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Caspian Journal of Applied Sciences Research, 1(11), pp. 45-53, 2012 Available online at http://www.cjasr.

com ISSN: 2251-9114, 2012 CJASR

Impact of Global Financial Crisis on Small and Medium Enterprises (SMEs) in Iran
Manouchehr Jofreh1, and Reza Gharoie Ahangar2,*
1

Assistant Professor of Management Department in Islamic Azad University at Central Tehran Branch of Iran 2 Department of Management, Islamic Azad University, Central Tehran Branch, Tehran, Iran

*Corresponding Author: Reza_gh578@yahoo.com


The aim of this research was to examine of the impact of Global Financial Crisis on small and medium enterprises (SMEs) of Iran. The survey was conducted to identify various economic and financial issues that were impacted by the crisis in terms of profitability, demand-levels of products and/or services and asset turnover ratios, among other. Despite of reports from critics that the economy of Iran, especially in terms of the local Stock Exchange, is separate of other countries (e.g. United States of America), the impact of financial crisis has not had a significant effect on Irans economy when compared to that of other countries. Key words: Service Quality, Technical Education, Reliability, Iranian Education System

1. INTRODUCTION The financial crisis has been a common phenomenon during the economic life of countries (e.g. the United States of America). Reducing the negative effects of a financial crisis is a thorny challenge for any country confronting this problem. Also other countries like Iran have done preventive actions as a base of attempts for occur crisis, and avoid of transmittal to their economic. Financial cresses in the southeast of Asian Countries, Argentina, Brazil, Mexico, and so on, as such of great financial cresses in the 1980 and 1990 decades, and also the greatest financial crisis have occurred in the 1929. Between late 2007 and the second quarter of 2009, the global economy slid deeper and deeper in the midst of an economic crisis with a sluggish recovery in the third quarter of 2009 (Naidoo, 2010). The phenomenon of financial crisis began in the United States housing market, and it had a tremendous influence on global trade, investment and bargaining of all countries in the world. In this respect, Alcorta and Nixson (2011) stated that the origin of financial crisis is related to poor performance of the United States in its housing and financial markets during 2007 and 2008. Since 2007, the global financial crisis (GFC) occurred; the GFC has deep effects on all financial sectors and across most economies. Small and medium enterprises (SMEs) also, have been principally affected by crisis: demand for goods and services have decreased, suppliers of materials are less likely to sell on credit; customers are more likely to postpone payments; banks, investors and stockholders are more conservative; and national

and international markets are dwindling. SMEs possess limited capital and properties rather than large firms; in addition, SMEs have fewer financing sources; they have weaker financial structures; and, due to their small sizes, it is enormously challenging for SMEs to downsize or variety economic activities (Grilli et al., 2010). In addition, some researchers (e.g. Grilli et al., 2010; Prez et al., 2004) revealed that the financial crisis has negative effects on the growth rate of SMEs. Due to limited financial, technological and human resources and also fewer consumers, suppliers and markets, this event has a tremendous effect on these firms (Beck et al., 2005; Butler and Sullivan, 2005; Gertler and Gilchrist, 1994). Therefore, it is relatively more difficult for SMEs to survive this complicated economic situation. On the other hand, smaller enterprises might be more flexible in adjusting to recessions, being more able to utilize market opportunities and activities characterised by agglomeration economies, rather than scale economies, and being less dependent on formal credits compared with larger firms and thus less inert to in trouble costs (Liu et al., 1999; Tan and See, 2004). With attention to above descriptions, the vital role of the SMEs sector is well recognised all over the world and its contribution is relevant in achieving several financial and economic purposes, such as contribution to national output and exports, and developing new entrepreneurship. Financial crisis has been a problem that troubles SMEs for a long time, which restrains them from sustainable development and international competitiveness in the long run. Certainly, these companies suffer from the challenges of the current economic situation, but

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Jofreh and Ahangar Impact of Global Financial Crisis on Small and Medium Enterprises (SMEs) in Iran

their need for financial resources is the only solution to endure the global economic crisis. In this economic atmosphere, we need a better management which is based on previous studies to confront the financial crisis (Barney, 1991; Champion, 1999; Danneels, 2002; Day, 1994; Dickson, 1992; Goad, 1999; Grewal and Tansuhaj, 2001; Hamel, 2000; O'Connor and Rice, 2001). This is rational of survey the great depression for current GFC, Asian Financial Crisis, and Iran Financial Crisis. 2. LITERATURE REVIEW 2.1. The Role of SMEs in the Economics In the economy of any country, SMEs have specific importance and credit. These companies account for about 50% of Gross Domestic Product (GDP) and more than 60% of job opportunities in developing Asian countries (WASME, 2011). Therefore, SMEs have important role in the development of newfangled countries, especially Asian countries. For instance, in the Taiwan, 60% of exports have been done by such as these companies, that this ratio in the China is 50% and in the South Korea is 43% (WASME, 2011). Investigations that have been done by Global Union of Small & Medium Enterprises, revealed that most countries in the progressing countries in the Asia, Africa and Latin America, have purvey progressive plans for financial supporting of these enterprises and conduction activity toward exporting market. For example in the Malaysia, 267 projects have planed for developing of SMEs activity with partnership of more than 15 ministry, 60 intuitions and organizations. The purpose of implementation of these plans was competing of production of these Enterprises, and increase of added value of production. In this content, the number of SMEs of Iran is about 5.1 million units, that one fourth of them have activity in the merchandise section. In addition, SMEs play a particularly important role in economic development of Iran, such as; SMEs generate a disproportionate share of job opportunities; SMEs contribute substantively to the GDP; and SMEs spur innovation. Business owners also identified finding qualified labour, consumer instability, insurance rates, and government regulations as barriers to SMEs growth, these problems were not only issues for Iranian firms. In order countries, SMEs face these and other problems, including bureaucratic red tape, fiscal constraints, financial

constraints, and the institutional environment (Bartlett, 2001; Hashi, 2001). 2.2. The Effects of the Global Financial Crisis on the Economics The current GFC was the result of postponed economic problems and has a cursory attention to housing market in the USA. The global financial crisis, which happened in the USA in 2007 and to deepen as of the third quarter of 2008 by spreading to other countries, became a global crisis and had considerable impacts on developing countries. Several findings about the reasons and consequences of crises can be specified in order to contribute to the current situation. Hoggarth and Reidhill (2003) argued that central banks provided liquidity to banks and blanket guarantees to depositors. Therefore, shareholder panics decreased, but the cost of budget increased. This happened because of the extra amount of liquidity in the market. Crotty (2009) stated that there were some characteristics on the direction of the deregulation and globalization of financial markets, the rapid pace of financial innovation and moral hazard that can help to decrease financial crisis. Moreover, Taylor (2009) mentioned that another factor that has an effect on the financial crisis is government actions and interventions that led to financial crisis through deviating from historical precedents and principles for setting interest rates. Reinhart and Rogoff (2009) concluded that severe financial crises led to deep and lasting effects on asset prices, output and employment. Impacts on unemployment and housing price extend out for five and six years, respectively. In a research, which surveyed the determinants of the current crisis, Levine (2010) stated that financial policies during the period from 1996 through 2006 precipitated the crisis. Policymakers certainly, can to be to blame for contributing to the crisis by becoming blind to extreme risk and threatening behaviors. GriffithJones et al. (2010) showed that during the global financial crisis, the emergence of international financial markets refers to the degree of regulation of global financial markets and potential reforms of multilateral financial institutions. The proposals are related to the developing institutions capable of preventing, managing, and compensating for the high volatility of the system. Also (Stiglitz, 2010) emphasized many factors that contributed to the current crisis including lax regulations and a flood of liquidity. It is clear that the SMEs are the heart of economy and any changing in the word

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Caspian Journal of Applied Sciences Research, 1(11), pp. 45-53, 2012

economy has direct effect on the SMEs situation. The GFC has severely impacted SMEs and are more vulnerable because they are smaller and, relative to large firms, rely more on external financial resources. 2.3. The situation of Irans Economy in the World The newest report from Word Federation Exchange (WFE) reveals that the index and present value of Tehran Stock Exchange (TSE) is the second rank of highest Stock Exchange in the word. Present value of TSE in during of first two months of 2011 with growth of 58, has placed in the second rank of paramount Stock Exchange of the word. Transactions of TSE with growth of 40%

in these months of 2011 rather than same time in the prior year are 2 billion and 300 million dollars. Based on the International Monetary Found (IMF), 1% of economic growth of Iran in the 2010 will stable in the 2011. But high unemployment and intensification of inflation in the newfangled countries, is the major economic challenge in the 2011. In this report, Iran economics growth in the 2010 was 1% and for 2008 & 2009 was 0.1%. this organization have predicted that at the end of 2011 the Iran economy growth will decreased and after that will have a ascendant rate, and will acquires 3% in the 2012. With focus on these statistics, we can find that diverse of other countries, Irans country has a hopeful economy. Countries growth and inflation, according to the IMF report is summarized in Table 2.

Table 1: Economic Growth & Inflation of several courtiers in 2010 and forecasting for 2011 & 2012 (percent)
Country Argentina Australia Brazil Canada China England France Germany Hong Kong India Iran Iraq Japan Jordan Korea Malaysia Mexico Morocco Russia Saudi Arabia Singapore United State Taiwan Thailand Turkey 2010 9.2 2.7 7.5 3.1 10.3 1.3 1.5 3.5 6.8 10.4 1.0 .8 3.9 3.1 6.1 7.2 5.5 3.2 4.0 3.7 14.5 2.8 10.8 7.8 8.2 Economic Growth 2011 6.0 3.0 4.5 2.8 9.6 1.7 1.6 2.5 5.4 8.2 -.0 9.6 1.4 3.3 4.5 5.5 4.6 3.9 4.8 7.5 5.2 2.8 5.4 4.0 4.6 2012 4.6 3.5 4.1 2.6 9.5 2.3 1.8 2.1 4.2 7.8 3.0 12.6 2.1 3.9 4.2 5.2 4.0 4.6 4.5 3.0 4.4 2.9 5.2 4.5 4.5 2010 10.5 2.8 5.0 1.8 3.3 3.3 1.7 1.2 2.4 13.2 12.5 5.1 -.7 5.0 3.0 1.7 4.2 1.0 6.9 5.4 2.8 1.6 1.0 3.3 8.6 Inflation 2011 10.2 3.0 6.3 2.2 5.0 4.2 2.1 2.2 5.8 7.5 22.5 5.0 .2 6.1 4.5 2.8 3.6 2.9 9.3 6.0 3.3 2.2 2.0 4.0 5.7 2012 11.5 3.0 4.8 1.9 2.5 2.0 1.7 1.5 4.4 6.2 12.5 5.0 .2 5.6 3.0 2.5 3.1 2.9 8.0 5.5 3.0 1.6 2.0 3.4 6.0

Source: IMF (2011)

With review of these literatures, we can find that the SMEs have sensitive role in the economic of any countries and the financial crisis is a phenomenon that SMEs have not loophole for avoid of it, and perforce must fight with this event and have find an appropriate solution for survival.

In this regard, we determine some question which analyses of them can reveal the condition of SMEs during crisis in Iran. Based on the above, this study proposes following hypotheses:

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Jofreh and Ahangar Impact of Global Financial Crisis on Small and Medium Enterprises (SMEs) in Iran

Hypotheses H1: Financial crisis has negative impact on demand for goods or services offered by SMEs. H2: Financial crisis has negative impact on operating profitability of SMEs. H3: Financial crisis has negative impact on financial profitability of SMEs. H4: Financial crisis has negative impact on rotation of assets of SMEs. 3. METHOD 3.1. Data and Measure This research investigated the effects of GFC on SMEs of Iran. A number of organisations from business, electrical and chemical industries in Iran have been chosen as the subjects of the study through purposive sampling. The questionnaires were mailed to the respective registered offices of the selected sample of medium and small companies in Iran along the first week of February 2011, with the express understanding that they

should be answered by the managers of the selected companies, as well as specific details of the study. We were requested to fill the questionnaire on the spot or on their convenience and return it to the researchers. A total of 450 copies of the questionnaire were delivered to organisations, and in the following two weeks, 247 copies had been returned with 240 valid samples. Participants indicate level of agreement on a 5point Likert scale (1 = Strongly Disagree, 5 = Strongly Agree). Cronbachs alpha revealed that overall reliability of these variables is approximately 88.6%, which were higher than the standard of 0.7 suggested by Nunnally (1978). This indicates that the internal consistency of measuring tools is good. Data collected was analyzed by using SPSS (Statistical Package for Social Sciences), Version, 16.0). Also, after analysis of responses, we show the statistical results of managers answers. 3.2. Conceptual Development The conceptual model of this study is shows on Figure 1:

Demand for Goods or Services H1Financial Crisis H2Operating profitability H4H3-

Financial Profitability

Rotation of Assets

Figure 1: The conceptual model

4. FINDING AND RESULTS Correlation matrix results (Table 2) depict that Financial Crisis has clear relevance with Demand for Goods or Services (0.579, p < 0.01) &

operating profitability (0.271, p<0.01), also, significantly correlated with financial profitability & rotation of assets (0.662, p< 0.01 & 0.243, p < 0.01) respectively) which is in align with real condition.

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Caspian Journal of Applied Sciences Research, 1(11), pp. 45-53, 2012

Table 2: Correlation Matrix of Variables


FC DGS OP FP RA Mean 3.764 3.591 3.843 3.845 3.932 S.D FC DGS OP .442 1 .317 -.579** 1 .325 -.271** .095 1 .433 -.662** .221 .005 .497 -.243** .067 .473** ** Correlation is significant at the 0.01 level (2-tailed). FP RA

1 .426**

Financial Crisis = FC, Demand for Goods or Services = DGS, Operating Profitability = OP, Financial Profitability = FP, Rotation of Assets = RA

Overall regression analysis results (Table 3) show this model to be a good fit (F = 24.257) and these variables explained 69.70% of total GFC sector of SMEs in Iran (R2=0.697). Therefore, remaining 30.30% of variance depend on other variables that there are not in this paper. Linear regression analysis revealed that Demand for Goods or Services is highly significantly and negatively related with Financial Crisis of SMEs sector in Iran (= -0.573, p <0.001). Operating

Profitability was negatively and significantly related to Financial Crisis of SMEs in Iran with = -0.387 & p <0.001. Similarly, Financial Profitability revealed affected of financial crisis of SMEs of Iran with very high significance level of 0.000 and value of -0.641. Also, Rotation of Assets correlation with Financial Crisis of SMEs was significance (= -0.422, p <0.006). Hence we accepted all hypotheses due to significant results.

Table 3: Regression Analysis of Model


Variables Constant DGS OP FP RA Beta -1.767** -.573** -.387** -.641** -.422** Standard Error .638 .126 .138 .104 .101 t value -2.770 -4.510 -2.832 -6.126 -3.167 Significance .008 .000 .007 .000 .006

R Square= 0.697 F = 24.257** DW = 2.219 ** Correlation is significant at the 0.01 level (2-tailed). Demand for Goods or Services = DGS, Operating Profitability = OP, Financial Profitability = FP, Rotation of Assets = RA

In figures 2, 3, 4, and 5 the level of responses (very high, high, medium, and low) are based on comparing amount of demand for goods and services, operating profitability, financial profitability, and asset turnover before and after the financial crisis. Indeed, this percent is a comparing rate between two periods of times. The results revealed that for the first hypothesis, the negative impact of financial crisis on demand for goods or services offered by the company in the period, late 2007- first 2011- the firms analyzed evaluate the effects of the economic crisis as very negative, with 17% of them

considering that impact as very high, 23% as high, 53% as medium and 7% as low. There were no answers of zero impact, which is quite significant, given the gravity of the crisis, especially for the segment of business analyzed. Regarding the second hypothesis, what was the negative impact of financial crisis on the operating profitability of the business in the period, late 2007- first 2011, results were again quite conclusive, as 24% of the managers surveyed recognized the impact as very high, 28% as high, 44% as medium and 4% as low.

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Jofreh and Ahangar Impact of Global Financial Crisis on Small and Medium Enterprises (SMEs) in Iran

Demand for Goods and Services

60% 50% 40% Percentage 30% 20% 10% 0% Very High High 17% 23%

53%

7%

Medium

Low

Level of response

Fig. 2: Impact of Financial crisis on demand for goods and services

Operating Profitability

50% 40% 30% Percentage 20% 10% 0% Very High High 28% 24%

44%

4% Medium Low

Level of response

Fig. 3: Impact of Financial crisis on operating profitability


Financial Profitability

50% 40% 31% 30% Percentage 20% 10% 0% Very High High 22%

45%

2% Medium Low

Level of response

Fig. 4: Impact of Financial crisis on financial profitability

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As regards the third hypothesis, in relation with the impact of the crisis on the financial profitability of the business, the results confirm the above, since 22% of the respondents recognized a very high impact, 31% a high impact, 45% a medium impact and 2% a low impact. The fourth hypothesis analyzed the impact of economic and financial crisis on the asset turnover of the company in the late 2007- first 2011. Thus,

18% of the companies claim that the turnover of assets in its business has increased dramatically as a result of the reduction of the overall business investment resulting from the decline in domestic demand, 26% believe that the rise in asset turnover has been low or moderate and the remaining 51% and 5% respectively said that the asset turnover has not been influenced by the drop in demand following the economic crisis.

Asset Turnover

60% 50% 40% Percentage 30% 20% 10% 0% Very High High 18% 26%

51%

5% Medium Low

Level of response

Fig. 5: Impact of Financial crisis on asset turnover

5. DISCUSSION AND CONCLUSSION Some scientists in Iran indicated, for reasons of economic sanctions and little connections between TSE and other stock markets; GFC has not direct impacts on monetary sections and SMEs of Iran. So, we can find that despite of some experts comments in Iran, this country is not separate of other economics and the influence of this catastrophic crisis, will affected by bit delay. For instance, Irans economic is based on oil, and any changes in this product can affect on SMEs in Iran. This theory that TSE has not any link with other Stock Exchange and will be immune from this crisis is an airy scheme. The results of this research show that anxiety of SMEs managers in Iran is representative of accuracy of this claim. The statistics diagrams reveal that SMEs have been affected by financial crisis, but the impact of crisis is lower that Europe and US. We believe that the moderate effect is not for this matter that Irans economy is not link to those countries; instead the real reason is that the government of Iran implements a thrift policy during this crisis. The implementation of subside policy is the successful key in Iran. In fact Irans people experienced the

austerity event along with Europe and US people in other shape. This study suggests that the intensity of the financial crisis was a major setback for the consumption and investment at the SMEs level. The gradual decline in global demand has led to very negative consequences for the segment analyzed (Muslumov et al., 2005). For example, and for the time period considered, there is a significant decline in the economic profitability as a result of a sharp decrease in demand for goods and services resulting from the domestic and international recession, which has the main negative consequence of worsening profit margin on sales, gross operating profit. (Brealey and Myers, 2008) It has also been noticed an increase in asset turnover of the companies analyzed as a result of a decrease of the overall investment in the business resulting from the decline in domestic demand. However, the positive effect of reducing asset turnover ratio has been insufficient to offset the negative impact of falling demand on the volume of sales and turnover of the companies under study, so the final effect on the Return On Assets (ROA) of this specific type of companies has been negative (Schroeder, 1992). The fall in

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Jofreh and Ahangar Impact of Global Financial Crisis on Small and Medium Enterprises (SMEs) in Iran

profitability of the business assets has had a negative impact on financial performance before and after taxes for the shareholders of the companies analyzed, possibly as a result of two interrelated factors, on the one hand the obvious reduction of business-economic benefit due to falling sales, and on the other its negative impact on the net profit (Qian, 2002). Moreover, the decline in Return On Equity (ROE) also might have its explanation in the huge increase in financial costs this kind of companies have had to face, as a result of a significant increase in the volume of short and long term borrowing, which could not be compensated with the gradual reductions in interest rates and could have a especially negative impact in SMEs (Hall et al., 2000). The decline in net profitability of the companies under study in this work has been a key explanatory factor for the increase in funding from current liabilities, especially short-term debt, by reducing the volume of equity in all tested companies, as a result of the collapse of global business results. Thus, under the analysis we can conclude that declines in economic and financial profits and its negative impact on economic and financial profitability ratios of the SMEs analyzed, result in increased economic and financial risk of those, and finally, in an increased overall risk of the company. This research also shows an effective measure of the impact that economic and financial crisis has had, in the Iranian case, in terms of profitability and overall business risk for the specific set of institutions analyzed. 6. RECOMMENDATION FOR GLOBAL FINANCIAL CRISIS In any market there are some tools for controlling and regulation. Most of scientists have called financial and monetary policies. In the great of conferences and meetings have been presented lots of solutions, but most of them did not attention to the problem with sagacity. In this paper the researcher decided to indicate a new policy that effect of it is more that two other policies. The main reason of GFC is related to Unite State economy. This event is sequence of distrust of people and stockholders of US from some of financial institute of US. In this situation with lack of budget of one financial institute, if stockholders do not gather their money, and allow to the institute to reinvestment, it is most possible that we have not see the worsen circumstance for that institute any certainly, the economic growth will be improved. Indeed, this policy we decided to

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