The sustainability of small businesses in recessionary times (original) (raw)

Abstract

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This paper investigates the strategic behavior of rural SMEs in comparison to urban SMEs during recessionary periods in New Zealand. Utilizing data from a national survey of 1411 SMEs, it provides empirical evidence regarding the distinctiveness and sustainability of rural SMEs in difficult economic conditions. The findings contribute to knowledge on SME strategies and highlight the importance of rural enterprises within the broader economic landscape.

Figures (13)

4.2 The Economic Context: Features of New Zealand’s Economy

4.2 The Economic Context: Features of New Zealand’s Economy

OECD? = 100, at constant 2000 Purchasing Power Parities and constant prices

OECD? = 100, at constant 2000 Purchasing Power Parities and constant prices

In the four years to 2008, New Zealand recorded an annual average rise of 3.5 percent in real GDP in one of its most sustained periods of economic growth (OECD, 2009). As well as booming commodity prices, at least for some key exports, this performance was assisted by favourable economic conditions in Australia, New Zealand’s single most important overseas market, a housing sector boom and record immigration. New Zealand’s shift in economic fortune began prior to the world financial crisis in response to heavy pressure on production capacity through wage demands and skill shortages, currency appreciation and a tightening of monetary policy designed to curb inflation (OECD, 2009). The economy has nonetheless avoided some aspects of the international financial crisis that unfolded during 2008 as a consequence of the low level of public debt and the comparatively strong position of the Australian banks that dominate the financial sector in New Zealand. The Australian banking sector has avoided the need for the nationalisations and capital injections that have occurred in Europe and North America. In 2009 the current account deficit amounted to 10 percent of GDP and, while this is expected to increase, it allowed the government to inject a large ‘fiscal stimulus’ into the economy during 2009. A cumulative GDP decline of 3.3 percent was experienced from December 2007 to early 2009 (Treasury, 2010). Unemployment increased from 3 percent to 6.5 percent by the third quarter 2009, peaked in early 2010 and has since fallen to slightly over 6 percent. Another immediate and partly short-lived impact of the financial crisis was a sudden drop in net migration and short term visitor arrivals (figure 1). Figure 3: Unemployment rate by region 1987-2010

In the four years to 2008, New Zealand recorded an annual average rise of 3.5 percent in real GDP in one of its most sustained periods of economic growth (OECD, 2009). As well as booming commodity prices, at least for some key exports, this performance was assisted by favourable economic conditions in Australia, New Zealand’s single most important overseas market, a housing sector boom and record immigration. New Zealand’s shift in economic fortune began prior to the world financial crisis in response to heavy pressure on production capacity through wage demands and skill shortages, currency appreciation and a tightening of monetary policy designed to curb inflation (OECD, 2009). The economy has nonetheless avoided some aspects of the international financial crisis that unfolded during 2008 as a consequence of the low level of public debt and the comparatively strong position of the Australian banks that dominate the financial sector in New Zealand. The Australian banking sector has avoided the need for the nationalisations and capital injections that have occurred in Europe and North America. In 2009 the current account deficit amounted to 10 percent of GDP and, while this is expected to increase, it allowed the government to inject a large ‘fiscal stimulus’ into the economy during 2009. A cumulative GDP decline of 3.3 percent was experienced from December 2007 to early 2009 (Treasury, 2010). Unemployment increased from 3 percent to 6.5 percent by the third quarter 2009, peaked in early 2010 and has since fallen to slightly over 6 percent. Another immediate and partly short-lived impact of the financial crisis was a sudden drop in net migration and short term visitor arrivals (figure 1). Figure 3: Unemployment rate by region 1987-2010

Table 4: Firm Size and Sector by Urban and Rural Location

Table 4: Firm Size and Sector by Urban and Rural Location

Table 5: Owner characteristics of rural and urban firms Educational qualification patterns of owner-managers were significantly different between urban, independent urban and rural areas. While rural areas had a higher amount of owner- managers with a national certificate, trade certificate or equivalent urban areas had a higher amount of owner-managers with a degree level or higher. The educational qualification pattern of owner-managers in independent urban areas was closer to the ones in urban areas.

Table 5: Owner characteristics of rural and urban firms Educational qualification patterns of owner-managers were significantly different between urban, independent urban and rural areas. While rural areas had a higher amount of owner- managers with a national certificate, trade certificate or equivalent urban areas had a higher amount of owner-managers with a degree level or higher. The educational qualification pattern of owner-managers in independent urban areas was closer to the ones in urban areas.

Table 6: Comparative Business Performance in Q4, 2009 compared to Q4, 2008 Respondents were asked to compare their firm’s performance i.e. turnover and profitability to 12 months ago and to indicate on a five-point Likert scale whether their performance had increased, stayed the same or decreased. The results indicated that the recession did not affect all firms equally, but that there is a range of performance outcomes. Overall, more firms reported decreased, rather than increased, performance with regard to turnover and profitability. Some firms, however, actually reported increased performance during the last 12 months: 27 percent of firms reported increased turnover and 21.5 percent of firms increased profitability. A slightly smaller number of firms - 16.4 percent - reported growth i.e. increased turnover and profitability.

Table 6: Comparative Business Performance in Q4, 2009 compared to Q4, 2008 Respondents were asked to compare their firm’s performance i.e. turnover and profitability to 12 months ago and to indicate on a five-point Likert scale whether their performance had increased, stayed the same or decreased. The results indicated that the recession did not affect all firms equally, but that there is a range of performance outcomes. Overall, more firms reported decreased, rather than increased, performance with regard to turnover and profitability. Some firms, however, actually reported increased performance during the last 12 months: 27 percent of firms reported increased turnover and 21.5 percent of firms increased profitability. A slightly smaller number of firms - 16.4 percent - reported growth i.e. increased turnover and profitability.

Further, respondents were asked to indicate what their main source of competitive advantage was during the economically challenging times. While the firms across the three locations agreed in principle what the main three sources were (i.e. established customer relationships, quality of product/service and uniqueness of product/services) we found some distinctive differences as well. Although location didn’t rank very high as a competitive advantage, independent urban and rural firms (6.2 percent and 8.1 percent respectively) were significantly more likely to agree compared to urban firms. Further, rural firms were less likely to see price and the quality of product/services as a competitive advantage compared to urban and independent urban firms.

Further, respondents were asked to indicate what their main source of competitive advantage was during the economically challenging times. While the firms across the three locations agreed in principle what the main three sources were (i.e. established customer relationships, quality of product/service and uniqueness of product/services) we found some distinctive differences as well. Although location didn’t rank very high as a competitive advantage, independent urban and rural firms (6.2 percent and 8.1 percent respectively) were significantly more likely to agree compared to urban firms. Further, rural firms were less likely to see price and the quality of product/services as a competitive advantage compared to urban and independent urban firms.

Table 8: Main source of competitive advantage during recession

Table 8: Main source of competitive advantage during recession

North Island

North Island

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  1. 0 Notes: ***p<.01; **p<.05; *p<.10 X 2 with post-hoc analysis of standardized residuals
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