New Institutional Economics
New institutional economics offers that decisions on risk management can be reached by the enterprise itself and it should be about the firm’s business risks (Wiliamson, 1997). Property procurement is connected with this theory (Williamson, 1988). The theory emphasizes risk management practices relevance for an organization but it does not explain how to perform that. The theory is vital towards this study since SMEs representatives may ignore risks management practices, so the firm should be liable for practicing risk management practices even if the manager may seem not to like doing so. Therefore, it leads to another theory.
Enterprise Risk Management Theory
Since risks have the potential of negatively impacting an enterprise, this is the reason behind enterprise risk management. Thus, the impact may be on resources such as properties, human resources but also may be on markets. More often risks expose an enterprise towards a liability positions, therefore, there is a need for a contingency plan.
This theory assumes that risks can either be handled in two ways. The first is by allotting those risks to the particular department which is being faced by them or by concentrating on the general risks threats and deal against them (Lam, 2003). Hence, an enterprise’s main focus will be on pure risks only through being more proactive to the threats.
This theory also put emphasis on having a formal system or process of approaching risks (Miccolis, 2001). It gives way of dealing with threats from the business plan even before the enterprise has been put into actions (Hagen and Wenstøp, 1984). This can be linked with the SMEs by having a well-designed and feasible business plan with such risk management part showing policy and strategy of dealing with risks or minimizing loss. The theory is relevant to this study since it shows what process and methods of control SMEs should follow when it comes to risk management practices by showing what process have to adhere.
Empirical Literature Review
Various researches have been done about general enterprise risk management in the world. As a result, little concerns have been paid to property risk management practices conditions. Therefore, literature review is categorized into the following forms: The ones which explain the general risk management practices, the ones which explain SMEs risk management practices views, and a little proportionate which put emphasis on the property risk management on SMEs.
Chiara (2017) study on new perspectives in managing risks in SMEs focused on corporate and risk administration. The study emphasizes the importance of giving risk management the attention it requires since decisions making is built on it. The focus should be directed to human resources of the organization in order to be aware of the risk management significance.
Raz (2002) found that risk management practices play a major role in influencing enterprise project’s achievement. In this study, they argued that for the project to deliver the goods there have to be a modern risk management practices in an organization. Also, Kwak (2003) conducted a research on risk management and came up with same findings. He claimed for an enterprise’s project to make through risks management practices must be able to choose and analyze the resources allocation for the project.
There is little literature on SMEs risk management because the majority of researches pay attention to large enterprises. The study by Mathews and Scot (1995) found that majority of SMEs lacks resources to enable them to accommodate experts in the organization, unlike large firms which have resources at their disposal to use. Due to this fact, owners or managers who assume the managing role have to do everything without following procedures and solve issues as they fall due. Also, Henchel (2008) found that practice of risk management to small businesses is not likely due to limited resources. He further claimed that large enterprises have what it take to operate within risk management standard practices. In short, SMEs decisions are done by unqualified personnel who rely on their instincts in most cases (Sparrow, 1999).
According to Janey and Dess (2006), SMEs are not going to practice a standard risk management because they have insufficient resources such as experts, technology, and access to finance. Also, Turpin (2002) claimed that SMEs in Europe have limited information on the market as well as personnel who hinder them from growing big. Furthermore, he found SMEs majority of them do not have plans and strategy for their operations.
Majority of small and medium enterprises lacks plans for risk management and the few which have plans they happen to be of poor quality in terms of systematic design. According to Henschel (2008) SMEs are exposed to risks due to unskilled personnel who are managing business since they have limited awareness of risk management subject. Sparrow (1999) contributed to this by his study findings, which found risk management practices in small business rely upon the owner of the businesses. Experiments further show the huge gap on risk management practices between SMEs and large enterprises due to their differences in terms of size, resources, management, and capital.
According to Muli (2003) Kenya insurance service misses an angle of understanding SMEs sector even though they practice risk management. Furthermore, his paper concluded and recommended that the sector have to fully utilize the information technology uses and its applicability in operations done. In the Muli’s study based on property risk management in Kenya, insurance industry was used as a case study.
New Institutional Economics