.6 66.2 51 711"
BankLoan no 90.0 57.1 56.3 53

(5yrs or less) yes 10.0 42.9 43.8 35 448
.
BankLoan no 100 85.7 81.7 74

(above5 yrs) yes 0 14.3 18.3 14 580
Trade no 50.0 100 53.5 50

Supplier yes 50.0 0 46.5 38 275
Government no 90.0 100 83.1 75

Scheme(CGC) yes 10.0 0 16.9 13 488
Hire-Purchase no 90.0 57.1 42.3 43

10.0 42.9 57.7 45 637""
yes
Leasing 90.0 100 77.5 71
no
0 22.5 17 610
yes 10.0 .
Factoring 100 100 97.2 86

no
0 0 2.8 2 1.00
10 7 71 88
N
Sign cant of 0.01 significance level, a two-toiled test

Signiftrnnt at 0.05 significance level, a two-tailed test
Appenda 4 346
Table A4.7(i)
(Malaysia)
Sources of Sector of Industr/

External
Finance WWP FMP FPB RPP BMT MVP TEX LLP PPP PPR CC%t ON. 0TH
i!
Venture no 100 92.3 100 100 100 66.7 100 100 100 100 100 100 100 86
Capital yes 0 7.7 0 0 0 33.3 0 0 0 0 0 0 0 2
Government no 72.0 76.9 81.8 100 100 100 100 66.7 100 100 100 100 88.9 74
Scheme(PUNB)yes 28.0 23.1 18.2 0 0 0 0 33.3 0 0 0 0 11.1 14
Relatives/ no 64.0 46.2 18.2 90.0 100 100 0 0 33.3 100 100 100 77.8 54
Friends yes 36.0 53.8 81.8 10.0 0 0 100 100 66.7 0 0 0 22 2 34
DOI
Overdraft no 44.0 38.5 72.7 10.0 20.0 0 100 66.7 0 0 50.0 100 55.6 37
yes 56.0 61.5 27.3 90.0 80.0 100 0 33.3 100 100 50.0 0 44.4 51
BankLoan no 64.0 76.9 81.8 30.0 40.0 33.3 0 66.7 100 0 50.0 0 66.7 5;
(3yrs or less) yes 36.0 23.1 18.2 70.0 60.0 66.7 100 33.3 0 100 50.0 100 33.3 35
BankLoan no 92.0 61.5 100 80.0 60.0 66.7 100 100 66.7 0 100 100 100 74
(aboveSyrs) yes 8.0 38.5 0 20.0 40.0 33.3 0 0 33.3 100 0 0 0 14
Trade no 52.0 61.5 45.5 70.0 80.0 33.3 100 33.3 33.3 100 100 100 44.4 50
Supplier yes 48.0 38.5 54.5 30.0 20.0 66.7 0 66.7 66.7 0 0 0 55.6 38
Government 84.0 84.6 100 90.0 80.0 66.7 100 66.7 100 100 0 100 88.9 75
no
Scheme(CGC) yes 16.0 15.4 0 10.0 20.0 33.3 0 33.3 0 0 100 0 I. 1 13
Hirc-Purchase no 36.0 53.8 90.9 20.0 20.0 33.3 100 33.3 66.7 100 50.0 50.0 66.7 43
64.0 46.2 9.1 80.0 80.0 66.7 0 66.7 33.3 0 50.0 50.0 33.3 45
yes
Leasing 76.0 92.3 90.9 60.0 60.0 66.7 100 66.7 100 100 100 100 88.9 71
no
24.0 7.7 9.1 40.0 40.0 33.3 0 33.3 0 0 0 0 I1 17
yes
Factoring 100 100 100 100 80.0 66.7 100 100 100 100 100 100 100 86
yes 2
0 0 20.0 33.3 0 0 0 0 0 0 0
no 0 0
5 3 1 3 3 2 2 9 88
N 25 13 11 10
a
LLP Leather & Leather ProdUM
314'PWood & Wood Products
PUP Fabricated Metal Products PPP Paper & Paper Products
FPB Food Products & Beverages PPR Publishing. Printing A Reproduc-
tion of Recorded Media
RPP Rubber & Plastic Products
C(M Chemical & Chemical Products
BUT Basic Metals
OTE Oder Trwiuport Egiupmew
Mi'P Motor Vehicles& Parts
TEX Textiles OTH Other Industries
Appendix 4 347
Table A4.7()
Sources of External Finance by Type of Industry
(Percentage of Response by Type of Industry)
(Malaysia)
Sourcesof Type of Industry Gamma

External ('oelictertl
Finance Non Technology-based Technology-based N (G)
ui
Venture no 98.4 96.0 86

Capital yes 1.6 4.0 2 442
Government no 88.9 100 81

Scheme(PUNB) yes 11.1 0 7 -1.00"

Friends yes 15.9 8.0 12 -. 369
Debt

yes 50.8 76.0 51 508

(Syrs or less) yes 34.9 52.0 35 338

(above5 yrs) 14.3 20.0 14 200
yes
Trade no 55.6 60.0 50

Supplier 44.4 40.0 38 -. 091
yes

264
Scheme(CGC) 12.7 20.0 13
yes

no
49.2 56.0 45 136
yes
Leasing 82.5 76.0 71

no 198
17.5 24.0 17
yes .
Factoring 98.4 96.0 86

no 2 442
1.6 4.0
yes
24 64 88
N
0 Signifcant at 0.01 significance level a two-tailed test

Appendix
4 348
Table A4.8
Sources of External Finance by Business Plan
(Percentage of Response by Business Plan)
(Malaysia)
sourcesof BusinessPlan Gamma
External Did not have a written Had a written

Finance business plan business plan ti l(. i)
Venture no 97.1 98.1 86

Capital yes 2.9 1.9 2 -. 20g

Scheme(PUNB) yes 11.4 18.9 7 286

48.6 32.1 12 -.?? 3
Friends yes
Debt
Overdraft 42.9 41.5 37

no
57.1 58.5 51 08
yes
BankLoan 57.1 62.3 53

no
42.9 37.7 35 -. 106
(5yrs or less) yes
91.4 79.2 74
BankLoan no
20.8 14 4 7+
(aboveSyrs) yes 8.6
57.1 56.6 50
Trade no
Supplier yes 42.9 43.4 38 Oil
91.4 81.1 75
Government no
Schare (CGC) 8.6 18.9 13 425
yes
54.3 45.3 43
Hire-Purchase no 179
45.7 54.7 45
yes
81.1 71
Leasing no 80.0
17 -.036
20.0 18.9
yes
96.2 86
Factoring no 100
0 3.8 2 1.00'
yes
53 88
N 35
' Significant at 0.01 significance level, a two-tailed test

Appendix 4 349
Table A4.9
Sources of External Finance by Age of Owner-Managers
(Malaysia)
Sourcesof Age Category (years)

External Gamno
Finance 20-29 30-39 40-49 50-59 >59 N Coefficient(G)
Venture no 92.3 100 100 94.4 100 86

Capital yes 7.7 0 0 5.6 0 2 049
-.
Government no 100 93.3 92.3 83.3 100 81

Scheme(PUNB) yes 0 6.7 7.7 16.7 0 7 450
.
Relatives/ no 76.9 83.3 88.5 94.4 100 76
Friends yes 23.1 16.7 11.5 5.6 0 12 -.365
Debt
Overdraft no 46.2 60.0 38.5 11.1 100 37

yes 53.8 40.0 61.5 88.9 0 51 392
.
Bank Loan no 69.2 70.0 57.7 38.9 100 53

(5yrs or less) yes 30.8 30.0 42.3 61.1 0 35 305
.
Bank Loan no 92.3 83.3 80.8 83.3 100 74

(above5 yrs) yes 7.7 16.7 19.2 16.7 0 14 119
.
Trade no 53.8 60.0 53.8 61.1 0 50

Supplier 46.2 40.0 46.2 38.9 100 38 012
yes .
Government 76.9 73.3 96.2 94.4 100 75

no
Scheme(CGC) 23.1 26.7 3.8 5.6 0 13 -. 535
yes
Hire-Purchase 61.5 43.3 50.0 50.0 0 43

no
56.7 50.0 50.0 100 45 065
yes 38.5 .
Leasing 92.3 66.7 88.5 83.3 100 71

no 135
7.7 33.3 11.5 16.7 0 17 -.
yes
Factoring 96.7 100 100 100 86

no 92.3
0 0 0 2 -. 817
yes 7.7 7.3
26 18 1 88
N 13 30
Appendix 4 35o
Table A4.10
Sources of External Finance by Level of Education of Owner-Managers
(Percentage of Response by Level of Education)
(Malaysia)
Sourcesof Level of Education-

External Primary Secondary/Nigh College! Gamma
Finance School School University ti' (', t1i ic,i ;
ui
Venture no 100 97.7 96.9 86

Capital yes 0 2.3 3.1 2 374
.
Government no 69.2 97.7 93.8 81
Scheme(PUNB) yes 30.8 2.3 6.3 7 -.483
Relatives/ no 84.6 88.4 84.4 76

Friends yes 15.4 11.6 15.6 12 062
.
Debt
Overdraft no 69.2 41.9 31.3 37

yes 30.8 58.1 68.8 51 387
.
BankLoan no 76.9 58.1 56.3 53

(5yrs or less) yes 23.1 41.9 43.8 35 193
.
BankLoan no 84.6 93.0 71.9 74

(above 5 yrs) 15.4 7.0 28.1 14 432
yes .
Trade 53.8 62.8 50.0 50

no
Supplier 46.2 37.2 50.0 38 121
yes .
Government 84.6 86.0 84.4 75

no
Scheme(CGC) 15.4 14.0 15.6 13 027
yes .
Hire-Purchase 53.8 60.5 31.3 43

no 373
46.2 39.5 68.8 45
yes .
Leasing 92.3 83.7 71.9 71

no 402
7.7 16.3 28.1 17
yes .
100 93.8 86
Factoring no 100
0 6.3 1.00"
yes 0
43 32 88
N 13
Sign caoniof 0.01 significance level, a two-tailed tut

Appendix43 51
Table A4.11
Sources of External Finance by Training of Owner-Managers
(Percentage of Response by Training)
(Malaysia)
Sourcesof Training in Business/Management Gamma

Firme No Training Some Training N rc;
Venture no 92.3 98.7 86

Capital yes 7.7 1.3 2 721
-.
Government no 100 90.7 81

Scheme(PUNB) yes 0 9.3 7 1.000

Friends yes 23.1 12.0 12 -. 375
Debt

yes 69.2 56.0 51 -.277

(5yrs or less) yes 15.4 44.0 35 624
.

(above5 yrs) 30.8 13.3 14 -.486
yes
Trade 53.8 57.3 50

no
Supplier 46.2 42.7 38 -.071
yes
Government 100 82.7 75

no
Scheme(CGC) 0 17.3 13 1.00'
yes

no 461
30.8 54.7 45 .
yes
Leasing 84.6 80.0 71

no 158
15.4 20.0 17 .
yes
97.3 86
Factoring no 100
2.7 2 1 000
yes 0 .
75 88
N 13
Sagnotcant
at 0.01 significance level, a two-tailed test
4ppedix
4 352
Table A4.12
Sources of External Finance by Level of Experience of Owner-Managers
(Percentage of Response by Level of Experience)
(Malaysia)
Sources
of Levelof Experience
(years)
&rlernal No Gamma
Finance Experience <5 5-9 10-14 15-19 N Coefficient(G)
ui
Venture no 100 100 92.3 100 100 86

Capital yes 0 0 7.7 0 0 2 51t,
.
Government no 89.5 96.4 92.3 77.8 100 81

Scheme(PUNB) yes 10.5 3.1 7.7 22.2 0 7 086
.
Relatives/ no 89.5 82.1 84.6 88.9 100 76

Friends yes 10.5 17.9 15.4 11.1 0 12 -. 079
D&I
Overdraft no 42.1 53.6 26.9 44.4 50.0 37

yes 57.9 46.4 73.1 55.6 50.0 51 100
.
BankLoan no 63.2 50.0 65.4 66.7 66.7 53

(5yrs or less) 36.8 50.0 34.6 33.3 33.3 35 -.099
yes
BankLoan 84.2 89.3 73.1 88.9 100 74

no
15.8 10.7 26.9 11.1 0 14 023
(aboveSyrs) yes .
Trade 57.9 60.7 53.8 44.4 66.7 50

no
42.1 39.3 46.2 55.6 33.3 38 062
Supplier yes .
Government 94.7 75.0 92.3 77.8 83.3 75

no 077
Scheme(CGC) 5.3 25.0 7.7 22.2 16.7 13
yes .
Hire-Purchase 47.4 50.0 42.3 55.6 66.7 43

no 45 059
52.6 50.0 57.7 44.4 33.3 -.
yes
85.7 84.6 77.8 100 71

Leasing no 63.2
22.2 0 17 -. 334
yes 36.8 14.3 15.4
96.2 100 100 86

Factoring no 100 96.4
0 0 2 083
0 3.6 3.8 .
Yes
9 6 88
N 19 28 26
Appendix 4 353
Table A4.1.3
(Malaysia)
Status oA /"non
Characteristics Not Successful Successful
EmploymentSize
(i) I-9 employees 36.0 64.0
10 - 19 employees 22.2 77.8 I8
20 - 29 employees 15.4 84.6
30 - 39 employees 8.3 91.7 12
40 - 49 employees S_0 93.0 20
N 17 _ 71 88
Gamma Coefficient (G) 546"
.
20 employees& above 8.9 91.1 dS
N 17 71 88
Gamma Coefficient (G) 632"
Age of Firm
4 years & below 20.0 80.0 20
5-9 years 21.4 78.6 2S
10 - 14 years 21.1 78.9 19
15 - 19 years 11.1 88.9 9
20 years& above 0.0 100.12 9
N 17 71 85'
Used External Adviser 64
N 17 71 88
Gamma Coeecient (G) 233
LegalStatus .
Private Limited 14-1 85.9 71
71 ' $$
N 17
-
.
Sectorof /ndustdy
(i) Wood& Wood Products 8.0 92.0 2S
FabricatedMetal Products 23.1 76.9 13
0.0 100.0 5
Basic Metals
33.3 66.7 3
Textiles 100.0 0.0 I
Leather& Leather Products 66.7 33.3 3
33.3 66.7 3
Paper& Products
0.0 100.0 1
Publishing& Printing 4
Chemical& Chemical Products 0.0 100.0
0.0 100.0 2
Other Transport Equipment
22 2 77.8
Other Industries . 88
17 71
N h3
20.6 79.4
(ii) Non Technology-based 23
Technology-based -14.4----- 88
1 71
N .
.
BusinessPlan 33
20.0 80.0
Did not have a written businessplan $I1 53
Had a written businessplan 18.9
71 88
N
.
Sign(f cant at 0.05 significance level, a two-wiled test

Numberof Missing Cases -3
pndu i 54
Table A4.14
(Malaysia)
Existenceof 1)afj
.u. ti
Characteristics No Difficulty Some DifficuIiws
Employment Size
(i) I-9 employees 37.5 6_ 5 16
10 - 19 employees 57.1 42.9 14
20 - 29 employees 36.4 63.6 I1
30 - 39 employees 45.5 54.5
40 - 49 employees 68.4 31 h 19
N 36 35 71
-.
20 employees & above 53.7 46.3 41
N 36 -- -- --- 35 -
11
-.
Age of Firm
4 years & below 31.3 68.8 16
S- 9years 54.5 45.5 22
10 - 14 years 60.0 40.0 IS
IS- 19 years 87.5 12 5 8
20 years & above 22.2 77 S 9
N 35 3. 79
Gamma Coefficient (G) -/61 i
N 36 35 71
275 ----
Gamma Coefficient (G)
.
LegalStatus
Partnership 33.3 66.7 r,
N 36 35 71
Sectorof Industry
(i) Wood & Wood Products 39.1 60.9 23
Fabricated Metal Products 60.0 40.0 10
71.4 28.6 7
Food Products & Beverages
Rubber & Plastic Products 66.7 33.3 9
40.0 60.0 5
Basic Metals
0.0 100.0
100.0 0.0 1
leather & LeatherProducts
Paper& Products 100.0 0.0
0.0 100.0 1
Publishing& Printing 2
50.0 50.0
Chemical& Chemical Products
0.0 100.0
Other Transport Equipment 7
Al 42 9
Other Industries ;1
36 5
N 49.0 49
fi) Non Technology-based 51.1
Technology-based so36o o.0 22
- 71
N
BksinrssPlan 29
53.6 46.4
Did not have a written businessplan SI2 4)
Had a written businessplan 48.8
36
.N Gamma Cot,ftient (G) 095
a
Numberof Missing Casts

AppendLr 4 %55
It
-
Table A4.15
(Malaysia)
Characteristics Not Successful Se cessful `'
,
20 - 29 38.5 61.5 13
30 - 39 23.3 76.7 30
40 - 49 15.4 86.6 26
50 - 59 5.6 94.4 18
60 & above 0.0 100.0 1
N 17 71 88
.
Levelof Education
N 17 ---- 71__.
___ _- 88
Gamma Coefficient (G) 427 - - -
.
Training in Business & Management

N 17 71 88
.
Levelof Experience
4 years& less 21.4 78.6 28
5-9 19.2 80.8 26
years
10 - 14 years 11.1 88.9 9
1S- 19 years 0.0 100.0 6
"0 years& over 100.0 0.0 2
17 71 88
N
Appendix 4 356
Table A4.16
(Malaysia)
Existence of Difficulty
Characteristics No Difficulty SomeDifficulties N
Ageof Owner-Manager
20 - 29 25.0 75.0 8
30 - 39 56.5 43.5 23
40 - 49 48.5 54.5 22
50 - 59 64.7 35.3 17
60 & above 0.0 100.0 1
N
Levelof Education
N 1A 35 71
.
Training in Business& Management

70.0 30.0 10
No Training
47.5 52.5 61
SomeTraining
36 35 71
N
.
Levelof Experience
42.9 57.1 14
No Working Experience
45.5 54.5 22
4 years & less 21
52.4 47.6
5-9 years
55.6 44.4 9
10 - 14 years
80.0 20.0 S
15 - 19 years
0.0 0.0 0
20 years & over
36 35 71
N
Appendix 5
CASE STUDIES SUMMARY

4pile': JLr 5 358
Case Studies Summary
Note
To preserve business confidentiality the
actual names HHJ the firms and
the owner-managers have not been used. In some
of the cases the
financial data have been omitted at the
request of the owner-managers
The case studies are developed to illustrate the financing
practice and
problems ofgrowing firms which are a particular concern of this
stud"
They are not intended to illustrate eithergood
or bad businesspractice
A 4.1 THE U. K. CASE STUDIES
Firm A
The firm was founded in 1988 by the present owner who had previously been
employed as a
managerin a textile company for sixteen years. The firm was initially financed through the
personalsavings of the owner. In order to help the firm started its operation, the owner brought
in oneof his friends who contributed his own savings. Both of them becamedirectors after the
firm was registered as a private limited company. The company obtained its first external finance
in that year through a short-term loan from the bank. The main activity of the company is to
produceunderwear fabric. The product is manufactured for various customers. Besidesthe two
directors who are involved full time in the business, the company is also employing twelve full
time and two part time workers.
The company's primary sources of internal finance have been derived from the
directors' personal savings as well as retained profits. The external sources of finance used h,
thecompany have been bank overdraft and term loans as well as leasing and hire purchase. The
low level of technology within the firm makes it inexpensive to invest in the fixed assets;therefore
thecompany can afford to purchase some new and second hand machines. Other equipment and
machineryis obtained through leasing facilities.
The company intends to grow steadily by improving production methods rather than
its
takingon more employees, therefore it plans to increase production capacity by installing more
equipmentand machinery. By leasing (operating) the company will incur less maintenancecosts
sincesuch costs are borne by the lessor. The working capital will be financed through the bank
especiallyfor the purchase of raw materials. To this end, the company is planning to computerise
its records. At day-to-day bookkeeping jobs have been done by one of the directors.
present all the
For the computerisation plan, the company is seeking help and advice from in
experts this area
Appendix 5 359
The company has been getting good advice on financial matters from
outside accoun-
tants. Since it has a good relationship with the bank, it has also been receiving
advice from the
bank managers. The expansion plan will be mostly financed through standard bank facilities.
Sincethe bank has never turned down an application for finance from the compan,N, it will never
consider any other sources, as pointed out by one of the directors:
It is a waste of time asking somebody else to finance the expansion since we have
a very good
relationship with the bank.
Firm B
Firm B, founded in 1970 by the present owner (Mr. J) and a partner (Mr. K), was started with
a bank loan. The firm, a private limited company, is primarily a manufacturer of stripping,
strapping and padded collars for the footwear trade. Over the last twenty five years the company
hadbeenexpanding into other industries, including pet products, saddlery, luggageand handbag.
Thefirm owns a modern 5,000 square foot building and employs 25 full-time personneland a team
of outworkers.
In 1992, Mr. L joined the company as Operations Director and in 1993 was promoted
to Managing Director. Mr. L subsequently acquired a 25 percent shareholding in the company,
whenMr. C retired, with the balance of shares held by Mr. B. Mr. L's appointment has brought
to the company his thirty-year experience in the footwear trade. The company has continued to
expandwith a policy of providing a manufacturing service in close liaison with customer, some
of whom supply their own materials.
Besides serving the U. K. market, the company also serves overseas markets either
directly or through agents. Because of the general decline in footwear industry, the company has
to look at other related markets. To this end it has acquired an elastic agency in Italy and a buckle
in
andtrim agency Spain. Other areas which the company is developing are its cutting service,
leatherconversion and foam supplied to customers' requirements.
With a successful track record, as well as good relations with its bankers, the firm has
faced difficulties in finance for its expansion plans. The company has
never any major raising
facilities from bank, expansion plans have been funded
regularly obtained overdraft the and some
out of retained profits. In fact, the company had recently purchased new machines through self-
financing. A recent application for external finance, made in 1994. to
was expand into overseas
for the purpose of purchasing fixed assets, as well
markets. A long-term bank loan was approved
to retain the ownership of
as financing working capital. With the directors' strong commitment
finance. The main sources of
the company, they have a strong aversion to the venture capital
financial advice have been bank managers and the firm's accountant.
Appendix 53 60
Over the next two to three years the company does not intend to
expand, but plans to
its in
improve sales performance overseas markets: U. S.A., France, Sweden,GermanN,ItaIN and
Spain. As a result, the company is making an investment in setting up a holding company
specially to look after the overseas markets.
Firm C
In 1982 Mr. C with two other partners founded a limited company which produced medical
equipment for hospitals. The three of them became directors of the company and they divided the
initial equity equally. The company's initial capital was not adequate,therefore they searchedfor
external finance and successfully obtained a bank loan. The company also received financial
support from Department of Trade and Industry under the DTI Enterprise Initiative Scheme. The
company has grown successfully over the last ten years and its competitive advantageis related
to its technology-based products. The company is a leading gas pendantmanufacturer in the U. K.
lt also designs and produces intensive care beam, ceiling and wall-mounted medical gas pendants
and surgeon's control panels.
In 1991 the other two directors resigned from the company. Their shares in the
company were paid back through the sale of some of the company's assets. Since then the
companyhas been managed by Mr. C alone. With twelve full-time employees,the company has
beengrowing very rapidly in local as well as export markets. In building its current market
position the primary sources of finance have been both internal (retained profits and
director's loan) and external (bank overdrafts, a bank term-loan and hire purchase). In obtaining
bank finance, the firm has always faced a problem of a lack of collateral. In order to keep the
expansiongoing as planned, the directors have had no choice but to adhere to bank pressure to
provide personal guarantees for the borrowing.
In the next three years the company is planning to grow steadily. The company is
currently negotiating a joint venture project with a firm in Malaysia to manufacture and supply
intensivecare systems to hospitals in that country. At present, besides U. K., the company is
Gulf Countries. Finance is not considered to
supplying its products to Hong Kong, China and
bea problem since the company has a good track record as well as having a good relationship with
thebank. The only problem which disturbs Mr. C is the availability of suitable collateral and the
company'shigh debt-equity ratio:
from bank but it is the worst thing you can do

It is always very tempting to accept money the
improving the ratio and I want to keep
if the debt to equity ratio goes wrong. 1'm gradually
that going.
Appendix 5 361
Firm D
After having been dissatisfied with his job as a sales manager in a large machinery manufacturing
company, Mr. D decided to run his own business in 1986. Mr. D, his wife and one their friends
agreed to operate a textile business, a private limited company, in Nottingham. The initial capital
of the business was 28,000, split between personal funds and a bank loan. The company also
obtained overdraft facilities for working capital as well as hire purchase for machinery. Since
then the company's growth has been rapid and sustained. The company has moved from
Nottingham to Loughborough as part of its expansion plans.
In 1995, the company managed to obtain 100 percent bank loan (ten years) to purchase
its present building. The move to the new factory which is located in Coalville is consideredby
Mr. D as the biggest expansion the company has ever achieved. The company bought additional
machinery through hire purchase. Since the company could not sell the old factory, it has also
beenrelying on retained profits and an overdraft facility of 15,000 to cater for the growth. The
company has increased the number of employees from 15 (in 1995) to 23. The production activity
hasbeenincreased from two shifts (1995) to three shifts. The company doesnot intend to expand
beyondthe present capacity or range of product lines.
Firm E
Firm E, a private limited company, was established in 1991 in Melton Mowbray by Mr. E and
friend. Mr. E his friend to work with a big company involved in publishing. Both of
a and used
them decided to leave the company as a result of redundancy due to the closure of its technical
production unit. Their new company's main activity is producing all types of technical
publications including illustrations and instructions. They took over most of their previous
did outside finance since most of the financial
employer'scustomers, therefore they not require
from At defence play an important part in the growth
needscame their sales. present, contracts
There in the market but the company's
of the company's sales. are a number of competitors
E, from aimed at giving its clients
competitive edge, according to Mr. stems a philosophy
The company does not carry out any
competitive advantages through better quality publications.
but machines, equipment and
research and development activity uses the most up-to-date
documents such as CDs.
software. It also generates its own software and produces electronic
finance especially bank

At present, the company does not and will not use any external
financial community. The company
finance. In general, the company appears suspicious of the
its client are good payers and
hasa very strong cash flow position. It is lucky in the sensethat
four to five days after completion;
the payment for the work completed is normally received
Mr. E did once apply for substantial
therefore it does not need any external finance. However.
300.000 but the bank would only
bankfinance when the company secured a defence contract of
4ppc'rJtr 5 36"
.
give about 30,000 so he turned down the offer. The company has used leasing for a machine
from Rank Xerox but Mr. E is quite unhappy with this type of facility
since the machinequickly
becameoutdated; by the end of its lease term the machine was no longer productive. therefore
the company had invested 85,000 in new machines from cashflow in 1995. Mr. E has
no plans
to useventure capital financing, since the company has a very strong cash flow and he does
not
want to dilute control.
Regarding the company's growth, Mr. E points out that the

company has a very good
record of growth in both employment and sales. The company has beenincreasing its employees:
from four to twenty-six people in just four years. In 1995 the company's sales were
estimatedto
bearound 800,000. However due to the nature of the industry, the company's sales growth has
beenfluctuating since almost all of its sales dependon contracts particularly in defencebusiness.
However Mr. E is confident that the company's growth can be sustained since it has a sound
reputation. In fact Mr. E is now planning to look for another bigger job. Therefore he has decided
to moveinto another rented building(in Grantham) which is more than twice the sizeof the present
premise.
Firm F
After working with a machine tool manufacturing company as a sales manager for four
years,Mr. F formed his own company in Hinckley in 1971 with start-up capital entirely from his
own savings. The firm produces machine tools for automotive industry. Its market are
predominantly second line automotive component suppliers such as Bosch and Lucas. The
company'sgrowth has been financed using retained profits as well as bank term loan and other
external sources.
In 1981 the company made a major investment in its

setting up salesoffice in the U. S.A.
Sincethat country is the largest industrial country in the world, the company decided to have a
base there. The investment was financed through a bank term-loan and retained profits.
However,the investment was not financially successful for almost ten years. The problem related
down in automobiles. During the
to declining market demand due to the slow manufacturing of
from Japan. Only in
period the American automobile industry was under pressure particularly
improve, the demand for the
1991, the demand for American cars began to and as a result
has increased its turnover and has
company'sproduct increased. As a consequence,the company
improved its cash flow.
from Hinckley to Nuneaton. The new building space

In early 1996, the company moved
is three times the size of the previous premises. The move has been financed partly through the
85 the total funds required. The
Small Firms Loan Guarantee Scheme (LGS) up to percent of
for a period of fire years on the
balance is financed by British Coal and the loan is given
APPenda ` 363
understanding that the company employs ten more people during the
period. The companN is
entitled to this scheme since it operates in an ex-coal mining area. The new machineshave been
purchased using hire purchase facilities through finance companies. The
company has also
obtained overdraft facilities from the bank. Despite the relative
ease of obtaining external
finance, Mr. F complains that he has to provide excessive security/collateral for
the finance. He
hasto provide a personal guarantee, life insurance policies as
well as chargeson personal and
company'sproperties.
With its present employees of 24 people (and 2

part-time workers), the company is
planning to expand further in terms of investment over the next three years. The
company is
planning to design and manufacture certain products. However, it will not undertakethese
plans
unlessits market research indicates that the investment is viable.
Firm G
The firm, a private limited company, was founded by Mr. G and his wife in 1985. The
company's
initial capital was supplemented by a cash injection from the sale of Mr. G's
previous company
and a government-backed scheme (Enterprise Allowance Scheme). The company is producing
polyurethane floormats and trims for heavy vehicle industry.
Its first production started in 1986. In 1990 the company started to expandrapidly. The
companyhad been appointed as a sole supplier to JCB. As a result of this expansion,the company
neededmore raw materials and employed more employees (currently the company employs 26
people). The company also purchased more machines and equipment in order to increase
production. The building space was also extended. Owing to the increasein raw material prices,
the company decide to manufacture its own raw materials. With the help of a university the
companymanaged to achieve this objective. The funds neededfor the expansionwere generated
from bank term-loan, overdrafts, and hire purchase and leasing for the machinesand equipment.
The company also benefited from a government-backed equity scheme (Business Expansion
Scheme). During that time, Mr. G claims to have had no difficulty in obtaining finance, and
attributes his financial success to his technical background and product knowledge (his previous
companymanufactured the same type of product and had been in operation for almost nine years
beforehe sold the company to a PLC).
The company's over-dependence as a single source supplier to JCB had

in
almost pushed him out of the business. The increase raw material prices coupled with the
downturn in the demand from heavy vehicle industry had depressedthe company's profit margin.
Mr. G was lucky that the bank manager, being an old friend, did not call in the loan. To help ease
thisproblem, Mr. G had developed more customers. Whilst the company's sales to JCB accounted
for 70 percent of its turnover in 1993, it has now reduced to 40 percent. The company managed
to compete with a Korean company to win a contract with Samsung in Harrogate.
Appendix ' 164
In 1994 the company moved into the present building (in Chesterfield)
%%hich was
bought by his brother. After some renovations, his brother agreed to lease the building to the
company. His brother had also put in some equity capital in the company. Over 1994-1995, the
prices of raw materials kept on increasing. The company had no choice but to increasethe price
of its product in order to cope with the increase in the prices of raw materials. As a result the
company had lost one substantial contract. The next problem related to competition from his
previous firm which is now owned by a cash rich PLC.
Without expanding beyond the capacity of his present factory, Mr. G is now planning
to develop a new product called 'castable foam' and for that purpose it has been offered an
innovation grant of 20,000. The company's way forward is to go for the Europeanmarkets. and
it is considering expansion into a non-automotive industry, namely the leisure industry. Growth,
according to Mr. G, requires more competitive product range, yet the cost of financing the growth
is quite high. He agrees that obtaining adequate finance would be a problem. His past experience
also showed that, despite the relative ease of obtaining some finance, he has to pay high interest
to
rate as well as provide excessive collateral for the loan.
Firm H
Firm H, a limited company, was formed by Mr. H in Derby in 1987. The initial capital of the
companywas shared by Mr. H (75 percent) and his wife (25 percent). With two full time and three
is involved in the designing of dust control unit for the
part time employees, the company actively
dust control industry worldwide. The company also employs eight self-employed sales agents.
The products are currently being used in the quarry, cement, mixed concrete, and metal
Besides U. K., the also manufactured through joint venture firms
reclamationplants. products are
in Europe, U. S.A., Japan and India.
in
The company has been growing steadily the last two years. In terms of turnover, the
in 1995 to 1994. Mr. H has no plan to expand further
company'ssales have doubled compared
be more widely known in the
in the near future. However he does hope that the products will
market place in the next two to three years.
has been using both internal and

Regarding financial facilities, the company
savings and director's
external sources. Internal sources consist of retained profits, personal
hire-purchase and leasing.
loan. External sources consist of bank overdrafts, trade suppliers,
with the banks Mr.
However, the company seemsto have encountered some painful experience
funds under the Small Firms
H had tried to approach few banks for the possibility of obtaining
about the banks:
Loan Guarantee Scheme (LGS). He has one major complaint
5
+ppendLL 365
They always take a short-term view .
on a project. They will lend the monc% today
the money back tomorrow. They are not prepared to anJ %ant
go along with in, cgment If nu don't
have security or don't put in your money, the bank
will not finance even under L.c; S Hank
should not administer LGS. No bank operates it correctly. Thr) look
bankers and apply pure banking criteria, at propos, uon as
not as development funding which must he of
higher risk than banks like to take. a
When asked about the possibility of going for

venture capital finance, Mr. If doc not
like the idea of sharing control of his business.
A 4.2 THE MALAYSIAN CASE STUDIES
Firm I
Firm 1,a private limited company, was founded in 1992 in Shah Alam by four entrepreneurswho
jointly contributed an equal share to initial paid-up capital of RM 150,000. The current paid-up
equitycapital is RM400,000. The company's main activity is to develop, manufactureand supply
paint products. To supplement its equity, the company had successfully obtained finance
facilities through bank overdrafts of RM300,000 and a bank term loan of RM1400,000for
working capital and for the purchase of a factory. It also used a hire purchase facility for
machinesand laboratory equipment.
The company's main customers are governmentand semi-governmentagencieswhich are

directly involved in housing and estate developments such as State Economic Development
Corporation (SEDC), Urban Development Authorities (UDA) and Public Work Departments
(PWD). Being a small sized company with twenty-two employees, the company faces strong
competition from a number of large and established companiessuch as ICI, Par, Berger, Nippon
Paints and Jotun Paints. However the company's competitive advantage is its quality products
at a competitive price. Its current production is 4,000 litres per day. Owing to the increase in
demand,the production is expected to increase to 20,000 litres per day. To this end the company
is planning to build a new factory and to purchase additional machines and equipment. The
project is expected to cost:
New building : RM220,000

Additional machine & equipment : RM500,000
the high interest rate charged by the bank will

The availability of adequate finance as well
long-term loan from a commercial bank has just been
affect the company's growth. Although a
the still needs money for the new
for
approved the purchase of machines and equipment, company
building. The company is presently applying for a financial grant from a government-backed
Industrial Scheme) managed by the Ministry of
scheme- Skim Industri Kampung (Rural -
hopes to increase overdraft facilities to
National and Rural Development. The company
a loan from one of its directors.
RM500,000. Besides external funds. the company also obtained
Appendix 5 366
When asked about the possibility of using venture capital finance,
one of the directors
stressedthat the company will not consider any venture capital finance unless its application for
SkimIndustri Kampung is turned down; then the company might decide to go for
venture capital
finance either through PUNB or individuals.
Firm J
Firm J was established in Melaka in 1983 as a sole proprietorship. During the first few )-ears
of
operation, its main activity was producing window and door grills. Besidesthe owner's personal
savings, the initial capital was obtained through a government-backed scheme; the Skim
Rancangan Usahawan Baru (New Entrepreneur Programme Scheme).
After the death of the owner in 1989, the managementof the businesswas taken over by
one of the owner's daughters, Mrs. J. She has been with the company since 1986 as a finance
manager after obtaining a degree in financial management from the USA. The firm was in serious
financial difficulties during the first year of her control of the business. All cashaccounts in the
bankshad been frozen; as a result the firm faced a serious cash flow problem. During her father's
tenure,the firm had been burdened with external debts particularly from trade creditors. After
his death, a substantial loan with a commercial bank was still outstanding. Mrs. J's strategy for
the financial recovery was to apply for funds from a commercial bank under the Skim Tabung
Usahawan Baru (New Entrepreneur Fund Scheme). Unfortunately her application was not
successful. Furthermore the suppliers had also declined to supply materials on credit. In order
to keep production going, Mrs. J had no choice but to borrow from family membersas well as
to bring in her own savings into the business. A number of workers had to be made redundant.
After one year the firm's financial conditions seemed to improve. The firm was then
first to Mrs.
registeredas a private limited company. The company's major expansion, according
J, started in 1991. In that year the company was offered a big governmentcontract to supply wire
had successfully obtained a loan
products. With the letter of intent for the contract, the company
from a commercial bank. The company started to employ more workers (at present it has 38
employees). In 1994, the company purchased a new factory and additional machines using a
loan (Industrial Technical Assistance Fund ITAF) of RM300,000
government-backed scheme -
Some acquired through leasing. The
at an interest rate of five percent. of the machines were
departments (80 percent) and open market (20
company'spresent market consists of government
percent).
factory located about 30

The company plans in the near future to open up another
kilometres from the present factory. The total project cost will be RM650,000 of which
from bank. The company
RM520,000 has been obtained through a second loan the commercial
hopesthat the balance could be funded through the company's retained profits.
Appendu5 367
Mrs. J agrees that the company is planning to grow rapidly in the
next three years. it also
plans to expand into the overseas market by exporting 50 percent of its products. However, the
availability of finance would be a constraint on the company's plan. However, shestressed
that
the company is still family owned, and it remains a conscious policy not to release equity to
outsiders.
Firth K
After obtaining his first degree in mechanical engineering from the U. K. in 1982, Mr. K worked
as a Project Manager with an engineering firm. He left the firm in 1985 to join another similar
firm as an Operation Manager. In 1986 he set up his own firm, a private limited company, with
an initial capital from his own savings of RM 10,000. The company is involved in the production
of steel fabrication as well as mechanical, environmental and civil engineering works.
Government contracts played an important role in the growth of the company's sales
during the first few years of its operation. The company started to go for open market in 1989.
Thecompany's major expansion has been undertaken since 1988 in manufacturing various range
of products: steel beds, sanitation bins for Municipal Councils, ward and hospital equipment,
door and window grills, and air conditioner brackets. As a result, the company increased its
employees from 10 to 15 people. However, a major problem facing the company is insufficient
finance. The company's growth had been financed through both internal (personal savings and
retainedprofits) and external sources (equity from relatives, trade suppliers and hire purchase).
Mr. K stressedthat he has not used any finance from banks and does not plan to apply for bank/
institutional finance in the future. He refuses to borrow from the banks becausethe payment of
interest(usury or riba) is absolutely prohibited under Islamic law.
The company intends to expand steadily over the next three years. It plans to specialise
in the manufacture of machinery such as brick making and drilling machines.
Firm L
This private limited company was founded in 1985 by Mr. L and his wife. Mr. L had previously
beenworking for a total of twelve years with three firms which produced shoesand leather related
TZ Leather (2 years). The firm's main
products: BATA (3 years), Kulitkraft (7 years) and
In 1986 their daughter joined the firm
product during its first year of operation was leather shoes.
Mr. L's his contributions were 70
and contributed 10 percent to the firm's equity. and wife's
firm a term loan of RM77,000
Percentand 20 percent respectively. The subsequently obtained
from a Development Bank for the purchase of plant and machinery (RM50,000) and for working
capital(RM22,000).
Appendix 3 368
Over 1987-1989 the business suffered from lack of demandfor its

product due to heav
from other established manufacturers. There was a needto develop new products and
competition
to refine existing product lines to meet the needs of a dynamic market. Besides its present
products, the company decided to manufacture other leather related products, using PVC and
canvas such as belts, handbags and briefcases. The company had successfull\ obtained a
government-backed loan of RM 150,000 under the Tabung Pemulihan Usahawan (Entrepreneur
Rehabilitation Funds). As of the result of this expansion, the company's salesincreasedin 1992.
Salesfrom the government contracts were increased from RM446,000 to RM 1 million per year.
.8
In 1993, the company obtained additional finance facilities, an overdraft and term loan, a total
of RM 1.2 million from a commercial bank to cater for the increasein production. The workforce
was also increased to 33 people.
Mr. L perceives growth as vital for the company's future survival. With regard to
financing, the company has never faced any difficulties. Besidesretained profit, growth can be
financed using bank loans. Mr. L attributes his financial successto the company good track
record and its market potential. At present, the company makes 70 percent of its in
sales the
governmentmarket (through contracts); the remainder through an open market. Mr. L is aware
that the company's future growth will require an expansion in the international market. To this
end, the is
company planning moderate growth in production and employment.
Mr. L stresses the importance of retaining the family ownership of the business. With its
good relationship with the banks, it has no plans to share the company's equity with venture
capitalists.
Firm M
Firm M was registered as a private limited company in 1989. It was founded by the presentowner,
Mr. M, in 1989. It was initially financed through the owner's own savings. Plant, machinesand
initially by the Standards Industrial Research Institute of Malaysia
equipmentwere provided and
(SIRIM) under the incubator programme. The company produces computer and audio compo-
Japanese firms: Sony, Philips and Fujitsu. In 1990
nents. Its main customers are multinational
Technical Assistance Fund
the company obtained a government-backed fund - the Industrial
development as well as to upgrade its
(ITAF) to support the company's technological
-
international competitiveness and viability.
the importance of its

Owing to the increase in demand for the company's products and
in 1992. As part of its expansion
customers' confidence, the firm has decided to expand
building is located in Shah Alam..
programme, the company had purchased the present which
Selangor. The purchase of the building, machines and equipment were financed through retained
from Bank Industri. The
profit and Mr. M's personal savings. A term loan was also obtained
Appendix3 369
company also used hire purchase and leasing facilities for the purchase of the machines and
equipment. The company had subsequently increased its employeesto 48 people.
The company's most recent request for external finance was

made in 1994. The
application for the intermediate-term loan was successful. Whenaskedabout his plans for further
growth, Mr. M is very cautious not to over expand. Over expansion, according to him. could
jeopardisethe company's survival. Therefore, the company will not grow further over the next
threeyears.
Firm N
Firm N was established in 1992 as a private limited company. The company was formed by three
entrepreneurs,Mrs. N (the present owner and managing director), Mr. N (her late husband)and
a friend, Mr. T. They contributed RM50,000 each from their own savings to start the business.
The company benefited from a government-backed financing scheme; the Tahung Usahawan
Baru (New Entrepreneur Funds). The company was also offered a term loan and an overdraft
facility from a commercial bank. Some of the machines were purchasedusing hire purchaseand
leasingfacilities. However, Mr. T left the company in 1993 and in the sameyear Mr. N passed
away. Since then Mrs. N became the sole owner of the company. The is
company now one of
the leading manufacturers of staples and paper clips in Malaysia.
The idea of producing staples and paper clips had originated in Germany where Mrs. N
had spent several months in 1985 to undergo a practical training under the Skim Latihan
Usahawan Bumiputra (Bumiputra Entrepreneurs Training Scheme) organised by the Prime
Minister Department.
In 1992 the company was selected as one of the suppliers to Guthrie Trading under the
Vendor Support Scheme; a government-backed programme which creates a direct linkage
betweensmall and large firms. However, in 1993, due to certain problems, the company decided
to stop being a supplier under the scheme. Instead, Mrs. N, together with seven other
manufacturers, formed a consortium of stationery manufacturers. The consortium managed to
big departments through the Ministry of
securea contract to supply stationery to government
Finance.
plans to expand its product

With the present workforce of 15 employees, the company
lines. Mrs. N has already given a careful thought to manufacturing punchers and staplers in the
and international market
near future. She believes that, because of the company's national
be a problem for the company to obtain
potentialas well as its good track record, there should not
could affect her application
externalfinance. However, the lack of adequate security/collateral
interest rate charged is high and
for the finance. Furthermore, Mrs. N is is quite worried that the
.+ppeLr '3 70
this could affect the company's profit margin. Besides external finance, the company's retained
profit will also be used to finance the expansion programme. Although Mrs. Nis willing to dilute
control of her business, she will not consider any venture capital finance at the moment since she
perceives that venture capitalists in the country still lack the technical expertise required b her
company.
Firm 0
Firm 0, a plastic injection moulding company, was established in 1989 by Mr. 0 and his brother
with their own savings and a loan of RM50,000 from the bank. One of the reasons for the
formation of the company was an opportunity as a component supplier and preferred vendor with
Perusahaan Otomobil Nasional Berhad (Proton). The company produces window winders for
the automobile industry and its first production started in 1990. Being an appointed vendor for
Proton, the company obtained a grant of RM250,000 in 1990 for the purchaseof machinesand
equipment. Another grant of RM750,000 was obtain from Proton in 1992to purchaseadditional
machines and equipment. The company had also obtained some government-backed funds such
as the New Entrepreneur Fund administered by CGC and the Industrial Technical Assistance
Fund(ITAF) administered by the Ministry of Trade and Industry.
During the first few months, the company subcontracted its production to a plastic
processor in Shah Alam. However the to
company managed obtain a loan of RM230,000 from
the bank to purchase a factory in Section 16, Shah Alam to start its own production. From the
factory in Section 16, the company has expanded to three premises in Section 24 and Section 26,
ShahAlam. Besides retained profits, the expansion plans were financed through term loans and
overdraft facilities from two banks. The company also used trade credit for raw materials and
hire purchase for machines and equipment. It also benefited from a government-backedequit`
schemethrough Perbadanan Usahawan Nasional Berhad (PUN B). In 1995 the company recorded
businessof the company comes from Proton
a turnover of RM 10 million. Almost 50 percent of the
40
while percent is for other vendors and 10 percent comes from other automobile manufacturers
suchas Toyota, Mazda, Ford and Citroen.
The company has plans for further expansion. The main office which currently has two
and mould front feeders
production lines will be to
expanded produce parts such as wheel arches
for the new Proton cars. Another small factory which is used for warehousing facility will be
1996. The of this expansion is estimated

convertedto a spray painting facility at the end of cost
in Tanjung, %Ialim, Perak. Mr.
at RM300,000. In 1998 the company plans to set up another plant
0 doesnot expect any difficulties in obtaining the necessary finance since the company has a
strongreputation and good relations with the banks.

4Fc'1IJLX 31
Firm P
Firm P, a private limited company, was founded by Mr. P in 1992 with an initial capital of
RM 120,000 of which RM40,000 was from his own savings and the remainder was borrowed from
two of his friends. The company also acquired some machines through hire purchaseoffered by-
the supplier. The company employs 24 workers and it produces plastics based products. At
present the company is supplying its products to a Japaneseelectronic firm; Sons.
The company has been growing moderately in the last two years. In 1994 the company
hadto increaseits production capacity due to the increase in the demandfor its products. It needed
to buy It
someadditional machines. successfully obtained a bank term loan of RM 1.2 million for
the purchase of machinery. Besides using retained profit and Mr. P's personal savings, the
company also obtained an overdraft facility from another bank to finance its working capital.
When asked about his plans for the near future, Mr. P thinks that it would be a good idea
for the company not to grow further over the next three years. Mr. P is reasonably happy with
thesituation he now finds himself in. He is beginning to build up financial security for the future.
Furthermore he has the satisfaction of running his own business.

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(https://dspace.lboro.ac.uk/) and was harvested from the British Librarys

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Submitted in partial fulfillment of the requirements

Ismail A. \\'ahab 1996

Finally, I am thankful to my wife, Faridah, for all her compassion, patience,

FINANCING THE GROWTH OF

This thesis aims to contribute to a better understanding of the practices and

Chapter One INTRODUCTION

1.1 SMALL FIRMS IN DEVELOPED AND DEVELOPING

Chapter Two REVIEW OF THE LITERATURE I:

2.5 THE LITERATURE AND SPECIFIC FACTORS )8

Chapter Three REVIEW OF THE LITERATURE II:

Chapter Four THEORETICAL FRAMEWORK AND

Chapter Six THE U. K. SURVEY: RESULTS AND ANALYSIS

6.1 INTRODUCTION 126

7.1 INTRODUCTION 156

Chapter Eight CASE STUDIES: DISCUSSION AND ANALYSIS

8.1 INTRODUCTION 184

Chapter Nine COMPARATIVE ANALYSIS OF THE SURVEY

9.1 INTRODUCTION 205

Chapter Ten CONCLUSIONS

10.1 INTRODUCTION 220

Figure 1.1 The Research Process 12

Table 5.1 Small Firm Finance: Summary of Previous Studies

1.1 SMALL FIRMS IN DEVELOPED AND

most countries, be it in a developed country like the United Kingdom (U. K. ) or a

The small firm, according to Bolton Committee (1971, p. 343):

is in many ways a highly efficient organism, better adapted to the exploitation

can be summarised as follows:

i. Small firms offer a productive outlet to a large number of enterprising and

optimum size of the business unit is small.

mentary role to larger concerns.

v. Small firms act as sources of innovation and invention.

The number of small firms in the U. K. is estimated to be around 3.7 million

Substantial growth in the small firm sector is desirable as means of reducing

order to survive. However, there are a number of potential drawbacks and

In order to understand the factors which contribute to the financing prob-

1.2 OBJECTIVES OF THE STUDY

Petty (1991, p. 90) has stressed that:

meaningful research in the area of small-firm or entrepreneurial finance must

The main purpose of this study is therefore to contribute to a better

understanding of the practices and problems of small manufacturing firms in

financing their expansion activities in developed and developing countries, with

In particular, the study attempts to examine whether the practices and

More specifically, the study attempts to examine:

ii. The association between characteristics of owner-managers and the need

ties experienced in raising external finance.

of external finance and the difficulties experienced in raising external

experienced in raising finance.

1.3 RESEARCH QUESTIONS

questions with regard to the characteristics of small firms, the characteristics of

Need for External Finance

i. Is there an association between the characteristics of a firm and the needfor

ii. Is there an association between the characteristics of the owner-manager of

Sources of External Finance

i. Is there an association between the characteristics of a firm and the sources

ii. Is there an association between the characteristics of the owner-manager of

Difficulties in Raising External Finance

i. Is there an association between the characteristics of a firm and the

United Kingdom and Malaysia?

ii. Is there an association between the characteristics of the owner-manager of

existence of difficulties in raising external finance for small firms in the