Small and Medium Enterprises and Global Risks: Evidence from Manufacturing SMEs in Turkey

Global economic risks have significant implications for SMEs, particularly those in the manufacturing sector. Asset bubbles in a major economy can increase the production costs through inflation, wage increases and labor shortages, and access to financial resources that will impact the global economy (Zheng et al. 2010). Global financial crises cause substantial downturn in the formation of new SMEs, their performance, and their existence in the market. The 1997–1998 world financial and economic crisis severely impacted SMEs. As interest rates started to rise, many SMEs were bankrupted due to the credit crunch, tight monetary policies, and decline in domestic and international demands (Filardo 2011; Wehinger 2014). The number of bankrupted SMEs in South Korea, for example, particularly in the manufacturing sector, increased by nearly 100% from 1996 to 1998 (Gregory et al. 2002).

The 2008 economic crisis induced severe socioeconomic impacts worldwide and impacted SMEs in almost every economy, far beyond expectations, through fast domino effects that caused massive SME closures, downsizing, and reduced the number of new ventures (Chowdhury 2011; Sannajust 2014). Small and medium enterprises were under extreme pressures and experienced devastating decrease in demand and revenues, increased lay-offs, and stressful working environments (Kossyva et al. 2014). Close to 50% of the SMEs in Belgium and the Netherlands, for example, experienced extended delays in their receivables (Kossyva et al. 2014). Small and medium enterprises in the United States lost 2.8 million jobs (Gagliardi et al. 2013). During this global turmoil, Turkish SMEs were also impacted heavily (Karadag 2016).

During an economic crisis, SMEs are more vulnerable because of weak cash flow and financial structures, low equity reserves, limited adaptation potential and flexibility for downsizing, liquidation problems, too much dependency on external financial resources, tightened credit lines, payment delays on receivables, lack of resources, and lack of necessary skills to adopt or make necessary strategic decisions (Ates et al. 2013; Sannajust 2014; Wehinger 2014; Karadag 2016).

Failure of aging and insecure energy, transportation, and communications infrastructure can have major short- and long-term risks for SME performance and competitiveness. High structural unemployment lowers demand for goods and services and impacts SMEs significantly (Alegre and Chiva 2013). Illicit trade reduces SME competitiveness in the global market. In countries with higher levels of economic risk, SMEs have less of a chance to flourish (Mekinc et al. 2013). Energy is an important input for SME production and logistics. If energy prices are not manageable or controlable, SMEs face major uncertainties about energy costs and availability (Mulhall and Bryson 2014). Energy price shocks raise SME production costs (Kilian 2008) and compromise their individual and collective competitiveness in the global economy. It is mainly because SMEs are usually less flexible with respect to their energy sources and SMEs in the manufacturing sector are very energy intensive, that unpredicted fluctuations in energy prices impact them extensively. Energy price shock events have become more frequent and a consistent feature of the energy markets in recent years (Mulhall and Bryson 2014). As the global demand for energy increases, more shock events in the energy prices are expected. Finally, unmanageable high inflation rates at national and global levels pose risks to SMEs through higher interest rates (Cefis and Marsili 2006; Gül et al. 2010).

Small and medium enterprises around the globe, particularly those that are part of the global supply chains, are exposed to various types of global environmental and disaster risks that can have devastating impacts on SMEs (Auzzir et al. 2018). These enterprises are highly vulnerable to and not well prepared for most of the global environmental and disaster risks (Crichton 2006; Schaefer et al. 2011). They are vulnerable to environmental disaster risks on four fronts: capital, labor, logistics, and markets (Ballesteros and Sonny 2015). Environmental and disaster risk events can damage and disrupt the supply chain networks in which many SMEs are embedded. They can also damage SME assets, premises, and inventories, disrupt their operations, increase their production costs, and reduce their revenues and long-term growth potentials (Snyder and Shen 2006; Linnenluecke and Griffiths 2010, 2012; Asgary et al. 2012). Small and medium enterprises have limited capabilities to recover from these events and bring their operations, revenue, and profit back to pre-event conditions (Asgary et al. 2013). Considering the links that exist between climate change and extreme events, it is expected that these events will increase in the future (IPCC 2013). Small and medium enterprises face significant climate change-related environmental and regulatory risks (Schaefer et al. 2011). Major costly floods, severe heat and cold waves, heavy rains and extreme storms with higher frequency and intensity are observed globally. Extreme events not only cause disruptions and destruction to SMEs, but also create major challenges for their continuity of operations and future planning (Gunawansa and Kua 2014; Gasbarro et al. 2018). Studies show that few SMEs are adequately prepared for disaster risks. Small and medium enterprises are among the top underinsured sectors, and they usually do not conduct risk assessments or have business continuity plans (Wedawatta et al. 2010; Ye and Abe 2012). The 2011 floods in Thailand, for example, had major impacts on SMEs, and approximately 550,000 SMEs experienced direct and indirect damages, estimated at 71.1 billion Thai Baht per month, with 2.32 million jobs lost (Ye and Abe 2012). The 2011 Great East Japan Earthquake and the Thailand floods demonstrated that natural hazard-induced disasters can seriously inhibit the development of SMEs (Ye and Abe 2012; Auzzir et al. 2018).

Studies show that overall about 25% of SMEs do not reopen following a major disaster (Ballesteros and Sonny 2015). Of the US companies that experience disasters, for example, 43% never reopen, and another 29% close within 2 years (Weinhofer and Busch 2013; Ballesteros and Sonny 2015). Small and medium enterprises are worse off after disaster events compared to before disaster because they are relatively resource constrained, less resilient, are mainly informal and some of them do not fully comply or are not requested to follow standards and codes, lack necessary insurance, do not carry out risk assessments, and are often without business continuity plans (Ye and Abe 2012; UNDP 2013; Ballesteros and Sonny 2015; Halkos et al. 2018).

Being prone to multiple natural hazards such as flooding, earthquakes, and drought, natural hazards and disasters have affected SMEs in Turkey as well. The 1999 earthquake had significant economic impacts on the enterprise sector, ranging from USD 1.1 to 4.5 billion in damages (OECD 2000), most of it from the loss in manufacturing (USD 600 to 700 million). About 63.2% of the total manufacturing industry were damaged in five provinces, and 31,000 SMEs suffered heavy physical damages. Ezgi (2014) reported that the vast majority of SMEs had little preparedness before the earthquake and only 30% of them invested in insurance before the earthquake.

A world of geopolitical instability and uncertainty is a major concern for all sectors and businesses, but more so for SMEs. Many of these risks are cross border with global consequences. While existing international political and economic agreements such as those of the World Trade Organization (WTO) are weakened by unilateralism, there is little evidence that new and better multilateralism agreements are replacing them (Pascual-Ramsay 2015; Asgary and Ozdemir 2019). Rather these agreements are being replaced by fragmentation, bilateralism, regionalism, as well as local and short-term interests (Pascual-Ramsay 2015; Asgary and Ozdemir 2019). The international economy and its key players, including SMEs, are becoming more exposed and vulnerable to existing and emerging geopolitical risks and uncertainties (Pascual-Ramsay 2015).

Studies show that terrorist attacks, for example, even though they are very small in terms of direct physical impact zones, have economic impacts that are often substantial and very extensive. Repeated terrorist attacks in one country not only impact the economy of that country but create spillover impacts for neighboring countries and the global economy. Terrorist attacks discourage foreign investments and capital inflows and cause significant loss of economic activities and international trade (Abadie and Gardeazabal 2008; Araz-Takay et al. 2009). These risks can also increase insurance, transaction, transportation, and security costs for SMEs.

Turkey as an emerging economy located in a geopolitically complex region (Middle East and North Africa), with several potentially failing neighboring states, and as a member of various types of regional agreements, has a unique situation in terms of geopolitical risks. Turkey has been suffering from terrorism and dealing with regional conflicts, both of which have had various impacts on the SMEs. The presence of terrorist activities has impacted the emergence and growth of SMEs and the overall economic performance in the country. Bilgel and Karahasan (2017) found that after the rise of terrorism, the per capita real GDP in Eastern and Southeastern Anatolia declined by about 6.6%. Other studies also found that terrorism has a major negative impact on foreign direct investments in Turkey (Omay et al. 2013).

Global societal risks have specific implications for SMEs. Failure of urban planning leads to declining cities, informal urban growth or sprawl, and poor and fragile infrastructure with significant social, environmental, and health issues (Asgary and Ozdemir 2019). Such urban environments are not able to adequately support enterpreneurship activities that can compete at national and global levels. Cities without efficient and interconnected transportation systems, with significant air pollution, and unaffordable land and housing prices are not attractive for entrepreneurship growth (TURSAB and TUADER 2017). But SME engagement in risk management and critical infrastructure protection is an effective way to reduce the impact of future disasters in urban areas (Chatterjee et al. 2015; Chatterjee et al. 2016). Food and water crises are other important global risks that can affect SMEs in several ways, particularly those in the agri-food business and those that are in water-intensive manufacturing sectors. Social instability as another global risk is not healthy for SME growth and competitiveness. Global pandemics such as the 2003 Severe Acute Respiratory Syndrome (SARS) pandemic and the 2009 H1N1 pandemic can have immediate direct and indirect impacts on SMEs. For example, SARS had major impacts on SMEs, particularly those in the tourism and hospitality sector in heavily impacted countries such as China, Canada, Thailand, and Hong Kong (Kuo et al. 2008). Studies have found that many SMEs do not recognize pandemics as a meaningful risk. Although governments have tried to raise awareness and provide resources to enhance pandemic preparedness by SMEs, awareness or concern and actual preparedness have not changed much, and most SMEs do not have appropriate preparedness and continuity plans for future pandemics (Watkins et al. 2008). Armed conflicts, interstate wars, natural hazards and disasters, and climate change are creating widespread involuntary and forced displacement around the globe. Population displacements have a range of economic, social, and political impacts on both source and host countries (Tumen 2016; Salgado-Gálvez 2018). The impacts of forced migration on SMEs have not been studied yet, but it may have both positive and negative impacts. At least SMEs can be considered a solution for some of these problems by providing job opportunities for displaced people. Turkey has received more than 4 million displaced people from Syria since the start of conflict in 2012 (Onur 2018).

Adverse consequences of technological advances could be very diverse and consequential for SMEs, especially those in the manufacturing sector. New technologies such as robotics, autonomous vehicles and drones, automation, smart phones, artificial intelligence, 3-D printing, cloud computing and big data, and new materials are among the new technologies that can have unintended consequences and risks for manufacturing SMEs. These technologies have the potential to reduce outsourcing. Studies predict that 47% of the jobs in the United States (much of them in SMEs) are at high risk of being automated over the next 20 years, especially in manufacturing, logistics, and administrative support (Pascual-Ramsay 2015). These advances will possibly reduce employment opportunities for workers in manufacturing SMEs and will challenge SMEs survival.

While information technology brings significant growth opportunities for SMEs through knowledge and information availability, business communication, cost savings and efficiency, improving decision making, responsiveness, and overall flexibility (Mbuyisa and Leonard 2017), technology also introduces risks, including data theft, disruptions, and cyber-attacks (Chacko and Harris 2006). Like other institutions, SMEs are dependent on internet and information technology and a substantial number of their sales and orders are handled through cyberspace and networks. Any major failure and disruption of the national and global information infrastructure and networks due to large-scale disaster events can have significant negative impacts on SMEs. Such disruptions can have severe consequences for SMEs that are very vulnerable and without adequate protection. Small and medium enterprises use these technologies in production and service delivery, distribution, sales, and marketing. Data breaches, cyber security, and intentional or accidental technological failures can disrupt or significantly damage the short- and long-term operation as well as the existence of SMEs.

The sample covers SMEs in different manufacturing areas. After the unspecified “Other” manufacturing subgroup (39), SMEs in food products (22), textiles (22), machinery and equipment (22), furniture (20), fabricated metal (13), basic metal (9), wood products (9), rubber and plastic (9), electrical equipment (8), and chemical products (8) had the highest number of participants in this study. The questionnaire was completed by various individuals within each sample business, including managers (36), owners (20), accounting managers (13), financial managers (9), business partners (10), board members (3), engineers (6), and other employees (9). Sample SMEs are operating in 50 different cities and 7 geographic regions in Turkey, including Marmara (72), Central Anotolia (47), Aegean (29), Black Sea (24), Mediterranean (23), Eastern Anotolia (11), and Southeastern Anotolia (11).

The majority of the sample businesses (132) have been in operation for less than 10 years, only 34 have been in operation for 11 to 20 years, 29 between 21 and 30 years, and the rest (22) have been in business for more than 31 years. About 39.6% of the sample businesses were micro businesses, 37.8% small businesses, and about 22.6% were medium-sized enterprises. More than 60% of the SMEs export their products to varying degrees. They export to a large list of neighboring and European countries in particular. The sample SMEs also import some of their raw materials and equipment, and about 85% use imported products in their productions.

Almost all global economic risks are perceived to have very high and high likelihoods by the sample Turkish SMEs (Fig. 1a). However, fiscal crises in key economies, high structural unemployment or underemployment, and severe energy price shock are among the most likely risks according to the sample enterprises. A majority of the SMEs thought that catastrophic and severe impacts can be expected from the economic risks, particularly unmanageable inflation, high structural unemployment or underemployment, and fiscal crises in key economies (Fig. 1b).

Global environmental risks seem to have relatively lower likelihoods to the sample SMEs, compared with the global economic risks (Fig. 2a). Man-made environmental damages caused by human and major natural hazards and disasters show higher perceived likelihood. The perceived impacts from these risks were scored lower as well. Among these risks, environmental damages caused by human are perceived to have slightly higher impacts for the sample businesses (Fig. 2b).

Figure 3a and b show the sample SME respondents’ opinion about the likelihoods and the consequences of the global geopolitical risks. Failure of national governance and failure of regional or global governance, and large-scale terrorist attacks have the highest average perceived likelihood in this risk category. However, the impacts are assessed to be higher for interstate conflicts with regional consequences, followed by the failure of national governance, and failure of regional or global governance.

Among global societal risks failure of urban planning and profound social instability were perceived to have the highest likelihood and impact averages among the sample businesses (Fig. 4a, b). While water crises seem to have a high perceived likelihood, sample businesses on average do not see it as having severe or catastrophic impacts on their operations.

Figure 5a and b present the stated likelihoods and consequences of the global technological risks. While the likelihood of all these risks is perceived to be high, large-scale cyber-attacks and large data fraud are among the top in this risk group. Although the means of the impacts are lower for most of these risks, except for the negative consequences of technological developments, more SMEs stated that the consequences of large-scale cyber-attacks and large-scale data fraud are expected to be severe and catastrophic.

Risks can be calculated as the multiplication of likelihood by impacts (Table 2).

Using the mean values of each risk category, economic and technological risks are perceived to have the highest likelihood levels followed by geopolitical risks (Fig. 6a). In terms of impacts, however, economic risks and geopolitical risks take the first and second ranks followed by technological risks. Societal and environmental risks are considered to have lower impacts (Fig. 6b). In terms of the overall risk, the results show that economic risks and geopolitical risks take the first and second place, followed by technological risks (Fig. 6c).

Using the qualitative risk analysis methodology and perceived likelihood and impact data, a risk matrix was generated. Although the horizontal and vertical axes take the values 1 to 5, the matrix axes have been rescaled for better visualization. This risk matrix displays the means of stated likelihoods and consequences for each risk. Risks at the top right and in the red colored area are risks with higher than average likelihoods and consequences. Risks in the lower left part of the matrix and colored green are considered to be low.

Figure 7 presents the resulting risk matrix for the 217 businesses and the 30 risks. Most economic risks are in the upper part of the risk matrix, followed by some geopolitical risks. Large-scale data fraud is the only technological risk that falls into the same area. Majority of environmental and societal risks, although scattered diagonally in the risk matrix, are in the lower part of the matrix.