Adoption of project appraisal practice and accessibility of finance : an empirical analysis on selected small and medium-sized manufacturing companies in Malaysia

Abstract

The crucial role played by small and medium-sized industries (SMIs) in developing countries is very well acknowledged. In Malaysia, for example, the SMIs are perceived as the backbone of the nation's industrialisation process. However, the promotion and development of these SMIs are often hampered by their lack of access to formal institutional credits. The lack of access to formal credits is often ascribed to the higher level of perceived risks, moral hazards and transactions costs. At present, banks and SMIs in developing countries do not have the appropriate technology to adequately assess these risks. The present study seeks to suggest that project appraisal practice can and should be adopted by the SMIs in order to assess their project's risks. Banks are recommended to use similar techniques to objectively evaluate their lending risks. Built upon the theoretical framework of finance and development, the study empirically evaluates the relationship between the adoption of project appraisal practice by the SMIs and their access to formal sector finance. In addition, the study also attempts to identify the factors that can influence the company's decision whether or not to adopt formal project appraisal practice. A very significant and positive relationship was found between the adoption of project appraisal practice and the SMIs' access to formal sector finance. The following factors were found to be significant in determining whether or not a firm adopts project appraisal practice: (1) access to banks finance, (2) entrepreneur's level of education, (3) training on project appraisal, (4) market classification, and, (5) level of business experience. The study therefore concludes that the adoption of project appraisal practice by SMIs should be encouraged through formal training. Finally, the study suggests that the present system of providing finance to SMIs should be reformed and a more innovative and efficient system is recommended.