Impact of Economic Crisis and Way Forward for the Survival of SMEs: A Sri Lankan Perspective

Abstract

The small and medium scaled Enterprises (SME) sector in any country including Sri Lanka is considered a vital sector for a country’s economic growth. However, past research evidenced that despite the large number of business establishments that occur every year in Sri Lanka, a high SME failure rate, a low growth rate, and survival rates were reported comparatively with other countries. The prevailing economic crisis in Sri Lanka further creates a vulnerable situation for the SME sector and it affects highly the growth and performance of most of the SMEs. This effect may continue for a long period and affects seriously hamper the country’s economic growth further. Therefore, it requires identifying the impact of the prevailing economic crisis on SMEs in Sri Lanka and ways for ensuring the SMEs' survival. Hence, this research aims to reveal the key problems encountered by SMEs during this economic crisis and determine which factors affect the business survival even if the crisis brings many negative impacts. This study was based mainly on the positivism paradigm followed by the quantitative approach. The study sample included 172 manufacturing SMEs which were located in the Southern and Western Provinces of Sri Lanka. The Independent variable of this study was entrepreneur-specific factors and two sub-dimensions including dynamic capabilities and entrepreneurial orientation of the entrepreneur were used to measure the independent variable. The dependent variable was the business survival. As data analysis techniques, the factor ranking method was applied to identify the key problems faced by the SMEs due to the prevailing economic crisis, and multiple regression technique was applied to reveal the most persuasive determinants of SME survival during the economic crisis. Key problems faced by the SMEs included: high cost of production and demand decline due to inflation, shortage of required raw materials, continuous power cuts, working capital and liquidity problems, and breakdown of their supply chain due to fuel issues. All these key issues affect diminish the capacity utilization rate and lower the business performance of many SMEs. This research found that several SMEs were capable to protect as survivors even during the economic crisis period due to their dynamic capabilities and entrepreneurial orientation possessed with them. Among the two factors that were considered as owner-specific factors in this study, dynamic capabilities possessed by the owner–manager work as the most persuasive determinant of the business survival than the entrepreneurial orientation during the economic crisis.