funding

“To analyze the impact of equity-based crowd funding on the growth of SMEs in the Middle East”

 

 

Abstract

Purpose: The key purpose of this research is to determine the impact of equity-based crowd funding source on the success and growth of the SMEs in the Middle East region. This research enabled the researcher to evaluate the contribution of this financing source in the growth and success of the SMEs. In addition, some challenges that are faced by the SMEs in the Middle East and recommendations to improve the use of the equity-based crowd funding are also presented in this research study.

Methodology: In this research, a survey through questionnaire was conducted by the researcher to collect the views and opinions of 42 SME owners in the Middle East. For this research, statistical analysis tool i.e. SPSS technique was used to analyze the collected data and present the meaningful findings to achieve research objectives and prove hypothesis.

Results: From the analysis, it is identified that insufficient real assets, large sum as down payment for bidding, lack of sufficient credit lines, inadequate financial structure, lending capacity, and regulations, poorly equipped banks and financial institutions and shortage of skilled workforce are major challenges for the SMEs in Middle East. All these challenges fort these firms to achieve high growth and success in the market. Apart from this, it is also identified that equity-based crowd funding provides advantages in terms of better operational control by the owners, finance accessibility at low cost with different credit lines and opportunity to invest in new ideas and ventures that help to grow their business effectively.

Recommendations: In this research, it is also recommended to the government and regulatory authorities of the Middle East countries to facilitate the use of equity-based crowd funding by focusing on educational and literacy programs, promoting public support schemes and ensuring transparency in regulatory framework. At the same time, future researchers can focus on large sample size and consider financial aspects of the SMEs to get more valid and generalized findings.

 Chapter 1: Introduction

1.1 Research problem

It is significant for every firm to arrange finance to smoothly operate the business operations. Without proper arrangement of the fund, it is difficult for the businesses to run their operational activities on time. SMEs are the businesses that are operated at small and medium level. Each country defines SMEs at own level in terms of number of employees and capital invested. SMEs play a significant role in economic development of the Middle East countries. SMEs also contribute in socio-economic development through job creation (Habib, 2012). In Middle East countries, SMEs have risks of uncertainty for generating the profits due to being operated in restricted areas of business in limited size. In order to start and operate the business, it is needed for the SMEs to get the required capital for adequate operational running and organizational growth. However, there are several financing sources are available depending on the success and feasibility of the business (Holmey, 2017). But, SMEs face challenges to arrange the required finance to operate the business as they need finance for taking risks and grabbing profit opportunities. It is difficult for them to develop trust among creditors and ensure them regarding creditworthiness as it creates a challenge for them to arrange required fund. In spite of the fact that SMEs are an extraordinarily essential supporter of the economy, gathering funds for organizations is more difficult as compared to other countries of the world as just 8% of bank landing is allocated to SMEs. In this way, the SMEs look for other sources of financing generally subject to family, companions, and inevitably individual assets (Belleflamme et al., 2014). Concerning to this, different funding sources like crowd-funding, micro-financing, venture capital, personal investment, loans and angel investors are available for the SMEs in the Middle East countries. Among these sources, equity-based crowd funding is a valuable source of finance for these firms to meet their financing requirement that is helpful for them to operate the business successfully. However, this source of funding has a significant influence on the business of the SMEs in terms of the operational areas, technical aspects, interference in the operational activities and proficient solutions (Irwin and Scott, 2010). All these impacts are crucial for the SMEs to get success in the market. In Middle East countries, several reasons like modifications in regulations and policies of the government, tax changes, investment by finance sector and changes in working practices have contributed in the success of the SMEs in the region. Because of the ceaseless development and the current achievement of businesses and the government approaches in the Middle East to help the SMEs expanded the thought of the finance providers likewise to contribute in their development and accomplishment (Khamis, 2016). Lack of Financing to the SMEs dependably remained a noteworthy obstruction in the development of these organizations, however because of changing situation due to expanding rivalry and government approaches, the financing support is expanding alongside the association of the Crowd-funding to guarantee skill and specialized help to the SMEs, which is additionally contributing in the development and accomplishment of these organizations. A dynamic crowd-funding ecosystem is effective in terms of enabling policies, conductive culture, human capital, venture friendly markets, infrastructure and financing (Lehner, 2013). This study is engaged to evaluate the significance of Equity-based crowd-funding sources on the achievement and development of SMEs in the Middle East Countries. There is a growing trend of Equity-based Crowd-funding in Middle East countries for the SMEs as this study explored how this financing source is connected with the development of them in these countries.

1.2 Research aim, objectives and questions

1.2.1 Research Aim:

While crowd-funding in the Middle East is still in its beginning period, its potential is immense. Given the expansion in the government support and the financial specialists’ craving, the crowd-funding stages are relied upon to raise (Jones, 2014). What’s more, since crowd-funding prompted a fundamental change in the way the SMEs raise finance, this undertaking intends to talk about, assess, and measure the effect of directing the equity-based crowd-funding on the SMEs in the Middle East (Gleasure, 2015).

The key research aim is to evaluate the role of the crowdfunding in the growth and development of the SMEs in the Middle East countries.

1.2.2 Research objectives:

To achieve this aim, the following objectives are accomplished by the researcher:

  • To determine the challenges in the growth of SMEs in the Middle East countries
  • To critically assess the significance of Equity-based crowd-funding in the development of the SMEs in the Middle East countries
  • To suggest effective ways for the development of Equity-based crowd-funding in relation to the growth of the SMEs

1.2.3 Research question:

  • To what extent, the crowdfunding plays an important role in the growth of SMEs in the Middle East?

1.3 Definitions & Variables

Equity-based crowdfunding is the way of financing for start-ups by getting opinions of several people i.e. crowd for investing a small amount of money and get the returns in form of equity shares in that firm.

Hypothesis formulation:

There are two variables including dependent variable (the use of equity-based crowd-funding) and independent variable (business performance) that need to be linked with each other. the following hypotheses are tested and proved in this research to determine the relationship between the equity-based crowdfunding and growth of the SMEs:

H0: There is no relationship between equity-based crowdfunding and growth of the SMEs in Middle East countries.

H1: There is the relationship between equity-based crowdfunding and growth of the SMEs in Middle East countries.

1.4 Significance of the research (Knowledge gap is being addressed)

The research has focused on the SMEs of Middle East due to ceaseless development of SMEs in this region. The development and accomplishment of the SMEs are very successful to catch the consideration of the fundraisers as they are putting resources into the organizations, as well as getting engaged with their operations to pick up the advantages of potential development. Because of this, this study is compelling to assess the present aspect of the SMEs in perspective of fund sources and its effect on their prosperity and development. This study is helpful for the SMEs to understand the significance of equity-based crowd-funding as another source of arranging fund in the Middle East. This research can be effective for empowering the role of equity-based crowd-funding in enhancing business activities by the SMEs. This exploration is additionally critical as in the current, this funding source is becoming very prevalent in the Middle East among the SMEs and the investigation will empower to decide the viability and commitment of this source in the general development of these firms. The embraced investigate is compelling to assess this capital source accessible for the SMEs as far as their commitment to the development and achievement of the SMEs in the Middle East. It will be viable for the new organizations and the potential entrepreneurs to distinguish the upsides and downsides and to settle on more proper choices for financing their organizations. There are several studies conducted by previous researchers on the significance of crowd-funding on developed countries, but this study helped to focus the research on the Middle East and contribute in existing literature through adding more relevance in the existing environment.

1.5  Research methods

In order to conduct this study, primary research is conducted that focused on the survey through questionnaire over the SMEs owners in the Middle East. It helped the researcher to collect real and fresh data. A survey is led to gather information from the SMEs proprietors, owners in various areas, genders, and ethnical foundation to approve whether crowd-funding urges them to go out on a growth path or then again, pull back the trade they held out the bank and put resources into new SMEs on the stage. The quantitative information then again, for example, age, sexual orientation, area, ethnical foundation, industry, in the event that they get a kick out of the chance to begin their own business, what is the incline toward technique to gather fund, do they trust crowd-funding platforms and other applicable data is gathered through online studies, sent by means of email. All the data is statistically analyzed through SPSS tool to present the descriptive statistics and determine the relationship between the variables.

1.6 Research Layout

This study is alienated into five chapters that are as follows:

  1. Introduction: The first chapter of a research study is introduction chapter that provides an outline of the research background and relevant context with justification. This section also includes justification for the research and mentions research aim and objectives that help the researcher to get proper direction for study systemically.
  2. Literature Review: This second chapter provides an understanding of theories and concepts related to the research topic. In this chapter, various literature and narratives including articles, publications, and journals related to research problem are critically assessed to determine theoretical perspectives on the research topic.
  3. Research Methodology: It includes various research methodologies such as research philosophy, research design, research approach, research design, data collection methods, sampling, data analysis method, etc. with the appropriateness of their selection in the study to solve the problem efficiently. This chapter is useful for the researcher to get proper direction to conduct the study appropriately and enhance the reliability of the research outcomes.
  4. Data Analysis & Discussion: It is the important section of the research study that includes analysis of data, which are obtained from different data sources and various findings related to the research problem. It enables the researcher to present reliable and valid research findings and results in a comprehensible way through the use of specific data analysis method.
  5. Conclusion and Recommendations: It is the final chapter of the study that provides summarized findings and recommendations for solving research problem to the associated users of the research. Overall, it summarizes the major findings of the research in relevance to research aim and objectives. Along with this, it also provides the explanation about research limitations and future research implications of same research problem for further researchers.

Chapter 2: Literature Review

2.1 Introduction

Under this part of the research, the researcher presents a wide understanding of the concept of crowdfunding and related theoretical concepts such as investment crowdfunding and its types, equity crowdfunding, its significance and influence on SMEs growth. The researcher also identifies the challenges faced by the SMEs for its growth in developing countries in the context of the Middle East countries. This chapter reviews the journals, articles, and eBooks related to the study topic as well as the finding of other theorists, researchers, and field academicians to analyze the study topic and determine each research question. This review of existing literature by other researchers offers a clear theoretical framework to the researcher to conduct the research to determine the impact of equity-based crowdfunding on the SMEs growth in the context of Middle East.  This chapter has helped the researcher to establish the theoretical understanding of the topic and link with the study findings.

2.2 Theoretical Concepts

2.2.1 Crowdfunding

Crowdfunding as an alternative financing has emerged in past few years for new ventures and projects. The process of crowdfunding is to provide support to social entrepreneurs and project owners through a socially responsible investment based on trust and collaboration through an online platform. The concept of crowdfunding came into the limelight since 2000 from the United States (Vulkan et al., 2016). Initially, the use of crowdfunding was employed to finance the music artists through the web-based platform such as ArtistShare and later in the entertainment industry areas such as film and journalism (Kirby and Worner, 2014).

According to Ordanini et al. (2011), crowdfunding refers to the efforts of the social system to fund entrepreneurial individuals or groups venture without the involvement of any standard financial intermediaries or banks. Van Wingerden and Ryan (2011) define the concept of crowdfunding as a subset of crowdsourcing which draws attention to the influence of the crowd to be of assistance in providing the solution to entrepreneurs and development of product/services projects. Sannajust et al. (2014) point crowdfunding as a financing method involving a large number of individual in preference to a few investors or venture capitalists.  Thus, crowdfunding as a joint effort from a number of individuals supports that pool resources for an initiative by the organization or other individuals through networking utilizing the online platform or internet. The networking of individuals provides finances to potential and existing entrepreneurs, innovators, etc. for the individual project, business re-structuring, new ventures and start-up business. It can be said that crowdfunding helps to raise capital by small monetary contributions obtained from the different individual through social networking over the online web-based platform.

Frydrych et al. (2014) describe that reasons for companies to choose this form of alternative financing. The author found that collection of funds was the major motive for crowdfunding followed by obtaining feedback for offered products/services and to attract the public interest in the firm. In a similar study, Alemany et al. (2010) found that financing, increase product awareness, building relationships and networking were the motives to choose crowdfunding.  It can be added that the crowdfunding has become a means to narrow the funding gap for the small business owner, entrepreneurs and for initial stages of the new venture, business plan or project. The crowdfunding has been successfully adopted in the United States, Australia, European countries such as Italy, Germany, etc., and Asian countries.  However, Abushaban (2014) argues that it has received little support from governments, and the private sector of developing countries especially in the Middle East countries and North Africa.

2.2.2 Types of Crowdfunding

Colgren (2014) mentions four broad categories of crowdfunding platforms as lending or debt- based, equity-based, donation-based and reward- based. Some leading and most popular online sites for different types of crowdfunding are Kickstarter, Indiegogo, crowdfunder, GoFundMe, EquityNet, rockethub, etc (Sannajust et al., 2014).

Donation-based crowdfunding refers to a donor contract mostly used by the NGOs, and for charities and disaster relief program. Here, the individual donates money for supporting a social cause without getting any return on its contributions. Vien (2015) reminds that there is no financial return to the fund contributor.

Reward type forms a purchase contract for product/service employed by individual project managers or business owners to give some in return for pre-purchase. Frydrych et al. (2014) describe this form of the campaign as a subset of donation crowdfunding that involves individual contribution for a product/service project in exchange for a reward such as VIP tickets or other non-financial rewards for high donations made.  At the same time, Vien (2015) states that reward-based crowdfunding provides incentives but does not involve any financial returns or any equity-like arrangements for the contributors.

The debt or lending-based crowdfunding involves the organization or company to borrow money from an individual or group rather than any financial institution or banks. It is also referred to as peer-to-peer lending as it provides contribution as credit loan or personal loan in exchange for an interest rate.  Colgren (2014) states debt crowdfunding forms a credit contract which is being repaid with interest. Lehner (2013) also describes that lending-based crowdfunding provides a platform to match the borrowers with investors interested in providing unsecured loans at a fixed interest rate to small business and nascent entrepreneurial ventures.

In equity-based crowdfunding, the company aim is to attract investments from a large group of people rather than investors, venture capitalistic, banks. This form of crowdfunding is a shareholding contract. Turan (2015) reminds that equity crowdfunding is also referred to as crowd investing where funder as a creditor receives equity investment thus, the same payoff as equity shares and this form has equity-like instruments and arrangements for revenue sharing for its investment made.  Habib (2012) underlines that equity-based crowdfunding provides the fund contributors financial return and make them eligible to collect a share of firm profits through a structure of dividends.

Figure 1: Types of crowdfunding platforms

(Source: Kirby and Worner, 2014)

2.2.3 Equity crowdfunding

Crowdfunding as crowd investing is a concept that has been into practice in the United States since 2000. However, Ordanini et al. (2011) state that equity crowdfunding as an alternative financing method been into the limelight since 2009 during the financial crisis and liquidity shortage. The growth of crowdfunding after the financial market crisis led to changes in the legislation of the United States which led to a proposal for small and medium enterprises venture to increase the access to capital funds/ equity capital through JOBS Act (Jumpstart Our Business Startups Act) in 2012. Vulkan et al. (2016) remind that Title III of the JOBS Act referred to as Crowdfund Act that established the obligations and rule for the issuer of online platforms, inventors, and equity aspects. The author also states that the legal terms are different and country-specific in case of equity crowdfunding. For instance, in the European Union, the issue of shares is prohibited whereas in some developed countries it requires strict legal requirements fulfillment and issuer may bear the high cost in issuing shares in equity crowdfunding.

According to Van Wingerden and Ryan (2011), equity crowdfunding involves a number of different individuals (crowd) to invest in an unlisted commercial firm in exchange of same firm shares to make the investor a partial owner for revenue and risk sharing.  Turan (2015) describes equity funding as a mechanism to receive interest by funders in terms of equity shares or sharing of profits and losses for the investment made. Sannajust et al. (2014) discuss that the difference between the traditional form of financing with the equity-based alternative financing option lies in the process of obtaining funds. Thus, this type of crowdfunding provides the online platform for investments by offering firm securities under investment crowdfunding. Also, the investment in the startup is not restricted to venture capitalists, banks and business angels’ as equity crowdfunding provide the platform to the digital user to make investments in the choice of company sector or for project venture.  Here, the firm or potential entrepreneurs or small business owners provide an open platform through a crowdfunding site and provide information about the project based on which the investors make decisions. Once the investment decision is made, standardized investment contracts as shareholder equity contract facilitate the transaction for straightening out the payments (Van Wingerden and Ryan, 2011). Thus, it can be noted that equity crowdfunding forms an alternative means of raising capital for a specified equity amount in form of equity shares to funders through the web-based platform. Based on above views, it can be understood that equity-based crowdfunding platform is an emerging investment financing method that focuses on social networking and trust that lead to a collective effort by social system members to pool money and resources through investment to support the efforts and initiatives of another individual, group or organization by making stock offering via online platform.

The concept of crowdfunding has to gain momentum for entrepreneurs and small business owners to obtain funding and launch the business plan or projects and as a means of low-cost start-up financing model. On the other hand, Abushaban (2014) argues that the despite the increasing popularity of crowdfunding platforms, any type of investment crowdfunding has not penetrated in many developing countries such as North Africa and Middle East countries.  The author also points that equity-based crowdfunding can be helpful to lift the poor financial situations, encourage innovation, create the job, and generate economic value for the SMEs growth and development in the MENA regions.

2.3 Challenges in the growth of SMEs in the Middle East countries

In the views of Alemany et al. (2010), the fundamental challenge for any new venture, project or business is to seek initial capital from outside firms, individual or groups. Another common challenge in the growth of SMEs is insufficient real assets which make it evident to involve the third party in the business for the growth and development of the enterprise as stated by Nassr and Wehinger (2016). The third party can include from banks, investors/creditors or even members of the family.  The funds from these parties can be in form of debt as the loan or equity capital from professional investors (Alemany et al., 2010). In the context of Middle East countries, the small and middle enterprise faces problem in bidding and implementation of government contracts which is required for steady business and future growth.  According to The World Bank (2015), the countries in the Middle East lack the tool and resources to take advantage of the huge public market and government contracts in the Middle Eastern regions. This is also due to the reason as the government in MENA (the Middle East and North Africa ) involve a large sum as down payment for bidding in government public contracts that discourage SMEs participation in these public contracts (The World Bank, 2015). Moreover, the findings of Hassan et al. (2009) highlight that lack of sufficient credit lines to the small and medium enterprise is a major challenge faced by SME in the Middle East.  Similarly, Nadal (2013) highlights the inconsiderate bankruptcy law poses the big problem for the SME in the MENA regions. The author also found that the financial structure, lending capacity, and regulations are inadequate in MENA region that impedes SMEs environment for a proper SME finance. In support of this, Farazi et al. (2011) viewed that SME finance in the Middle East is restricted due to poorly equipped banks and financial institutions.

Furthermore, according to Hassan et al. (2009), there is limited arrangement of Islamic finance products for the enterprises in the countries like Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. According to World Economic Forum (2017), there is approximately 5% of the commercial banking activities is focused towards SMEs across the Middle East countries.  This challenge of fundraising in the Middle East counties is evident as McConaghy (2013) highlights that the lending of the bank to the MENA regions forms only 8% of the total lending by the bank.

Figure 2: SMEs loan share in the Middle East and North Africa region

(Source: McConaghy, 2013)

Thus, the start-up businesses in MENA have limited options for sourcing finances such as family members, relatives, and friends or depend on their personal resources or savings. Moreover, according to Abushaban (2014), the start-up businesses in these regions do not opt for bank financing due to the burden of debt repayment in the initial stage of business operations. Thus, this limited source of financing in MENA region has created a funding gap of approximately US$360 billion according to (Issuu, 2016). This indicates that SMEs seek problem in seeking credible firms for financial activities and determining ways to support the business operations of the SMEs to take advantage of the public market. Apart from this, Haghighat (2013) recognizes that the shortage of domestic workers and the high cost of expatriates’ workers make the business environment more challenging in the Middle East countries such as Saudi Arabia, Kuwait, Oman, etc. It can be noted that the above challenges for SMEs highlight to the finance, skill shortage and lack of business environment in the Middle East countries. It can be understood that the small and medium enterprises in the Middle East countries are financially constrained. This is evident due to lack of access to sufficient finances and banking products to drive business growth and development in these countries. Without proper financial access, these SMEs will not able to expand in markets and obtain new technologies for building productive capacity (Deffains-Crapsky and Sudolska, 2014). This emphasizes the need of financial transparency for the improving the SME management skills, provision for profitable banking products and encourage the flow of credit into the SMEs from different sources and improve access to financing for the economic development of the Middle East countries. It can be added that the challenges faced by the SMEs in the developing countries specifically in the MENA regions indicate the need to develop a supportive and trust ecosystem for encouraging investment crowdfunding in the Middle East regions.

2.4 Significance of Equity-based crowdfunding in the SMEs development

The capital is a major requirement for entrepreneurs and for many small to medium business owners to support the business operations, for growth and development in the business landscape. To fulfill the initial capital needs, the business owners are choosing alternative form of financing such as equity crowdfunding that provides assistance in new venture and projects keeping away a regulated exchanged through the online social platform where money is exchanged with some equity (Cholakova and Clarysse, 2015). The current legislation has given way for equity-based crowdfunding for SMEs to obtain the necessary capital and narrows the gap between the capital amounts that an SME can acquire and desired capital.

Chu (2017) states that crowdfunding can offers support to the development of small to the medium enterprise at multiple levels. According to Vulkan et al. (2016), equity-based crowdfunding is preferred over donation and rewards crowdfunding as it provides additional course to increase equity with related risks. Cholakova and Clarysse (2015) highlight the importance of crowdfunding over business angels. The authors state that investors depend on the word of mouth publicity in business angels whereas crowdfunding options seek to match the investors with the choice of sector or companies.  This market-based finance could be helpful to provide credit to the small business owners to encourage the growth of their businesses and other SMEs and thus, overall economic growth and recovery of the region (Valanciene and Jegeleviciute, 2013). Turan (2015) found that equity-based crowdfunding has the potential to drive the economic growth by increasing credit flow to SMEs for its development and expansion that leads to job creation for economic revival. However, Deffains-Crapsky and Sudolska (2014) point that few jurisdictions do not support this alternative financing method or capital rising due to the risk of platform shutdown and frauds. On the other hand, Vulkan et al. (2016) state that equity crowdfunding serves the need of SMEs as a low-cost alternative and an affordable option for financing than traditional financing methods for raising capital.  Moreover, current laws and regulations have given space to small businesses to obtain investment dollars by means of equity crowdfunding. Chu (2017) viewed that equity crowdfunding form of investment has transformed the nature of SMEs business permitting individual funder to acquire equity stakes in new firms in the United States. This type of capital rising holds relevance for SMEs business where banks are not willing or have insufficient tools or inadequate products to lend loan to these small businesses.  Alemany et al. (2010) point that many small business owners and potential entrepreneurs have been aware that professional investors such as venture capitalists and business angels would not likely and has the least probability to invest in the minor business. Thus, this has increased the relevance of investment crowdfunding among small business owners as the concept and nature of equity crowdfunding is opposite to these professional investors. According to Chu (2017), through the model of equity crowdfunding business like art and creative studio, food businesses, pubs and similar business have used the investment crowdfunding to raise average approximately $700, 000 in the United States. Thus, this form of crowdfunding has offered the required capital as venture capital, growth capital, and funds for new equipment or for planned hires which were unlikely in traditional models of financing for SMEs. Additionally, in the views of Belleflamme et al. (2014), equity crowdfunding would evolve as an alternative to Initial Public Offering (IPO) and would avoid the high costs of IPOs for enterprises. It can be said that equity crowdfunding has opened new ways to expand the financing options for the start-up business and many small to medium enterprises in and outside the United States. Jones (2014) underlines the mechanism of equity-based crowdfunding has potential to develop a resourceful option for small and nascent entrepreneurial ventures to enable them to attain capital from different credit lines. In addition to this, Haghighat (2013) recognizes that the contribution of crowdfunding platform in the growth of SMEs in MENA region is small as compared to the huge potential of equity crowdfunding in development of startups and small enterprises projects or new ventures.

2.5 Effective ways for the development of Equity-based crowd-funding for SMEs growth

There has been debate regarding the use of crowdfunding mechanism for promoting alternative financing options for new ventures, minor and small business owners and for entrepreneurial finances. Despite this, several studies have suggested the use of crowdfunding platforms to foster the finance in SMEs development (Holmey, 2017) and MSME (Khamis, 2016) and also for the development of business in MENA countries (Habib, 2012).  In the views of Chu (2017), the equity-based crowd-funding for the growth of enterprises seems to be promising in terms of risk sharing, exchange of information and gain access to new sources of financing.

Habib (2012) suggests the development of public support schemes to facilitate the crowdfunding platform that can provide incentives for professional investors. The author also states that development of community networks that includes different stakeholders can improve cooperation among the society to assist the equity crowd for SMEs development. Similarly, Ryan et al. (2014) point to the private guarantee through integral funding scheme in collaboration with financial institutions to encourage crowdfunding to be put into practice for commercial investors. In addition to this, Valanciene and Jegeleviciute (2013) recognize that the role of equity-based crowdfunding in financing the SMEs growth. The author states that reducing infrastructural barriers and regulatory burden can be an effective way for the development and implementation of equity-based crowdfunding for the growth of these enterprises. In support of this, Agrawal et al. (2014) state that providing a supportive regulatory framework that allows some flexibility for equity investments to the commercial investors can be useful for the growth of equity-based crowdfunding for SMEs expansion. Holmey (2017) viewed that introduction of incentives can also encourage crowd for investments in new initiatives of SMEs which are unable to obtain funding and intangible returns (social esteem) through traditional financing. Moreover, Ng et al. (2015) underline providing support to equity-based crowdfunding to encourage investments which are socially responsible for Islamic finance. The author recognizes the need to increase the transparency in financial market through legal principles to protect the investors and consumers and proper mechanism frauds and malpractices reporting to encourage crowdfunding. Accordingly, it indicates that incorporation of adequate social standard, reporting of issue and accountability for the business operation and activities of crowdfunding stimulate the social entrepreneurs to fulfill needs to raise capital for scalable projects. Hence, as per authors view, the development of a clear and transparent regulatory framework would encourage the innovation and market development in developing countries to boost the crowdfunding platform ecosystem. Khamis (2016) states that use of technology can support the crowdfunding platform through increasing access to the internet and strengthening social networking for market penetration. Apart from this, Ng et al. (2015) also state that providing education and increasing market awareness by crowdfunding association and/or professionals can stimulate coordination in promoting activities of equity-based crowdfunding. In support of this, Vien (2015) viewed that networking with industry, universities, and investors interested in small enterprises improves coordination and support the startup business plan or new ventures to become commercially feasible. Thus, the increase in awareness about crowdfunding through education is also an effective way to receive cooperation in equity investments. It can be added that educating the social entrepreneurs and non-traditional investors about technical literacy and a financial market can contribute to the potential of equity-based crowdfunding in tapping the SMEs financial requirements of developing countries.

2.6 Conclusion

The concept of crowdfunding is viewed as an alternative mode of financing for new ventures, nascent entrepreneurial projects, and small business owners and for the growth of SME growth. The different authors referred to crowdfunding platforms to raise capital for development of product/services and the new venture, start-up business funding without the involvement of banks or financial and choice of the crowd (a large number of individuals) as funders preferred through online web-based platform over commercial investors, venture capitalists or IPO. The different platforms of crowdfunding such as donation-based, debt- based, reward- based and equity-based has narrowed the funding gap for entrepreneurs, small business owners and for SMEs for the new business plan, venture or project. The literature points the significance of equity crowdfunding during the financial crisis and liquidity shortage which led to changes in the US legislation through Title III of JOBS Act that emphasize the access to capital funds/ equity capital and regulations for issuing shares in equity crowdfunding. Several authors have underlined the several significance of perspective of equity-based crowdfunding. These are to fulfill the initial capital needs by increasing credit lines, narrow the capital amounts gap that SME desired and acquired capital, provide additional way to increase equity, match the investors with choice of industry venture, provide social cooperation business operations for new venture and projects and contribute in development and growth of SMEs as a low cost alternative to raise capital over traditional financing methods and less dependence on venture capitalists, professional investors and business angels. The literature also identified the challenges faced by the SMEs in Middle East countries are majorly related to funding problems. The studies highlighted problems related to looking for initial capital, insufficient real assets, lack of down payment for bidding the government contracts and insufficient financial support for implementation of government contracts, lack of sufficient credit lines, inadequate bank products and poor lending capacity of professional investors and banks for SME, insensitive bankruptcy law and limited arrangement of Islamic finance products for the small and medium enterprises. This indicates the need for a crowdfunding platform to assist the financially constrained SMEs in the Middle East countries. The literature has highlighted the several ways to promote the Equity-based crowdfunding for the growth and development of SMEs by different authors and theorists. Some ways are to develop a supportive regulatory framework, increase market transparency towards frauds and malpractices reporting, introduce incentives, networking, reducing infrastructural barriers and regulatory burden, use of technology, increase market awareness and technical literacy for equity-based crowdfunding and creation of community networks to stimulate SMEs development through enhanced coordination in equity crowd-funding.

Chapter: 3 Research Methodology

3.1 Introduction

The aim of this research study is to to analyze the impact of equity-based crowd funding on the growth of SMEs in the Middle East. In addition to this, the study found the effect of crowd funding strategy on the SMEs. Similarly, the significances of crowd-funding over the SMEs will be identified. Moreover, the research methodology proves to be useful for the company in regards to determine best suited outcome for research problem. This become possible only undertaking different methods such as research philosophies, approach, strategy, data collection and many different aspects etc. these aspects contributes towards the collection of relevant data based  on research topic so that right and appropriate research result could be obtained.

3.2 Research Philosophy

Research philosophy is used to determine the nature of knowledge on the bass of the fundamental assumptions and beliefs. Research philosophy is categorized into ontology and epistemology that are useful in the determination of the nature of social phenomenon to develop knowledge of the research area. The ontological views consider objectivism and subjectivism views. Objectivism views show the objective nature of social phenomenon while subjectivism views focuses on the impact of social actors regarding social phenomenon (Roberts, 2013). The research title is to determine the effect of crowd funding on the success of the SMEs in Middle East as this is objective in nature. It is because although the use of these funding sources is similar for all SMEs in Middle East, but the impact of these sources on the success of these firms may be different. Therefore, subjectivism cannot be chosen as this view is highly dependent on the opinions of people in concern of any situation, but topic is not concerned to the opinion of any individual. Apart from this, there was no interest of researcher in conducting situation analysis for this study (Green et al., 2012).

The epistemological views consider the philosophy in three views namely positivism, realism and interpretivism. Similarly, realism philosophy is that concept in which data is collected based on reading and understanding individual perception. This gives more realistic facts which have major influences on the research outcome. On the other side, positivism research philosophy uses natural phenomena for gathering data and information related to research problem (Snyder, 2012). At the end, interpretivism philosophy allows the researcher to collect different types of information and then interpret the facts by concluding the research facts. This approach follows broad way to achieve the relevant data solving research issue or problem.

In order to conduct this study, researcher chose positivism philosophy due to objective nature of research topic and need to develop hypothesis to prove relationship between the crowd funding and success of the SMEs. This study is also based on some theories related to financing that justifies the selection of positivism philosophy for the undertaken study. The use of theories and concepts and collection of quantitative data helped the researcher to conduct this study effectively (Williams, 2011). Other philosophies were not considered by the researcher due to their irrelevancy in terms of subjective aspects of the research issue.

3.3 Research Approach

The selection of particular research approach is based on the nature of knowledge. Research approach involves two approaches such as inductive or deductive. In case of deductive approach, researcher used the existing theories which are already developed by any individual. On that basis, researcher creates the hypothesis towards study. While, inductive approach focuses more on the developing own new theorises as per the study. This approach gives high chances to bring something unique in the research result.

Researcher selected the objective ontological views and positivism philosophy so deductive research approach is considered. It is because this approach is helpful to assess the current theories on topic and integrate them to evaluate the social phenomenon for the accomplishment of the study (Smith, 2015). Theories related to SMEs and financing are preferred in this study to develop understanding of the SMEs owners regarding crowd funding and its impact on their success. This approach is significant to increase reliability and validity of the research outcomes by analyzing quantitative data. This approach allows the researcher to generalize the findings by evaluating the current theories. However, researcher did not focus on the inductive research approach as this research approach is useful in the development of new theory and generalizing the findings that is not suitable for this study.

3.4 Research strategy

In context to this study, researcher primarily focuses on survey method. It is used by the researcher with the aim to get the authentic result of the research problem. This method is implemented through collected the data from the selected sample size. Similarly, researcher in this case gathered data from the 50 SMEs proprietors and owners (Panneerselvam, 2014). This is done through survey method in which researcher conduct the survey by using questionnaire. In this, they asked questions to the SMEs proprietor, owners regarding whether crowd-funding urges them to go out on a growth path or then again, pull back the trade they held out the bank. It means that, researcher wants to find out how much SMEs get the benefit with the crowd-funding process. At the same time, this method is less time consuming and cost effective as it contributes towards the accomplishment of suitable research end result.

3.5  Research choice

Research choice is significant aspect of research design that allows the researchers to determine the data collection methods and data analysis approach. This can be categorized into qualitative, quantitative and mixed nature. Qualitative research choice is related to the textual data or non-numeric data that is used to develop theoretical understanding of the research topic. Contrary to this, quantitative research choice is related to the quantitative data or numeric data to present the findings in measurable form (Neuman and Robson, 2014). At the same time, mixed research choice is the mix of all these research choices.

For the undertaken research, researcher used quantitative research choice to determine the link between the financing and business growth of the SMEs in the Middle East.  This design is selected because the research objectives of this research demand for the facts and figures to measure the growth of the SMEs in the Middle East. In order to conduct this study, the financial data of different SMEs during last five years is considered to determine the effect of crowd-funding on their success. Apart from this, the views and opinions of different SMEs owners have been also considered to decide the effectiveness of the crowd-funding on their business activities.

3.6 Time horizon

Time horizon explains the research duration at single point of time and different points of time. Cross-sectional study focuses on the single point of time while longitudinal study emphasizes the study at different time intervals. The undertaken study was a cross-sectional study as all the data was collected during a particular time period due to time constraints. On the other hand, researcher feels easy to conduct the survey one time (Flick, 2015). The researcher did not consider the longitudinal study because of its inappropriateness regarding problem analysis at different time intervals.

3.6 Data collection method

There are two methods through which researcher extract the data. The main sources could be the primary and secondary source. In addition to this, researcher mainly uses these methods. Likewise, primary method includes surveys, observation while secondary method provides data which is already developed by some author or researcher. Similarly, secondary data is considered to be cost effective and less time consuming (Khan, 2011).

But in case to this, researcher focused on primary method to gather the data. This method is well suited to research topic. However, research aim is to analyze the impact of equity-based crowd funding on the growth of SMEs in the Middle East. In regards to this, researcher conducted survey among the SMEs proprietor, owners so that effectiveness of crowd funding could be identify. Based on that, researcher arrives at the relevant research result. Questionnaire survey is considered by the researcher to determine the opinions of the SMEs’ owners regarding any relationship between their financing strategy related to crowd funding and success patterns.

In order to collect primary data, researcher sent questionnaire to the respondents by using email to enhance their handiness to answer and easily analyze the self-administered data. In this survey, structured questions are prepared with the inclusion of dependent and independent variables of the study to determine their relationship. All the questions were based on the Likert scale for deciding the degree to which funding source like equity-based crowd-funding contributes to the growth of the SMEs in Middle East. This type of questionnaire helped the participants to answer questions because of the closed options (Taylor et al., 2015). This questionnaire was categorized to three parts namely demographical information, challenges in growth of the SMEs and assessment of significance of equity-based crowd-funding in the development of the SMEs in the Middle East and ways to develop this funding in the growth of the SMEs. These sections of the questionnaire helped the researcher to access the needed data and information to explore the research problem and achieve the research objectives.

3.7 Sampling method

The sampling method plays a significant role in achieving the right sample size. Sampling method is classified into two many parts. It consists of probability or non-probability. In regards to probability sampling, every individual gets an equal chance to become a part of research study. While, non-probability sampling does not give equal chance for getting select as the selection is done as per the judgements instead of random basis (Silverman, 2016).

In context to this study, it is identified that researcher uses the random sampling method with the purpose to give equal chance to all the SMEs proprietor and owners so that they become a part of the study. At the same time, SMEs owners described the significance that they get from the crowd funding method. However, researcher through this study collects the data related to growth of small firms with the made investment of crowd funding over the equity shares of small firm. The cause of select the random sampling is to eliminate high chances of biasness in the study (Mackey and Gass, 2015). It is quite important that research study should be biased free as it directly impacts the research result. That is why researcher adopted the probability sampling method instead of non-random sampling method.

The population of the research was the SMEs’ owners who are doing business in and outside of the Middle East. However, it was not easy for the researcher to incorporate all the SMEs’ owners in the Middle East, so a representative sample size of 42 SMEs’ owners was selected to conduct the survey in the study. Total 60 owners were approached but some of them denied for participating due to time issues and some were not considered due to incomplete responses. These owners were from different industries and having different experience of years to access the diversified opinions on the research issue. By using email, researcher could be able to access the large number of participants to get their views and opinions on the research issue.

3.8 Data Analysis

For the undertaken research, quantitative data is used by the researcher to develop the link between dependent and independent variables. In order to analyse the data, the statistical analysis method is used by the researcher to determine the impact of equity based crowd funding on the success of the SMEs. The use of statistical analysis method was suitable because all the data was collected in numeric codes such as 1,2,3,4 and 5 that helped to reframe this data through SPSS tool. The use of this tool enabled the researcher to present descriptive statistics including mean, variation, correlation, regression and cross tabulation (Liamputtong, 2013). It is also beneficial to discuss the findings with the support of findings obtained from literature review. Apart from this, it also helped the researcher to present the findings in tables and graphs to understand the findings in more effective way.

3.9 Ethical considerations

Researchers need to consider ethical aspects of the research to conduct the study in fair and transparent way. This research is based on human participants as it was important for the researcher to focus on ethical considerations in the research. For avoiding ethical issues in the study, the prior consent was taken by the researcher from the survey respondents to participate in the study. In survey, there was voluntary participation for the research participants to leave the survey any time without providing any cause (Miller et al., 2012). All the information related to purpose and objectives were communicated to the participants to get their consent. Apart from this, researcher also ensured the confidentiality and privacy of personal information of the research participants. Additionally, some ethical issues regarding copyright and plagiarism were also avoided by rewriting all information without making changes in the meaning of the data and providing the credit to all authors for their contribution through citation.

3.10 Summary

On the basis of the above discussion, it can be concluded that the use of appropriate methodology helped the researcher to get proper direction for conducting the research effectively. The collection of quantitative data through primary and secondary data collection methods enabled to collect the required data and evaluate the impact of crowd funding on the business growth of the SMEs of the Middle East.

Chapter 4: Data Analysis

4.1 Introduction

This chapter of dissertation focuses on the analysis of the collected data from the primary research and discusses the findings with the support of the literature review. In this chapter, all the data is presented by using tables and graphs through SPSS tool to understand the findings in effective way. This chapter is useful to develop understanding of impact of equity-based crowd funding on the growth of the SMEs in the Middle East countries. For this purpose, a survey through questionnaire (See: Appendix 1) has been performed to determine the perceptions of the SME owners in the Middle East region for finding the gap in literature regarding the research topic.

4.2 Primary Findings

This study was focused on primary research and provided primary findings through questionnaire. In this study, 60 SME owners were targeted through questionnaire survey by considering time, cost and access constraints. But, only 42 owners were agreed to participate in the study as the response rate was 70% for study participation. Remaining owners did not take part in this survey due to busy schedule and lack of interest. The findings obtained from these 42 participants are presented and analysed by using statistical method.

The following sub-sections incorporate the presentation of outcomes received from the statistical analysis:

4.2.1 Reliability test

Firstly, it is necessary to determine the reliability of the responses obtained from the participants to ensure the validity of the research outcomes. For this, reliability test namely Cronbach’s Alpha is conducted to evaluate the level of consistency in the responses of the respondents. The value of Cronbach’s Alpha > 0.6 ensures the consistency and reliability in the responses to provide valid research outcomes. The questionnaire was divided in three segments (See: Appendix 1) and for each segment; reliability test was conducted as below (See: Table 1):

Table 1: Reliability statistics

Section and Variables Alpha (reliability) Value
Demographics and general information: (3 variables)

·         Source of financing

·         Duration of operations

·         Number of employees

0.680
Barrier in growth and success: (6 variables)

·         Insufficient real assets

·         Large sum as down payment forbidding

·         Lack of sufficient credit lines

·         Inadequate financial structure lending capacity and regulation

·         Poorly equipped banks and financial institutions

·         Shortage of skilled workforce

0.939
Impact of Crowd Funding: (6 Variables)

·         Effective  source  to  finance 

·         Parameter  of  business  growth

·         Resolving  social  and  economic  challenges 

·         Control  the  business  operations 

·         keep  the  financing  costs  low 

·         to  arrange  finance  from  different  credit  lines

0.852
Ways to develop Crowd funding: (3 Variables)

·         develop  public  support  schemes 

·         educating  about  technical  literacy    financial  market

·         Transparent    supportive  regulatory  framework 

0.642

(Source: prepared by researcher)

On the basis of the above table, it can be determined that there was high consistency and reliability in the responses obtained from the survey participants. All the segments provide reliability value > 0.6 indicating the sufficient consistency and reliability in responses. It means these responses can be used further for data analysis to present the valid research findings.

 

 

4.2.2 Demographics and general information:

In this section, general information regarding participants including the source of financing and duration of operations and number of employees is asked from the research participants. It helped the researcher to determine the sufficient scope to determine linkage the findings with the success of the business of SME. In relation to this, the below tables show the general and demographic information about the research participants:

Table 2: Source of financing

Source of financing
Frequency Percent Valid Percent Cumulative Percent
Valid Equity-based Crowd funding 42 100.0 100.0 100.0

The above table depicts that all the SME owners which were selected in this study, use equity-base crowd funding. It is because this study was based on the impact of this source of financing on the growth of SMEs in Middle East.

Table 3: Duration of operations

Duration of operations
Frequency Percent Valid Percent Cumulative Percent
Valid Less than 3 years 9 21.4 21.4 21.4
3-5 15 35.7 35.7 57.1
5-8 9 21.4 21.4 78.6
Above 8 9 21.4 21.4 100.0
Total 42 100.0 100.0

From the above table, it can be stated that there is a mix of respondents, who vary in duration of operations. Most of the respondents (35.7%) have been operating their business for 3 to 5 years. Remaining SME owners have business with different duration of operations including less than 3 years, 5-8 years and above 8. It helped the researcher to determine the views from different perspectives to increase the generalization of the research outcomes.

Table 4: Number of employees

Number of employees
Frequency Percent Valid Percent Cumulative Percent
Valid Below 10 6 14.3 14.3 14.3
11-20 16 38.1 38.1 52.4
21-30 10 23.8 23.8 76.2
Over 30 10 23.8 23.8 100.0
Total 42 100.0 100.0

The above table depicts that there is a good mix of SME owners who have different number of employees (range of below 10 to over 30) that is important to get the reliable and generalized findings.

4.2.3 Barrier in growth and success:

In this section, major challenges and barriers, which are faced by SME owners, are recognized. Regarding this, the below descriptive table present the responses of the participants (See: Table 5):

Table 5: Descriptive Statistics

Descriptive Statistics
N Mean Std. Deviation
Insufficient real assets 42 2.6905 1.13671
Large sum as down payment for bidding 42 2.6905 1.13671
Lack of sufficient credit lines 42 2.6667 1.02806
Inadequate financial structure lending capacity and regulation 42 2.7381 .96423
Poorly equipped banks and financial institutions 42 2.5476 1.01699
Shortage of skilled workforce 42 2.6667 1.07446
Valid N (listwise) 42

From the above descriptive statistics, it can be stated that moderate number of the respondents termed the given variables as the key barriers in running their business. The mean value indicates the most of the respondents do not consider these barriers as key challenges. But at the same time, moderate number of the participants considers that they have faced these issues while running their business. Insufficient real assets, poorly equipped banks and financial institutions and inadequate financial structure lending capacity and regulation and shortage of skilled workforce are the major issues for the SMEs owners. At the same time, insufficient real assets, large sum as down payment for bidding and lack of sufficient credit lines are also considered as an issue that impact the effectiveness of SME owners to achieve the success and growth.

In relation to this, for each barrier, the responses are obtained that are presented in the below tables:

Table 6: Insufficient real assets

Insufficient real assets
Frequency Percent Valid Percent Cumulative Percent
Valid Insignificant problem 9 21.4 21.4 21.4
Minor problem 8 19.0 19.0 40.5
Moderate problem 12 28.6 28.6 69.0
Serious problem 13 31.0 31.0 100.0
Total 42 100.0 100.0

The above tables depicts that 25 participants out of 42 (59.6%) consider the insufficient real assets as a major issue.

Table 7: Large sum as down payment for bidding

Large sum as down payment for bidding
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 9 21.4 21.4 21.4
Agree 8 19.0 19.0 40.5
Disagree 12 28.6 28.6 69.0
Strongly Disagree 13 31.0 31.0 100.0
Total 42 100.0 100.0

From the above table, it can be depicted that the participants (17 or 40.5%) consider large sum as down payment for bidding as a major issue in running business. It indicates that the SME owners face problem related to lacking fund that causes obstacles in their business growth.

Table 8: Lack of sufficient credit lines

Lack of sufficient credit lines
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 7 16.7 16.7 16.7
Agree 10 23.8 23.8 40.5
Disagree 15 35.7 35.7 76.2
Strongly Disagree 10 23.8 23.8 100.0
Total 42 100.0 100.0

The above table shows that a considerable number of research participants (17 or 40.5%) agreed on the lack of sufficient credit lines for achieving the business growth.

Table 9: Inadequate financial structure, lending capacity and regulation

Inadequate financial structure lending capacity and regulation
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 5 11.9 11.9 11.9
Agree 11 26.2 26.2 38.1
Disagree 16 38.1 38.1 76.2
Strongly Disagree 10 23.8 23.8 100.0
Total 42 100.0 100.0

From the above table, it is evident that large number of survey participants (16 out of 42) considers that there is inadequate financial structure, lending capacity and regulations in the Middle East. Such inefficiency in financial market causes obstacles for the SMEs to achieve high growth.

In relation to this issue, the below table presents cross-tabulation between duration of operations and inadequate financial structure, lending capacity and regulation:

Table 10: Cross-Tabulation

Duration of operations * Inadequate financial structure lending capacity and regulation Crosstabulation
Count
Inadequate financial structure lending capacity and regulation Total
Strongly Agree Agree Disagree Strongly Disagree
Duration of operations Less than 3 years 0 3 3 3 9
3-5 2 5 4 4 15
5-8 1 1 4 3 9
Above 8 2 2 5 0 9
Total 5 11 16 10 42

The above table presents that the responses of SME owners having 3-5 years of operations are more consistent with the findings in relation to this key issue.

Table 11: Poorly equipped banks and financial institutions

Poorly equipped banks and financial institutions
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 6 14.3 14.3 14.3
Agree 17 40.5 40.5 54.8
Disagree 9 21.4 21.4 76.2
Strongly Disagree 10 23.8 23.8 100.0
Total 42 100.0 100.0

Based on the above table, it can be determined that 23 out of 42 participants are agreed that they face issue related to poorly equipped banks and financial institutions. This issue caused problems for them to acquire the required finance and operate the business smoothly to achieve high success and growth.

Table 12: Shortage of skilled workforce

Shortage of skilled workforce
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 8 19.0 19.0 19.0
Agree 9 21.4 21.4 40.5
Disagree 14 33.3 33.3 73.8
Strongly Disagree 11 26.2 26.2 100.0
Total 42 100.0 100.0

It is clear from the above table that 17 out of 42 (40.5%) provide their consent on the issue related to shortage of skilled workforce because that are not able to provide higher salaries and compensation to the skilled and proficient workers.

4.2.3 Impact of Crowd Funding:

This section highlights the responses of the participants in relation to the impact of the crowd funding on the business of the SMEs in Middle East region. In relation to this, the below descriptive statistics show whether the participants agreed or disagreed regarding different variables measuring the impact of crowd funding:

Table 13: Descriptive Statistics

Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
Effective source to finance 42 1.00 4.00 2.1667 1.18767
Parameter of business growth 42 1.00 4.00 2.4762 .96873
Resolving social and economic challenges 42 1.00 4.00 2.0476 1.05812
Control the business operations 42 1.00 4.00 2.2143 1.17982
keep the financing costs low 42 1.00 4.00 2.0952 1.22593
to arrange finance from different credit lines 42 1.00 4.00 2.2143 1.25980
Valid N (listwise) 42

From the above statistics, it can be stated that the most of the participants are agreed (mean value near 2 and standard deviation approx 1) that the use of crowd funding is beneficial for the SMEs to acquire huge amount of capital easily to run the business smoothly. The use of equity-based crowd funding is significant to resolve social and economic challenges and control the business operations. At the same time, it is also crucial to keep the financial costs low and enables to arrange the fund from different credit lines contributing in their business growth.

In relation to this variable, the following tables present the impact of equity based crowd funding in different perspectives:

Table 14: Effective source to finance

Effective source to finance
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 17 40.5 40.5 40.5
Agree 10 23.8 23.8 64.3
Disagree 6 14.3 14.3 78.6
Strongly Disagree 9 21.4 21.4 100.0
Total 42 100.0 100.0

The above table depicts that the most of the participants (27 or 64.3%) agreed that the equity-based crowd funding is the effective source of finance that helps them to operate their business successfully and expand it to achieve high growth in the market.

Table 15: Parameter of business growth

Parameter of business growth
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 7 16.7 16.7 16.7
Agree 15 35.7 35.7 52.4
Disagree 13 31.0 31.0 83.3
Strongly Disagree 7 16.7 16.7 100.0
Total 42 100.0 100.0

At the same time, the above table shows that majority of the participants (22 or 52.4%) consider that equity-based crowd funding is a significant parameter of business growth. It is because this enables the SMEs to acquire the required fund and invest in different business projects to generate high revenues and profits. In relation to this variable, a cross-tabulation between duration of operations and parameter of business growth is provided as below:

Table 16: Cross-Tabulation

Duration of operations * Parameter of business growth Crosstabulation
Count
Parameter of business growth Total
Strongly Agree Agree Disagree Strongly Disagree
Duration of operations Less than 3 years 1 2 3 3 9
3-5 3 6 4 2 15
5-8 1 4 4 0 9
Above 8 2 3 2 2 9
Total 7 15 13 7 42

The above cross table shows that the SMEs having 3-5 years of operations are more consistent with the findings as they consider more that the use of equity-based crowd funding is the parameter of the business growth.

Table 17: Resolving social and economic challenges

Resolving social and economic challenges
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 17 40.5 40.5 40.5
Agree 11 26.2 26.2 66.7
Disagree 9 21.4 21.4 88.1
Strongly Disagree 5 11.9 11.9 100.0
Total 42 100.0 100.0

Based on the above table, it can be depicted that approx 67% of total respondents of survey consider that the use of equity-based crowd funding is significant for them to resolve social and economic challenges. It is because fund availability through this financing source enables them to take better measures to handle such challenges effectively and get success in the market.

Table 18: Control the business operations

Control the business operations
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 15 35.7 35.7 35.7
Agree 13 31.0 31.0 66.7
Disagree 4 9.5 9.5 76.2
Strongly Disagree 10 23.8 23.8 100.0
Total 42 100.0 100.0

Respective to the next question related to impact of equity based crowd funding to control business operations, the majority of the participants (approx 67%) agreed that they use equity-based crowd funding in controlling their business operations effectively. It is because the use of this financing source is effective to run the routine operations effectively and make sufficient investment to improve the current operational efficiency. The accessibility of fund through equity based crowd funding enables the SME owners to have full control on the business decisions and allows them to adopt creativity and innovation leading to success of the business.

Table 19: Keep the financing costs low

Keep the financing costs low
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 19 45.2 45.2 45.2
Agree 10 23.8 23.8 69.0
Disagree 3 7.1 7.1 76.2
Strongly Disagree 10 23.8 23.8 100.0
Total 42 100.0 100.0

Further, the respondents (29 or 69%) majorly provided their consent that the use of equity-based crowd funding enables to keep the financial cost low. It is the cost effective way for arranging the fund for operating the business rather than loans and equity financing.

Table 20: To arrange finance from different credit lines

To arrange finance from different credit lines
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 18 42.9 42.9 42.9
Agree 8 19.0 19.0 61.9
Disagree 5 11.9 11.9 73.8
Strongly Disagree 11 26.2 26.2 100.0
Total 42 100.0 100.0

The above table depicts that approx 62% participants consider that equity-based crowd funding is an important source of financing for them as it is effective to arrange finance from different credit lines. It means it becomes easy for the SME owners to get the required finance, if they choose equity-based crowd funding. These participants agreed and strongly agreed that this financing source is an easy way of obtaining finance and solving the financial barriers.

Besides above results, a correlation analysis is also conducted to determine the relationship or link between equity-based crowd funding and success of the SMEs as below:

Table 21: Correlation Analysis

Correlations
Effective source to finance Parameter of business growth
Effective source to finance Pearson Correlation 1 .714**
Sig. (2-tailed) .000
N 42 42
Parameter of business growth Pearson Correlation .714** 1
Sig. (2-tailed) .000
N 42 42
**. Correlation is significant at the 0.01 level (2-tailed).

From the above correlation table, it can be stated that easiness to arrange finance at low cost through equity-based crowd funding to handle operations is the key aspect that develop positive perception among the SMEs owners towards the use of this financing source. Because of this, they agreed that it is a key parameter of business growth. The value of correlation is 0.714 between equity-based crowd funding as effective source of finance and parameter of business growth indicating a strong relationship between both variables. At the same time, p-value is 0 that is less than 0.05 significance value showing null hypothesis can be rejected. It means there is a significant relationship between both variables. The use of finance in different operational activities allows the SMEs owners to take risks and expand their business that leads to business growth. There are barriers in accessing the finance and other resources for the SMEs as the use of equity-based crowd funding helps them to access the required finance and other resources easily and achieve high success. From this, it can be determined that equity-based crowd funding is possible to obtain from different credit lines or people as it enables to develop large customer base; so investors already get attracted from the products and services offered by the SMEs  that results in business growth.

4.2.4 Ways to develop Crowd funding:

This section provides analysis on the ways to develop equity-based crowd funding for the users. In this section, questions related to ways for improving the use of this financing source were asked to the research participants and below responses are obtained:

Table 22: Develop public support schemes

Develop public support schemes
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 9 21.4 21.4 21.4
Agree 18 42.9 42.9 64.3
Disagree 8 19.0 19.0 83.3
Strongly Disagree 7 16.7 16.7 100.0
Total 42 100.0 100.0

From the above table, it can be stated that most of the research participants (27 out of 42 or 64.3%) agreed and strongly agreed that it can be beneficial to develop public support schemes to improve the use of equity-based crowd funding. It can be helpful for the SME owners to use equity-based crowd funding effectively and access the finance more easily.

Table 23: Educating about technical literacy of financial market

Educating about technical literacy  financial market
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 5 11.9 11.9 11.9
Agree 24 57.1 57.1 69.0
Disagree 6 14.3 14.3 83.3
Strongly Disagree 7 16.7 16.7 100.0
Total 42 100.0 100.0

The above table shows that the majority of participants (69%) agreed and strongly agreed that the responsible authorities and government should educate technical literacy of financial market to the SME owners to better use of equity based crowd funding. It is because some of SME owners do not have sufficient understanding of how to use this financing source effectively.

Table 24: Transparent supportive regulatory framework

Transparent  supportive regulatory framework
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly Agree 5 11.9 11.9 11.9
Agree 22 52.4 52.4 64.3
Disagree 5 11.9 11.9 76.2
Strongly Disagree 10 23.8 23.8 100.0
Total 42 100.0 100.0

It is evident from the above table that the majority of respondents consider that it is important to develop transparent and supportive regulatory framework for the development of equity based crowd funding. This framework can be effective for getting chances for the SME owners to access this finance easily in Middle East region and achieve high growth and contribute in the national economy.

4.3 Discussion

This section provides discussion on the findings obtained in previous section of this chapter to determine the extent to which the research objectives are obtained. In this section, the findings are discussed and interpreted with the perspective of research objectives and consideration of the theories and concepts developed in literature review. The key assumptions which were made in starting of the research are that equity-based crowd funding is significant to enhance the market access and bring innovation for SME owners. These aspects are important for the SMEs to achieve growth in the industry. The key findings obtained from primary research are quite similar with the key assumptions, which are supported by literature review.

4.3.1 Barriers for growth and success of SMEs

From the primary findings, it can be revealed that the SME owners have to face barriers related to shortage of skilled workforce. From this, it can be discussed that in this competitive business environment, it is mandatory for the SMEs to manage resources effectively to handle the increasing competition adequately in the industry. The shortage of skilled workforce causes problems for the SMEs to execute the new and innovative ideas that lead to decline in growth and success in the market. At the same time, the incompetency of the SMEs to acquire sufficient real assets to run the business efficiently is also a major barrier for their growth in the Middle East region identified from the primary research. These interpretations are consistent with the findings of Alemany et al. (2010) and Haghighat (2013) and Nassr and Wehinger (2016) as it is mentioned in these studies that insufficient real assets and shortage of domestic workers and the high cost of expatriates’ workers due to lack of required fund are major issues for the SMEs in Middle East countries that cause obstacles in their growth and success in the market. It is because these aspects are important for the firms to develop capabilities and achieve the desired level of success. Lack of insufficient real assets causes issues for the SMEs to incorporate banks, investors/creditors or family members that results in lack of business growth.

From the primary findings, it can also be interpreted that lack of sufficient credit lines for the SMEs to access the needed fund is also a key issue that affects their ability to achieve high success in the market. It is because the SME owners try to focus on new ideas and have less ability to access markets than the large firms. It causes hurdles for them to execute their plans appropriately. In addition it can also be interpreted that lack of credit lines causing shortage of required fund affects the ability of the SMEs to arrange the resources including technological capabilities, human and physical resources that negatively influence their growth and success in the market.

The research of Hassan et al. (2009) and Issuu (2016) provided the similar findings as it is discussed that there is lack of sufficient credit lines and options for sourcing finances that limits the ability of the SMEs to expand their business and achieve high growth. There are limited finance options for the businesses like family members, relatives and friends and personal savings in the Middle East region to support the business operations of the SMEs to take advantage of public market.

At the same time, it can discussed from the survey findings that there are other challenges for the SMEs like requirement of large sum as down payment for bidding, inadequate financial structure, lending capacity and regulations in the Middle East region. Apart from this, it can also be interpreted from the primary research that there are poorly equipped banks and financial institutions in the Middle East region that cause difficulties for the SMEs to arrange the needed fund to operate their business adequately. Along with this, the research of The World Bank, (2015) can also be used to support the above interpretations as it is found in this research study that SMEs need large sum as down payment to win the government public contracts that discourages them to participate and win contracts leading to reduction in chances to grow rapidly. Apart from this, studies conducted by Nadal (2013) and Farazi et al. (2011) also support these interpretations by concluding that there are inconsiderate bankruptcy law and inadequate financial structure, lending capacity, and regulations and poorly equipped banks and financial institutions in MENA region that impedes SMEs environment for a proper SME finance and achieve high growth.

4.3.2 Impact of equity-based crowd funding for SMEs in the Middle East

The primary findings reveal that equity-based crowd funding is an important source of finance for the SMEs as it is easily accessible and resolve the financial barriers that are faced by the SMEs while conducting the business. According to survey findings, it is interpreted that this financing source is an effective source of finance the business operations and overcome financial challenges for the SMEs in current time. These findings are consistent with the literature review as Cholakova and Clarysse, (2015) stated that equity crowd finding is an alternative form of financing that helps to fulfil the initial capital needs and assist in new venture and projects by having a regulated exchange through the online social platform where money is exchanged with some equity.

At the same time, primary research through correlation analysis also reveals that there is a positive relationship between equity-based crowd-funding and success of the SME’s business. Hence, alternative hypothesis is proved showing a significant relationship between equity-based crowd-funding and growth of the SMEs. In relation to this, studies conducted by Turan (2015) and Chu (2017) reflected that equity based crowd funding is important to support the development of SMEs as it enables them to acquire the required fund easily and invest in new ideas and ventures to make more revenues and profits. Therefore, it can be stated that there is a significant relationship between equity based crowd funding and business growth of the SMEs in the Middle East region.

From the primary research, it is also identified that equity-based crowd-funding plays an important role in resolving social and economic challenges that are faced by these firms due to lack of required financing sources. The use of equity-based crowd-funding enables them to solve related issues due to access to finance easily. Similarly, Valanciene and Jegeleviciute (2013) & Vulkan et al. (2016) also pointed out that equity-based crowd funding is preferred over other financing sources as it provides additional course to increase equity with related risks and offers credit to small business owners to increase business growth and thus overall socio-economic growth and recovery of region through job creation and economic growth.

Further, from the primary findings, it can be interpreted that equity-based crowd-funding is important for the SMEs to control the business operations and achieve higher business growth. It is because due to fund accessibility, it is easy for the SME owners to implement the ideas freely having better control on the business operations that leads to business growth. Relating to this, the findings of literature review are also consistent with the interpretation of primary findings. Cholakova and Clarysse (2015) also highlighted in their study that equity-based crowd funding seeks to match the investors with the choice of sector or companies. It enables the business owners to have better control on operations as they are acquire required capital as venture capital, growth capital, and funds for new equipment or for planned hires and implement their ideas in reality to expand their business and achieve higher growth.

The findings also reveal that SMEs are able to reduce the financing cost by using equity based crowd funding. It is because there is no need to pay dividends and interest on the large amount of fund. This interpretation can be supported by the findings of Belleflamme et al. (2014) &Vulkan et al. (2016) that equity based crowd funding is a cost effective financing source than traditional financing methods for raising capital because it is evolved as an alternative to IPO and avoid high costs of IPOs for the SMEs.

Further, primary findings reveal that equity-based crowd-funding is effective to arrange finance from different credit lines. It makes easy for the SMEs to easily access the needed fund to operate and achieve the success. In the MENA region, there is lack of financing sources and banking regulatory framework that reduces the credit lines for accessing fund but the use of equity-based crowd-funding is useful to arrange the finance from different lines. The findings of Haghighat (2013) & Jones (2014) also support these primary findings by stating that equity-based crowd funding is effective for the small and nascent entrepreneurial ventures to attain capital from different credit lines.

4.3.3 Ways to develop equity-based crowd funding in the growth and success of SMEs

In relation to this objective, it can be interpreted from primary research; the development of public support schemes can be helpful to support the equity-based crowd funding framework to enhance growth of the SMEs. It is because the focus on these schemes by the government and regulatory bodies can be effective to support the equity-based crowd funding organizations and finally contribute to the growth of the SMEs. Supporting to this interpretation, Habib (2012) stated that the development of public support schemes can be effective to facilitate the crowd funding platform to offer incentives for professional investors. In relation to this, Ryan et al. (2014) pointed out that private guarantee through integral funding scheme by collaborating financial institutions can be supportive for the growth of equity based crowd funding firms to support the SMEs at large scale in the Middle East region.

From primary research, it can be interpreted that facilitation of the education programs related to technical literacy and financial market can be significant to develop awareness among the SME owners regarding the use of the equity based crowd funding and use it properly. In support of this interpretation, Ng et al. (2015) & Vien (2015) also stated that to provide education and increase market awareness by crowdfunding association and/or professionals can promote the use of equity-based crowdfunding through proper networking with universities.

It can also be interpreted from survey that transparent & supportive regulatory framework is supportive for the development of equity-based crowd funding. In the same sense, Valanciene and Jegeleviciute (2013) & Agrawal et al. (2014) explained that it can be better to reduce infrastructural barriers and regulatory burden through a supportive regulatory framework to develop and implement equity-based crowdfunding for the growth of these enterprises.

4.4 Summary

From the above analysis and discussion of the findings, it can be summarized that insufficient real assets, large sum as down payment for bidding, lack of sufficient credit lines, inadequate financial structure, lending capacity, and regulations, poorly equipped banks and financial institutions and shortage of skilled workforce are key issues and barriers for the growth and success of the SMEs in the Middle East. At the same time, it can be concluded that equity-based crowd funding is an important source of finance for the SMEs as it provides huge capital without any hurdles and at low cost to enhance financial and market access with full control on business operations. The focus on public support schemes and transparency in regulatory framework and educational programs can be effective to support equity based crowd funding framework and increase the growth of the SMEs.

 Chapter 5: Conclusion & Recommendations

This chapter is related to key findings and recommendations that are provided for the betterment of the strategies taken by the involved businesses to gain more access to the finance and achieve the high growth in the market.

5.1 Conclusion

This section presents key findings which are obtained from the research. In relation to the first objective related to challenges in the growth of the SMEs in the Middle East countries, it can be summarized that several challenges are faced by the SMEs in the business environment of the Middle East region. The shortage of skilled workforce reduces the ability of the firm to manage the resources and make adequate decisions leading to reduction in growth opportunities. At the same time, finance related issues such as large sum required as down payment for bidding and lack of sufficient credit lines also cause problems for the SMEs to access the required capital to operate the business smoothly. In addition, it is also summarized from the research that insufficient real assets to grab opportunities due to lack of finance and inadequate financial structure, lending capacity, and regulations, poorly equipped banks and financial institutions also create difficulty for the SMEs to arrange the needed fund and expand their business to grow. It is because finance is required to acquire all other resources and in absence of finance, it is difficult for them to execute their plans and strategies that reduce the chances to grow and get success in the market.

In the context of second objective, it can be concluded that Equity-based crowd-funding is effective for the development of the SMEs in the Middle East countries. It helps the business owners to have control on their business operations due to easy access to finance that enables them to make investment decisions promptly and achieve the growth. At the same time, access to finance at ease through equity-based crowd funding is significant for the SMEs to grow due to arrange other resources and access the new market bases. From this, alternative hypothesis is proved that there is a relationship between equity-based crowd-funding and growth and success of the SME’s business. In addition, this financing source is also cost effective as it helps to keep the financing costs low for the SMEs and increase profitability.

Further, in relation to the third objective, it can be concluded that it is better for the government and regulatory bodies to focus on educational programs to educate the SME owners and related employees to use the equity-based crowd financing at large level. At the same time, it is also summarized that public support schemes can be supportive for the development of the crowd funding platform to offer incentives for professional investors. Additionally, there is need to develop a transparent & supportive regulatory framework to facilitate the development of equity-based crowd funding for the growth of SMEs.

5.2 Recommendations

On the basis of the above discussion, it can be recommended that in Middle East region, it can be effective for the government authorities to ensure the transparent and supportive regulatory framework for the growth of the equity based crowd funding use by the SMEs. For this, it is required to adopt flexibility and exemptions for the SMEs in using this financing source. Apart from this, educational activities can be supportive to educate the SME owners that they could use this financing source at wider level and easily access the required finance to achieve high growth and success. In addition, government can also focus on the public support schemes to facilitate the use of the equity based crowd funding and support the growth of the SMEs.

5.3 Research Limitation and Further Scope of the Study

It is identified from the study that there are some limitations regarding time and resource access. Another limitation of this research is the limited sample size as it focuses only 42 research participants to collect primary data through survey. It is because the researcher faced issue related to accessibility to the number of research participants that led to small sample size. The consideration of small sample size may affect the validity and reliability of the research outcomes due to ineffectiveness of the researcher to collect more generalized and diverse views on the research issue. In addition, the focus on only survey data collection method is also a limitation of this research.

For addressing these issues, the future researchers can focus on large sample size to get more diverse and generalized research outcomes. At the same time, other data collection methods like interview, focus group study, observation, etc. can be used in future researches to develop more diverse data to enhance the validity and reliability of the research outcomes. In addition, this study lacks of financial information in terms of business growth as the future researches can be conducted by considering the financial aspects of the SMEs to relate it with the use of equity-based crowd funding.

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Appendices

Appendix 1: Questionnaire

The major aim of the questionnaire survey is to determine the impact of equity-based crowd funding on the growth of the SMEs in the Middle East. This survey will help to determine how the crowd funding is used by your firm to get success in the market.

It is ensured you that confidentiality and privacy will be maintained while conducting this survey. This survey will be used for academic purpose only. Without your prior consent, no information will be disclosed to third party. This survey participation does not cause any harm to your personal and professional life.

If you are agree for participating in this study, please mark (√) for the following statement and go ahead for next questions:

[   ] I am acknowledged of all research perspectives and provide my consent for study participation.

Section 1: Demographic Information

  1. Source of financing used for starting your business?
  • Equity-based Crowd funding
  • Others

(Please leave the survey if you chose ‘others’ because this study is based only on the determination of impact of crowd funding on growth of SMEs)

  1. Duration of operations:
  • Less than 3 years
  • 3-5
  • 5-8
  • Above 8
  1. Number of employees:
  • Below 10 [  ]
  • 11-20 [  ]
  • 21-30 [  ]
  • Over 30          [  ]

Section 2: Challenges in growth of the SMEs:

  1. To what extent you think insufficient real asset is a problem for the SMEs?
  • Insignificant problem, 2- Minor problem, 3- Moderate problem, 4- Serious problem)

Provide rating for the below challenges as to what extent you think these challenges as major issue in growth of the SMEs in Middle East:

(1. Strongly Disagree, 2. Disagree, 3. Agree, 4. Strongly agree)

Q.N. Barriers (1) (2) (3) (4)
2 Large sum as down payment for bidding
3 Lack of sufficient credit lines
4 Inadequate financial structure, lending capacity, and regulations
5 Poorly equipped banks and financial institutions
6. Shortage of skilled workforce

Section 3:  Assessment of impact of Crowd-funding

  1. Do you think equity-based crowd-funding is effective source to finance the business operations and overcome financial challenges for the SMEs currently?
  • Strongly agree
  • Agree
  • Disagree
  • Strongly disagree
  1. Equity-based crowd-funding is a parameter of growth of the SME’s business.
  • Strongly agree
  • Agree
  • Disagree
  • Strongly disagree
  1. Equity-based crowd-funding is significant in resolving social and economic challenges for the SMEs and to grow the business.
  • Strongly agree
  • Agree
  • Disagree
  • Strongly disagree
  1. Equity-based crowd-funding is important for the SMEs to control the business operations and achieve higher business growth.
  • Strongly agree
  • Agree
  • Disagree
  • Strongly disagree
  1. Equity-based crowd-funding is effective to keep the financing costs low for the SMEs.
  • Strongly agree
  • Agree
  • Disagree
  • Strongly disagree
  1. Equity-based crowd-funding is effective to arrange finance from different credit lines.
  • Strongly agree
  • Agree
  • Disagree
  • Strongly disagree

Section 4: Ways for the development of Equity-based crowd-funding

  1. Do you think it can be effective to develop public support schemes for the development of equity-based crowd funding?
  • Strongly agree
  • Agree
  • Disagree
  • Strongly disagree
  1. Equity-based crowd funding can be facilitated by educating about technical literacy & financial market.
  • Strongly agree
  • Agree
  • Disagree
  • Strongly disagree
  1. Transparent & supportive regulatory framework is helpful for the development of equity-based crowd funding.
  • Strongly agree
  • Agree
  • Disagree
  • Strongly disagree

 

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