Small and medium businesses (hereafter called SMBs) as a whole have played a prominent role in the Taiwan economy. Statistics released in March 1982 by the Division of Small and Medium Business of the Ministry of Economic Affairs reveal that SMBs are responsible for a very substantial share of the nation’s overall economic activity. For example, SMBs employ some 70 percent of all working people in Taiwan, they sell 65 percent, in value terms, of total exports, and they include within their ranks 95 percent of all business establishments in the country. In recognition of their importance, in this paper we attempt a preliminary analysis of the factors determining SMB investment.
On the demand side, a comparison between the profitability of SMBs and large firms is made by dividing reported earnings, in turn, by capital, total assets, fixed assets, and net worth. Our calculations reveal that the rates of return for these factors are on the same order of magnitude for both SMBs and large firms, which indicates that the SMBs’ lower level of investment is primarily the product of a shortage of funds.
On the supply side, two major sources of funds – retained earnings and borrowings – are examined. The option of SMBs issuing their own stocks had to be ruled out because, by definition, SMBs cannot possess capital in excess of 40 million New Taiwan Yuan, which is below the minimum amount of capital (50 million) necessary for such issuance in the Republic of China. We find that the retained earnings of SMBs are often insufficient to allow for reinvestment. SMBs face a further difficulty in procuring funds from authorized financial institutions, and hence are often forced to borrow, at substantially higher rates, on the curb market. SMBs sometimes even experience frustration on the curb market. As a direct consequence of this inability to obtain adequate financing, SMBs are often forced to roll back investment schedules or even to eliminate them altogether.
