Comparison Of Smes Between China And German Economics Essay

Nowadays the world economy has entered the era of global competition. Economic competition is far more intense than any previous historical period, and its intensity is growing very fast, so many SMEs face a crisis and a bad situation.

The Nobel Laureate in economics, Stiglitz (reference?) pointed out that the current globalization process is driven by the interest of international companies, and it has exacerbated the inequality in the world. When foreign enterprises enter one country, they often destroy local competitors and beat down the ambitions of local SMEs to develop their national industry.

Chinese SMEs have 95% of the total number of the national enterprises, and over 3/4 of the urban employed population working in SMEs. Statistics also show that SMEs in China are the most dynamic part of its economic, involve nearly 65% of the patented technology, and more than 75% of the technology innovation. 80% of new products are developed by SMEs. Big business also comes from the development of SMEs. There is no doubt the future of China’s economy to a greater extent dependent on the development of SMEs.

Stiglitz also pointed out that unemployment is more harmful than waste of resources, it is likely to destroy the entire market economy (reference!), while the engine of creating new jobs is SMEs.

So, how can SMEs to deal with the challenges of globalization? Maybe the German companies can provide us with the best example. The German professor of management, Herman Simon started to study the German enterprises because he was asked such a difficult problem when he visiting Harvard Business School: Germany’s top 500 enterprises, in the world ranking performance, are not outstanding, so how can Germany become the world top exporter for such a long time, and how did Germany become a world economic heavyweight.

The ten years of research findings surprised him.The original German exporters as well as the mainstay of the economy is not those familiar companies like Siemens, Bayer, Mercedes-Benz, and so on, but some unknown SMEs such as Brita, Hauni, and Xilabulan. They focus on a particular industry, but far more ahead in the international market than any other business, such as production of Brita water filters which now have 85% of the world market. Most of these SMEs are not familiar to media and public, but they are the true champion exporters.

There are hundreds of those stealth champion companies in Germany. Do not think that they are now small size businesses. For example, in the production of tropical fish feed, the Tetra company owns 60% of the global market share,.Although this is a niche product, it has a turnover of 6 billion USD, and Tetra have wholly-owned subsidiaries in more than 100 countries in the world.

The reason why these SMEs in Germany are little-known to people, is that they are mostly not able and not willing to spend millions in self-promotion, or they even deliberately avoid contact with the media in order to avoid too many difficultiess because it might increase the number of competitors and imitators.

In summary, for the developing Chinese SMEs, by comparing the enterprises standard, management performance, financial intermediation and social services, we should be able to sum up the differences between the two countries and try to gain experience for China.

Methodology:

Will use the methodology of comparative studies, statistic analyzing, inductive logic.

Research question:

Differences of enterprises standard, management performance, financial intermediation and social services between China and German.

â… . Enterprises standard comparative study between China and Germany.

Standard of the Germans SMEs

At present, the popular standards for SMEs in Germany are the new provisions for SMEs standard introduced by the SME Research Center in Bonn and the European Union in 2003. The result of Standard Research from SME Research Center in Bonn is shown in Table 1

Table 1 The SME standard of Germany and the European Unionâ‘´

Firm size

Employees(No. of person)

Sales per year (10,000 of EURO)

Firm size

Employees(No. of person)

Sales per year (10,000 of EURO)

Assets(10,000 of EURO)

Micro

<9

<200

<200

Small

≤9

<100

Small

10~49

<1000

<1000

Medium

100~499

100~5000

Medium

50~249

<5000

<4300

Large

≥500

≥5000

SMEs

≤250

≤5000

≤4300

Standard of the Chinese SMEs⑵

Chinese SME standard is introduced by the National Development and Reform Commission Ministry of Finance, National Bureau of Statistics study in 2003 formulated the “Provisional Regulations on Standards for SMEs”, such as shown in table 2.

Table 2 The SME standard of china⑵

Industries

Firm size

Employees(No. of person)

Sales per year (10,000 of RMB/EURO)

Assets(10,000 of RMB/EURO)

Industry

Small

<300

<3000/290

<4000/387

Medium

300~2000

3000~30000/290~2900

4000~40000/387~3868

Construction

Small

<600

<3000/290

<4000/387

Medium

600~3000

3000~30000/290~2900

Wholesaling

Small

<100

<3000/290

Medium

100~200

3000~30000/290~2900

Retail trade

Small

<100

<1000/97

Medium

100~500

1000~15000/97~1451

Transportation

Small

<500

<3000/290

Medium

500~3000

3000~30000/290~2900

Postal services

Small

<400

<3000/290

Medium

400~1000

3000~30000/290~2900

Hotel & catering

Small

<400

<3000/290

Medium

400~800

3000~15000/290~1541

3. Conclusion

In summary, by comparing of the SMEs standard between China and German can draw the following conclusions:

First, the SMEs standard of China is different from Germany, except the standard of number of employees, with total assets and sales of three commonly are using international indicators, industry indicators as criteria for classification of enterprises with Chinese characteristics. In the standard requirements of the seven industries, the primary industry and tertiary industry is not included. The major difference between different industries is the number of employees.

â…¡. Business management performance comparison between China and Germany

1. Business performance of Germany SMEs

At the end of 2005, the number of SMEs is 99.7% ⑶of total number of enterprises in Germany has reached 33.8 million of sales, in the end of 2004 micro-enterprises (less than nine workers and sales in 2 million euros or less)ocuppy 81% of SMEs, creating 18.2% of total employment. By the end of 2005 the sales of German SMEs achieved 39.1% of total, providing 70.9% of employment; by the end 2004 the added value created 46.7%, 51.5% of investments, exports of 66.4%.The development of SMEs in Germany has a clear difference between regions and industries. There is a rapid develop of west Germany SMEs. German SMEs has an absolute advantage in the agriculture, forestry and fisheries, construction, accommodation and catering industry. Among them, small and medium enterprises occupy 94% of all agricultural enterprises, 85% of all construction enterprises, accommodation and catering industry, 89%, services 60%.⑶

2. Business performance of Chinese SMEs

Since 1997, SMEs have been growing rapidly in China after government declared that the private sector is an important part for the country’s economic development. The number of Small and medium enterprises in late 2006 reach 42 million, occupying more than 99% of the total number of enterprisesâ‘·. At the end of 2002 the number of Micro-enterprises (less than nine workers) reached 23.5 million, occupying 56% of the entire small and medium enterprises. Among them, micro-enterprises create 26.8% of employment for total registered labor⑸. During the 10th five-years program period, small and medium industrial enterprises reached about 28% average annual growth rate of value-added, created 60% of final goods and services and about 50% of taxâ‘·. SMEs have become the main channel for expanding employment, providing more than 75% of urban jobs, and more than 80% of laid-off workers were re-employed in small and medium enterprises, the majority of migrant workers are working in small and medium enterprises. A group of powerful SMEs explore the international market very actively.

The data from the Ministry of Commerce shown that by the end of 2005, there is 88% of enterprises investment is SMES in Africa ⑹. Chinese SME occupied 68% of exports in late 2005 ⑸.

The development of SMEs in China is also obviously differences differences between regions and industries. SMEs are located in the eastern region, especially the southeastern coastal areas of Zhejiang, Jiangsu, Guangdong, Shandong, Shanghai and Beijing ⑺.

According to information provided by “China’s Economic Development Index for SMEs” ,the fastest improving industry is the power, gas and water production and supply sectors and the index of improving is 66.76%; The second is the construction industry, for 66.09%; and third is information transmission, computer services and software industry, which is 65.92%; and the last is the manufacturing sector with 63.22%. In 1993, the average registered capital of small and medium enterprises is RMB 286,000, in 1995 is RMB 40 million, in 2002 it grow to RMB 2.5 million â‘».

Because the lack of statistical data for Chinese SMEs bankruptcy rate, there is a rough estimate, bankruptcy rate of Chinese SMEs after the establishment in 3 to 5 years is as high as 50% â‘».

Because lack of statistical data of Chinese SMEs bankruptcy rate. A rough estimate, bankruptcy rate of Chinese SMEs after the establishment in 3 to 5 years is as high as 50% â‘».

3. Conclusion

In summary, through the comparative of small and medium enterprises operating performance study between China and Germany, the following conclusions can be drawn.

First, whether in the developing China, or in the developed Germany, small and medium enterprises played a leading role in economic development, with the increase exports and create the new jobs. It stabilizes and be the hardcore for economic development and social development. However, due to the special background of China’s transition economy, the SME absorb a large number of laid-off workers and surplus rural labor force who fired by the state-owned enterprises.

Regional is the second reason for the differences between the development of SMEs in both countries. The main difference in Germany is because it divided into East and West. In China, it is because of the coastal areas and inland areas. Therefore, the development of small and medium enterprises and regional levels of economic development are closely linked.

Third, due to the lower capital ratio, Chinese and German SMEs both have a high rate of bankruptcy.

â…¢. A Comparative Study of Chinese and German SME financial intermediation

1. German SME financing

The main resource for SMEs lending is from deposit banks, which is about 44.8% within the total loans, 20.3% from the co-operative banks, 20.2% from the private banks (Deutsche Bank, Commerzbank, Dresdner Bank and Postbank). This proportion of lending does not change much in the market share for a long time already.

There is a direct relationship for the application of bank loans between the successful and the management of the firm. If the sales are less than 100 millions euro, the rejection rate for the application of loans reaches 34.7%. However, if the sales are over 5000 million euro, the rejection rate is only around 6.6%.⑼

According to the report for the rejection of bank loans, 49.3% of firms are unable to provide guarantees or collateral, 46.8% is because of the lack of free capital and there is 36% for the changes in banking policy.With the development of the capital market and the banking system in Germany, there are some changes for financing within SMEs:

(1). the standardization of mezzanine financing reduces the cost and the proportion is increasing in the financing market. The German mezzanine financing market becomes the second largest market and the first is United Kingdom. With the increase of the mezzanine financing, the firms are able to increase their own capital ratios, thereby increasing the amount of external finance to broaden the sources of financing.

(2). the asset securitization and private capital investment has became the main resources for the financing in German through the raise in capital market.

CLOs: Collateralized Loan Obligations is issued by the bank for the asset securitization in SME. The German reconstruction bank, KfW Bankengruppe, has developed PROMISE for comprehensive product trading. This market in Germany developed rapidly and the trading amount reached 20 billion euro for the first 6 months in 2006. The SME loan securitization market development will lead the connection between the traditional and modern banking institution. This helps the SME’s financing and greatly enhance the liquidity, security of transaction and profitabiliy for banks.

2. Chinese SMEs Financing

In the World Bank report about China’s investment environment, they compared with other Asian countries and shown China’s SMEs are facing a more serious credit constraint. In 2000, individual and private enterprises received short-term loans only, by all financial institutions to 1%.

The owner of the share of own capital financing will be reduced as the scale of business rise. Large-scale enterprises (with number of employees from 100 to 500 people) financing from the owner’s own funds accounted for 22%; but in less than 50 persons is 45%. If the owner’s own funds and retained earnings are added as a source of financing within the number of employees is less than 52 small businesses and 67% of the funds is from the endogenous financing; in more than 100 large enterprises, the percentage is 57%. In addition, the successful rate of obtaining bank loans for the large-scale enterprises is clearly more than the small enterprises. If the bank loans and funds received from the rural credit cooperatives as a sum of intermediation of funds from financial institutions, there is only 8% for the small businesses get financing while large enterprises are 27%.. ⑽

Professor Lin Hanchuan(2003) ⑾conducted two surveys for the current situation of SMEs in 1998. The first survey showed that 75% of surveyed venture capital financing comes mainly from self-financing; get bank loans, finance companies accounted for 53.5% of them state-owned enterprises accounted for 94%. Bank loans from state-owned banking institutions in the majority, there are a small number of collective enterprises received loans from rural credit cooperatives. And 25% of private SMEs financing is from non-formal financing channels. The second poll for the first time similar results, 55% of the surveyed enterprises to capital derived from the self, 24% of the surveyed companies 50% of the working capital come from self-financing, only 9% of enterprises to capital come from bank loans.

China Industrial and Commercial Federation and the China Private Economy Research Committee make five investigations in 1993,1995,1997,2000 and 2002. Self-financing is the main form of capital financing for SMEs, accounting for 65.5%, bank loan financing is 21%â‘¿ . In the 2002 survey, 3258 was only 23.4% of SMEs surveyed by the financing banks and rural credit cooperatives. Obtaining bank loans to finance companies, 30% of the enterprises get bank loans for less than RBM 10 million, 73.4% of enterprises less than RBM 100 million. 53.8% of the companies with “difficulty in obtaining loans” are the obstacle to enterprise development, one of the most important factor â’€. Chinese SMEs applying for bank loans, faced with three “discrimination”: the ownership of discrimination, size of discrimination and discrimination in the region. According to the standard corporate ownership for the types of enterprises, leading to the banks of the differential treatment of different ownership enterprises. With the increasing levels of economic openness and regional discrimination, discrimination in ownership gradually replaced. In more developed areas, non-state-owned enterprises are more readily available for bank loans. Guangdong, for example, in 1999 for non-state economy, share of bank loans has exceeded the state economy, accounting for 56% in 2002 rising to 65%. Because of the size of SMEs is self-limited with the lack of applications for bank loans guarantees and collateral, therefore, the smaller the size of the enterprise are more difficult for bank loans from banks and other formal financial institutions, financial intermediation, which resulted in the scale of discrimination in bank loans.

Table 3 Loans for SMEs gained from bank when established

Loan amount

Sample proportion

Sample enterprises

Loan amount

Sample proportion

Sample enterprises

<0.5

3.66

35

30~50

11.84

113

0.5~1

2.41

23

50~100

11.74

113

1~5

13.42

128

100~200

4.51

43

5~10

11.74

112

200~500

15.51

148

10~15

3.04

29

500~1000

3.14

30

15~20

9.01

86

>1000

3.46

33

20~30

6.05

62

Total

100

954

SME loans among banking institutions in different and uneven development. For example, Sichuan Province, as of the end of 2007, three large state-owned commercial banks accounted for the province’s small business loans small business loans to 50.31 percent, but only the bank’s loans to 11.42%; while city commercial banks and credit agency issued small business loans accounted for 23.84%, but it is the bank’s loan balance of 48.48% ⒁. Large state-owned commercial banks are only developing micro-credit operations from the headquarters with the specific requirements and more restrictive conditions, so the enthusiasm is not high.

3. Conclusion

(1) there is widespread difficulty in obtaining loans for SMEs, not only is a transition economy like China, that is, the economically developed in Germany as well. Endogenous financing is the main source of SME financing, bank financing accounted for 26.3% in Germany, but in China, this proportion is much smaller. (2) SMEs applying for bank loans to the difficulty is due mainly to the lack of security or collateral, equity capital is inadequate. However, in Germany, the banking sector SME lending changes are difficult for special reasons; in China it is the ownership constraints. (3) financing products offered by financial institutions in a single, difficult to meet the financing needs of SMEs in specific diversification. In China, financial institutions, the main financing products offered by bank loans. However, in Germany, in addition to the traditional bank loan financing outside the capital, mezzanine financing and securitization financing share on the rise. (4) Germany there is a clear division of labor between banks, forming the major banking institutions for SMEs, deposit banks and cooperative banks. Local operation of these banks are specialized banks, has carried out the comparative advantages of SMEs. In China, almost all of the banking institutions have developed small and medium enterprises financing business, however, large state-owned commercial banks and lack of motivation. Fourth, China and Germany Comparative Study of the social service system for SMEs

SME development requires not only financial intermediation of financial services, but also a variety of security, ratings, advice, information and technology, social services. Social service system, the construction and perfection is a prerequisite for rapid development of SMEs.

â…£. Comparison of social service between Chinese and Germany SMEs

1. Germany’s social service system for SMEs

Germany’s social service system for SMEs is relatively healthy. Auditing bodies, accounting firms and banking institutions provide SMEs with the main information services. In Germany, the main bank for SMEs, not only in corporate finance has played a leading role, but also provide SMEs with a variety of consulting, information, and help them formulate a development plan and other intermediary services also play an irreplaceable role. German SME credit guarantee system for the development of early, early in 1954 set up its first guaranteed banks. Currently, in Germany, each state guaranteed at least one bank. After more than 50 years of development, Garanti Bank has established a sound credit rating system, a major consideration factors such as corporate financial factors (financial position, earnings, etc.) on their own qualities (manager’s management ability, business history) , enterprise development situation (products, markets, etc.), and historical records (credit and non-compliance records, etc.). Garanti Bank secured rates at 1.75% ~ 2.5%, rate adjustments are mainly based on the industry in which companies, products and markets, risk-related. Germany guarantees bank loans to bank-specific credit risk-sharing ratio of 8:2. Occurs when the secured bank loan losses, the Government has to bear the loss of 65%, the lending bank to take risks to 7%, the security institutions to assume the risk of 28%. In addition, the Garanti Bank asked to control the loss rate of 4% or less, the surplus by increasing the guaranteed rate, loss ratio or the Government to increase investment write-off, owned, etc.. At present, individual guarantees banks average loss rate of about 1%.

SMEs have to reduce costs borne by the administrative examination and approval. In 2003 the German government, according to a survey undertaken in the enterprise 460 kinds of administrative examination and approval costs, borne by SMEs accounted for 80%. SMEs in order to reduce the costs borne by the administrative examination and approval, the German government promulgated the “reduce the burden on SMEs law” . Among them, a very important measure is the standard

Quasi-oriented small and medium enterprises to establish, change, consulting services, systems and processes and procedures, to improve and enhance services at a speed and quality. In addition, when the establishment of small and medium enterprises by simplifying administrative examination and approval procedures, set up an electronic registration procedures to enable enterprises to set up as long as online registration can be completed within a few days.

2. China’s development of a social service system for SMEs

(1) Government improve the social service system for SMEs, the measures the Chinese government attaches great importance to the development of SMEs, the decision in the “Eleventh Five-Year” during the implementation of the “SME development projects.” This is China’s SME development program of action, including improving the social service system for SMEs and improves relevant laws and regulations, enhance the ability of science and technology innovation of SMEs in nine measures ⑸.

Laws and regulations in the building of small and medium enterprises, the Chinese government has promulgated the “SME Promotion Law of The People’s Republic of China” “the State Council on Encouraging, Supporting and guiding the individual and private and other non-public economic development in a number of opinions”, and formed a “SME Promotion Law” as the core, the relevant supporting documents to support the promotion of SMEs and non-public economic development of laws, regulations and policy framework system to provide SMEs with a sound external environment for laying the foundation for the law. The security system, China has started the practice of SMEs credit guarantee in 1992, by 2006, the National SME credit guarantee institutions more than 1,000, a total of 28.7 billion fund-raising, the cumulative amount of loan guarantee 120 billion yuan, the cumulative security companies 5 10000 .â’‚ In the technical support for SMEs, the Chinese government chose Qingdao, Hefei and other cities, combined with technological systems, established a city-backed, technology innovation services for SMEs, regional, professional technology center, while establishing and various types of technological innovation and improved services.

(2) the social service system for SMEs, although the Chinese SMEs in the development of the social service system has experienced from scratch, from small to large rapid development, but still need to further improve and perfect. The main problems are:

Services, higher costs. Banking Bureau in Sichuan SME survey, the high cost of social services is to prevent the financing of SMEs, a very important reason. Small businesses in the process of applying for bank loans may have to pay, including audits, collateral assessments, mortgage registration, security, notary, insurance, legal advice, credit rating, business inquiries, and other expenses more than 10 items, its consolidated expense ratio may be up to 10%. Assessment and mortgage registration fees occupy a large proportion in bank loan. Mortgage registered in the duplication of the registration, evaluation and fees, and charges required by the Government has not strictly enforced and others are caused by additional direct cause of the high cost ⒁.

System is not perfect. Management of bank loans because of the high cost of a lack of social credit management system, banking, industry and commerce, taxation and other social service agencies have not yet set up a unified credit management system.

Government in SME credit guarantee system to intervene too much in the emergence of capital, operational structure and management of many problems. For example, many local governments funded the establishment of financial security agencies, on the one hand a one-time injection of funds, lack of compensation mechanism, guarantee funds to small; the other hand, the lack of commercial operation, can not satisfy the diversified needs of SMEs. Even in the U.S., Japan and other large-scale government-funded national, policy loans guaranteed no more than 10% of SME loans. Therefore, the SME policy alone can not guarantee security, but also to play a private capital and commercial security role.

3. Conclusion

(1) Germany’s social system is sound and SME services, including accounting, consulting, auditing, information and other social service agencies. Banks not only provide financial services to SMEs, but also includes other information and consulting services. Chinese SMEs in the service of social system, the construction and improvement, the biggest problem is how to improve the guarantee system for small and medium enterprises.

(2) The German government attaches great importance to the development of SMEs, but how the Government will play a supporting SME development, the two countries have significant differences. The German government pay attention to use of indirect, economic and legal means, such as tax policy, through the national policy banks indirect financial support, to establish a unified information system, standardization of the Government’s various administrative examination and approval systems and procedures. In addition, the German government by providing more education and training opportunities and improve the capacity of enterprise managers to achieve long-term and sustainable development of SMEs. The Chinese government in promoting the development of SMEs in the greater use of the direct administrative measures and interventions. For example, financial investors to establish a credit guarantee system for small and medium enterprises, direct operation and management of credit guarantee institutions, direct financial subsidies.

(3) The German Government has set up export-oriented SMEs in specific administrative and social service system. By the China Enterprise Evaluation Association in the “export-oriented SMEs in the study” points out that China’s lack of specialized business services for export-oriented social system. In the surveyed enterprises, 51% of export enterprises need to finance and advisory servicesâ’ƒ.

â…¤. Enlightenment

1. Chinese SMEs are small, but employed more workers, this is the unique result of the development stages and conditions. Due to the transition of Economic and social system, China’s SMEs faces an more special development environment. To solve the specific problems of SMEs development in China, we’d better learning from international experience of other advanced, but also need to considerate with the special conditions of China.

2. Chinese SMEs standards require timely updates and continuous refinement.

3. Chinese SMEs faced with the general difficulty in obtaining loans, which are an important source of financing.

4. Chinese SMEs guarantees system for the commercial operations need imperative development. Guarantee agencies need to establish a sound capital injection mechanism, regulate the investment of government funds and compensation mechanisms to achieve the diversification of funding sources. Learn from the successful experience of Germany, the introduction of risk-sharing guarantee institutions and compensation mechanisms.

5. The establishment of SMEs exporting to China’s social system of professional services. With the continuous development of China’s export-oriented economy, export share of gross national product is rising, it should improve the export-oriented SMEs, including finance, and consulting, international operations required a variety of special services. The Government should set up specifically for the export-oriented SMEs, service platforms, and simplification of administrative examination and approval procedures, expediting the approval process.

6. Rationally define the government’s role in SME development. International experience tells us that the Government should use economic and legal and other indirect means to reduce the direct administrative intervention and capital subsidy, thereby enhancing the effectiveness of policy implementation to promote sustainable growth of SMEs.