Re-interpretation of the concept of Financial Gap.

AuthorPashang, Hossein

    Swedish research has repeatedly acknowledged the vital role of small businesses for the improvement of welfare society. A statistical study from year 2009 shows that 99% of all companies in Sweden are small businesses and that the welfare society is more than before dependent on the success of these businesses (Tillvaxtverket, 2009). Furthermore, it was shown that a region having a large numbers of small firms is experiencing a more dynamic industrial environment and healthier community life (Davidsson, Lindmark and Olofsson, 1994). According to Olofsson (the Minister for Enterprise and Energy in Sweden) small and medium sized companies are the key to future growth and success (Regeringskansliet, 2009). However, the critical factor for these businesses to exist and grow is the availability of funds to finance their operations.

    According to Landstrom (2003), the most common source of funding the Swedish small firms is bank loan. This means that the availability of bank financing is an essential factor for the survival of the small businesses. A recent governmental study shows that 31% of all small companies claim that they have problems of obtaining a bank loan (Konjunkturinstitutet, 2009). In Swedish studies, the difficulties in obtaining external finance are often termed under the umbrella concept of "Financial Gap". Generally speaking the concept of Financial Gap indicates that there exists the state of "asymmetric information" between the owners of small businesses and financial institutions. In most cases, the term asymmetric information was related to the failure of small businesses to prepare financial information in accordance with what is usually prepared for the context of big businesses (Landstrom 2003).

    It seems like that the previous researchers have examined the Financial Gap, mainly from the perspective of economic theory and market information, where the concept of asymmetric information originates. Arguably, the benchmark used for the evaluation of information produced for the context of small businesses can be questioned. This study will reduce the pre understanding effect of economic theory on the construction of Financial Gap. We, therefore, employ a different approach to re-interpret the Financial Gap. In so doing we examine the Financial Gap as a relational concept, for instance, as a phenomenon that needs re-interpretation in regards with the new situations, actors, and contexts. In re-interpretation of Financial Gap we will replace the promises of economic theory with the actors' vocabulary. It is more sensible that Financial Gap to be examined by engaging the standpoints of at least two parties, the financial industries and the small businesses. By engaging the actors--those who experience the Financial Gap--in the process of interpretation, we will reduce the theoretical effect of economic reasoning that was repeatedly involved to determine the Financial Gap (see Bruns 2001; Landstrom 2003). The strategy of engaging the two parties as actors tend to result in the presentation of the Financial Gap as a relational concept.

    Of course, the existence of the gap between small firms and banks lead to unfavourable situations for both parties; on the one hand, the small businesses experience constraints to develop and survive, on the other hand, banks are restricted from engaging in profitable business in their surrounding communities. On the other side, it is necessary to investigate that to which extent the Financial Gap is structured by theoretical emphasis without engaging the actors in the process of interpretation. The problem of the study is further specified by addressing the following questions:

  2. How is the Financial Gap described by the owners of small businesses?

  3. How is the Financial Gap of small businesses described by banking industries?

  4. Considering the two parties different ways of interpretation, in which way can the Financial Gap be redefined?


    Perhaps the first study that showed concern for the existence of the Financial Gap dates back to the 1930's, when the concept of "MacMillan Gap" was introduced into the research context. This concept was invented by MacMillan to indicate that small businesses are experiencing difficulties in obtaining external capital even though securities for the loan are guaranteed (Stanworth & Gray, 1991). Bolton (1971) builds further on MacMillan's findings and emphasize that the difficulties for small businesses to rais external funding is related to the problem of knowledge. Later in time, Bruns (2001) argues that deficient external accounting information and failure in providing internal accounting information are reasons for why banks deny credit to small businesses. The Swedish researchers have often interpreted the Financial Gap as an information gap. For example, Landstrom (2003) claims that asymmetric information between the two parties is the cause to the rise of Financial Gap.

    Recent Swedish experience, however, showed that banking institutions have difficulties to match their credit with the risk of business. For example, the bank fund exposure of big and middle size companies operating within the building constructions has caused 90% of the credit losses for two decades ago (Paulsson 2002). One of the big advantages of the small businesses is their ability to quickly adapt to the changing environment. This is because they normally have less bureaucracy than larger firms (Pettit & Singer, 1985) and the relative cost of credit lost is lower. The owner and manager of small firms is often the same person and this affects the level responsibility contributing to the survival of the company (Demsetz, 1983). Furthermore, the owner is involved in every aspect of the day-to-day operations; they are engaged in all levels of decision-making simultaneously which reduces the cost of management control (Demsetz, 1983). Decision-making in small businesses is conducted in an informal manner. Rice and Hamilton (1979) emphasize on the social perspective of decision-making and view the decision process as an "open system" where the decision makers seek satisfactory solutions rather than optimal solutions based on alternative choice-making. Rice and Hamilton (1979) explain that the small business owner does not have a system for filtering the information and will thus experience unorganized noise. Small businesses do not expend their money on developing advanced management accounting systems. A favourable aspect is that the information they use is not rationalized by management accounting system and it contains ambiguity and contingencies which is a natural part of operational activities and actions. The owners...

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