The Dynamics of SMEs and Multinational Enterprises

Posted on Nov 2, 2024 in Economy

T-9: General Characteristics of SMEs

Nature of SMEs

SMEs (Small and Medium-sized Enterprises) represent 95% of businesses. They are primarily small and medium-sized, holding significant social importance. Key characteristics include:

  • Market imperfections influence them due to their small size.
  • Capital belongs to one or a few individuals, making decisions autonomous and influencing character and function.

This structure impacts development:

  • Few owners facilitate homogenous decision-making.
  • Proximity between owners and employees helps achieve business objectives.
  • Reduced supervision and control costs.
  • Strong work relationships enhance performance.

Advantages and Disadvantages of SMEs

Advantages:

  • Few conflicts due to direct owner involvement.
  • Employee participation in decisions and adaptability to changes.
  • Close, direct client relationships.
  • Lower delinquency rates due to direct client knowledge.
  • Small structures allow for quick adaptation to changing conditions.
  • Can act as auxiliaries to larger businesses.
  • Better absorption of economic downturns due to fewer structural burdens.

Disadvantages:

  • Small size hinders optimal bidding conditions and economies of scale.
  • Limited financial capacity and dependence on bank loans.
  • Lack of technical capacity compared to large enterprises.
  • Inability to impose corporate policies on clients or the system.
  • Vulnerability due to fiscal, social security, and labor legislation.
  • Potential loss of autonomy if acquired by larger businesses.

T-8: Multinational Enterprises

Multinational enterprises (MNEs) are matrix-structured companies controlling subsidiaries in different countries. This structure centralizes direction and design for international expansion, favored by globalization. Key aspects of globalization include:

  • Creation of open trading areas with free flow of goods, capital, and labor.
  • Reduction of trade barriers and restrictions.
  • Development of communications (internet, telephony).
  • Globalization of financial markets, enabling free investment.

Factors Influencing MNE Development

  • Conquering new markets.
  • Overcoming protectionist barriers by establishing subsidiaries in protected markets.
  • Exploiting competitive advantages (e.g., lower wages, less stringent environmental laws).
  • Transferring technology or declining products to less developed countries.

Structure of MNEs

MNEs can organize with a single global control or regional centers responsible for their area. Common MNE structures include:

  • Opening branches dependent on the parent company (more centralized, potential autonomy issues).
  • Creating subsidiaries.

Social Responsibility of MNEs

While MNEs can positively impact wealth creation and employment, they can also harm society and the environment. Common abuses include:

  • Establishing industrial plants in countries with lax environmental regulations.
  • Relocating to countries with lower costs, causing job losses in the original country.

States need laws to balance foreign investment flexibility with societal benefits.

T-5: Business Competitiveness

Competition

Competition arises when multiple businesses offer similar products or services, vying for the largest consumer base. Capitalist economies are characterized by this competitive struggle for market share. Monopolies and perfect competition are rare; oligopolies and monopolistic competition are more common. Efficient and competitive businesses ensure survival.

Competitive Strategy and Advantage

A business’s competitive strategy is intertwined with its environment and industry. Key competitive factors include:

  • Rivalry among existing competitors.
  • Threat of new entrants.
  • Threat of substitute products or services.
  • Bargaining power of buyers and suppliers.

Successful competitive strategies include:

  • Cost leadership: Offering lower prices.
  • Differentiation: Unique design, superior brand image.
  • Segmentation: Targeting specific market segments.

Competitive Advantage

Competitive advantage is the value a business creates beyond competitors. Value represents what buyers are willing to pay. The greater the difference between perceived value and price, the stronger the competitive advantage.

Defense Against Anti-Competitive Practices

Some businesses engage in illicit agreements to control markets, harming consumers and other competitors. Abusive practices include price fixing, coordinated production limitations, and market sharing. Organizations defending competition include:

  • Competition Defense Authority: Oversees agreements between businesses.
  • Government Services for Competition Defense: Monitors and inspects markets.
  • Competition Defense Court: Enforces competition law.

T-3: The Business Environment

The business environment encompasses all influencing factors, including people, institutions, and agents. The general environment includes political, economic, social, and technological aspects. The specific environment comprises agents directly affecting each business.

Characteristics of the Business Environment

  • Dynamism: Intense changes in consumer tastes require quick detection and appropriate responses.
  • Complexity: Requires extensive knowledge and information for sound decision-making. Businesses must navigate documentation, finance, taxes, labor laws, and safety standards.
  • Hostility: Primarily manifested in price, product quality, and competition. Legal restrictions, economic conditions, and other factors contribute to hostility. A more hostile environment hinders business development.

External Agents

Businesses aim to achieve objectives by influencing external agents. These include:

  • Shareholders: Seek increased share value and dividends.
  • Customers: Demand lower prices, better quality, broader guarantees.
  • Financial institutions: Focus on business liquidity and loan repayment.
  • Government: Enforces laws, tax payments, and job creation.
  • Trade unions: Advocate for better wages and working conditions.
  • Society: Expects ethical behavior and rapid adaptation.
  • Competitors: Businesses compete to gain market share, sometimes to the detriment of consumers.

T-1: Evolving Perspectives on the Function of Businesses

Economists like Adam Smith, David Ricardo, and John Stuart Mill initially shaped our understanding of businesses. Richard Cantillon differentiated between fixed and uncertain wages. Jean-Baptiste Say defined businesses as entities combining factors of production to generate value. Alfred Marshall viewed management as a factor of production.

20th-century perspectives offered further insights:

  1. Schumpeter: Innovation is key. Businesses achieve temporary monopolies through innovation, leading to extraordinary profits until competitors imitate.
  2. Knight: Risk-taking is central. Businesses anticipate factor costs before outcomes are certain.
  3. Sombart: Successful businesses are conquerors, organizers, and negotiators.
  4. Weber: Businesses are driven by the pursuit of profit, not innate human nature.
  5. Galbraith: Large businesses have a “technostructure” that analyzes consumer desires, organizes elements, and establishes efficient functions.

Key business functions include analyzing consumer desires, organizing and coordinating elements, and establishing efficient control functions.