GROUP ASSIGNMENT

COURSE TITLE: Research Methods for Business and Management COURSE CODE: GM504 LECTURERS NAME: Mr Low Kok Sun STUDENTS NAME AND ID NUMBERS: Musurmonkul Choriev -1001128104

ASSIGNMENT TOPIC: Research Proposal of the Relationship between Small and Medium Enterprises and Private Lending in Imperfect Financial System
Table of Contents

SEMESTER: September 2011 December 2011

LIST OF FIGURES

Chapter 1 Introduction
1.1 Problem Statement
Funding is very important to any enterprise for business, especially to small and medium enterprises. Whatever a company is facing emerging market, stuck in crisis or dealing with emergency, it needs a lot of funding in a short-term. However, limiting by profitability, small and medium enterprises dont often leave reserve funds in their hands, unlike the large enterprises. Majority of small and medium enterprises are lack of funding when they need it suddenly. But in imperfect financial system, just like in some developing country, for example, China, they can hardly borrow the funding they need from the bank. On the one hand, normally, because of their own risk, they dont have enough fixed assets as collateral. On the other hand, they just need short-term loans. The interest of short-term loans is always high and if they want the loan they have to find guarantee companies. The result is the interest
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plus the fee rate of guarantee companies will be higher than their average profits. So the private lending came into being and this research aim to reveal the relationship between SMEs and private lending in imperfect financial system.
1.2 Background of the Study

After the economic winter of the global financial crisis in 2008, the small and medium enterprises of China are stuck in crisis again in 2011. Facing the high inflation expectation, The Central Peoples Bank raised the deposit reserve ratio eight times in 2010. This action leads to all banks tighten their loans in 2011. At the same time, the costs of labor are increasing year by year and the market of America and European is also declining. According to the report (January to July, 2011) of Ministry of Industry and Information Technology (China), sixty to seventy percent of SMEs are facing very difficult operation and sixty percent of SMEs are downtime among them because of lack of funding. Even the chairman of Promotion council of SMEs (Wen Zhou, China) predicted forty percent of SMEs in Wen Zhou will be bankruptcy at the end of 2011. The causes are not only the three reasons I mentioned above, but also relative with Government of China cracked down the private lending in 2011. The importance of private lending to SMEs is becoming a growing concern.

1.3 Objectives of the Study

So far, there are many researches regarding SMEs financing but most of them pay close attention to SMEs themselves or financial system of a country, just like the significance of financing for SMEs, how many channels that SMEs can finance in China, how to perfect the financial system of China and so on. However, they all ignore the private lending which always plays an important role even if it exists in the edge of the law. Therefore, under the latest situation which is described in the background, we plan to do this research so that we can find out the relationship between SMEs and private lending, identify private lending is the medicine or the drug to SMEs, extend the channel of financing for SMEs so that can help them developing and give some useful advises to government.

1.4 Research Questions

This research tries to find out the relationship between SMEs and private lending in imperfect financial system (Figure 1). Therefore, the relationship is the most important aspect of this topic for us to focus on. But before it, we should define the SMEs and the private lending and limit the financial environment which is imperfect. What is the role the private lending played for SMEs? Is this role positive or negative for SMEs development? These two questions is the core of the relationship which we plan to reveal.
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Figure 1

1.5 Significance of the Study

We all know SMEs play an important role in economy and society, especially in developing country. SMEs can promote economic development of a country and absorb a large number of employments of a society. They also have played another important role in adjusting the economic structure. Nevertheless, the issue of financing has been plaguing the development of SMEs. Just making a simple analysis of financing of SMEs we can figure out there are many problems such as narrow channels of direct financing, high financing cost and low financing credit, discriminatory policies of bank, and lack of cooperative social financial services, etc. So this research can help us to understand the plight of financing of SMEs in imperfect financial system, can help us to know the function of private lending in imperfect financial system, can help us to reveal the relationship between SMEs and private lending and can help us to find out some advises about financing to strengthen SMEs development. Moreover, it is also significant to government to identify private lending is good or not, to improve the capital markets, to deepen financial system reforms and to build the social financial services system.

1.6 Research Scope

Although many countries, especially in developing countries, involved in this issue, this research is limited in figuring out the relationship between SMEs and private lending in one typical developing country, China. The study further focuses on the samples which can be considered as the representative of SEMs and private lending of China.

Chapter 2 Literature Review and Theoretical Framework

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2.1 Literature Review

Financing of SMEs is the process of social capital allocation for SMEs. It can help SMEs maintaining their competitive advantages and maximize the economic benefits. SMEs are the major force in economic growth but the financing issue always restricts the development of SMEs. In recent years, the literature on SMEs financing are more and more, which means SMEs financing is a growing concern. The existing literature focused on the following aspects:
2.1.1 The basic theories of financing

In this aspect, firstly, is the theory of the contract of corporate capital structure. American economist David Deland made it in 1952, he pointed out the company's capital structure is established in accordance with the following three methods: the net income method, the net operating income approach and the traditional method, which is the early capital structure theory. Modern corporate finance theory was founded by Franco Modigliani and Merton Miller in 1958 years, known as the MM theory. Later scholars improved and developed the assumptions of MM theory continuously, such as the incentive theory, information transmission theory and control theory. Secondly is the theory about financial system, just like the theory of financial deepening. Goldsmith R.W. claimed that In the financial sector, if the financial structure and financial development is not the single most important issue on economic growth, it is also one of the most important issues. in his book named Financial Structure and Financial Development. In the theory of financial deepening, the financial system is considered that it can pull economy out from a stagnant situation and accelerate economic growth. But if itself is inhibited, then it will hinder and undermine economic development. Financial repression, that means a countrys financial system is imperfect, is a common feature of developing countries. The third is Bootstrap Financing theory. Since Bhide first proposed "Bootstrap Financing" the concept in 1992, Bootstrap finance-related theories and methods in west countries has made rapid progress, and develop into an almost complete system. Simply, Bootstrap financing is the method that a business owner avoids long-term borrowing, issuing shares, long-term contractual commitments and other traditional forms of financing, through consultations, sharing to meet the needs of business financing. These methods find the resources to maximize their effective use, minimize their costs.
2.1.2 The analysis of SMEs financing difficulties

The existing literature focused on three aspects of analysis: economic analysis, system analysis and SMEs own barriers analysis. From the economic view, the root of the problem of SMEs financing is market failure. Market is too small or non-natural monopoly causes a high degree of narrow channels of SMEs financing. Other scholars believe that the problem of SMEs financing for two main reasons: first, the transaction costs are high, and second, the
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information asymmetry. In system analysis, lack of supply in system is the major external factor of SMEs financing difficulties. The origin of the difficulties of SEMs financing is the state-owned financial system only supports state-owned enterprises. SEMs can hardly obtain the financial support by state-owned financial system. And thinking about the SMEs themselves, lack of credit and ambiguous property rights of SMEs resulting high-risk operation is the critical reason.
2.1.3 The research about private lending

Private lending displayed its advantage in the promotion of SMEs development and easing the contradiction between supply and demand of social capital. Therefore it has gradually become a research topic. Many scholars think about private lending is the inevitable product of corporate finance activities in the market economy conditions. The subject of private lending is limited to purely civil body, not including financial institutions, which can occur in natural persons, legal persons and other organizations. Private lending is a civil action, not a private investment behavior. Some literatures defined private lending as activities which are separated from official financial institutions, between the non-financial institutions social individuals and enterprises, value of alienation and repayment of the principle and interest. These literatures also found out the features of private lending and the relationship between private lending and banks.

2.2 Theoretical Framework

There are many factors that will affect the appearance of private lending as well as the relationship between SEMs and private lending. So far, the first target of SMEs financing is the Banks. However, these factors which will be list later caused the difficulties of SMEs financing.

Factors of SMEs themselves Family-style management, centralized management. Distortion of financial statements reaction. Restrictions of Guarantee conditions. Factors of Banks The direction of state-owned banks operating. Accountability and incentive mechanism "disorder". Higher cost and risk of loans of SMEs.

Generally speaking, the characteristics of SMEs loans are small amount of capital, shortterm, time-sensitive and arbitrary. The whole process of banks loan to SMEs, such as establishment of the credit relationship, investigation, review, distribution, loan after the inspection and post-loan, it takes a lot of manpower and financial resources. And many SMEs involved in the competitive labor-intensive industries. The poor stability, high out-rate of business and non-standard financial statement are difficult for banks to judge
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the operation conditions and profit prospect of SMEs. Hence, these commercial banks don't have the will and brave to loan to SMEs. At the same time, some advantages of private lending build the relationship between SMEs and private lending. Factors of private lending Broad participation of subjects. The breadth of funding sources. Borrowing flexibility. Diversification of borrowing forms. Market lending interest rate.

2.3 Hypothesis Development

According to the research questions, the research objective and the theoretical framework, this research is going to explore the relationship of following hypothesis: H: Private lending for SMEs is an important complement in an imperfect financial system.
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Chapter 3 Research Methods and Design

3.1 Research Methodology
In research, we will inevitably use some research methods to carry out the analysis. A survey study will be used in this research. Survey research method is the most commonly used methods. It is purposeful, planned, systematic-way to collect information on the study or historical reality of the situation. It is a basic scientific research method, which combines the use of history data, observation and other methods as well as interview, questionnaires, case studies, tests and other scientific methods. For deeper study, qualitative analysis also will be utilized. It is the study of "qualitative" aspects of the analysis. Specifically, it uses the induction and deduction, analysis and synthesis as well as abstract and general and other methods to thinking process the variety of obtained materials to understand the nature of the things and reveal the inherent laws.

3.2 Sampling Design

A sample is a subset of the population. By studying the sample, we should be able to draw conclusions that are generalizable to the population. In this research, we plan to use two sampling methods: Stratified random sampling Cluster sampling

3.2.1 Stratified random sampling Stratified random sampling divides the population into a number of individual layers (groups) by biological sample and random extract sample from each layer (group), then weighted to estimate the parameters of the overall. It is suitable for the objects whose amount of units is more and internal difference is large. It compare with simple random sampling and Random sample of equidistant, at the same number of the sample, its sampling error is smaller; at the same requirements of sampling error, it requires a smaller number of samples. For example, we need to know about conditions of SMEs and private lending, we decide to use stratified random sampling method to extract some enterprises as sample for survey. Particularly, firstly, we divide the enterprises into three categories by industry (also can by the administrative divisions, earnings, size, etc.) and assume the number of each category. Then, according to the proportion of various types of enterprises in population, determine the number of samples in each category of enterprises. Finally, we can extract the sample from all categories of enterprises by using simple random sampling method. 3.2.2 Cluster sampling
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Cluster sampling generally groups units of population into a number of clusters which do not cross and do not duplicate, then extract sample from the clusters. Application of cluster sampling requires a better representation of clusters, that means the differences of units of clusters requires large and differences among clusters requires small. The advantages of cluster sampling are convenient to implement and saving money. For instance, firstly, see SMEs as a population, then random select a number of clusters from this population and investigate all individuals of these clusters. Sampling process can be divided into the following several steps

Determine the classification mark of clusters. Population is divided into a number of non-overlapping clusters. Determine the number of clusters should be taken. Use simple random sampling to determine the sample size.

3.2.3 Sample Size by simple random sampling We need to use simple random sampling in above two methods. In solving practical problems, if you take a larger sample than required, it will waste materials, manpower and finance; if the sample you took is smaller than required, it cannot meet the requirement of analysis. Thus, it is important to determine an acceptable sample size. The sample size is determined by factors as following:

It is influenced by the size of 2. If 2 is large, overall variance of sampling is large, so sample size should be large. On the contract, sample size should be cut down some. The degree of reliability. The higher reliability required, the greater necessary sample size needed. The size of allowable error. Asking for more precise inference, allowable error should be lower, then sample size should be larger. And vice versa.

To find required sample size usually used following formula (simple random sample in not repeat the sampling conditions):

* n: required sample size * N: the number of population * 2: population variance *

: The degree of reliability(95%; standard value of 1.96)
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: The size of allowable error

3.3 Data Collection

There are three ways we are going to use for data collection: Interview: For the primary data, we can negotiate with related departments of government, industry association and high-level leadership of enterprises to gain the acceptable face to face or telephone or internet interview. Questionnaire: we also can negotiate with related departments of government, industry association and high-level leadership of enterprises to acquire the right to send questionnaires to certain people of SMEs for the investigation. Internet: We mainly collect the second hand data regarding SMEs and private lending issues through the internet (here refers to the data which are released by enterprises themselves, industry association and State Department).

3.4 Research Limitation

This research has certain limitation that should be acknowledged. This sample scope is mainly focus on one area of China, southeast. Obviously, there are still so many SMEs in other areas of China. So the final result may be has deviation when it is applied on other areas of China.

3.5 Key words Imperfect financial system; Small and medium enterprises; Private lending; Relationship;

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