The Investment Decision Making Process in the Small Manufacturing Enterprises. With Particular Reference to the Printing and Clothing Industries


This study is concerned with the investment decision behaviour of small manufacturing enterprises. In this respect it is concerned with how managers actually behave in relation to what the theories and the literature have claimed about investment decision-making.

Capital investment is the vital foundation for progress in any organisation, and helps towards the creation of jobs in the economy and the achievement of competitiveness through innovativeness and quality factors (Storey et al, 1989), and also through cost reduction, new product development and product differentiation (Smallbone et al, 1995). Small manufacturing enterprises are increasingly facing competition within the UK and in Europe which means that their responsiveness to customer demand is an important factor influencing their competitiveness. This in turn has potential implication for investment. In fact, “very few manufacturing firms can survive without incuring some capital expenditure each year” (Smallbone et al, 1996, p 112).

To encourage the small manufacturing enterprises to make effective investment decisions, it is necessary to understand:

[i] the distinctiveness of the small firms[ii] the investment decision process, and[iii] the behaviour of owner-managers

The Distinctiveness of the Small Firms

The Bolton Report (1971) described the small firm as one which has a small share of the market, is managed in a personalised way, and is independent and free from outside control. However, the Bolton criteria have been criticised by Storey (1994): First, it is inappropriate to assert that a small firm is one which has a small share of the market given the fact that a small firm may be operating in a niche which initially at least has the whole market. Second, the personalised management is applicable only to the extent that the small firm is either a start up or a micro firm with under ten employees and with only one major decision maker. Third, a small firm is independent as far as ownership is concerned but in circumstances where the small firm is serving a large corporation possibly as its only customer or supplier or acting as a subcontractor or as a franchise then the claim of independence from outside control becomes questionable. Despite these criticisms the Bolton definition provides a valuable starting point.

Another aspect of the distinctiveness concerns the conceptual differences between small and large firms. Small firms differ from large firms in a number of other respects including, the combination of ownership and management either in an individual owner-manager or within a family, the limited resources in terms of finance and management skills, and the inability to control or shape the external environment (Burns, 1996; Westhead and Storey, 1996). Consequently, the needs of small firms are different from those of large firms and the distinctiveness demands management tools tailored to their needs rather than those developed for large firms or even the simplified versions (Jarvis et al, 1996).

The Investment Decision Process

Investment decision is defined by Nayak and Greenfield (1994) as expenditure on items which will benefit the firm for several years and which require a relatively large outlay on the part of the firm. There is less theoretical literature on investment decisions of small firms than there is empirical research (Peel and Wilson, 1994). The available theoretical and empirical literature on investment decision making developed for large firms are clearly of limited relevance to understanding the behaviour of small firms because the factors affecting small firm investment decisions differ considerably from those addressed by the large firm studies (Keasey and Watson, 1993). These factors, in conjunction with the distinctiveness already mentioned above, include:

[i] The high exposure to business and financial risk due to the uncertainties of the small firm operating environment and the owner-manager’s relatively undiversified portfolio.

[ii] The separation of financing and investment decisions, assumed in large firm literature, can not apply to small firms because of the nature of their financial environment. In the small companies the provision of finance is limited to specific projects due to the presence of uncertainty, asymmetric information and limited sources of finance.

[iii] Multiple objectives. Peel and Wilson (1994) points out that since small firm owners may be pursuing objectives other than wealth maximisation (eg survival, independence, preferred life-style, etc) then they would be less likely to use techniques which are consistent with the wealth maximisation objective but may focus on minimising risk by using other methods.

To determine how these factors influence investment decisions the research will examine the nature of the projects which are under consideration, the processes used to evaluate the projects and the provision of finance. In addition to Keasey and Watson (1993) and Peel and Wilson (1994), the study will also draw on the work of Nayak and Greenfield (1994) which examines capital expenditure decisions in micro businesses and conclude that “the lack of formal paper analysis appeared to be more a function of not having to justify the expenditure to anyone else than a lack of analytical thought” (P. 217).

The Behaviour of Owner-managers

The central tenet in this study is that the behaviour of owner-managers of small firms need to be clearly understood with respect to investment decision making if our knowledge of how and why small firm owners invest is to be distinguished from how they ought to behave. This is important if recommendations are to be made to small businesses, financial institutions, small business advisers, consultants, and policy makers on how small firm financial management practices are to become more effective. This involves understanding what actually motivates small firms owner-managers, how common are their patterns of behaviour and what factors influence practices. Here, the works of Jarvis et al (1996), Curran et al, 1997, and Kirby and King (1997) will be used to inform the proposed study.

However, these studies can be criticized for the following weaknesses: Firstly, they suffer from methodological issues such as reliance on mail questionnaires with “closed ended” questions in the case of Peel and Wilson, and Nayak and Greenfield. These are positivist-type methodological approaches which fail to incorporate the actual motives of the subjects under study and do not help to answer the basic questions relating to process. These methods assume that every company, whether large or small, has a single objective of wealth maximisation, with other objectives seen as subsidiary. They also fail to recognise the high levels of uncertainty, information asymmetry, and the strictly limited sources of long-and medium-term finance which makes the operating environment of small firms extremely unpredictable. This is, however, not an attempt to discount the importance of quantitative methods or, for that matter, any other methods. They should be used where they are appropriate. In fact, in some instances both quantitative and qualitative methods should be used as supplements and for mutual verification. But in a study of processes, behaviour and motivations qualitative methodology enables greater and better understanding.

Secondly, Jarvis et al (1996), and Curran et al (1997) suffer from a lack of specific practical recommendations about how the financial management needs of small firms can be met.

Thirdly, the focus of the literature on investment decision making has been directed only towards the quantitative criteria, providing information on the use of the appraisal techniques only. Whilst this is undeniably important, the research to date seems to have overlooked a more fundamental aspect of small enterprise investment decision making process such as the qualitative decision criteria. Attention to the pivotal issue of motivations of owner-managers in small enterprises would seem to be a logical first step to understanding the actual investment decision-making behaviour in this context.

It must be recognised that the small firm is not a scaled-down version of a large firm. Therefore, studies relating to small firms must consider the motivations, constraints and uncertainties facing small firms and recognise that these differ from those facing large firms (Westhead and Storey, 1996).

This research aims to add value to these earlier studies by extending the scope of the investment decision making beyond the quantitative criteria by incorporating the real motivations and actual behaviour of the owner-managers.


The objectives of this research are as follows:

[1] To analyze the actual investment decision-making behaviour of the small manufacturing enterprises for different types of capital asset and to assess the methods actually used in relation to those that could be used.

[2] To find out the extent to which investment decisions are based on previous learning experiences of decision makers.

[3] To analyse how capital investment is financed in small manufacturing enterprises.

[4] To identify the policy implications of the analysis.


The research aims to find answers to the following questions:

[1] What motivates investment decision-making in the small manufacturing enterprises?

[2] What methods are actually used in making investment decisions and to what extent are investment decisions based on qualitative criteria as well as quantitative techniques?

[3] To what extent are investmnet decisions in small manufacturing enterprises based on previous learning experiences of decision makers?

[4] What are the key factors influencing investment decision-making?

[5] To what extent is raising investment finance a problem to the small manufacturing enterprises? What strategies do business owners use to cope with it?


This study will be designed to collect qualitative data using ethnography often used in sociological and anthropological studies. This approach will therefore enable hypotheses and theory to be inductively drawn from the data as opposed to the much dominated hypothetico-deductive approach where hypotheses are drawn from existing theory and tested against quantitative data. It will ensure that owner-managers’ account of their motives for their actions can be tested for relevance (Giddens, 1976). Ethnography also allows the researcher to “live among those who are the data” (Rosen, 1991, p 5) and to become a part of the research setting (Stockport and Kakabadse, 1992).

The research will be conducted longitudinally during which owner-managers will be interviewed and observed at different stages over a period of one year and case material built up on each company.

The Interviews

Interviews will be non-directive and semi-structured and follow a detailed interview plan, which will be designed to enable firstly, flexibility which will enable the topics to be covered but not necessarily in any prescribed order, and secondly., the opportunity to follow up issues raised during the course of the interviews. The interviews will be allowed to flow as conversation with questions designed to elicit free flowing narratives (Jarvis et al, 1996) around investment decision making. Respondents will be allowed freedom in their responses and will be encouraged to elaborate on their comments through the use of non-directive probes.

The first interview will take the form of sensitising propositions (Jarvis et al, 1996). These will be generated through literature review and brain storming exercise and will be unstructured and exploratory in nature. They will establish the initial boundaries for the research as well as provide details of the owner-managers’ background, business objectives, their attitude to growth, and in particular the progress, plans and problems of the business. The organisations to enter for detailed study will be identified at this stage.

The second interview will be in-depth and will focus on investment decision making, sources of investment finance and the difficulties in raising such finance, investment techniques and factors affecting choice of techniques. Although owner-managers will be the prime focus of attention as the key personnel, other employees, accountants and business advisors will also be interviewed. This will help in checking and stabilising conflicting evidence.

Participant Observation

The researcher will participate fully in the investment decision-making activities of the owner-managers. This means experiences will be shared by not merely observing what is happening but also taking part (Gill and Johnson, 1997). Participant observation will allow access to what owner-managers actually do in relation to what they say they do in the interview or what the theory and literature have suggested (Holliday, 1992; Stockport and Kakabadse, 1992).

Analysis of Data

The data will be tape recorded for each respondent and verbatim transcripts made. These will permit detailed comparison between respondents’ accounts and the identification of common features and practices. The data being qualitative will allow a conceptual rather than descriptive analysis particularly focusing on how the respondents evaluate their actual investment behaviour.

The sample firms

A sample of 6 independent firms is proposed for the qualitative case study. The sample will consist of firms with 1 to 50 employees. The sample firms will be drawn from the manufacturing industry such as printing and textile and will be principally clients of the Southwark Enterprise and Training Agency and those receiving business support from Business Links. Companies will be selected on the basis that they either have recently made investment decisions, or are making it at the time or just about to make one. To be included in the study the firms will have to be in existence for at least a year and will have to be independently owned since subsidiary companies may adopt investment decisions of parent companies which are not themselves small companies.

Limitation of the study


The qualitative method of sampling is not necessarily representative, but its strength lies in the more detailed focus and the commitment of the respondents, and provides rich data for the research. However, the aim of the study is not necessarily to seek representativeness but to gain insight into the investment process and the actual behaviour of owner-managers with respect to investment decision making.


Access is identified by Gummesson (1991) as the researcher’s number one problem. In this study, it is anticipated that gaining entry into the companies will not be a major problem since most of the companies will be clients of Southwark Enterprise and Training Agency for which the researcher works as a business advisor. This relationship with the companies will be a big advantage and a very strong bargaining card. The researcher has already spoken to the Director of the Enterprise and Training Agency who has agreed to play the gate-keeper role.

Access will be effectively negotiated with the organisations involved in return for preservation of anonymity and confidentiality, and a feedback on the study. The researcher has already had informal discussions with some of the small firms in Southwark regarding access and acceptance has been obtained in principle. In the course of the discussion with the owner of a small clothing firm it transpired that the organisation is not happy at all with the services provided to them by their accountants, especially in the preparation of their financial statements and in view of the researcher’s background in accountancy they hope to benefit from his accounting knowledge and skill.

Ethical Issues

Ethical issues in ethnography arise from the type of relationship existing between the researcher and the organisation/subjects he or she is studying (Gill and Johnson, 1997). One of the fundamental problems encountered in ethnography is the ethics of covert research (Easterby-Smith et al, 1991). In this study, key informants such as major suppliers of equipments, accountants and business advisors will be used. The ethical dilemma is whether information obtained from such sources constitute covert operation.

The eventual publication of the findings of ethnographic work often brings a number of ethical problems (Morgan, 1972). In this research, assurances for confidentiality will be given in the event of publication.


Ethnographer bias is another issue of concern in ethnographic research (Stockport and Kakabadse,1992). Hammersley and Atkinson (1983) suggest that to deal with the issue of ethnographer bias reflexivity was necessary. Reflexivity means that ethnographers must come to terms with their own bias both within the research setting and afterwards when interpreting the findings since “we are part of the social world we study” (p.14).

In this research the possibility of bias will be minimised by working 1 day in a fortnight within the organisations, thus avoiding “going native”; distinguishing between prompted and unprompted responses, avoiding leading probes and asking those under observation for their own interpretations of events to eliminate interview bias; and constant reflection on the data and the central thrust of the whole study.

The research will be supported by a very thorough review of the academic literature.


This research project will be pursued in two stages, relating to the attainment of an MPhil, followed by advancement to PhD.

The MPhil element will include a full literature review and the analysis of findings regarding investment decision making.

The analysis will be taken to PhD standard by conducting original research regarding the actual investment decisions making behaviour of the small manufacturing enterprises. Through the analysis of these research findings, the study will provide answers to the key questions and develop academic debate concerning the real motivations behind investment decision making.


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