1. Research Aims and Objectives
This research project aims to highlight the impact of micro, small and medium-sized enterprises (MSME) on banking sector competitiveness. In particular, it seeks to empirically establish meaningful relationships between individual corporate growth indicators and enhanced banking performance. Such indicators include but are not limited to: volume of domestic/export business; net contribution to the country’s GDP; net contribution to the country’s aggregate value added; level of innovative activity (as measured by R&D expenditure); increase in capital expenditure (e.g. tangible fixed assets). For reasons of comprehensiveness, total factor productivity (TFP) is utilized as quantitative measure of banking sector competitiveness. In light of the previous considerations, the proposed research question is:
How does MSME growth impact competitiveness in the banking sector?
In this context, milestones to be achieved by this project include:
- Creation of ample MSME sector profile
- Identification of statistically significant corporate growth indicators
- Calculating banking sector productivity
- Empirically testing correlations between significant growth indicators and banking productivity
- Data analysis and results interpretation
Main objectives of this research are:
- To emphasize the importance of MSME growth in explaining banking competitiveness developments in the period 1998-2007.
- To underline the ever-growing role of banking sector in facilitating economic growth within the segment.
2. Research Topic Background
In modern market driven societies, MSME are prime engine for economic expansion. Their strategic functions and capabilities can be defined as follows (Stoianov, 1996, p.23-27):
- Employment generator and contributor to more competitive business environment
- Important driver/tool for social and regional development
- Primary factor for “middle class” formation
- Micro, small and medium-sized enterprises possess flexibility and can respond quickly to changing market conditions
- MSME sector acts as fundamental platform for innovation and is favourable arena for development of entrepreneurial skills and strong corporate culture Processes of mass privatization and outsourcing in the 90es have brought flows of foreign direct investment into the country and have shifted the size structure of corporate sector toward smaller more flexible and less capital intensive business units.
Gradually, micro, small and medium-sized enterprises have become leading employment generator and have played important role in improving the competitiveness of the Bulgarian economy. Roughly 99% of all enterprises (private and public) can be classified as MSME (Bulgaria, 2008, p.11).
In bank-based financial systems, banking institutions facilitate economic growth through financial intermediation. Provided that capital markets in Bulgaria have failed to offer viable alternative source of capital, debt finance instruments prove to be primary fund resource for MSME (apart from subsidies and grants). The competitive ability of financial institutions is provoked from many compound factors: from the pegged to the Euro national currency to the usage of modern market strategies, new managerial approaches, which differ from the former planned-economy and the restrictive policies concerning the whole financial system. Privatization has lead to liberalization in banking and attracted international financial players on the market. Foreign direct investment in the sector has enhanced its competitiveness position and has resulted in development and implementation of new business models and innovative products in the country. However, introduction of the currency board (1998) has inevitably resulted in restrictive financial policies and contributed toward more conservative lending behaviour of financial institutions.
Nevertheless, credit function of banks has stabilized in recent years. Debt capital has provided excellent means of financing production capacity expansion, M&A activity, infrastructural projects, initiating and developing export etc. In January 2008 the Bulgarian banking sector consisted of 36 commercial banks. Over 96% of their total assets were controlled by private entities and more than 87% were owned by renowned foreign investors (Bulgaria, 2008, p.56).
In the context of steady banking sector performance and growing weight of MSME in the national economy, the choice of research topic is particularly appealing. Overall, little empirical studies have been conducted in the area, with only outdated conceptual work to be noted.
Mladenov (2005) and Ignatiev (2003) have summarized effects of the banking crisis in Bulgaria (1996-1997) and have identified preceding “credit boom” as potential reason. Ionkova (1999) has analyzed banking sector performance during currency board regime and restrictive policies of the Bulgarian National Bank (BNB) aimed at reducing credit risk. She has found that the period immediately after the introduction of the board (1998-1999) has been characterized by extremely low aggregate lending/borrowing ratio of roughly 30% for the top ten banks in the country. In the period after 2000, successful privatization in the banking sector, improving business environment and hence higher increasing demand for debt capital have resulted in easing of credit restriction policies and boost in lending. More recently, Pirimova (2004) has explored the role of banking institutions for economic growth and wellbeing in Bulgaria.
3. Methodology and Data Sources
The nature of research topic implies collection and analysis of secondary data. Main raw data sources include: National Statistical Institute (NSI); reports of ESTAT Sociological Agency prepared for the Ministry of Economics and Energy; sociological surveys on the condition of MSME conducted by Vitosha Research Agency; Bankscope. Statisatical/Econometric analysis is conducted using SPSS and Eviews software packages.