CJASR-12-13-116

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

Available online at http://www.cjasr.com

ISSN: 2251-9114, ©2012 CJASR

45

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

Iran

Manouchehr Jofreh1, and Reza Gharoie Ahangar

2,*

1Assistant Professor of Management Department in Islamic Azad University at Central Tehran Branch of Iran

2Department of Management, Islamic Azad University, Central Tehran Branch, Tehran, Iran

*Corresponding Author: [email protected]

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 Iran’s 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;

Pérez 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

mailto:[email protected]

Jofreh and Ahangar

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

46

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. Griffith-

Jones 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


47

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 Iran’s 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, Iran‟s

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 Economic Growth Inflation

2010 2011 2012 2010 2011 2012

Argentina 9.2 6.0 4.6 10.5 10.2 11.5

Australia 2.7 3.0 3.5 2.8 3.0 3.0

Brazil 7.5 4.5 4.1 5.0 6.3 4.8

Canada 3.1 2.8 2.6 1.8 2.2 1.9

China 10.3 9.6 9.5 3.3 5.0 2.5

England 1.3 1.7 2.3 3.3 4.2 2.0

France 1.5 1.6 1.8 1.7 2.1 1.7

Germany 3.5 2.5 2.1 1.2 2.2 1.5

Hong Kong 6.8 5.4 4.2 2.4 5.8 4.4

India 10.4 8.2 7.8 13.2 7.5 6.2

Iran 1.0 -.0 3.0 12.5 22.5 12.5

Iraq .8 9.6 12.6 5.1 5.0 5.0

Japan 3.9 1.4 2.1 -.7 .2 .2

Jordan 3.1 3.3 3.9 5.0 6.1 5.6

Korea 6.1 4.5 4.2 3.0 4.5 3.0

Malaysia 7.2 5.5 5.2 1.7 2.8 2.5

Mexico 5.5 4.6 4.0 4.2 3.6 3.1

Morocco 3.2 3.9 4.6 1.0 2.9 2.9

Russia 4.0 4.8 4.5 6.9 9.3 8.0

Saudi Arabia 3.7 7.5 3.0 5.4 6.0 5.5

Singapore 14.5 5.2 4.4 2.8 3.3 3.0

United State 2.8 2.8 2.9 1.6 2.2 1.6

Taiwan 10.8 5.4 5.2 1.0 2.0 2.0

Thailand 7.8 4.0 4.5 3.3 4.0 3.4

Turkey 8.2 4.6 4.5 8.6 5.7 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:

Jofreh and Ahangar


48

Figure 1: The conceptual model

Financial

Profitability

H1-

H2-

Financial

Crisis

H3-

H4-

Demand for

Goods or Services

Rotation of

Assets

Operating profitability

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 5-

point Likert scale (1 = Strongly Disagree, 5 =

Strongly Agree). Cronbach‟s 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

manager‟s answers.

3.2. Conceptual Development

The conceptual model of this study is shows on

Figure 1:

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.


49

Table 2: Correlation Matrix of Variables

Mean S.D FC DGS OP FP RA

FC 3.764 .442 1 DGS 3.591 .317 -.579** 1 OP 3.843 .325 -.271** .095 1 FP 3.845 .433 -.662** .221 .005 1 RA 3.932 .497 -.243** .067 .473** .426** 1

** Correlation is significant at the 0.01 level (2-tailed).

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 (β= -0.573, p <0.001). Operating

Profitability was negatively and significantly

related to Financial Crisis of SMEs in Iran with β=

-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 β value of -0.641. Also, Rotation of

Assets correlation with Financial Crisis of SMEs

was significance (β= -0.422, p <0.006). Hence we

accepted all hypotheses due to significant results.

Table 3: Regression Analysis of Model

Variables Beta Standard Error t – value Significance

Constant -1.767** .638 -2.770 .008

DGS -.573** .126 -4.510 .000

OP -.387** .138 -2.832 .007

FP -.641** .104 -6.126 .000

RA -.422** .101 -3.167 .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.

Jofreh and Ahangar


50

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

Fig. 3: Impact of Financial crisis on operating profitability

Fig. 4: Impact of Financial crisis on financial profitability

17% 23%

53%

7%

0%

10%

20%

30%

40%

50%

60%

Percentage

Very High High Medium Low

Level of response

Demand for Goods and Services

24% 28%

44%

4%

0%

10%

20%

30%

40%

50%

Percentage


Level of response

Operating Profitability

22%

31%

45%

2%

0%

10%

20%

30%

40%

50%

Percentage


Level of response

Financial Profitability


51

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.

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 expert„s

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, Iran‟s 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 Iran‟s

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 Iran‟s 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

18%

26%

51%

5%

0%

10%

20%

30%

40%

50%

60%

Percentage


Level of response

Asset Turnover

Jofreh and Ahangar


52

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

introduce is not only in hand of economical

superior leaders, but any major position can

perform it and we call “psychological policy”. For

prove of this policy, we can say, if superior

manager of a country, have psychological support

along with financial and monetary policies from a

bankrupt institute, certainly the financial situation

will improved. We can show the accuracy of this

policy with an example. In continues of fall of US

Stock Markets, in the October 2008, the leaders of

Central Banks performed the decrease in rate of

interest, although this actions had decreased the

trend of fall of Stock Markets, but after two days,

when the leader of Federal Reserve announced that

even with contribution of governments, we must

not expectation rapidly in economic situation, the

Dow Jones Indexes had increased an amount of

733. We can find from this people‟s reaction that

stockholders have attention to psychological

matters as amount of financial and monetary

issues.

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