Bank finance and export activities of Small and Medium Enterprises

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Availableonlineatwww.sciencedirect.com

ScienceDirect

ReviewofDevelopmentFinance4(2014)97–103

Bank

finance

and

export

activities

of

Small

and

Medium

Enterprises

Joshua

Yindenaba

Abor

a,∗

,

Elikplimi

Komla

Agbloyor

a

,

Ransome

Kuipo

b

a_Department_of_Finance,_University_of_Ghana_Business_School,_Legon,_Ghana b_Department_of_Accounting,_University_of_Ghana_Business_School,_Legon,_Ghana

Abstract

ThisstudyexaminesSMEs’accesstobankfinanceandhowthataffectstheirexportactivities.Thestudyadoptsaprobitmodeltoassessthe empiricalrelations.ThefindingsofthestudysuggestthatSMEaccesstobankfinanceimprovestheirlikelihoodtoexport.Suchfinanceiscritical tocaterforthehighfixedcostsofexporting,internationalmarketingandbranding,andmeetinghigherqualitystandardsrequiredforoverseas markets.Theresultsofthestudyalsoindicatethatolderfirms,moreproductivefirms,andlargerfirmsaremorelikelytotaketheimportantstep ofenteringintotheexportmarket.PolicyinterventionsshouldthereforebedirectedatreducingthebottlenecksthatpreventSMEsfromaccessing fundingfromthecommercialbanks.

Keywords:Bankfinance;Exports;SMEs;Ghana

1. Introduction

Exporting seems to be the most common foreign market entrymode.Thisisespeciallytruefor smallfirms,wherethe lowresourcecommitmentandhighflexibilitymakesita favor-ablewaytointernationalize(Youngetal.,1989;Leonidouand

Katsikeas,1996).Itiswellestablishedthat manyfirms,

espe-ciallysmallfirmshavesignificantexportingpotential,however, relativelyfewofthemhaveundertakenactualexporting(Yeoh

andJeong,1995).Thisphenomenoncouldbeattributedtofirms’

difficultyinaccessingtheneededfundsforexport.

Financialconstraintsare cited as an important obstacle to firms’ investmentin general and in particular to their desire to venture into export business. Recent literature in interna-tionaltrade has focused onthe sunk costs that firmshave to

∗_{Corresponding}_author.

E-mailaddress:Joshabor@ug.edu.gh(J.Y.Abor). PeerreviewunderresponsibilityofAfricagrowthInstitute.

http://dx.doi.org/10.1016/j.rdf.2014.05.004

incurinordertoenterforeignmarkets.Theseincludeexpenses of gatheringinformationonforeignmarkets,upgrading prod-uct quality, changing packaging, and establishing marketing channels. Greenaway et al.(2005) suggest that an important determinantoffirms’investmentandparticipationintheexport marketisfinance.Wethereforehypothesisthatfirmsthathave better access to financial resources are capable to meeting expensesandcostsassociatedwiththeexportbusinessand there-forearemorelikelytoincreasetheirinvolvementintheexports market.

The ability of afirm toexport aproportion of its sales is increasinglybeingregardedasanimportantmeasureof compet-itiveperformance(Buckleyetal.,1990).However,thedecision toexportcouldbeinfluencedbyaccesstorequisitefinancing. This study contributes to the literature by investigating how SMEs’accesstobankfinanceaffectstheirexportmarket par-ticipation.Inparticular,wefocusonSMEsinGhana.Previous studiesonGhanafocusedonproblemsnon-traditionalexporters faceinaccessingfinance(Buatsi,2002;AborandBiekpe,2006) andhowexportstatusinfluencefirmsfinancingchoice(Abor,

2007a).Thiscurrent studyaimsatfillingthisresearchgapby

examiningthelinkbetweenaccesstobankfinanceandexports ofSMEs.

Therestofthepaperisorganizedasfollows;Section2 pro-videsstylizedfactsonexportinginGhana.Section3describes

Open access under CC BY-NC-ND license.

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themethodologyusedinthestudy.Section4presentsthe empir-icalresults,andfinallyinSection5weconcludethestudyand providepolicyrecommendations.

2. OverviewofSMEdevelopmentandexportsinGhana SmallandMediumEnterprises(SMEs)havebeenidentified as importantcontributorstothe Ghanaianeconomic develop-ment process.SMEs contribute significantly to the country’s national product by either manufacturing goods of value, or throughtheprovisionofservicestobothconsumersand/orother enterprises. Theyrepresent over90% ofGhanaian businesses andcontributeabout70%toGDPandover80%toemployment

(Abor,2007b).

Ghana has since the 1970s taken a number of initiatives, including thesettingupof keyinstitutions such asthe Office ofBusinessPromotionandtheGhanaEnterpriseDevelopment

Commission (GEDC) to promote SMEs in the country. The

implementationoftheEconomicRecoveryProgramme(ERP)in 1983broadenedtheinstitutionalsupportforSMEs.TheNational Board for Small Scale Industries (NBSSI) was also estab-lishedwithintheMinistryofIndustry,ScienceandTechnology to address the needs of small businesses. The NBSSI estab-lishedanEntrepreneurialDevelopmentProgramme,intendedto trainandassistpersonswithentrepreneurialabilitiesinto self-employment.In 1987,theindustrialsectoralsowitnessedthe cominginto operation of the GhanaAppropriate Technology Industrial Service (GRATIS). It was to supervise the opera-tionsofIntermediateTechnologyTransferUnits(ITTUs)inthe country.GRATISaimsatupgradingsmallscaleindustrial con-cernsbytransferringappropriatetechnologytosmallscaleand informalindustriesatthegrassrootlevel.ITTUsintheregions areintendedtodeveloptheengineeringabilitiesofsmallscale manufacturingandserviceindustriesengagedinvehiclerepairs andotherrelatedtrades.Theyarealsotoaddresstheneedsof non-engineeringindustries(KayanulaandQuartey,2000).

Notwithstandingthe important role of SMEstoeconomic growthandjobcreation,theyareconfrontedbyanumberof chal-lengesthattendtolimittheirgrowthanddevelopment.Themost significantinstitutionalweaknessfacingdynamicSMEsistheir lackofaccesstoexternalfinance.Repressivefinancialpolicies inthepast,especiallylowinterest,andamonopolisticbanking systemminimizedtheinterestofbanksindevelopingtheSME market.Toreversetheconsequencesofthesepractices,a combi-nationoffinancialliberalizationandinstitutionalreformwasin order(Aryeeteyetal.,1994).Inviewoftherelativelylowlevelof responsefromtheprivatesectortoearlyERPreformmeasures, thefocus wason theliberalizationof varioussectors, includ-ingthefinancialsectorundertheFinancialSectorAdjustment Programme(FINSAP).UndertheFINSAP,directinstitutional measuresaimedatsupportingsmallenterpriseswerealsoputin place.WithWorldBankassistance,theProgrammeofActionto MitigatetheSocialCostsofAdjustment(PAMSCAD)created aspecialfundtoassistmicroenterprises,andtheFundforSmall andMedium Enterprises Development(FUSMED) was initi-atedtoincreasetheamountofcreditavailabletoSMEsthrough commercial and development banks. This was based on the

presumptionthatpooravailabilityofcreditfromformalsources was oneof the major reasons why the private sector invest-ment hadnot grownasexpected.Amajorargumentwas that smallfirmswithgoodgrowthpotentialwerebeingdiscriminated against(Aryeeteyetal.,1994).Atthesametime,however,the effectivenessofmanysimilarSMEcreditwasbeingcalledinto question(Webster,1991).

Otherconstraintsincludelackofmanagerialskillsand train-ing,lackof equipmentandtechnology,regulatoryissues,and limited access to international markets (Steel and Webster,

1991;Aryeeteyetal.,1994;GockelandAkoena,2002).SMEs

normallyhavedifficultyattracting highlymotivatedmanagers becauseofthefiercecompetitionwithlargecompaniesonthe labormarketforsuchskilledandtalentedpersonnel.Thishasto dowiththequalityofmanagement.Also,SMEsarenotableto affordthehighcostoftrainingandadvisoryserviceswhileothers donotseetheneedtoupgradetheirskills.Intermsoftechnology, SMEsoften havedifficultiesingainingaccess toappropriate technologiesandinformationonavailabletechniques(Aryeetey et al., 1994). In most cases, SMEs utilize foreign technol-ogy withascarcepercentageof sharedownershipor leasing. They usually acquire foreign licenses, because local patents are difficult to obtain. Regulatory constraints also pose seri-ouschallengestoSMEdevelopmentandalthoughwideranging structuralreformshaveledtosomeimprovements,prospectsfor enterprisedevelopmentremaintobeaddressedatthefirm-level. The highstart-upcostsforfirms, includinglicensingand reg-istration requirements,canimpose excessiveandunnecessary burdensonSMEs.Further,thehighcostofsettlinglegalclaims, andexcessivedelaysincourtproceedingsadverselyaffectSME operations.InthecaseofGhana,thecumbersomeprocedurefor registeringandcommencingbusinessarekeyissuesoftencited.

TheWorldBankDoingBusinessReport(2013)indicatedthat

ittakes12daystostartabusiness,19daystoexport,1.9years toresolveinsolvencyand487daystoenforceacontract.

Thoughpreviouslyinsulatedfrominternationalcompetition, manySMEsarenowfacedwithgreaterexternalcompetitionand theneedtoexpandmarketshare.However,theirlimited inter-nationalmarketingexperience,poorqualitycontrolandproduct standardization,andlittleaccesstointernationalpartners, con-tinue toimpede SMEs’expansion into international markets

(Aryeeteyetal.,1994;KayanulaandQuartey,2000).Theyalso

lackthenecessaryinformationaboutforeignmarkets. 3. Literaturereview

Banks make a wide variety of loans toa wide variety of customers for manydifferent purposes.However, small busi-nessesoftenencounterdifficultieswhenapplyingtoproviders offinanceforcredittosupportfixedcapitalinvestmentandto provideworkingcapitalfortheiroperations(TuckerandLean, 2003).SMEs’accesstobankloansismainlyaffectedbyboth demand andsupplyconstraints.The demandconstraintsrefer to factorsthat make it difficultfor SMEsthemselves to seek externalfinancefromfinancialinstitutionssuchaspoorquality of potential projects that qualify for funding andthe inabil-ityofSMEstodraftconvincingbusinessplansandpro-forma

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financialstatements.Thesupplyconstraintsrefertothosefactors thatmakeitdifficultforfinancialinstitutionslikebankstolend (supplyloans)toSMEsincluding,higherlevelsofinformational asymmetriesrelatedtoSMElending,highertransactionalcosts, inherentlyriskiernatureofSMEsandinstitutionalweaknessin developingcountries that make it more difficult for financial institutionstolendtoSMEs.

SMEsareviewedtoberiskybecausemanyofthemdonot surviveduetoamyriadofreasons.SMEclosureratesexceeded

20%peryear(Liedholm,2001)andmostofthemfailintheirfirst

year(Biekpe,2004).Thelevelofriskisinverselyrelatedtothe

sizeofthefirm.Intermsoftransactioncosts,banksexperience highertransactioncostsintheirdealingswithSMEs.Thecostof lendingmayinsomecircumstancesbeviewedasfixed.These costsincludeadministrative,legalandacquisitionof informa-tionfromaspecializedagent.Thecoststructurefortwoloansis likelytobequitesimilarregardlessofthesizeoftheloan.For example,itmaycostabankasimilardollaramounttoprocess anSMEloanrequestof$10,000asagainstaloanof$100,000 fromalargercorporation.Therefore,duetoscaleeconomies,the costoflendingtolargerfirmsislikelytobelower.Also, trans-actionalcostsintermsofloanmonitoringafterdisbursementare disproportionatelyhigherforSMEs.

Bilkey(1978)whoattemptedtosummarizetheliteratureon

exportbehavioroffirmsobservedthatthemostfrequentserious obstaclestoexportingreportedbyU.S.firmsintheempirical studiesare: insufficient finances, foreign government restric-tions,insufficientknowledgeaboutforeignsellingopportunities, inadequateproductdistributionabroad, anda lackof foreign marketconnections.Priorresearchhasalsonotedthat though banksareamajorsourceofexternalcapitalforsmallfirmsitis moredifficultforthemtoobtainbankloansthandolargefirms

(PetersenandRajan,1994;ColeandWolken,1995;Schifferand

Weder,2001).Smallfirmsobtainonly30%oftheir financing

fromexternalsources,whereaslargefirmsmeetupto48%of theirfinancingneedsthroughexternalfinancing(WorldBank,

2004).

Binks et al. (1992) caution that restricted access to bank

debt by small businesses may not be directly attributable to theirsizebutrathertoproblemsassociatedwiththeavailability ofinformationfromwhichprojectsareevaluated(information asymmetry).Theyarguethatsuchinformationproblemsarenot peculiartothesmallbusinesssectoralone,butarepredominant therebecauseoftheanticipated(proportionately)highercosts ofinformation-gatheringassociated withthat sector.The pro-visionof financeby abank toafirmcould be consideredas asimplecontract between the twoparties inwhichthe bank istheprincipalandthe smallfirmisthe agent.This relation-shippotentiallyleadstotheproblemofinformationasymmetry

(Binksetal.,1992).Theproblemofinformationasymmetryis

exacerbatedindevelopingcountriesbecauseinformationabout thecreditqualityofborrowersislimited.Creditratingagencies arevirtuallynon-existentwhilstcreditreferencebureausremain largelyundeveloped.Thecoverageofreputablecreditagencies suchasS&PdoesnotencompassavastmajorityofAfricanfirms andinanycasecoveragewillbeforonlythewellestablished firms.InGhanaforexample,localcreditratingagencies have

notemergedtofillthisinformationalgap.Thoughacredit ref-erencebureauhasbeenestablishedinGhana,itisinitsinfant stageandtheissueofcoverageforSMEsremainsaconcern.

Theinformationasymmetryproblemmaynotonlyresultin goodlendingprospectsbeingrejectedbyproviders,butalsopoor prospectsbeingacceptedbyproviders(Altman,1968).Altman definedthelatterasaTypeIerrorandtheformerasaTypeII error. In theory,the provider canreducethe risk of TypeI/II errorsby carefullyscreeningfirmsatthe outsetand monitor-ingprojectsduringthelifeoftheloan.However,screeningand monitoringarehighcostactivitiesassociatedwiththelending proposition.Ifthelenderistorecoupthesecoststhenborrower interestratesmaybeincreased,additionalriskmaybecovered bydemandingcollateralormaybeavoidedaltogetherby reject-ing theloanapplication. OftheAltmanerror categories,it is theTypeIIerrorwhichisofmostconcerntothesmallbusiness sector–thatis,agoodinvestmentprojectwhichisincorrectly rejectedbythelender(TuckerandLean,2003).Common occur-renceofthistypeoflendingerrorwouldcontributesignificantly toafinancegap.Itisimportanttonotethatinformation asym-metrymay beevenmoreacuteinthe caseof smallfirms as, havingdiscoveredgoodinvestmentopportunities;theyare usu-ally reluctant to disclose relevant confidential informationto outsiderswhoarecapableofstealingtheirideas(Petersonand

Schulman,1987).

Institutional factors also affect the amount of credit that SMEsareabletoaccess fromfinancialinstitutions.Thelevel ofbankconcentrationinacountrywillaffecttheincentivesfor banks toreach out tothe SMEsector. Countrieswith highly concentrated and uncompetitive markets are more likely to have less credit being directed to the SME sector. This is becausethelowlevelofcompetitiondoesnotmotivatebanksto seeknewanduntappedmarketstoboosttheirincomestream. The enforcementof collateralcantakeyearsdue toapoorly resourcedjudiciary.Also,propertyrightsandtherightsof cred-itorsarelessprotectedinsomedevelopingcountries.Thelaw andfinanceliteratureshowthatlegalvariablessuchascreditor rightspositivelyinfluencefinancialmarketdevelopment.Small firmsare25%morelikelytobedeniedcreditiftheyareinstates thatprovidecreditorswithlessprotectionwhentheborroweris bankrupt(WorldBank,2004).

Becketal.(2005)suggestthatfinancialconstraintsaffectthe

smallestfirmsmostadverselyandthatanincremental improve-mentofthefinancial systemthathelpsrelaxtheseconstraints willbemostbeneficialforSMEs.Providersoffundsgenerally preferborrowers whohavegood trackrecord ofprofitability, somedegreeoflongevity,andassetsthatcanbeusedas

collat-eral(ColeandWolken,1995).Inminimizingtheriskassociated

withdealingwithpotentialloanborrowers,banksemploy cer-tain strategies. They may raise the interest rate on loans to riskierborrowerssuchassmallbusinessestoreflectthegreater uncertaintyofrepayment(BergerandUdell,1995a,b).Petersen

andRajan(1994)confirmintheirstudythatsmallerfirmspay

higherinterestonloansthanlargerfirms. Iflendersdocharge highinterestrates, thisincreases therisk theyareexposedto by discouraging low-risk,low-return borrowersfrom seeking loans, ultimatelydiscouraging lendersfrom lendingtoSMEs

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altogether(Hallberg,2000;WorldBank,2004)Anotherstrategy iscollateralrequirementwhichcouldbemanagedorliquidated topayofftheloanincaseofdefault.Loansaremostlygrantedon acollateralizedbasis,especiallywhentheseloansareassociated withriskyborrowers.

Athirdstrategyforminimizingriskistodeveloplong-term relationshipswithborrowers.Overtime,lendershavethegood opportunitytogetenoughinformationonthefirmandtolearn moreaboutthecompany.Thisputsthelenderinabetter posi-tiontomaketherightdecisionsonloanapplications(Coleman, 2000).Firmswithlongertermbankingrelationshipsareoften monitored less frequently andcharged lowerrates of interest

(PetersenandRajan,1994).Theliteraturealsoshowsthatbanks

areinrecenttimesapplyingdifferenttransactionalbased lend-ing strategies that facilitate arms-length lending (Berger and

Udell,2006;DelaTorreetal.,2010).Thesestrategiesinclude

creditscoring, uniquerisk assessment toolsandmanagement processes, asset-based lending,factoring,fixed-asset lending, andleasing.

Insummary,SMEsidentifylackofaccesstofinanceasone of thekey constraintstotheirgrowth andinvestmentandthe financingconstraintsareattributabletotheSMEs’inabilityto present goodand convincingbusiness plans, higher levels of informationalasymmetriesrelatedtoSMElending,higher trans-actionalcosts,inherentlyriskiernatureofSMEsandinstitutional weaknessindevelopingcountriesthatmakeitmoredifficultfor financialinstitutionstolendtoSMEs.SMEsaccesstobank lend-ingcouldbeenhancedbytheprovisionofcollateral,goodtrack recordandlongerbusinessrelationships.

4. Dataandeconometricmethod

Thisstudy usestheRegional Projecton Enterprise Devel-opment (RPED) panel dataset which consists of firm-level informationrelatingtotheperiod,1991–2002.Thisisa compre-hensivepaneldatasetonasampleoffirmswithintheGhanaian manufacturingsector.Thisdatawascollectedinsixroundsas part of theRPED organizedby theWorld Bank. Thesample is stratified bysub-sector,location andsize. Three size cate-gorieswere used tostructure the sample: microfirms (those employinglessthan6persons);smallfirms(employingbetween 6and29persons);mediumfirms(employingbetween30and 99persons).

The composition of the sample is indicated in Table 1. Withrespecttosectoralclassifications,thegarmentsub-sector account for the highest percentage of the total sample with 22.36%, followed by the furniture sub-sector and the metal sub-sector(21.95%).The machinesub-sector istheleast rep-resented,accountingforonly3.66%ofthefirmsinthesample. More than half (58.76%) of firms are located in the capital city(Accra).About30.93%,6.19%and4.12%ofthefirmsare located inKumasi, Takoradiand CapeCoast respectively. In termsoffirmsize,medium-sizedfirmsarethemostrepresented, accountingfor 67.2%of the sample,followedbysmall-sized firms(24.3%).Micro-sizedfirmsaccountforonly8.5%ofthe sample.

Table1

Compositionofthesample.

Variable Freq Percent Cum

Sub-sector Garment 660 22.36 22.36 Bakery 288 9.76 32.11 Textiles 120 4.07 36.18 Wood 276 9.35 45.53 Furniture 648 21.95 67.48 Metal 648 21.95 89.43 Machine 108 3.66 93.09 Chemical 204 6.91 100.00 Total 2952 100.00 Location Accra 2052 58.76 58.76 Kumasi 1080 30.93 89.69 Takoradi 216 6.19 95.88 CapeCoast 144 4.12 100.00 Total 3492 100.00 Firmsize Micro(1–5) 305 8.50 8.50 Small(6–29) 872 24.30 32.80 Medium(30–99) 2411 67.20 100.00 Total 3588 100.00

Wetesttheeffectofaccesstobankfinanceonexportstatus based onaprobitmodel. Theexport statusmodel isaprobit modelbecauseofthediscretenatureofthedependentvariable. Themodelisstatedas:

Probability(exporting=1)=Φ(Xβ) (1)

βisthesetofestimatedcoefficients;Xisthevectorof explana-toryvariables(bankfinance,age,output,profit,size,education, sector,location)and(Xβ)istheprobitscore/indexandexport dummy=1ifexport,otherwise0.

Bankfinanceisthebankborrowingasaproportionoftotal financing.Ageisthenumberofyearsinbusiness.Sizeisdefined as logofemploymentsize.Outputislogofthefirm’soutput. Profitabilityisthefirm’sprofitrate.Educationistheweighted average ofeducation ofworkersinthe firm.Sectorisa cate-gorical variable withGarmentas the reference. Locationisa categoricalvariablewithAccraasthereference.

Apriori,weexpectthefollowingrelationships:asignificantly positiveeffectofbankfinanceonSMEs’exports.Thissuggests that SMEswithbetteraccesstobankfinance aremorelikely toexport.Apositivelysignificantrelationshipbetweenfirmage andexportswouldsuggestthatolderfirmsthroughaccumulated experienceandeconomiesofscalewouldbeatabetteradvantage toexport.Asignificantlypositiverelationshipbetween produc-tivityandexportswouldsuggestthatfirmsthatexhibithigher productivitylevelsaremorelikelytoexport,andapositiveand significantrelationshipbetweenprofitabilityandexports, indi-catingthatfirmswithhigherprofitabilitylevelsaremorelikely toexport.Inthecaseofeducation,sectorandlocation,apriori expectations maybecountryspecificdrivenandhencebythe natureofthedata.

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Table2

Descriptivestatistics.

Variable Mean Std.dev. Min Max Obs.

Exports 0.1773 0.38 0 1 2070 Bankfinance 13.5945 32.35 0 100 291 Firmage 18.7589 12.53 0 76 2348 Output 17.3569 2.23 10.3737 24.1001 2026 Profitability 6.0232 83.41 −14.4220 2944.182 1937 Firmsize 3.2209 1.44 0 7.4955 2067 Education 9.9873 2.53 0 21.0998 2039 Table3 Correlationmatrix.

Exports Bankfinance Firmage Output Profitability Firmsize Education

Exports 1.0000 Bankfinance 0.3113* _1.0000 Firmage 0.0908* _0.1341* _1.0000 Output 0.4069* 0.2539* 0.2733* 1.0000 Profitability −0.0206 0.0234 −0.0068 0.0089 1.0000 Firmsize 0.4441* 0.2727* 0.2661* 0.8429* −0.0683* 1.0000 Education 0.1058* 0.1850* 0.0102 0.2782* −0.0341 0.2935* 1.0000

* _Significant_at_least_the_10%_level_of_{significance.}

Bankfinanceisthebankborrowingasaproportionoftotalfinancing;Firmageisthenumberofyearsinbusiness;Firmsizeisdefinedaslogofemploymentsize; Outputislogofthefirm’soutput;Profitabilityisthefirm’sprofitrate;Educationisweightedaverageofeducationofworkersinthefirm.

5. Empiricalresults 5.1. Descriptivestatistics

The descriptive panel summary statistics are presented in

Table2.Themeanlevelofexportsis0.1773suggestingabout

18%oftheSMEsareexporters.Bankfinancerepresents13.59% of the SMEs’ totalfinance. The average firm age is approx-imately 19 years andthe mean level of the log of output is 17.3569.Themeanprofitabilityrateisapproximately6%and theaveragelogofemploymentis3.2209.Themeannumberof yearsofeducationis9.9873(approximately10years).

5.2. Correlationanalysis

Inordertoascertainthedegreeofmulti-collinearityamong the independentvariables, we include acorrelationmatrix in

Table3.Bankfinanceispositivelycorrelatedwithexports.Firm

ageisrelatedtoexportsandbankfinance.Outputispositively relatedtoexports,bankfinance,andfirmage.Firmsizeis posi-tivelycorrelatedwithexports,bankfinance,firmage,andoutput butnegativelyassociatedwithprofitability.Educationalsohas positiveassociationswithexports,bankfinance,output,andfirm age.Firmsizeandoutputarehighlycorrelatedandthereforeboth variablesarenotputinthesamemodel.

5.3. Regressionresults

The regression resultsare presented in Table4.The table showstheeffectofbankfinanceontheexportactivitiesofSMEs.

Table4containstwocolumns;thisisbecausewedonotinclude

firmsizeandoutput inthesameregression.Theresultsshow

asignificantlypositiverelationshipbetweenbankfinanceand exports,indicatingthatSMEswithbetteraccesstobankfinance aremorelikelytoexport.Penetratingtheexportmarketsrequires substantialcapitalinvestments.Thus,firmswithhigherlevelof

Table4

Effectofbankfinanceonexports.

Variable (1) (2) Constant −9.7588(−4.56)*** ₋_5.1152₍₋_4.36)*** Bankfinance 0.0130(2.42)** _0.0131_(2.47)** Firmage 0.0313(2.16)** _0.0254_(1.76)* Output 0.3919(4.13)*** Profitability −0.0220(−0.50) 0.0020(0.11) Firmsize 0.6882(4.30)*** Education 0.0708(0.99) 0.0604(0.87) Location: Kumasi 0.6571(1.42) 0.5254(1.2) Takoradi −0.4372(−0.79) −0.7444(−1.30) Capecoast −0.7258(−0.47) −0.8395(−0.64) Sector Wood 1.9157(2.51)** _1.9410_(2.53)** Furniture −0.4093(−0.65) −0.6405(−0.98) Metal 0.2575(0.44) 0.5503(0.87) Chemical 0.3984(0.55) 0.7926(1.13) LRchi2 _113.75 _116.61 Prob>chi2 _0.0000 _0.0000 PseudoR2 _0.4995 _0.5121 Loglikelihood −56.9911 −55.5613

Notes:Allregressionsincludeaconstant.Z-valuesareinparentheses.

* _Mean_significant_at_10%_level_of_{significance.} **_Mean_significant_at_5%_level_of_{significance.} ***_Mean_significant_at_1%_level_of_{significance.}

Bankfinanceisthebankborrowingasaproportionoftotalfinancing;firmageis thenumberofyearsinbusiness;firmsizeisdefinedaslogofemploymentsize; outputislogofthefirm’soutput;profitabilityisthefirm’sprofitrate;education isweightedaverageofeducationofworkersinthefirm.

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bankfinancearemorelikelytobeabletotakeonthehighfixed costsof exporting,internationalmarketing andbranding,and meetinghigherqualitystandardsrequiredforoverseasmarkets. Apart from the funding provided,banks can provide support to firmsin terms of receiving payments, providing lettersof credit,providingforecastsforforeigncurrenciesandproviding opportunitiestohedgereceiptsandpayments.Theresults there-fore provide supportfor the sunk cost hypothesissince bank finance aids SMEsto overcome the high sunk cost required toexportandinternationalize.OurfindingssuggestthatSME accesstobankfinancecanincreasetheirlikelihoodof interna-tionalization.InternationalizationofSMEactivitiescouldlead toincreasedsales,profitability,competitiveness, marketshare andtechnological awareness. SMEinternationalization could also improvethe likelihood of survival andsuccessof SMEs andimprovetheircontributiontotheeconomy.

Firmage signalsasignificantlypositiveeffect onexports. Thissuggeststhatolderfirmsaremorelikelytoexport.Thisis becauseolderfirmshavemanagedtosurvive,aremorefamiliar withthe rubrics of the business, havebuilt upa goodname, developedthenecessarycontacts,andaremorelikelytobenefit fromscaleeconomies.Olderfirmsthereforearemorereadyto competeontheinternationalarenathroughexports.Therefore, comparedtoyoungerfirms, olderfirmsaremorelikely tobe exporters.

Thelevelofoutputshowsasignificantlypositiverelationship withexportdecision,suggestingthatfirmsthatexhibithigher productivity levels are more likely toexport. In other words onlythemostproductivecompaniesfinditprofitabletopaythe highcostsassociatedwithexporting.Productivefirmsgenerally wouldseektoselltheirproductsbeyondthedomesticmarket wherethedomesticmarketisnotlargeenough.Previousstudies showthatfirmsthatarenationalinnatureratherthanlocalor con-centratedinparticulartowns,citiesorstatesaremorelikelyto export.Thus,productivefirmsaremorelikelytocompeteonthe internationalmarket,thusinfluencingtheirdecisiontoexport.It isthereforeexpectedthatproductivefirmswouldbeverymuch interestedinexportingtooverseasmarkets.Theresultsconfirm ouraprioriexpectations.

Firmsize,measuredaslogofnumberofemployeesisfound tobeasignificantdeterminantofSMEexports.Largerfirmsmay experiencelowercostofproductionandenjoybettereconomies ofscale.Itmaybeeasierforsuchlargerfirmstocoverthesunk fixedcostsofexportmarketentry,suchasproductcompliance, marketresearch,upgradingproductquality,changing packag-ing,additionalmarketingeffortsandestablishingcontactsand marketingchannels.Operatinginforeignmarketsalsoexposes firmstoriskasaresultofuncertaintiesininternationalmarkets andeconomicdevelopmentsinthetradingpartners’countries. Thisproblemcanbeparticularlysevereforsmallerfirms. Com-paredtosmaller firms,largerfirmsmaybe well-resourcedto enterforeignmarkets.Largerfirmsmayalsohavebetteraccess tobankingserviceswhichareveryimportantforexports, there-fore,thelargerthefirm,thehigherthelikelihoodforittoenter intoexport.

In terms of the sub-sector effect, the results of thisstudy indicate that firms inthe wood sub-sector are morelikely to

exportcomparedtothereferencesub-sector(i.e.garment sub-sector). Qualitywoodcanbefoundinabundanceinthemany forest regions of Ghana.The investmentrequired inentering thismarketandexportisalsonottoohigh.Further,thereishigh demandforsuchwoodfromoverseas.SMEsinthewoodsector are morelikelytoexportsinceGhanahasabundant andhigh qualitywood.

6. Conclusionandpolicyimplications

Access tobank financehasbeenoneofthe mainbanesof SMEsinmanydevelopingcountriesincludingGhana.Various effortshavebeenputinplacesincetheliberalizationofthe econ-omytoimproveSMEs’accesstobankfinance.Thegovernment hasbeenkeentopromoteexportsandtodiversifytheeconomy. ThisstudyinvestigatedthelinkbetweenSMEs’accesstobank financeandexportsinGhana.UsingtheRPEDdatasetcompiled bytheWorldBankandaprobitmodel,thefindingsofthestudy providesupportforthenotionthatSMEswithbetteraccessto bankfinancearemorelikelytoexport.SMEsneedsuch fund-ingtocaterforthehighfixedcostsofexporting,international marketingandbranding,andmeetinghigherqualitystandards requiredforoverseasmarkets.Banksalsoprovideother value-ladenservicesthatmakeiteasierforanSMEtoentertheexport market.ThusSMEaccesstobankfinancewillincreasethe likeli-hoodthatthesefirmscaninternationalizeleadingtoanincrease intheir sales,profitability, competitiveness, market shareand technologicalawareness.ThusSMEaccesstobankfinancecan furtherincreasethecontributionofSMEstotheGhanaian econ-omyandincreasetheirchancesofsurvivalandsuccessthrough exports.Theresultsofthestudyalsoindicatethatolderfirms, moreproductivefirms,andlargerfirmsaremorelikelytotake the importantstepofenteringintotheexportmarket.Further, comparedtothegarmentsub-sector,SMEsinthewoodsector werefoundtobemorelikelytoexport.

Though thestudyprovidesnewevidencethatbankfinance increasesthelikelihoodofSMEexportactivities,werecognize thatdataforourstudyendsin2002.Futurestudiescanusemore recentdataasandwhentheybecomeavailabletoassessthe rela-tionbetweenbankfinancingandexportingactivitiesofSMEs. Theresultsofthisstudyprovideimportantpolicyimplications. Ghanahassufferedpersistentlyfromcurrencydepreciation.One of themainreasonsfor thisis thattheeconomyismainlyan import based one. Measures to boost exports are critical to stabilize thecurrent account situationandthereforethe value of the local currency.Bankfinance toSMEsiscritical if the governmentwantstoincreaseexports.Further,SMEaccessto the international market through exports will spur economic growthandleadtoimprovedlivingstandards.Policy interven-tions shouldthereforebedirected atreducingthe bottlenecks that preventSMEsfromaccessingbankfunding.These inter-ventionsshouldbeholisticandcomprehensiveaddressingboth demand-sideandsupply-sideconstraints.Specifically,tackling theinstitutionalweaknessesthatfinancialintermediariesfaceis likelytoimprovethesupplyofloanstotheSMEsector.Priority areasincludeshorteningthetimerequiredtoenforcecontracts. Further, governmentfundstopromotetheSMEsectorshould

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bechanneledthroughthebankssincetheycanmoreefficiently administersuchfundsandchargeeconomicrentalsforthefunds givenout.

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