The effect of demand-side factors on accessing external finance and performance of SMEs in Thailand

Abstract

SMEs make substantial contributions to the Thai economy in terms of output, employment, and effective utilisation of regional resources. In view of these contributions, SMEs are at the heart of the country's strategy aimed at making Thailand a competitive and dynamic knowledge-based economy. SMEs make up the majority of businesses in the country. The Department of Industrial Promotion revealed that, in 2002, there were 1,639,427 SMEs in Thailand, comprising 99.63 percent of all enterprises. The crucial role of SMEs in the overall health of the economy is dependent on their performance. Several factors have been identified as affecting SME performance, in particular access to finance. As the SME sector is the backbone of the Thai economy, the government has intervened to address their inability to access finance. However, intervention programs focus on supply factors; that is, they are aimed at increasing supply of funds to the sector. Despite financial sector reforms involving an increase in the number of financial institutions and the introduction of a secondary stock market with lower listing requirements, access to finance continues to be a major problem that constrains SME performance in Thailand. Persistence of the problem suggests that addressing only the supply factors by increasing finance to SMEs will not enable SMEs to access finance. In addition, a focus on supply factors alone may lead to the protection of inefficient businesses, as policies that subsidise inefficient firms interfere with their competitiveness. Previous research indicates that demand-side factors account more for the inability of SME to access finance. The demand-side argument suggests that SMEs are unable to access finance because they are not investment ready. Investment readiness enhances a firm's ability to access finance and its performance. Increased performance of the SME sector ultimately boosts national economies by encouraging survival of the most efficient firms. A number of studies have examined the relationships among investment readiness, access to finance, and the performance of large, publicly quoted companies. A few studies have examined these relationships for the SME sector in developed economies, but similar studies for developing economies are few and far between. This study therefore examines the relationships among investment readiness, access to finance and performance of SMEs in Thailand, with the aim of assessing the extent to which findings in the Western literature apply to the Thai context.