Exam: Small Business Management (Lecture 2 - Sustainability, Functional areas)

Why is HRM particularly relevant for SMEs? Are there certain conditions that further strengthen this relevance?

HRM is very important for SMEs because they are overrepresented in service industries where employee quality is crucial and because they must compete with large firms on the labor market through job design rather than wages.

Are there certain conditions that further strengthen HRM relevance?

This relevance increases in knowledge-intensive industries and during labor shortages.

Why is Finance particularly relevant for SMEs?

Finance is important for SMEs because they face difficulties accessing external finance due to opacity, low reputation, and limited internal resources.

Are there certain conditions that further strengthen finance relevance?

This relevance increases with firm age, growth intentions, and low financial literacy of the owner.

They mention four of these: trade-off theory, pecking order theory, agency cost theory and market timing theory. During the remainder of the paper Kumar and Rao conclude that one of these four theories is most relevant for SMEs. Which one is that? Briefly describe the content of this theory.

They argue that the pecking order theory is most relevant for SMEs. This theory states that SMEs prefer internal finance first, then debt, and only use external equity as a last resort due to information asymmetry and high financing costs.

The conceptual model that is developed in this paper indicates that both firm specific characteristics and owner-manager attributes determine financing preferences in SMEs. Give one example of both types of variables and explain their impact on financing preferences (so give 2 examples and 2 explanations). Try to use arguments and terminology that is also used in the paper or during the guest lecture.

SME financing preferences depend on firm and owner-manager characteristics. Young firms face high information asymmetry, making external finance expensive, so they rely on internal funds and debt. Owner-managers with a strong need for control avoid equity and prefer retained earnings or debt.

Corporate Social Responsibility (CSR)

Concept where companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a volontary basis.

Corporate Social Responsibility (CSR) mention the 3P’s

People
Profit
Planet

Consequences for functional management

Specific characteristics of SMEs
The nature of managerial work
Working in a small business

Functional areas

In SMEs not all of them as separate departments.

HRM practices in small firms compared to larger firms

Small firms use less of HR practices.