Finance

Smaller Enterprises Stand to Gain from Strategic Partnerships with Larger Firms

Based on research by Joseph Nketia, PhD, Enoch Asare, DBA, CPA, and Akwasi Ampofo, PhD

Management Control Systems (MCS) are the structures through which organizations analyze financial, operational, and strategic decisions. This study evaluates the likelihood of non-banks (either individuals or sponsors) investing in Small to Medium Size Enterprises (SMEs) based on their established MCS. While non-banks usually consider efficient financial reporting systems sufficient for short-term investments, their expectations are higher for long-term investments. Because long-term investments require more money being tied up for longer periods of time, non-banks require more extensive knowledge about the organizational control of the SME than just financial reporting. SMEs are also more likely to attract non-bank investors when they are subsidiaries of larger firms. Essentially, there is a baseline assumption that the effectiveness of the larger firm’s MCS will extend to its subsidiary SME, thus granting it credibility in the eyes of non-bank investors. Notably, this study also found that the subsidiary status of an SME was a stronger indicator of non-bank investment than an SME with effective reporting systems.

Key Points

  • Non-banks consider subsidiary status and effectiveness of the Management Control Systems (MCS) of Small to Medium Size Enterprises (SME) when making investment decisions.
  • Non-banks more closely scrutinize the overall MCS of SMEs for long-term investments.
  • Non-banks are more likely to invest in an SME that is a subsidiary of a larger firm.
  • These facts provide valuable information to SMEs in developing economies, the majority of which lack sufficient MCS. 

Why This Matters

This research not only reveals some of the ways that non-banks choose to invest, but also distinguishes between more and less likely avenues for SMEs to receive financing. SMEs can use these valuable insights to make strategic decisions about business partnerships with larger firms, which could increase their funding from non-banks. The majority of SMEs in developing economies have little or no MCS. As such, the legitimacy that a larger firm can offer to an SME is substantial. Even if an SME is not able or willing to become a subsidiary to a larger firm, it can still work to improve the quality and transparency of its overall MCS in order to appeal to non-bank investors. 


Based upon the following peer-reviewed manuscript: Nketia, J., Asare, E. K., & Ampofo, A. A. (2023). Non-bank financing of small and medium size firms in developing economies: Effect of management control systems including large firm affiliation. Journal of Corporate Accounting & Finance 34, 143–156.

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