SME Performance and Its Determinants: An Empirical Study in the Chinese Transitional Context

Abstract

The economic transition in China has facilitated a process of privatisation that promotes the development of entrepreneurship and, in turn, the growth of small and medium-sized enterprises (SMEs). As in the majority of countries around the world, SMEs are increasingly seen as playing an important role in Chinese economic development. However, although the association between SME performance and economic growth has attracted various research interests in the West, research in this area is sparse for Chinese SMEs on the mainland. It is proposed in the Western literature that SME performance is a multi-dimensional construct. A number of theoretical models or perspectives have been developed to identify the factors that influence SME performance. It is generally accepted that internal factors presented as business strategy and CEOs' personal characteristics as well as external factors in the business environment are critical to SME performance. There is no doubt that regardless of the perspective emphasised, existing models of SME performance and its determinants are based on market economies with free market systems. There is a research gap in the assessment of the extent to which these models apply in a transitional economy context. It is sometimes assumed erroneously that Western models of economic development and associated factors are applicable in all economic contexts. Based on the Chinese and Western literature on SME development, this study develops a framework of SME performance and its determinants and tests empirically the application of the framework to the Chinese context. The framework comprises SME performance and its three determinants: CEO characteristics, variables in the external environment and business strategies. The textile industry in the Shaoxing city of Zhejiang province was selected to test the direct and indirect relationships among these factors due to its important position in the Chinese economy. To meet the research objectives, a quantitative research design was adopted involving the use of the survey method to collect data for hypotheses testing. Structured questionnaires were distributed to more than 500 CEOs in the textile industry in Shaoxing. In all, 309 valid responses were collected and analysed. Structural equation modelling, using Partial Least Squares was employed as the statistical technique to test the hypotheses formulated from the research framework. The findings of the study were consistent with the Western literature in several areas. There were however other areas of differences. For example it was found that Chinese CEOs embody a combination of Western entrepreneurial and conservative values using both to their advantage in operating within the Chinese context. In addition, Chinese CEOs place a lot of emphasis on social systems and networks for business resources, information and opportunities. These social systems are used to fill the gaps in areas not yet addressed by the reform process.