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Financial problems faced by micro, small and medium enterprises in the

small Island states: A case study of the manufacturing sector of the Fiji Islands

Article  in  International Journal of Business Excellence · January 2013

DOI: 10.1504/IJBEX.2013.050573

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Int. J. Business Excellence, Vol. 6, No. 1, 2013 1

Financial problems faced by micro, small and

medium enterprises in the small island states: a case
study of the manufacturing sector of the Fiji Islands

Suwastika Naidu* and Anand Chand

Faculty of Business and Economics,
School of Management and Public Administration,
The University of the South Pacific,
Private Mail Bag, Suva, Fiji Islands
Fax: (679)-323-2008
E-mail: naidu_s@usp.ac.fj
E-mail: chand_a@usp.ac.fj
*Corresponding author

Abstract: Under the current paradigm in small business finance research, the
micro, small and medium enterprises (MSMEs) play a pivotal role in
generating employment, contributing to GDP, earning foreign exchange and
contributing to revenues and taxes for the government. The aftermath of the
global financial crisis has been very adverse for the Pacific Island economies.
The Pacific Island economies do not have the resources to cushion the impact
of the financial crisis. Hence, the government of many of the Pacific Island
countries are looking at the MSMEs to provide sustainable development for the
growth of the Pacific Island economies. The financial problems faced by the
MSMEs are universal and the Fiji Islands are not an exception to this. In this
light, this paper will investigate the financial problems faced by the MSMEs in
the manufacturing sector of the Fiji Islands. This research will further
demonstrate the severity of the impact of the financial obstacles on the growth
and survival of the MSMEs. The paper will also provide policy directions for
the government policy makers.

Keywords: financing development; micro, small and medium enterprises;

MSMEs; post crisis; finance; financial obstacles; public policy; development
banks; regulatory policies.

Reference to this paper should be made as follows: Naidu, S. and Chand, A.

(2013) ‘Financial problems faced by micro, small and medium enterprises in
the small island states: a case study of the manufacturing sector of the Fiji
Islands’, Int. J. Business Excellence, Vol. 6, No. 1, pp.1–21.

Biographical notes: Suwastika Naidu is a Teaching Assistant at the University

of the South Pacific, Suva, Fiji Islands. She obtained her Bachelor of Arts
majoring in Banking and Finance and Management and Public Administration
from the University of the South Pacific. She holds a Master of Commerce in
Management and Public Administration. Currently, she is a PhD student in the
School of Management and Public Administration. She has presented papers in
international conferences and published in international refereed journals.

Anand Chand is a Senior Lecturer in the Department of Management

and Public Administration in the Faculty of Business and Economics at
University of the South Pacific in Fiji. He holds a BA (Tasmania, Australia), a
Post-Graduate Diploma in Business Studies (Canterbury, NZ), an MA in

Copyright © 2013 Inderscience Enterprises Ltd.

2 S. Naidu and A. Chand

HRM/ER (USP), and a PhD (Wales, UK). He has been teaching, researching
and doing consultations at USP for the last 27 years. He has presented
42 papers at international conferences and published 30 articles and two book
chapters.

1 Introduction

The development of the micro, small and medium enterprises (MSMEs) in the Fiji
Islands is very crucial if Fiji’s economy is to grow. Importantly, the growth of the
MSMEs is one of the core interests to the aid donors and the government (Brigham and
Ehrhardt, 2010). The MSMEs in the manufacturing sector of the Fiji Islands have made
remarkable contribution to the country’s GDP, revenues, taxes and employment (Silva et
al., 2008; Strauss, 2008; Wu et al., 2008; Zeffane and Zarooni, 2008; Thevaruban, 2009;
Datta, 2010; Pandaram and Amosa, 2010). The financial obstacle faced by the MSMEs
is a universal problem (Yartey, 2011). The stakeholders of the MSMEs in the
manufacturing sector of the Fiji Islands find that they face poor access to internal and
external sources of financing, unfavourable market conditions and poor tax regime
(Fredrick and Kuratko, 2010). The development of the MSMEs in the Fiji Islands is
constraint with scarcity of financial resources, lack of managerial, marketing, human
resource, information technology and technical expertise. In response to this, the
government has implemented projects (Northern Development Project) and established
institutions such as National Centre for Small Business and Enterprise Development
(NCSMED) so that the MSMEs could flourish in Fiji’s economy. However, the success
of these government initiatives is highly questionable.
Against this backdrop, the area of small business finance remains under-researched in
the Pacific Island countries. One of the primary reasons that the subject of small business
finance is under-researched in the Fiji Islands is because there is lack of data on the
MSME financing and establishment. Surprisingly, the relevant government authorities do
not have sufficient knowledge on the status of the MSMEs in the Fiji Islands hence
making it difficult for the researchers and practitioners to conduct empirical research in
this area. Nevertheless, the growing importance of the role of the MSMEs in the Fiji
Islands makes small business finance an interesting area to study. The main aim of this
study is examine the financial obstacles faced by the MSMEs in the Fiji Islands. This
research also seeks to examine the severity of the impact of the financial obstacles on the
growth and survival of the MSMEs. Importantly, this research also provides policy
directions for the government policy makers. The concluding section provides the unique
contributions of this paper, limitations of this research and future research directions.

2 Overview of the manufacturing sector in the Fiji Islands

Fiji is an island nation that has approximately 330 islands of which about one third are
inhabited. There are two major islands in the Fiji group, that is, Viti Levu (10,429 sq. km)
and Vanua Levu (5,556 sq. km). Other main islands are Taveuni (470 sq. km), Kadavu
(411 sq. km), Gau (140 sq. km) and Koro (140 sq. km) (Central Intelligence Agency,
2009). The capital of Fiji is Suva and it is one of the two cities in the Fiji Islands. Fiji’s
 Financial problems faced by MSMEs in the small island states 3

economy is principally resource oriented although the size of the manufacturing sector
has increased over the recent years. Manufacturing sector has played a pivotal role in the
economic growth and development of the Fiji Islands. Recent statistics from the Fiji
Bureau of Statistics shows that in 2005 it provided employment to 15,492 males and
10,035 females. Further, in 2005 the manufacturing sector provided employment to
22,852 wage earners and 2,657 salary earners. The GDP of the manufacturing sector at
constant prices of 2005 at factor cost stood at $606,697,000 for 2008 and $594,526,000
for 2009. Since 1986 the production of garment has increased tremendously due to the
introduction of tax exemptions for factories exporting 70% of their annual production
(Narayan and Prasad, 2003; Fiji Bureau of Statistics, 2011). Table 1 shows the
manufactured production for 2008 and 2009.
Table 1 Manufactured production for 2008 and 2009*

Manufactured production 2008 2009

Sugar (000 tonnes) 257 162
Coconut oil (tonnes) 9,069 4,977
Sharps (tonnes) 267 248
Flour (tonnes) 52,754 89,113
Butter (tonnes) 3,349 3,369
Cigarettes (tonnes) 437 367
Saw log (000 cubic meter) 83 92
Stock feed (tonnes) 44,140 42,336
Gold (oz) 22,497 35,074
Silver (kilogram) 265 313
Cement (000 tonnes) 140 116
Beer 19 20
Paint (000 litres) 3,220 3,217
Soap (tonnes) 5,587 5,319
Matches (000 gross boxes) 138 114
Electricity (million kwhs) 799 809
Ice cream (000 litres) 3000 2,367
Non-alcoholic drinks (000 litres) 203,124 154,111
Toilet paper (000 rolls) 28,611 17,179
Garment (FJD 000) 47,387 56,809
Note: *The data for 2010 and 2011 is unavailable for the Fiji Islands.
Source: Fiji Bureau of Statistics (2011)
Table 1 shows the manufactured production for 2008 and 2009. It shows some of the key
manufactured products in the Fiji Islands namely; sugar, coconut oil, sharps, flour, butter,
cigarettes, saw log, stock feed, gold, silver, cement, beer, paint, soap, matches, electricity,
ice cream, non-alcoholic drinks, toilet paper and garment.
4 S. Naidu and A. Chand

2.1 State of the art of the MSMEs in the manufacturing sector of the Fiji Islands
The MSMEs in the manufacturing sector of the Fiji Islands are striving to survive with
the limited resources that they have. The economic, political and legal environment is
posing unmanageable pressure on the MSMEs. From the wider perspective, organisations
have provided different definitions of the MSMEs. According to the study conducted by
the European Commission (2005), the MSMEs in the European economic area are
classified according to the ceilings as indicated in Table 2.
Table 2 Classification of the MSMEs under ceilings in the European economic area

Enterprise category Number of employees Turnover of the business

Medium enterprises < 250 ≤ € 50 million
Small businesses < 50 ≤ € 10 million
Micro businesses < 10 ≤ € 2 million
Source: European Commission (2005)
According to the Commonwealth Secretariat’s (2009) definition of the MSMEs
in the small island states, enterprises that have employees between the limit of one to
ten employees are classified as micro, 11–50 employees as small enterprises and
51–200 employees as medium enterprises. The Commonwealth Secretariats definition of
the MSMEs is more relevant to the Pacific Island countries hence this definition will be
used to categorise the MSMEs in this study. According to the Fiji Bureau of Statistics
(2011) manufacturing survey, there are 831 registered MSMEs in the manufacturing
sector of the Fiji Islands. As per the Commonwealth Secretariats definition of the
MSMEs, out of 831 MSMEs, 449 (54%) are micro enterprises, 226 (32%) are small
enterprises and 116 (14%) are medium enterprises. In total the MSMEs in the Fiji Islands
employ 16,439 males and 8,216 females.

3 Literature review

In the past, financial research in the area of small business finance has largely focused on
three major issues. These issues are namely; ‘relationship between financial factors to
business fluctuations’, ‘heterogeneity in the effects of credit stringency on firms’ and
‘debt inflation after depression’. In recent years, studies on small business finance are
gaining prominence in the scholarly and public domain. There have been numerous
studies conducted on various areas of small business finance and two of these important
areas are ‘financial management practices of small businesses’ and ‘implications of
financial management strategies on the survival and growth of the small businesses’ have
been polarised by Berger and Udell (1998, 2002). Contemporary studies have tested the
hypotheses for financial variables for other developing countries (see, for example,
Lownes-Jackson et al., 2003). There have been numerous studies that analyse the
financial obstacles affecting the growth and survival of the MSMEs. These studies are
both quantitative and qualitative in nature. In this section, we will provide a brief
overview of selected studies related to our study.
 Financial problems faced by MSMEs in the small island states 5

3.1 Financial problems

Scholars and practitioners have argued that the financial variables affecting the growth
and survival of the MSMEs in the Fiji Islands are similar to other countries however the
severity of these variables may differ significantly across the countries. Recent empirical
studies provide evidence that the ability to obtain both internal and external financing is a
major constraint for the growth and survival of the MSMEs (Hall, 1992; Fajnzylber et al.,
2009; Yartey, 2011). Fazzari et al. (1988), Hall (1992), Rajan and Zingales (1998), and
Rahaman (2011) underscore that with the existence of external finance constraints, firms
rely more on internal funds to finance their growth. These studies further confirm that the
effect of internal financing on firm growth becomes less significant with the increase in
the firms access to an external bank credit facility. As the external financing constraint
becomes less severe, firms rely less on internal funds and more on external funds as the
primary source of finance for their business and vice versa (Carpenter and Petersen,
2002; Cabral and Mata, 2003; Oliveira and Fortunato, 2006; Moreno and Casillas, 2007;
Hale and Long, 2010; Hovakimian, 2011).
Apparently, the MSMEs operate in a highly dynamic and fragmented market with
scarce financial resources that constraints diversification of activities and product range
provided by the MSMEs (Ojala and Isomäki, 2011). This further increases the risk of
business failure through bankruptcy. Studies conducted by Ganesan (1982), Pettit and
Singer (1985), Baldacchino (1995, 1999), Yusuf (1995), Gunatilaka (1997), Berger and
Udell (1998, 2002), Huang and Brown (1999), Laxmi and Kumar (1999), Chow and
Fung (2000), Ganesan (2000), Berger et al. (2001), Radelet and Sachs (2001), Hoelscher
and Quintyn (2003), Lownes-Jackson et al. (2003), Rogers (2003), Bracker et al. (2006),
Pinson and Jinnett (2006), Mandal et all (2008), Silva et al. (2008), Strauss (2008), Wu et
al. (2008), Zeffane and Zarooni (2008), Thevaruban (2009), Datta (2010), Pandaram and
Amosa (2010), Fredrick and Kuratko (2010), and Yartey (2011) concluded that scarcity
of financial resources is one of the major constraints that is limiting the growth and
development of the MSMEs. The ability of the MSMEs to obtain debt is significantly
dependent on the MSMEs level of collateral. Particularly, for the lenders of funds it is
much easier to monitor short term debt than long term debts. Financial commitment
forces the MSME managers or owners to be financially disciplined and to implement
stringent financial management practices (Rehman and Subash, 2008; Serrasqueiro et al.,
2011).
Furthermore, Lownes-Jackson et al. (2003) study on the ‘Financial obstacles faced by
African American entrepreneurs: an insight into a developing area of the US economy’,
Benzing et al. (2009) work on ‘Entrepreneurs in Turkey: a factor analysis of motivations,
success factors and problems’, Franco and Hasse’s (2010) study on ‘Failure factors in
small and medium-sized enterprises: qualitative study from an attributional perspective’,
Fumo and Jabbour’s (2011) work on ‘Barriers faced by SMEs: evidence from
Mozambique’ and Chavis et al. (2011) study on ‘Access to bank financing and new
investment: evidence from Europe’ highlighted some of the financial obstacles that affect
the survival of the MSMEs. These financial obstacles include inability to obtain outside
financing, insufficient capital, heavy operating expenses, poor money management, large
losses due to crime, meeting the payroll, inability to obtain trade credit, insufficient
profit, inability to meet financial obligations, health insurance costs and the cost of
workers’ compensation.
6 S. Naidu and A. Chand

Similarly, academics and practitioners have largely concluded in extant literature

that the MSMEs are very poorly equipped to obtain funds from venture capitalists.
Reinforcing this view, Arthur (2000) conducted a study of the 26,998 MSMEs in the nine
census regions of the USA; namely, East North Central, East South Central, Middle
Atlantic, Mountain, New England, Pacific, South Atlantic, West North Central and West
South Central. This research concluded that out of 26,998 MSMEs studied, only 2% of
the MSMEs were able to get funding from venture capital firms. Building onto this study,
Cumming et al. (2009), Bates and Bradford (2008), Dushnitsky and Shapira (2010), and
Rajan (2010) underscored that venture capital is one of the major source of finance for
large corporations during the start up stage of business. Venture capital funded
companies usually have higher performance as compared to companies that are non-
venture funded. Given that venture companies only choose and fund the best companies,
the MSMEs are left out in the predatory economic environment.
The MSMEs in regions such as African, Americans, Asia, and the Oceania are facing
problems because in recent decade there has been drastic reduction in banks providing
credit to the MSMEs (Ganesan, 1982; Gunatilaka, 1997; Berger and Udell, 1998, 2002;
Laxmi and Kumar, 1999; Ganesan, 2000; Radelet and Sachs, 2001; Hoelscher and
Quintyn, 2003; Thevaruban, 2009). This has been the implications of banking crisis
engrossing failures, capital shortfalls and regulatory difficulties. Further the banking
crisis is followed by periods of recession and reduced economic growth hence this
contributes to increasing interest rates on loans by the banks to the MSMEs. In the
context of the Oceania region, the MSMEs are facing similar financial problems as
compared to other countries. The severity of the financial problems faced by the MSMEs
in the Oceania region is much intense as compared to other regions because the small
island states in the Oceania region are all developing countries. Many studies have been
conducted that cluster the financial problems faced by business managers (see, for
example, Tipu and Arain, 2011). However, these studies have largely focused on large
and fast growing corporations. Particularly, there is little research conducted on the
problems faced by the MSMEs. Huang and Brown (1999) and Wijewardena and Tibbits
(1999) investigated the significance of the problems faced by the Australian MSMEs in
the areas of marketing, human resource management and general management. Similar
problems have been identified by the MSMEs in New Zealand, Melanesian Papua
New Guinea (PNG), Vanuatu, Polynesian Western Samoa, the Micronesian state of
Marshall Islands and the Fiji Islands (Baldacchino, 1995, 1999; Yusuf, 1995; Pandaram
and Amosa, 2010).
To conclude, there are few studies conducted on the Fiji Islands concerning the
problems faced by the MSMEs. This research will fill up this research lacuna by
investigating the financial problems faced by the MSMEs in the Fiji Islands.
 Table 3

Micro business (MB) Small business (SB) Medium enterprises (ME) Total
Demographic characteristics Demographic variables N = 67 N = 69 N = 71 N = 207
No % No % No % No %
Gender Male 49 73.1 52 75.4 63 88.7 164 79.2
Female 18 26.9 17 24.6 8 11.3 43 20.8
Ethnicity Ethnic Fijians 16 23.9 4 5.8 10 14.1 30 14.5
Indo Fijians 36 53.7 65 94.2 47 66.2 148 71.5
Chinese 10 14.9 0 0.0 12 16.9 22 10.6
Part Europeans 5 7.5 0 0.0 2 2.8 7 3.4
Age Less than 20 years 0 0.0 0 0.0 2 2.8 2 1.0
20–30 years 15 22.4 6 8.7 30 42.3 51 24.6
31–40 years 24 35.8 9 13.0 26 36.6 59 28.5
More than 40 years 28 41.8 54 78.3 13 18.3 95 45.9
Working experience Less than 5 years 10 14.9 4 5.8 20 28.2 34 16.4
Demographic characteristics of the owners/managers

5–10 years 29 43.3 10 14.5 38 53.5 77 37.2

11–15 years 15 22.4 34 49.3 8 11.3 57 27.5
16–20 years 10 14.9 15 21.7 3 4.2 28 13.5
More than 21 years 3 4.5 6 8.7 2 2.8 11 5.3
Financial problems faced by MSMEs in the small island states

Source: Created by authors

7
8 S. Naidu and A. Chand

4 Research methodology

The primary focus of this research was to investigate the financial obstacles facing the
MSMEs in the manufacturing sector of the Fiji Islands. The definition of the MSMEs
varies from country to country (Abdullah, 2000). The Commonwealth Secretariat’s
definition of the MSME’s for small island states was used for tabulating and analysing
the size distribution of the sample. Firstly, the literature review was conducted and the
research lacuna was cautiously identified. Upon identification of the research lacuna, a
self-administered questionnaire was designed and delivered to the owners/mangers of the
MSMEs in the manufacturing sector of the Fiji Islands. Self-responsibility was taken in
the delivery and assortment of the questionnaire because the response rate seems higher
than it is for straight forward mail surveys (Corbetta, 2003; Babbie, 2010; Blaikie, 2010).
The owners/managers were asked to use their experiences in their business to rate the
questions on a five-point Likert scale where (1) signified not important and (5) signified
extremely important (Brace, 2008; Kumar, 2008). The questionnaire was developed using
the previous questionnaires developed by Lownes-Jackson (1997), Reynolds (1998), and
Lownes-Jackson et al. (2003) for their studies. The questionnaires used for these studies
were further modified to reflect the Fiji context. The questionnaire was pre-tested with
20 owners/managers of the MSMEs. The owners/managers comments were gathered and
the questions were revised accordingly. The revised version of the questionnaire was
delivered to 300 owners/managers of the MSMEs in Viti Levu and Vanua Levu.
Apparently, the MSMEs interviewed were methodically chosen from a well defined
population. Given that there was lack of availability of data from the NCSMED,
telephone books yellow pages was used as the primary sampling frame for this research.
There was some difficulty faced in completing the interviews because the
owners/managers of the MSMEs were very busy in managing the business operations.
Out of the 300 questionnaires distributed, 207 (69%) owners/managers returned the
questionnaires. Table 3 shows the sample distribution of the owners/managers of the
MSMEs. The demographic indicators considered were gender, ethnicity, age and working
experience. Out of the 207 owners/managers there were 164 (79.2%) males and
43 (20.8%) females. Of the 207 owners/managers to the ethnicity item, 30 (14.5%) were
Ethnic-Fijians, 148 (71.5%) were Indo-Fijians, 22 (10.6%) were Chinese and 7 (3.4%)
were part Europeans. The distribution of the age item is as follows; 2 (1%) were less that
20 years, 51 (24.6%) were between 20–30 years of age, 59 (28.5%) were between
31–40 years and 95 (45.91%) were more than 40 years old. A vast majority of the
owners/managers working experience concentrated between five to ten years
(77 owners/managers; 37.2%) followed by 11–15 years (57 owners/managers; 27.5%),
less than five years (34 owners/managers; 16.4%), 16–20 years (28 owners/managers;
13.5%) and more than 21 years (11 owners/managers; 5.3%).

5 Analysis and discussions

The MSMEs are the drivers of economic growth and investment in the Pacific Island
countries (Browne, 2006). At a global context, the MSMEs are known to produce items
that are unique and specialised hence obtaining monopoly position in the market.
Particularly, the goods produced by the MSMEs are used by the large scale corporations
(Charantimath, 2006; Fairbain, 2006; Baldacchino, 2011). In small island economy such
 Financial problems faced by MSMEs in the small island states 9

as the Fiji Islands the small businesses are not protected from predatory competition by
the large corporations. Prominent studies conducted by Fazzari et al. (1988), Hall (1992),
Carpenter and Petersen (2002), Lownes-Jackson et al. (2003), Bracker et al. (2006),
Pinson and Jinnett (2006), Silva et al. (2008), and Yartey (2011) have identified some of
the key financial obstacles faced by the MSMEs. The mean scores of the 19 financial
obstacles that were tested in this research are given in Table 4.
Table 4 Simple statistics of the financial obstacles facing owners/managers

Micro Small Medium

Financial obstacles business business enterprises Min Max
MB SB ME
F1 Inability to obtain external financing 4.83 4.91 4.77 1.00 5.00
F2 Inability to obtain internal financing 4.74 4.79 4.73 1.00 5.00
F3 Insufficient working capital 4.93 4.87 4.96 1.00 5.00
F4 Heavy start-up costs 4.07 4.97 4.92 1.00 5.00
F5 Expensive raw materials 4.88 4.94 4.88 1.00 5.00
F6 High wholesale price 4.81 4.88 4.92 1.00 5.00
F7 Large losses due to scrap rate, 3.70 3.94 3.77 1.00 5.00
sabotage, breakage and crime
F8 Decline in sales volume 4.86 4.64 4.96 1.00 5.00
F9 High bad debts and write offs 4.74 4.82 4.88 1.00 5.00
F10 Heavy equipment maintenance costs 3.93 4.48 4.81 1.00 5.00
F11 High government tax, 4.98 4.76 4.58 1.00 5.00
VAT and customs duty
F12 Heavy advertising and promotional costs 2.09 2.24 2.58 1.00 5.00
F13 High payroll, rent and utilities 4.09 4.97 4.77 1.00 5.00
F14 High transportation and petrol costs 4.02 4.78 4.92 1.00 5.00
F15 High interest rates on loans 4.86 4.76 4.88 1.00 5.00
F16 Ability to meet financial obligation 4.91 4.97 4.84 1.00 5.00
F17 High training and development costs 2.07 2.27 2.38 1.00 5.00
F18 High insurance costs 2.95 3.27 3.81 1.00 5.00
F19 Delays in account receivables payment 4.98 4.88 4.69 1.00 5.00
Source: Created by authors

5.1 Inability to obtain external financing

Apparently, there is abundance of finance options that small businesses could use to meet
the financial needs of their businesses. There are many reasons why the MSMEs are
unable to obtain external financing and some of these reasons are insufficient collateral,
poor cash inflows and low turnover. Many studies have argued that the existing financial
institutions serve the small businesses poorly hence the small businesses face financial
gap (Read, 1998). This problem has worsened in the Pacific Island countries because the
global financial crisis had a massive impact on the external financiers to lend money.
External financiers such as banks have become cautious in their lending decisions and
10 S. Naidu and A. Chand

tightened their lending criteria. As a result, many small firms have to rely on internal
sources of finance. As shown in Table 4, inability to obtain external financing was highly
ranked by micro, small and medium enterprises (MB = 4.83, SB = 4.91, ME = 4.77).

5.2 Inability to obtain internal financing

The most essential source of start up capital comes from the owners of the MSMEs
themselves. Research evidence also indicates that on average the start up capital for
males is twice as higher than females. The level of internal finance that the owner can
invest in the business is dependent on credit worthiness of the owner and the level of
experience that the owners have with the sources of funds (Stokes and Wilson, 2006).
Some of the port of call for internal sources of finance for the MSMEs includes friends,
family, founders and other fool hardy investors. Fool hardy investors seek higher rate of
return as compared to other internal sources of finance (Fredrick and Kuratko, 2010). As
shown in Table 4, inability to obtain internal financing was highly rated by the owners of
the MSMEs (MB = 4.74, SB = 4.79, ME = 4.73).

5.3 Insufficient working capital

Entrepreneurs of the MSMEs face with fluctuations of working capital on a daily basis.
Insufficient working capital is one of the major reasons for the failure of the MSMEs
(Shaikh et al., 2011). The fluctuations in the working capital signal success or trouble for
the MSMEs. Working capital is the life blood flow of the MSMEs. Specifically, working
capital is cash, receivables and inventory less short term debts. If the value for account
receivables is increasing and sales aren’t this means that people are not paying their bills.
Table 4 shows that insufficient working capital is a major concern for the MSMEs in the
Fiji Islands (MB = 4.93, SB = 4.87, ME = 4.96).

5.4 Heavy start-up costs

The success and failure of the MSMEs is largely dependent on how it deals with various
barriers. During the start-up stage of the MSMEs, a significant amount of financing is
needed to finance the purchase of capital goods such as equipment, plant, etc. The
MSMEs also face problems with marketing and management during the start-up stage
(Cromie, 1991; Watson and Hogarth-Scott, 1998; Fielden, 2000). The entrepreneur’s
technical knowledge and expertise helps in solving the barriers that the entrepreneurs are
facing. Table 4 shows that heavy start up cost was 4.07 for micro businesses, 4.97 for
small businesses and 4.92 for medium enterprises. These statistics reveal that this
problem is more severe for small and medium enterprises as compared to micro
enterprises.

5.5 Expensive raw materials

The MSMEs in different sectors are faced with different problems. One of the key
barriers constraining the growth and survival of the MSMEs in the manufacturing sector
of the Fiji Islands are high prices of raw materials. Raw materials are vital component of
the manufacturing production process. Raw materials are a necessity for manufactures in
the production process (Kraybill et al., 2011; Zrnic, 2011). Table 4 shows that expensive
 Financial problems faced by MSMEs in the small island states 11

raw material is a severe constraint for the MSMEs. The mean value for expensive raw
materials is 4.88 for micro businesses, 4.94 for small businesses and 4.88 for medium
enterprises.

5.6 High wholesale price

Wholesalers are the intermediaries between the suppliers of raw materials and the
manufacturers. The core role of the wholesalers is to purchase large quantities of raw
materials from the suppliers and distribute it at a mark-up price to the manufacturers.
Wholesalers are also faced with high costs on purchases from the suppliers of the raw
materials hence one of the factors that determine the price that is charged by the
wholesalers is the pricing of the suppliers. Likewise manufacturers, wholesalers also need
significant amount of cash to meet their daily expenses for inventory, receivables,
physical plant and the employees (Sharma and Upenja, 2005). Table 4 shows that high
wholesale price is the most severe for medium enterprises (ME = 4.92), followed by
small businesses (SB = 4.88) and micro businesses (MB = 4.81).

5.7 Large losses due to scrap rate, sabotage, breakage and crime
Problems such as scrap rate, sabotage, breakage and crime are not new to the MSMEs.
These problems existed from the start of the industrial revolution, still exist now
and will continue to exist in the future. Entrepreneurs have to implement stringent
measures to control the increasing scrap rate, sabotage, breakage and crime. It is largely
emphasised in extant literature that scrap rate, sabotage, breakage and crime are
negatively correlated with organisational performance (Rasool and Botha, 2011).
Table 4 shows that large losses due to scrap rate, sabotage, breakage and crime is
most severe for small businesses (SB = 3.94), followed by medium (ME = 3.77) and
micro (MB = 3.70) businesses.

5.8 Declining sales volume

The Fiji Islands are a small island nation that relies mainly on imports to meet domestic
consumption. The Fiji Islands have been the victim of global financial crisis. The
MSMEs in the manufacturing sector of the Fiji Islands do not have the capacity to
mitigate the impact of the global financial crisis. The manufacturing sector of the Fiji
Islands is striving to survive in the dynamic economic environment characterised with
fall in export earnings, rising prices of imports specifically fuel and food. The purchasing
power of consumers (users of end products of manufacturing goods) is significantly
declining hence the sales volume of the MSMEs in the manufacturing sector is
declining. Table 4 shows that the problem of declining sales volume is most severe for
medium enterprises (ME = 4.96), followed by micro (MB = 4.86) and small business
(SB = 4.64).

5.9 High bad debts and write offs

Bad debt is the amount that is written off by the businesses because the debtors failed to
clear off their accounts. This mainly happens if the debtor has been declared bankrupt. In
12 S. Naidu and A. Chand

financial terms, bad debts are treated as losses that offset income (Bracker et al., 2006).
For the write off to be treated as bad debts the write off should be closely related to the
activity of the business. Bad debts usually arise if the credit sale is made to the debtor and
the debtor is unable to pay their accounts. Table 4 shows that bad debts and write offs are
the most severe for medium enterprises (ME = 4.88), followed by small (SB = 4.82)
and micro businesses (MB = 4.74).

5.10 Heavy equipment and maintenance costs

The MSMEs in the manufacturing sector need heavy equipment to produce the goods that
is later purchased by the retailers and wholesalers. These goods are distributed to the
consumers by the retailers and wholesalers. The cost of purchasing the equipment is very
high. Most of these equipment are internationally produced rather than locally because
Fiji does not have the necessary skills and expertise to produce advanced equipment. The
costs of maintaining these equipments are also very high. The technicians in Fiji do not
have expertise on the manufacturing equipments and in majority of the cases the
entrepreneurs are deceived by technicians. In addition to this, the entrepreneurs
also do not have the knowledge and skills to maintain the manufacturing equipments in
proper working conditions. Table 4 show that heavy equipment and maintenance costs
is the most severe problem for medium enterprises (ME = 4.81), followed by small
(SB = 4.48) and micro businesses (MB = 3.93).

5.11 High government tax, VAT and customs duty

The growth and survival of the MSMEs is largely constraint by government regulations
such as taxation, VAT and customs duty. These government regulations impose stringent
financial constraints on the MSMEs. In the Pacific Island countries, the government
support for the MSMEs is extremely poor hence it makes them vulnerable from the
competitive pressures imposed by large organisations. Table 4 shows that the impact
of government tax, VAT and customs duty was most severe on micro businesses
(MB = 4.98), followed by small (SB = 4.76) and medium enterprises (ME = 4.58).

5.12 Heavy advertising and promotional costs

The MSMEs in the Pacific Island countries invest very less in advertising and
promotional costs. The rate of new product development or innovation of existing
product is very poor for the MSMEs in the manufacturing sector of the Pacific Island
countries hence the MSMEs invest less in the advertising and promotion of its products.
As mentioned above, one of the major constraints of the MSMEs is lack of finance hence
the MSMEs who do invest in advertising and promotion of its products find that
advertising and promotional costs are high. Table 4 shows that advertising and
promotional costs are most severe for medium enterprises (ME = 2.58), followed by
small (SB = 2.24) and micro businesses (MB = 2.09).

5.13 High payroll, rent and utilities

Fixed costs such as payroll, rent and utilities are expenses that are essential to keep the
business in normal operations and these costs are not dependent on sales volume. The
 Financial problems faced by MSMEs in the small island states 13

MSMEs in the manufacturing sector of the Fiji Islands face financial constraints hence it
is difficult for the MSMEs to meet the payroll, rent and utilities costs. Table 4 shows that
payroll, rent and utilities costs are the most severe for small businesses (SB = 4.97),
followed by medium enterprises (ME = 4.77) and micro businesses (MB = 4.09).

5.14 High transportation and petrol costs

Over the recent years the prices of crude oil is persistently increasing. This has caused a
slowdown of economic growth and simultaneously a rise in inflation. The product that is
included under the category of crude oil includes unleaded fuel, gasoline, kerosene and
lubrications. The increase in the oil price implies that it costs the MSMEs more to
produce the same level of goods. The MSMEs in the manufacturing sector of the Fiji
Islands have to deliver the final products to the wholesalers and retailers. The rising cost
of fuel prices is a major problem for the MSMEs because it increases the monthly bill of
the MSMEs. Table 4 shows that transportation and petrol costs are the most severe for
medium enterprises (ME = 4.92), followed by small (SB = 4.78) and micro businesses
(MB = 4.02).

5.15 High interest rates on loans

Commercial finance companies such as banks and non-bank financial institutions provide
small business loans at high interest rates. In addition to the high interest rates, the
MSMEs have to pay for processing fees. The MSMEs borrow money from banks and
non-bank financial institutions simply to finance the purchase of inventory, equipment,
pay off creditors, etc. Table 4 shows that high interest rate on loans is a very
severe problem for micro (MB = 4.86), small (SB = 4.76) and medium (ME = 4.88)
enterprises.

5.16 Inability to meet financial obligation

A crucial point that the entrepreneur of the MSMEs need to know is that if the
entrepreneur is the sole proprietor of the business then he/she would be held personally
liable for the debts of the business. This means that if the business is not able to pay its
debt to the suppliers, loses a lawsuit or finds itself in financial hot water then the
entrepreneur will have to pay for the debts of the business. One of the major reasons that
vast majority of small businesses are failing is because the businesses are not able to meet
its financial obligation. Table 4 shows that inability to meet financial obligation is the
most severe problem for small businesses (SB = 4.97), followed by micro (MB = 4.91)
and medium enterprises (ME = 4.84).

5.17 High training and development costs

The MSMEs in the manufacturing sector of the Fiji Islands invest little in training and
development of their workers. Training and development in the MSMEs is very essential
for quality performance. The MSMEs in the manufacturing sector of the Fiji Islands
mostly engage in on job training practices. A senior employee is usually assigned to a
junior level employee. On job training takes place at the job site or at the workstation.
Table 4 shows that high training and development costs have little or below average
14 S. Naidu and A. Chand

impact on the MSMEs in the manufacturing sector of the Fiji Islands. High training and
development costs are the most severe for medium enterprises (ME = 2.38), followed by
small (SB = 2.27) and micro business (MB = 2.07). .

5.18 High insurance costs

The MSMEs in the manufacturing sector of the Fiji Islands do not offer health insurance
benefits to its workers. It is often difficult for the MSMEs to obtain orders from
wholesalers and retailers if they do not insure for property and liability insurance (Dingell
and Wyden, 1992; Daily, 2008). Importantly, if the MSMEs in the manufacturing sector
of the Fiji Islands are insured for property and liability insurance then it would be very
easy for them to secure good customers. Table 4 shows that high insurance costs
is the most severe problem for medium enterprises (ME = 3.81), followed by small
(SB = 3.27) and micro enterprises (MB = 2.95).

5.19 Delays in account receivables payment

The owners of the MSMEs need to have a very good understanding of working capital
cycle as this provides the basis for examining the essential components of working
capital management, cash flows, account receivable, inventory and accounts payable
(Longenecker et al., 2010). The higher the cash collection period, the more difficulties
firms face to finance the day to day operations of the business. Due to the economic
shocks of the global financial crisis the MSMEs are facing even greater problems as
compared to previously in collecting the debts from its debtors. Table 4 shows that delays
in accounts receivable payment is the most severe for micro businesses (MB = 4.98),
followed by small (SB = 4.88) and medium enterprises (ME = 4.69).

6 Recommendations

6.1 Set goals and priorities

One of the best ways of guiding the behaviour of the MSMEs is through providing clear
goals for the MSMEs and then communicating these goals to the employees (Tagiuri and
Davis, 1992). Employees in the MSMEs should be motivated so that they are able to
produce the final output with fewer costs. On the contrary, when employees are not
motivated, then the scrap rate and the machine maintenance costs significantly rise.
Hence, to reduce the overhead costs it is extremely important that the entrepreneurs of the
MSMEs set the goals and priorities of the business and motivate the employees to
achieve the goals of the business. Setting goals and priorities and effectively motivating
the employees to achieve these goals and priorities will enhance the employee collegiality
in the organisation. The entrepreneurs of the MSMEs will find it easier to make core
decisions of the business with the consultation and collaboration of the employees.

6.2 Monitor financial trends

The MSMEs in the manufacturing sector of the Fiji Islands have played a key role in
employment, innovation, growth and development. Historical evidence suggests that both
 Financial problems faced by MSMEs in the small island states 15

micro and macro economic shocks have slowed the development of the MSMEs in the
Fiji Islands. It is very essential for the entrepreneurs of MSMEs to monitor the constraints
imposed on the MSMEs by these economic shocks. The entrepreneurs of the MSMEs
need to be well informed of the status quo of the internal and external environment.
Having a good knowledge and understanding of the internal and external environment
will help the entrepreneurs to implement strategies that drive the MSMEs to success even
in the situation of economic depression. To be able to monitor the financial trends, the
entrepreneurs of the MSMEs need to be well educated and have staffs that have good
understanding of the economy of the Fiji Islands. The MSMEs will also be required to
invest in research and development. However, the MSMEs in the manufacturing sector of
the Fiji Islands do not have financial resources in invest in research and development.

6.3 Government subsidies and tax exemption schemes

The liberalisation of international trade, globalisation of the capital flows, advancement
of technology and the increasing transfer of market information will sharpen the
competition that is currently faced by the MSMEs and the large enterprises in the Fiji
Islands. Majority of the available resources are siphoned by the large enterprises thus
leaving the MSMEs in starving conditions. The government of the Fiji Islands need to
intervene with relevant public policy directions such as through government subsidies
and tax exemption schemes so that MSMEs are protected from the predatory competition.
Currently, the Fiji Islands have poor public policy directions for MSMEs. The existing
small business institutions that have been established by the government need to be
restructured and measures should be implemented to measure the performance of such
organisations. Through the implementation of government subsidy and tax exemption
schemes, the entrepreneurs of the MSMEs would be able to import and export in
international markets with fewer trade barriers. Government subsidy and tax exemption
schemes will further reduce the financial constraints faced by the MSMEs.

6.4 Better access to finance

The MSMEs in the Fiji Islands find difficulty in obtaining finance even though MSMEs
form large part of the Fiji’s economy. The financial and institutional development will
provide proper channels through which the MSMEs would be able to access financing.
The entrepreneurs in the MSMEs in the manufacturing sector could also utilise financing
tools such as factoring and leasing so that the MSMEs can obtain finance even if
the capital market is under developed (Beck and Demirguc-Kunt, 2006). Notably, the
MSMEs in the Fiji Islands are informational opaque. The informational wedge in the
capital market tends to be acute for the MSMEs hence the ability of the MSMEs to obtain
external finance becomes challenging. Relationship lending practices by the lending
institutions such as banks and non-bank financial institutions will reduce the information
problems that is currently constraining the ability of the MSMEs to obtain finance
(Berger and Udell, 2002). Under the relationship lending practices the banks undertake a
longitudinal information acquiring process whereby the banks acquire information about
the small business from its owners and its community. Subsequently, the banks use this
information in deciding whether to provide the credit to the small business or not to
provide credit to the small business. Financing through the means of factoring, leasing
and financial and institutional development will have implications for the entrepreneurs
16 S. Naidu and A. Chand

of the MSMEs. By utilising such financial strategies, the entrepreneurs of the MSMEs
will be able to diversify their business and effectively finance the growth of the MSMEs.

6.5 Proper cash and credit management practices

The entrepreneurs of the MSMEs need to ensure that information is transferred
effectively and efficiently among salespeople, operations department and accounting
staff. This will ensure that there is short debtor’s collection period and too much cash is
not tied up in accounts receivable. It is extremely important that the small business
entrepreneurs keep in mind the cash flow requirements when establishing and
implementing the credit policies of the business. One of the primary goals of the MSMEs
in the Fiji Islands should be that they need to minimise the debtor’s turnover period. The
MSMEs can facilitate the task of bill collection more effectively and efficiently if it
streamlines the administrative procedures of its business. The global economic crisis has
had a negative impact on the debtor’s collection period. Generally, the sales are low and
the debtors are not able to pay their accounts. The entrepreneurs of the MSMEs need to
implement stringent credit lending criteria so that credit sales are only made to the
trustworthy debtors and the losses from bad debts decline. By streamlining the cash and
credit management practices the owners of the MSMEs will be able to have excellent
control over debtors and costs. This will further enhance innovation, growth and
competitiveness of the MSMEs in the manufacturing sector of the Fiji Islands.

7 Conclusions

This paper examined the nineteen financial obstacles faced by the MSMEs in the
Fiji Islands. Particularly, this paper examined the impact of each of the nineteen variables
on the MSMEs in the Fiji Islands. Using the mean analysis of the 207 MSMEs in the
Fiji Islands, this paper demonstrated that financial obstacles such as inability to obtain
external and internal financing; insufficient working capital; heavy start up costs;
expensive raw materials; high wholesale price; large losses due to scrap rate, sabotage,
breakage and crime; decline in sales volume; high bad debts and write offs; high
government tax, VAT and customs duty; heavy equipment maintenance costs; high
payroll, rent and utilities; high transportation and petrol costs; high interest rates on loans;
ability to meet financial obligation; and delays in account receivables payment are the
most severe problems for the MSMEs in Fiji. Financial obstacles such as high training
and development costs; high insurance costs; heavy advertising and promotional costs are
less severe financial obstacles faced by the MSMEs.
This research has implications for a number of literatures in small business finance.
As our research findings suggest, the MSMEs in the Fiji Islands are faced with a number
of financial obstacles and the severity of each of the financial obstacles vary depending
on the size of the businesses. Essentially, the research findings will provide a strong base
for undertaking future research in the field of small business finance. The contribution of
this paper to existing literature is unique however there are still gaps in the existing
literature that needs to be fulfilled. Future research needs to be undertaken that vastly
focus on theory and model building approach of the financial obstacles faced by the
MSMEs. The limitations of this study include small sample size of the study and
 Financial problems faced by MSMEs in the small island states 17

insufficient financial resources available to conduct the research. However, the

researchers were able to overcome these limitations and contribute to the extant literature.

Acknowledgements

The authors would like to thank the anonymous reviewers for their valued comments on
this paper.

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