Report on Transformation and Development of SMEs in China

Transcription

1 School of Industrial and Information Engineering Master of Science in Management Engineering Industrial Management Academic Year Report on Transformation and Development of SMEs in China Supervisor: Prof. Sergio Terzi Graduation Thesis by: Tutor: Prof. Wu Weimin (Tongji University) Yang Xiao (id )

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3 Report on Transformation and Development of SMEs in China Abstract: Nowadays, SMEs have already occupied a major part of the national economy and social development. They play a key role in promoting economic development, expansion of social employment, optimizing the industrial structure, promoting scientific and technological innovation. However, due to multiple internal and external factors, coupled with the strengthening of constraints of the resource and environment, the impact of the financial crisis, the increasingly fierce market competition, the development of SMEs in China is not quite optimistic. The stage of low production cost, low labor costs and low requirements of the environmental standard has gone. To achieve growth in order to better adapt to the environmental changes in China, SMEs have to face and solve practical problems in the current new normal development of China's economy, This paper begins with expatiation of the development process of SMEs in China. Through the analysis of relevant theories and literature review, this paper deeply studies and discusses the influencing factors and the effects of transformation and development of SMEs. And then this paper compares the development process of the developed countries such as USA, Japan and Italy to conclude the reference for the development of SMEs. After that, we choose the SMEs in southern Jiangsu, which is close to Shanghai, to make a general review of current situation of SMEs development and to know the conditions of SMEs in China in recent years better. Finally, we combine these analysis so as to come up with the suggestions of guiding the development of SME's and promoting their role in improving china s economy continually. Key words: SMEs, Transition and Development, Core Factors 1

4 Abstract:... 1 Chapter 1 Introduction Research background Research Objectives Research content and framework... 8 Chapter 2 Summary of relevant literature and theory The definition of small and medium enterprises The theory of corporate transformation Research on enterprise organization transformation Research on corporate strategy transformation The theory of enterprise development Traditional development theory Modern development theory Chapter 3 Studies on SMEs evolution in developed countries The development of SMEs in Japan The development of SMEs in the United States The development of SMEs in Italy The impact of changes in science and technology policy on the development of SMEs The impact of industrial cluster policy on the development of SMEs Chapter 4 General overview of SMEs development in Southern Jiangsu Province The empirical description of SMEs development in southern Jiangsu Condition about performance Condition about capital Condition about production Condition about human resource

5 4.2 The gray correlation analysis of SMEs development in southern Jiangsu Reflection on new mode of development of SMEs in southern Jiangsu Chapter 5 Conclusion and Prospect Recommendations on the funding-related policy The establishment of SMEs entrepreneurial growth fund Creation and perfection of guarantee institution The establishment of SMEs policy banks Creating a hierarchical market system of securities launching and trading Recommendations on brand-related policy Recommendations on talent-related policy Improve and standardize the professional manager market Organize social training institutions to provide training services for SMEs Establish advisory bodies to provide service for SMEs Recommendations on technology-related policy Establish and complete technology market for SMEs Guide SMEs to cooperate with universities and research institutions Recommendations on information-related policy Reference:

6 Chapter 1 Introduction 1.1 Research background Since the beginning of 2000, China's SMEs have kept the growth rate at almost ten percent per year, which injected fresh vitality to national wealth accumulation and made a positive contribution to China's market economy. But after 2008 the outbreak of the global financial crisis, development of SMEs in China have decreased greatly. Exports suffered a severe strike, causing serious dilemma for SMEs. As developed on the basis of regional market, how to adapt to the challenges of globalization is an important issue for SMEs. SMEs play an important and basic role in the prosperity of the national economy, increasing social employment, improving people's life standard and promoting innovation. SMEs is the main driving force of world's economic development and social progress, and they are the "new bright spot" of economic development and " new engine " of investment growth. According to the latest report of the State Council, "SMEs in China amount to 44 million, which completed 50% of the tax revenue, created 60% of GDP, and provided nearly 80% of urban job chances." Ministry of Industry estimates that "small and medium enterprises create nearly 65% of the patented invention of the whole China, more than 75% of enterprise technology innovation and more than 80% of new product development. Therefore, small and medium enterprises have become the main driving forces of China's market economy, the main force to promote employment increment, social stability and independent innovation. It is also the leading force in China's new rural construction, new industrialization and urbanization. Recently, China's economic and social development trend is stable in general, while structural adjustment, transformation and upgrading show some positive changes. The government accelerated the reform in key areas, leading to the continuous improvement of people's living standard, which also creates the economic foundation 4

7 for the development of small and medium enterprises. At the same time, the problems of domestic development imbalance, relatively surplus of production capacity, some SMEs difficulties in production and operation and other aspects are still very tough. At present, there are serious imbalances in the industrial structure of China's economy, the imbalance between internal and external structure, the unbalanced distribution of income, imbalance between investment and consumption, and the economic structure is changing from "investment-foreign trade" to "investmentconsumption ". Especially the rate of labor productivity growth slowed in three major industries of the Chinese economy, on contrary, industrial enterprises have increased the dependence on labor. So we can see that the effect of current transformation of development is not very significant. Due to the rising price of capital and goods, together with rising cost of the financing, logistics and labor of China's domestic market, small and medium-sized enterprises bear the pressure of rising operating cost. The rising labor cost is the most critical factor in leading to the rising cost for SMEs. At present, China is in the "Lewis turning point" stage, industrial enterprises gradually appeared the problem of insufficient labor supply, and then the wage level rose significantly. In addition, financing, raw materials, logistics, energy and other costs are rising very obviously, which also have a certain degree of inertia. SMEs are facing the market pressure in the slowdown of economic growth and excess capacity. Coupled with the " mode transferring, structural adjustment" policy, SMEs are accelerating the pace of transformation and development. Especially for those small micro-enterprises engaging in labor-intensive processing trade, the pressure increases continually. Since Chinese economic reform and opening in 1978, China has begun the road of transformation. Over 30 years gradual reform, China joined the global trade and introduced market competition mechanism, which transferred labor and optimized the allocation of resources, achieving the accumulation of wealth. The total size of the china s economy ranks second in the world, the market share of "made in PRC", "made in china" has exceeded the United States and becomes the world's first. In addition, the income level of nation has improved greatly, and China has completed 5

8 the transition from poverty to food and clothing efficient and to well-off. However, China relies much on exports to promote economic development, which leads to heavy environmental pollution and excessive dependence on external resources, and all these factors result in the lack of sustainable endogenous economic growth momentum. After the "ultra-high growth" era, China's economy is now facing the decline of national disposable income proportion, as high as 50% of the investment rate, Gini coefficient exceeding 0.5, food safety which is out of control, environmental pollution, corruption and other problems. The basic unit of the economic and social system is the enterprise, and the largest group is the small and medium enterprises. The development of society and national economy is closely related to the development of small and medium enterprises. The transformation of macro economy will change the survival and development environment for small and medium-sized enterprises and their own development strategies inevitably, which will have a profound impact on the development process. From practical angle, as a result of the first time of China economy s transformation, market mechanism has improved gradually, and the enterprise has completed the transformation of the contemporary enterprise system, which enhance the growth adaptability and international competitiveness continually. However, the first economic transformation did not achieve a fundamental change in the mode of economic development. China s current mode of economic development is still driven by exports and investment on the whole, the development of SMEs is more dependent on the comparative advantage and low cost of investment because of international labor division, which is at the expense of welfare and environment. This mode has much difficulties in getting out of the dilemma of low added value, low quality and low price. Since its accession to the WTO, China has made full use of price advantages in the labor and raw materials and others to participate in international collaboration. Although the product unit has a very low profit margin, but the size of world's overall market demand advantages has covered various problems SMEs encountering. In addition, although China's first economic restructuring established market mechanism, but the system is still not perfect, the 6

9 government's participation in the allocation of resources is still a reasonable arrangement in this system. In order to promote employment, increase nation revenue, promote local economic development, the government has a strong incentive to intervene in the operation of enterprises. Even sometimes because of the presence of corruption, some officials who have the right to the allocate resources will give some rent-seeking enterprise with more preferential tax and financial subsidies directly, which is often inefficient in resource intervention. And there would be a negative impact on the formation of a good competitive atmosphere and sustainable development in the long run. It can be seen that China s first economic transformation has introduced the market mechanism and scientific enterprise system for SMEs, which has promoted their rapid growth and also formed a more severe and complicated system environment. With the rapid development of science and technology, SMEs are facing more and more complicated business background. Coupled with the increasingly fierce market competition, all these factors have raised a more severe test for Chinese SMEs survival and development. Most SMEs has encountered a high bankruptcy rate and low development rate. Promoting China's second economic transformation, optimizing the economic structure and changing economic develop mode have become an important mission for Chinese sustainable economy development, which is bound to raise higher requirements for SMEs adaptation to challenging environment and their innovation ability. The micro level of economic transformation is the transformation of various types of enterprises. Formulating relevant government policies and getting the support from social organizations are urgent for SMEs survival and development in the new environment. 1.2 Research Objectives Promoting the transformation of economic development, optimizing the economic structure and changing the mode of development have already become China's the most difficult task in current economic sustainable development. Micro-level landing point is the enterprise, the focus of which is the transition of SMEs. China's SMEs 7

10 are mostly concentrated in the traditional industrial manufacturing and retail and wholesale industries, which are all labor-intensive. Coupled with low product content and service added-value, most companies located in the low-end of industry chain. Due to the small size, SMEs cannot get the bargaining power of product pricing and the ability to cope with changes in various types of upstream investment, so the ability to resist risk is poor, bearing more severe pressure of survival and transformation. Since the outbreak of the international financial crisis in 2008, the growth environment for SMEs in China has worsened and the internal and external problems have intensified. The debt crisis of Europe and the United States caused a result that many SMEs have no orders, and the increasing of labor costs and raw material prices led to low profit margins for them. Exposed in the adverse external economic situation, the environment and internal system have become increasingly prominent for SMEs. Especially the legal environment is still not perfect, coupled with too much government intervention, these factors are contrary to the market rules and fair economic system, and inhibited the sustainable development of SMEs and their innovative ability to a large extent. Based on this background, the choices of SMEs to complete the transformation has the basic strategy application value and practical significance for Chinese economy and the sustainable development. This research is designed to compare SME development patterns, to have a deep understanding of different patterns for SME development through theoretical analysis. This research will do some basic researches according to the problems encountered in the development of SMEs, and try to propose analysis and solutions to form system files in order to provide a reference. 1.3 Research content and framework This paper starts from development of SMEs in China, then we make a review of relevant theories and literatures on this topic to sort out the research on domestic and foreign research of SMEs in China and abroad. After that, we make a comparison of the development process of SMEs in developed countries, and study the present situation of SMEs in southern Jiangsu to know better about SMEs development and 8

11 problems in recent years. After combining these analysis, we try to put forward some practical policy recommendations for the transformation and development of SMEs. The contents of this paper are as follows: Chapter 1: Introduction to research background, purpose and meaning, content and framework. Chapter 2: Summarizing relevant literature and theory: first this paper tries to give definition of SMEs, then we combine theories of transformation and development of SMEs at home and abroad, and summarize the progress of academic research, give theoretical support and guidance to practical problems. Chapter 3: Referring to similar development process and transformation path of SMEs in other developed countries (USA, Japan, Italy), this paper studies the changes of the management mode of the SMEs in developed countries. Chapter 4: Taking SMEs in southern Jiangsu as the example to study the current pattern, situations of SMEs in China nowadays, and try to have a deep thinking. Chapter 5: After combining results of different theories, the experience of developed countries and present conditions of SMEs, this paper summarizes main conclusions, and discusses the policy recommendations for the development of SMEs in the background of the current new normal economic situation. The framework of this paper is shown in the following figure: 9

12 Chapter 2 Summary of relevant literature and theory 2.1 The definition of small and medium enterprises According to the relevant provisions of China's SMEs promoting law, small and medium enterprises refers to: enterprises, whose production and management scale is small and medium, established in the People's Republic of China with accordance to the law, while helping to meet the needs of society to promote employment, which are in line with China's industrial policy. With the rapid development of SMEs and their important contribution to the national economy in recent years, the development and support of SMEs have become a concern for theory field and government. China has promulgated a number of policies to support the development of SMEs, the studies and literatures of SMEs have also appeared in large numbers. The concept of SMEs is both relative and historical, there is no uniform standard. And different countries and regions in different periods usually use different standards. This is mainly because of different levels of economic development of various countries, different levels of industry and enterprises in different stages. In general, it is defined primarily by qualitative and quantitative aspects. In qualitative aspect, the level of the indicators includes the organization size of the enterprise, the status in that industry, the growth process, the ability to obtain resources, methods of financing. In quantitative aspect, the level of indicators includes capital and total assets, asset size, the number of employees and so on. Compared with the qualitative indicators, quantitative indicators are more easy to select, more intuitive to measure, so most countries adopt quantitative method. Although the specific criteria for SMEs quantification in different countries and regions are not exactly the same, it is normally assessed on the basis of the "size of assets" and "the number of employees". For example, the United States Congress introduced the "SME Law" for the definition of SMEs in 2002, which is the number of employees is no more than 500. United Kingdom and the European Union adopt quantitative indicators, but also use 10

13 qualitative indicators as a supplementary reference at the same time. In 2003, Chinese government promulgated interim provisions on the SMEs standard, and made clear assessment of SMEs standards in major industries. It is mainly based on the industry characteristics, in accordance with the total assets of enterprises, the total amount of sales, the number of employees and other indicators. The National Development and Reform Commission, the Bureau of Statistics and the Ministry of Finance promulgated the provisions on the Standardization of SMEs on July 12, The system for determining the criteria for SMEs in 16 industries of China's economic market was set up, which made adjustment of the indicators according to related data, and added the new "micro-enterprise" category. With the gradual deepening of economic theory, the definition of SMEs is considered as a dynamic process. For example, based on the organizational development point of view, "Grain model", which defines SMEs in special ways, believe that SMEs as organizations, usually rely on the guidance growth, coordinated growth, authorized growth, growth cooperation these four stages and then develop into large enterprises. So we can determine whether an enterprise belongs to SME by viewing these four stages as a basis. 2.2 The theory of corporate transformation The definition of enterprise transformation is also a process of continuous enrichment. Although the definition is not the same in content, but the main idea is to combine business choice, organizational behavior and strategic organization behavior in elaboration. Xiao buchu(2004), Li Chuanzhao and Li Chan (2005) suggested that the enterprises transformation usually happens when the enterprises entered the "new business strategy" or withdrewed from the "existing business strategy"; Hu Wei (2007) pointed out that transformation happens mainly when business model and / or industry has undergone a conversion in business level. In terms of organizational behavior, Merry and Levy (1989) pointed out that the transformation is the behavior of the organization for dealing with current changes. Joyce and Tin (1996) argue that the premise of organizational transformation is to change their own thinking patterns; 11

14 Jonethan (2000) suggested that crisis response must rely on faster organization selfchange, emphasizing the deep drive of corporate transformation is a crisis. In terms of organization behavior and strategy, Wangzhe, Dai Weidong, Ma Shuai (2013) proposed that enterprise transformation is the transformation of long-term business model, operation direction, the way of resource allocation and correspondingly organizational style, highlighting the complexity and integrity of enterprise transformation and development. Economic globalization has deepened the integration and complexity of economic development in various countries since 1980s, making enterprises business environment more complicated. In order to get survival and development continually, Japan, the United States, Italy and other developed countries have had the process of corporate transformation and development. International academic community have launched a profound and objective research in theoretical aspects, showing many outstanding results. Although the scope of the research results is very extensive, but there are mainly two aspects in theoretical level: One is the exploration of the organizational transformation based on the view of organizational behavior, the other one is based on the strategic management perspective to explore the transition Research on enterprise organization transformation From the perspective of organizational behavior, scholars from different countries have adopted different methods to focus on different contents, and have carried out many theoretical and empirical studies on the characteristics and concepts of organizational transformation, transformation model and dynamic mechanism, and achieved a series of important results. The scholars who focus on the system suggest that the relevant jurisdictional system or institution has led to organizations structural changes, including legal courts, industry associations and the public, government and parent companies (Wlison & Erakevia 2006). Organization transformation is on the basis of three reasons: one is the persecution of other organizations which it depends on or the limitation of legal norms, the second is the widely anticipation of normative system, and the third is that 12

15 the firm deliberately imitates or follows the path which the organization internal decision makers believe in. Researchers who focus on organization rational change pointed out that significant environment changes (such as changes in rule system, or new technology changes) bring pressure to organizational performance, which lead to the organization transition (Kotha & Ridonva, 2002). The change in the external environment leads to the pressure for organization in terms of transformation and upgrading. Because of the difference in historical scale, the normative system and the external relationship, the way and the speed of the different organizations in dealing with the environmental pressure are different (Wlison & Erakevic, 2006). The organization's response to environmental stress depends on the composition of the source of the pressure (industry, interest groups, government and the public), the causes of stress (economic or social), the manner in which the pressure is applied (voluntary and legal compulsory), content, and environmental conditions (relationship density and uncertainty between different organizations) (Oliver, 1992). Strebel (1995) endorsed the force theory on organization rational changes, pointing out that the interaction between motivation and resistance of change led to organizational change Research on corporate strategy transformation The exploration on enterprise strategic transition in the view of strategic management has resulted in a wide range of results. There are researches, which based on the static angle or structure, using traditional strategic management theory to study the strategies which Chinese enterprises take in the transition period. Also there are researches based on the dynamic perspective to study the process and the actual issues of corporate strategy evolution. (Ju Lei, 2010) (I) Business strategy transformation under static angle (1) the impact of strategic factors Based on the transformation background, China's corporate strategy is presented as 13

16 a strong "environment-strategy" model. The change of external strategic environment is usually the important factor influencing the characteristics of enterprise strategy. China's social and economic reform has changed enterprise's living environment in many aspects, the external environment changes gradually lead to changes in internal capacity then, showing corresponding characteristics which resulted in the internal environment for Chinese corporate strategy transformation. Thus we need to analyze these factors from two aspects: internal and external levels. In terms of external influence, researchers discussed external influencing factors of Chinese enterprises in the transition period, from the perspectives of economy, social culture and legal politics. For economic aspect, resource allocation (White, 2000) and market attributes (Keister, 2004) mainly affect Chinese corporate transformation strategy. From social and cultural perspective, Chinese collectivist society, crosscultural and other management characteristics and relationships (Luo, 2001) also have different degrees of impact on Chinese enterprises in transition period (Child & Yuan, 1996; He et al., 2004; Tsui et al., 2004).When it comes to political and legal environment, rule system limitation (Child & Yuan, 1996;He et al., 2004; Tsui et al., 2004), the role of the government (Hoskisson et al., 2000), and property rights (Hong & Adams, 2008; Wei & Lau, 2008; Zhang et al., 2007) are important factors for the strategy of Chinese enterprises in transition time. In terms of internal impact, the huge changes of external environment result in a unique business environment for Chinese enterprises in the transition period. The impact spread to the corporate strategy then. The internal environment of the enterprise strategy is mainly embodied in the two aspects : enterprise's ability and the resources it has. Researches related to enterprise's ability include the study of its normal ability and its learning ability. Researches based on enterprise's learning ability mainly deal with financial resource (Keister, 2004), human resources (Keister, 2002) and technical resources (Zhou et al., 2009). (2) policy type Under the constraints of the environment, traditional western-style M & A expansion strategy is not very suitable for Chinese enterprises strategy in transition period. Due 14

17 to the imperfect financial system and legal norms, coupled with the unclear property rights system, mergers and acquisitions strategy is unlikely to occur in China's economic market environment. In addition, the expansion strategy is not applicable for the lack of managerial talent. Finally, in the process of transformation and development, Chinese enterprises created coalition strategy, international joint venture management business strategy, basic network strategy and diversified development strategy. (II) Corporate strategy evolution under dynamic angle The former content is mainly focused on the static analysis under the background of the traditional strategy. However, in the case of transition, the local enterprises, including state-owned, collective and private enterprises, are weak due to the lack of management experience and the imperfect system. Most enterprises development is a dynamic process through learning and emergence. In the initial stage of transition, the planned economy has just turned into market economy, and the time that domestic enterprises have become a real "business" is not long. Due to lack of management experience and the imperfect system, forming a formal policy decision-making mechanism is not easy. Companies development is more dependent on the government and external network. During the initial stage of transition, domestic enterprises are under the background of planned economy, for which the environment is turbulent. Due to the lack of viability and experience under market economy system, companies take passive strategies of trial and error to adapt to environmental changes ( Litschert & Tan, 1994 ). During the late stages of transformation, domestic enterprises adapt to the market environment under economic transformation gradually, and the impact of external environment weakened at this time. Enterprises think more about how to use internal factors to promote their own development, and began to start trial and error selection gradually. Financial and management resources, their own learning ability and other internal strategic factors are the key restricting factors for China's SMEs transition strategy and development. Domestic enterprises were pushed to the market environment to develop passively in the beginning, and took the initiative to adapt to 15

18 the environment then. They began to get the trend of strategy selection. In order to enhance internal capacity, domestic enterprises choose international joint venture strategy actively, relying on market size and low labor costs to obtain foreign investment, and get advanced technology from advanced countries in the meantime to enhance their own productivity, knowledge and management capacity. Under the economic background of China's transition, foreign joint ventures tend to bring the know-how of management technology. Domestic employees obtain cutting-edge knowledge through the training of multinational enterprises at first, and domestic enterprises can achieve advanced experience when these employees switch their jobs (Buckey et Al., 2003). In addition, domestic enterprises can cooperate with foreign enterprises through spare parts supply, technical cooperation and franchise management to improve their management capability. Or by virtue of low cost, SMEs can have the access to advanced technology to obtain profits, and enhance their own production efficiency then. The factors which affect the strategy relied on the government, network, external environment and so on in the beginning. During the late stages of development, companies are more concerned about the use of internal factors. Responding strategies switched from trial-error adapting to trial-error choosing, and strategy choice changed from passive cooperation to active changing. However, in the process of strategic decision-making, due to inside and outside special environment under the economic transformation which domestic enterprises are facing, corporate strategy implementation process is not completely nor strictly in accordance with the traditional decision-making. The system is still not complete, and there is a big gap compared with multinational companies. In addition, domestic enterprise strategy, due to the lack of guidance in traditional theory, usually failed to make a full plan in advance and implement the plan strictly. Instead, new strategies emerge according to environmental changes continually in the management process. As stated earlier, managers expect to be able to meet the government's measurement of hard targets and adopt a defensive strategy at the initial stage of the transition. With the advance of time, China's economic system deepen the transition further. Managers adapt to 16

19 the competition laws of market economy, and offensive strategic decision-making comes out then. (III) Comprehensive review As China's economic market maintained a rapid and sustainable growth, problems involving Chinese enterprises development has been concerned gradually. However, under the special background of Chinese special transition system, the problems of Chinese enterprises transformation plagued scholars at home and abroad, and related researches became increasingly urgent and important. The above-mentioned literature research based on the view of organizational behavior and strategy management have very important reference value, which reveal the general law of Chinese enterprise development and the concrete form of dynamic evolution under the condition of transition economy. 2.3 The theory of enterprise development The development of the enterprise represents changing, a process of dynamic and trend. From management point of view, enterprises development is a process to make more value through the strengthened management and innovation (Zhang Yuli 2001). Enterprise is the combination of quality and quantity, so there are two aspects referring to enterprise development: First, the expansion of amount, which means purely increase of resource, like the increase of profit, staff number, and the total value of assets and sales. Second, the improvement of quality, that is, changes of nature of management resources, structural restructuring, the main changes of dominators and so on, such as the upgrading of enterprise innovation, environmental resilience, etc.. In fact, it is the improvement of internal management efficiency. Thus, sustainable development of companies refers to a continuous process during which the enterprise grows from weak to strong. Enterprise development can be achieved by the way of management, making full use of resources to start innovation and integration. On the theme of how to achieve enterprise development, scholars, based on multiple 17

20 perspectives, take a variety of research methods and extract a variety of research variables to carry out in-depth study, such as the theories on lifecycle, business strategy, resource management and competition and so on, which promote the theoretical prosperity Traditional development theory Adam Smith first demonstrated the decisive role of labor division for the factory production, noting that the reason factory could exist is that labor division created productivity. The generation of exchange capacity creates labor division, at the same time, exchange capacity restricts the specific degree of labor division, that is also the market constraints. Enterprises grow under market constraints, and the scope of market constraints enterprises size. Neoclassical theory focuses on the external relations of enterprises, viewing business as a black box, which failed to discuss internal layout of the enterprise deeply. Neoclassical theory uses the concept of scale payroll to analyze the horizontal expansion of enterprises, and explain vertical expansion by technology theory and market theory. Under the assumption of maximizing profits, based on the constraints of given technology and various conditions, the firm picks out the optimal production plan from the possible choices to maximize its profits. Enterprises are passive exogenous variables. The constraints of market conditions, given technology and cost structure determine the border of enterprise's productivity and development. However, the enterprise's own ability has been completely suppressed Modern development theory (1) based on the theory of transaction costs Coase has revised the hypothesis that market transactions can proceed smoothly in neoclassical theory, pointing out the cost of using the price mechanism, that is, the costs associated with the transaction. Enterprises can save the transaction cost 18

21 generated by market friction if market transaction activities are placed under the authority at the organizational level. The motivation for the development of enterprises is derived from the savings in market transaction costs. When the cost equals to the transaction costs increased within the enterprise, the enterprises should stop the expansion in scale and establish the boundaries between the market and the enterprises. In this view we can see that market is putted in the first place and the enterprise is in second place. (2) based on the theory of resources Prof. Elton Penrose of Johns Hopkins University in UK pioneered the theory of individual evolutionary economics and internal development. His "Enterprise Development Theory" (1959) inherited Professor Schumpeter's theory of economic development, viewing individual companies as the object of research, and elaborated many laws of company's development, which laid the theoretical basis for the development of modern enterprises. Professor Penrose s important contribution is the revision in perspective and way of the study of enterprise development in traditional economics, integrating the management theory into the enterprise development economics. Professor Penrose pointed out that there are a lot of resources within corporates, especially the resources of decision-making capacity, enterprises should be seen as an organization which uses various types of resources to obtain profit consciously. The company's production and business activities are constrained by managers ability and the possibility in catching and using production opportunities, in hence, the actual nature of the development theory is examining enterprises production opportunities in changing process. Penrose denied the factors that limit the size of the enterprise in neoclassical theory at the same time: the ability to manage the business, uncertainty risk in material and product market. Penrose argued that the reasons restricting the development of enterprises mainly arise from the enterprise itself, the power of management will limit the development of enterprises, while it would also promote the development of enterprises. The most important thing for an enterprise is not the indispensable and productive material resources itself, but the 19

22 extent to which resources are used, that is productive services. The fundamental source of business uniqueness is the services rather than resources. Productive services can be divided into two parts: entrepreneurial service and management services. Entrepreneurship services are used to discover and exploit the possibility of production opportunities, while management services are used to improve the implementation of expansion plans. Only to some extent, entrepreneurial services has a far-reaching impact for the motivation and direction of enterprises development. (3) based on the theory of strategy Ansonf (1964) analyzed firm s development from a strategic perspective in his corporate strategy book, and explained the process of decision making and the development of the enterprise. He pointed out that there are four attributes of the enterprise development strategy: First, plan appropriate products - the scope of market; Second, select strategy type according to the direction and scope of development; Third, use competitive advantage; Fourth, use synergistic effect flexibly. Ansonf put much emphasis on the capacity to use their own ability and synergies. Ability is the direct display of enterprises strength and weakness, embodies the enterprises existing owned resources and skills. Synergies in essence is a potential enterprise strength, embodies the relationship between enterprises existing management projects and new management projects. This perspective expounds the development of firms in a favorable range and direction (development of growth vectors), that is, companies can develop in horizontal or vertical (product or market) expansion strategies, or can develop along diagonal diversification strategies. (See Table 2-1). 20

23 Table 2-1 Ansonf Product & Market Matrix Maintain the status New same type product Customer development Regular Client Similar Customer New Customer Maintain the status Expanding Market Share Develop the Market New development Related tech Non-related tech Launching new products Diversification: Horizontal Diversification Vertical Diversification Concentric Diversification Conglomerate Diversification Ansonf proposed that enterprises need to develop in the direction of their own strengths and the associated business projects, to get relative advantages compared to competitors. Ansonf used market demand and products as two-dimensional parameters to determine four strategies for enterprises development, including the corresponding sub-strategies. These four development strategies are: to increase the market share and expand existing management projects, to develop new markets, to develop new types of products and diversification of management. (4) based on the theory of management Druker (1954) assisted that there is no advantage to talk about when referring to the development of enterprises, and the business getting bigger did not always represent a better status. Companies need to have a suitable level in accordance with its technology, market and economy, and only when they have the right size, companies can make the best use of existing production materials to achieve optimal output. The biggest problem of scale is growth, converting from one scale to another. Most development lacks a clear and specified way to determine the stage of the enterprise, let alone attitude of the management. The preparation of internal development 21

24 determines the enterprises grasp of development opportunities. Enterprises should have a realistic and reasonable direction of the target and the corresponding development strategy. Druker suggested that the level of employees development can determine the level of business growth, but the decisive factor in enterprises development is the resource of top managers ability in improving the management structure, changing the manager's position and behavior. In this way, the top managers have to adapt to the changes constantly from thinking to action. Maintaining and improving the entrepreneurial and innovative spirit of the company continually is particularly critical. The prerequisite to get survival and development in the era of rapid innovation is to implement efficient and innovative management. (5) based on the theory of industry level Bagmei (1998) expounded the key factors for company development from the perspective of business choice. Bagmei proposed that the common feature in enterprises with sustainable development is the ability to change the company's core business within the enterprise, and establish a new business with no interruption, that is able to manage three business operations (see Figure 2-2). When companies existing business is in downturn period, only to ensure the continuity of business development would be possible to remain the source of growth momentum. But many companies only concern about existing business, and there is no suitable way to balance the current business, new business and the future business choices. 22

25 Figure 2-2 Bagmei industry level Profit Level Three Cultivate viable alternative business Level Two Create new business Level One Expand and defend core business time Level one is the core business of the enterprise. This level of business has significant impact on company s performance, and can bring main cash and profit. It is the base for second and third level business. Level two is those business with bright future in company. These business has high growth and creative characteristics, and an almost formed management concept. They are often formed through the investment of much money, in order to get operating income and market share occupation. The second level business is the direction for company s existing business, or the new direction of business, which can replace and add the enterprise s existing core business in first level. Business growth will slow down and eventually be stagnant if there is a lack of this level business. Level three is companies long-term business choice, and it is the subject of business research. The third level business happens when the company carry out a small amount of investment, the union project and market pilot in order to deepen the understanding of industry. The optional service at this level is viable projects that has been proven. Although they are relatively few, but require high-level management support. Companies must reserve a large number of business in this level to ensure sufficient future choices. Bagmei pointed out that, regardless the maturity of this three level business, company 23

26 need to develop these business in parallel. Managers should focus on the following aspects: guarding and expanding the company's current core business; opening up and building the emerging business which would become the medium-term economy growth point; looking for possible new business to ensure company's long-term development. Bagmei's view abandons the traditional Porter strategy hypothesis of theoretical conditions in which companies seek the competitive position in established industrial structure. Upgrading in industry continually while innovating to be as companies long term competitive advantage, and using internal and external integration logic to lead company's growth, which further develops the Ansonf product market matrix. (6) based on the theory of contract agent Contract agency theory focuses on the agency relationship between the enterprises and internal organizational structure of enterprise development. Holmstrom and Taylor (2012) argue that ownership is critical in motivating business development. In particular, ownership should be linked to those elements which is most difficult valuated by marginal contribution. The reason capital pay for labor is derived from the characteristic that capital contribution would be valued by mistake easily and the difficulty in measurement. The view of Jensen and Archie (2013) is the expansion of McLean and Demsetz (2011) "Managers", arguing that agency costs determine the ownership structure of the firm. Since the manager is not the full owner of the firm, the agency costs are incurred. If the manager becomes the complete owner of firm's residual interest, it can at least reduce or even eliminate the agency costs. But the manager's own wealth will limit his ability to become the complete owner of the surplus. Debt financing may be able to improve the situation. Because in the condition of given managers property and the amount of investment, the manager as the acquirers of residual rights, he would have a higher enthusiasm to engage in riskier projects to develop enterprises, in order to achieve the profit of success. At the same time, in the way of limited liability system, the loss will be left to the creditors to bear the loss. Of course, since the creditors have their rational expectations, managers and other shareholders also have 24

27 to bear these agency costs. Thus, the balance between the cost of equity agent and the cost of claim agent determines the ownership structure of balanced developed enterprises. After Jensen and Archie (2013), Pyle and Leland (2015) established a formal signal model in which capital bets owned by capitalists solve the problem of agency signals. According to the assumption, there is an asymmetry in information between the external investors and entrepreneurs they have related to the average earnings of the project. Pyle and Leland proved that entrepreneur's own betting capital invested into the project can fully reflect his confidence in the recovery of the project's assets. It means that, the more shares they invested, the higher the value of the project, and the more optimistic about the prospects for business development. Normally we think that, shareholders master the remaining rights and interests because their shares are the signal. But in the opinion of Pyle and Leland, the reason stock is a signal is that shareholders are the claimants of the residual interest. In addition, Pyle and Leland argued that the entrepreneur's grasp of the bet and capital represents the quality of the project and the development of the enterprise, which broke the traditional view that it just reflects the financial ability. 25

28 Chapter 3 Studies on SMEs evolution in developed countries Due to different economic development background and institutional environment in foreign countries, SMEs evolution is also different. This paper will focus on Japan, the United States and Italy these three representative countries to study the development history, characteristics and evolution of SMEs in developed countries from historical perspective. The purpose of this chapter is to provide some reference and inspiration for SMEs sustainable development in Chinese new normal economic development background. From a historical point of view, the transformation and evolution of SMEs in each country have strong national and regional characteristics. The impact of different institutional and economic conditions in different countries can even determine the evolution of local SMEs. 3.1 The development of SMEs in Japan As an industrialized country that developed rapidly after the Second World War, Japan was one of the most typical countries in supporting SMEs, with the most perfect financial systems and market systems. SMEs have played an important role in promoting the rapid development of economy in Japan in the 1960s and 1970s. It is an important supporting force for maintaining social stability during the period of low economic growth in the early 1990s.Japan's SMEs not only promoted the development of Japan's economy, but also maintained social stability, promoting employment and technological innovation. Democratization of the economy period 1948 to the 1960s: After the Second World War, the Japanese government launched reform in the economic aspects, to realize the economic system transformation from the traditional dominant economic system to the government-led market economy system. At this stage, Japanese SMEs paid attention to the industry organization, improving market competitiveness through industry associations. Compared with large enterprises, SMEs have drawbacks of 26