The effect of ownership and capital structure on export performance of Turkish exporting SME's

SME's, defined in several ways by different countries and associations according to such measures as economic level, industrialization level, market size, number of employees, characteristics of sector or the product manufactured in which the company operates, has started to be seen as increasingly important in terms of their stance in the economy. Proper classification of SME's has a great importance on the following subjects: deciding public policies, distributing government supports and subsidies effectively, fulfilling the responsibilities arising from international aggrements. According to European Union, SME's are companies which has less than 250 employees and 50 million Euros of annual return or 43 million Euros of asset size. In the USA, different associations define SME's in different ways. The criterias to define SME's as regards to number of employees and annual returns changes from sector to sector in China and South Korea, as it is done in the USA as well. In Japan, Malaysia and India, criterias are set in comparison with manufacturing, trade or service companies. There has been no common definition and common criterias as for Turkey since 2005. In the bylaw issued in 2005, a common definition was determined. Later, the scope has been broaden with the bylaw issued in 2012, more companies has been defined as SME and gained access to government supports and subsidies. According to current definition, SME's are companies that have less than 250 employees and have less than 40 million TL annual net sales or size of assets. SME's can easily adapt to environmental changes with the help of their flexible and workshop style of manufacturing, and less bureaucratic organizational structures. They contribute to economic, social, and regional development. They have significant impact on decreasing the unemployment by creating new job offerings. Due to these and other such reasons, SME's are thought as an indispensable elements of the economy. 99,9% of all companies in Turkey operate under the umbrella of SME. They comprise 78% of employment, 55% of total value added, 59% of export. The situation is the same in other countries such as EU, USA, India, South Korea. More than 95% of all companies in these countries are SME's. As for employment, SME's provide 58% of all employment in the USA, 67% in the EU, 66% in Japan, 88% in South Korea. As for total value added, SME's provide nearly half of the total value added in the whole economy in the USA, Japan and South Korea, and 58% of total value added in the EU. There are some important differences considering the problems SME's face in different countries they operate. They may emerge from the differences in economical, social and legal environments. The major problem of SME's in Turkey is to obtain finance. They are not able to finance their expenses with their capital. Thus, in order to survive, develop, and compete in local and global markets, they canalize to liabilities. But they still can not find enough resources. Other than financing, SME's also have some problems related to management and organizing, production management, marketing, technology and export. Trade barriers and such kind of limitations has started to be eliminated with the spread of globalization. Local markets has started to be more competitive, so foreign markets has become an opportunity to increase sales volume and profitability especially for those who lost their competitive advantage. The underlying reasons for internationalization can be classiffied under the main headings of managerial level, firm level, environmental level. The modes of entry to foreign markets include exporting, licensing, franchising, strategic alliances, joint ventures or foreign direct investment. All modes of entry have some certain advantages and disadvantages. According to Upsala Internationalization Model, internationalization attempts generally start with exporting since it is the mode which requires the least knowledge and resources. Companies contact with foreign companies and institutions and obtain information about the institutional structure and the way they handle their work and processes by exporting. Thus as time passes, exporting company increases its knowledge level, then move on the next stage of internationalization. Measuring export performance has gained importance in conjunction with the increasing volume of export. Measuring is important for public authorities due to effects of export on currency reserves, unemployment, productivity and wealth. Exporting helps to improve corporate growth, increase competitive advantage that measuring is important for managers. Market researchers and academicians are interested in measuring export performance since it has become an interesting and important subject. Export performance is defined as the extent to which a firm's objectives, both economic and strategic, with respect to exporting a product into a foreign market, are achieved through planning and execution of export marketing strategy by Cavusgil and Zou (1994). Besides some researchers conceptualize it as a composite outcome of a firm's international sales, which includes three subdimensions: export sales, export profitability, and export growth (Shoham, 1998). On the other hand, Maurel (2008) argues that it is insufficient to define performance quantitatively. Perceptions of managers and/or owners' about success, failure, development and decline constitute the qualitative dimension of performance, and these should also be taken into account. The first studies on export performance diverged regarding their measurement models and criterias set. Measuring performance in accordance with only one criteria is insufficient, but also, measuring performance with a set of different criterias results in further complexities while comparing different studies. Thus, current studies combine distinct dimensions of performance to measure the export performance. When studies on export performance are examined, we see that performance is measured by several objective (export sales volume, export profitability, export growth, export market share, export market size) and subjective (perceived export success, satisfaction from export sales) criterias. Determinants of export performance can be classified as internal and external factors. Zou and Stab (1998) has examined the previous 50 studies on export performance and categorized the factors that effect the performance as controllable/uncontrollable and internal/external. The most important internal determinants include firm age, firm size, firm experience, resources and capabilities of the firm, technological level, characteristics of manager's, and strategies. On the other hand, the most important external determinants comprise characteristics of the local market the firm operates, and characteristics of export market. Performance is closely related with ownership structure. Owners' diverse priorities about investment choices and different attitudes about agency problems effect performance. The effect of ownership structure on export performance has generally been investigated in conjunction with whether the partners were local or foreign, public or private. Family-owned firms, corporate investors, venture capitalists were also examined in the literature. The effect of capital structure on export performance is an underresearched subject. Few studies on this subject found that firms with high liquidity and low financial leverage ratios have a tendency to export more. In other words, the more the financial success, the more the export. There are also some studies on the relationship between export performance and some accounting entries. It is found that export performance is negatively related with account receivables and payables, and positively related with liabilities/equity. And intangible fixed assets has a positive impact on export performance. In the second part of this thesis, it is aimed to examine the ownership and capital structures of Turkish exporting SMEs. The data was provided from Turkish Eximbank by assuring to privacy of the firms. 882 exporting firms which their financial information had been archived incompletely for the years 2009, 2010, and 2011 was chosen. Of the 882 firms, 450 of them were SME's as indicated by SME bylaw in 2012. When the characteristics of data set were examined shortly, it can be seen that 607 of them is joint-stock company, while 207 of them is limited partnership. They were established in 48 different cities in Turkey. The oldest one established in 1924. They operates in 18 different major sectors.779 of them is completely local, 643 of them is completely owned by natural entities. Besides, they performed a quarter of all exports in Turkey. The results of the vertical, horizontal and ratio analysis of the firms in the sample were compared with the results of sector analysis performed by Turkish Central Bank. According to the results of vertical analysis, the following results were found: exporters generally rely on current assets rather than fixed assets. Their inventory/assets ratios are 20-24% on average. 34% of their assets comprise by account receivables. Nearly a quarter of their receivables include bonded receivables. There is a tendency to decrease in equity capital ratio. Most of the foreign liabilities are current liabilities. Bank loans tend to increase for the observed 3 years. In order to perform horizontal analysis, balance sheets and income statements of all firms summed without consolidation. Asset size was found to increase 15% for the time periods between 2009-2010 and 2010-2011. The increase in assets mostly resulted from current assets, thus it can be argued that exporters began to have more liquid assets. As for the liabilities, the highest increases were observed in current liabilities. Income statements also demonstrated that sales increased 23,9% between 2009-2010 and %37,1 between 2010-2011. On the other hand, annual net profit increased 124% between 2009-2010 and decreased %3,5 between 2010-2011. In order to perform ratio analysis, liquidity, financial structure, turnover, and profitability ratios were calculated and results were again compared with the results of sector analysis done by Turkish Central Bank. Current and quick ratios above average for the years 2009 and 2010 were detected as below average in 2011 in comparison with Central Bank calculations. Also, cash ratio was found below average for all years investigated. As for financial structure ratios, exporters were found to have more liabilities and use more bank loans than the other firms. While turnover ratios of exporters were found below average, net working capital turnover ratios were above. When we look at the profitability ratios, exporters were observed to have less ability to pay interest expenses. Besides, ratio analysis of 882 firms were performed with regard to the sector in which the firm operates, and results compared with the results of the analysis performed by Turkish Central Bank. After the ratio analysis were conducted, an export performance model based on export intensity and export sales per asset was developed. With the help of panel data analysis, determinants of firm export performance were examined. Independent variables included firm age, employee number, net profitability rate, value added per employee, foreign owner share as dummy variable. Three main hypotheses related to ownership and capital structure were tested regarding the model. Main results were as follows: There is no significant relationship between firm age and export performance. Export performance is negatively related to employee number, and positively related to value added per employee. Unexpectedly, results demonstrated that export performance is negatively related to net profitability rate, and there is no significant relationship between foreign ownership share and export performance. Four different dummy variables were identified regarding the foreign ownership share. Foreign ownership share effect export performance, only if the firm is big in size, corporate ownership share was added to the main model, and the foreign ownership share is more than 60%. Also, there is a significant negative relationship between corporate ownership share and export performance. Besides, in order to examine the relationship between capital structure and export performance, leverage ratio was added to the main model and tested. Results revealed that increase in leverage ratios positively effect export performance, in other words liability has a positive effect on export performance. This study aims to examine the effects of capital and ownership structure on export performance. Dissimilarly from other studies on this subject, sample is more comprehensive. Thus it is expected to contribute to the literature in this way. There are also some limits. First, the time period for the data collection was the post financial crisis period that it may distort the results. Also, in this study only objective criterias were measured. In the future studies, a wider time period can be taken into account for analysis and subjective measures can be used to examine export performance.