A Risk Assessing Approach on Hi-tech SMEs of China: Based on Multi-stage Compound Real Options

Chen Zhang, Wei-Dong Zhu, Allen Garth, Yong Wu

Monfort College of Business in University of Northern Colorado.
School of Management of HeFei University of Technology.

DOI: 10.4236/jssm.2008.11006                

Abstract

The Small and medium-sized enterprises (SMEs) typically have very limited capital and rely on external finance although they may self-finance. When seeking external finance, most SMEs rely on the banking sector. Because the direct financial market and venture capital (VC) system need to be further improved in China, financing from commercial bank undoubtedly becomes the main support for hi-tech SMEs. While the high risk of hi-tech SMEs requires commercial banks make credit decision based on effective risk management. Focusing on the characteristics of hi-tech SMEs, this paper reviews the risk assessing approaches in VC, and puts forward an innovation of using the multi-stage compound real option approach in risk assessing for hi-tech SMEs and achieving a multi-stage loan’s decision making for hi-tech SMEs based on the firms’ value of each stage. In this way, commercial banks can admeasure hi-tech SMEs’ credit reasonably and can support the development of hi-tech SMEs efficiently.

Keywords

hi-tech SMEs, risk assessing, commercial banks, compound real option

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	SMEO. “SMEs in HongKong”. The Small and Medium Enterprises Office. 2003, February 2. www.sme.gov.hk/smeop/english/smehk.cfm.
[2]	Microsoft. “Sizing Up Global Opportunity”, Microsoft Business Solutions. 2003, February 26. www.navision.com/hq/view.asp?documentID=1320.
[3]	Blond R. “Will the global slowdown slow you down?” http://smeit.com.sg/psme.nsf/unidlookup. 2001, April.
[4]	Wu Xiaolin. “Speed up Financial Innovation and Promote Development of the Small and Medium-sized Enterprises”, High Level Seminar on Development and investment of Small and Medium-sized Enterprises (SMEs) in East Asia. Beijing, China, October 27, 2005.
[5]	Teuvo Uusitalo, Paivi Mikkonen, Mervi Murtonen. “Development of A European Risk Management Internet Portal for SMES, Safety Science Monitor. Vol. 7, ISSN 1, 2003.pp.27-33.
[6]	Leung. “SME sector growth looking good for HSBC”. United Arab Emirates. Tuesday, January 23, 2007.
[7]	Huang Jianbo, Zhong Meirui. “Evaluating the Value of Venture Corporation through Option Pricing Model” (Working paper).2007.6. http://www.paper.edu.cn
[8]	Trigeorgis L, Manson S P. “Valuing managerial flexibility”. Midland Corporate Finance Journal, 1987.5(1), pp.87~95.
[9]	Myers. S. C, Majluf. N. C., “Corporate Financing and Investment Decisions when Firms Have Information that Investor Do not have”. 1984, 13, pp.187~221.
[10]	Luehrman, T. A., Strategy as a portfolio of real options. Harvard Business School Press, 1998.
[11]	Keeley R, Punjabi, Turki L. “Valuation of early-stage ventures: option valuation model vs. traditional approach”, Entrepreneurial and Small Business Finance, 1996. 5(2), pp. 115~138.
[12]	Hsu Y. W., “Staging of Venture Capital Investment: A Real Options Analysis”, Working Paper，2002.
[13]	Mark Jeffery, Sandeep Shah. Robert J. Sweeney. “Real options and enterprise technology project selection and Deployment Strategies”, Working Paper, April 2003.
[14]	Sepp?& Laananen, 揤aluation of Venture Capital Investments: Empirical Evidence? R&D Management, 2001(6), pp.31-39.
[15]	Dias, M A G, Teixeira, J.P. “Continuous-Time Option Games Review of Models and Extensions-Part1: Duopoly under Uncertainty”, Working Paper, 2003.
[16]	Wang Xiao, Zhang Jie. “Study on the Bank Credit Rationing and Loan of Small and Medium-Sized Enterprises (SMEs)”, Economic Research Journal, 7th 2003.pp.37-41.
[17]	Rui Yin, “The dynamic game model of bank credit in small and medium enterprises”, Finance and Trade Research 4th 2002.
[18]	Cox J, Ross S, Rubinstein M. “Option pricing: a simplified approach”, Journal of Financial Economics, 1979.7(3), pp.229-263.