17 Issues Pertaining to the Survival of Micro and Small Fruit Processing Enterprises with Special Reference to Their Strategic Alliances: a Case Study in Kandy District, Sri Lanka A.H.M.S.W.B. Abeyrathne and H. Jaenicke S.S. Kodithuwakku International Centre for Underutilised Crops University of Peradeniya Colombo Peradeniya Sri Lanka Sri Lanka Keywords: alliances, business diversification, business environment Abstract This study explores whether the survival of small-medium sized (SME) fruit processing enterprises in the Kandy District of Sri Lanka can be enhanced by strategic alliances. From an examination of 44 small fruit processing firms, results indicate that most business operators accessed markets, credit and technology through strategic alliances. Marketing through external agents significantly affected business survival while marketing under established brand names provided temporary solutions to marketing problems. The poor flow of market information, high interest rates and the requirement for collateral hampered SME survival. Despite mainstreaming the products in the market, the nature of the relationship with actors in the same position of the supply chain was not strong enough to increase business survival. At the same time, the nature of the relationship with upstream actors in the supply chain such as raw material suppliers was also found to be problematic. In many cases, contracts were not followed by raw material suppliers. However, long-lasting strategic linkages facilitated business diversification in related sub-sectors and increased survival. Diversification into related sub-sectors also reduced the risk and increased the overall efficiency of SMEs. These results support the hypothesis that strategic linkages play a significant role in the survival of SME fruit processing enterprises, provided that the enterprise operators have business experience and the capacity to build and maintain linkages. INTRODUCTION The food and beverage sector in Sri Lanka is largely comprised of small and medium sized enterprises (SMEs). This sector plays an important role in economic development by contributing to poverty reduction through the creation of employment and income generation (TFSMESD, 2002). Although the prospects are bright, the fruit processing sub-sector has not received much attention from government and other development agencies (Silva, 2002). SMEs operating in Sri Lanka are inherently constrained by instability in the country’s highly competitive business environment. The business mortality rate is very high, especially among micro enterprises (Richards et al., 2002). Generally, the business operators’ skills, experiences and family support affect business survival (JUDAI, 2002). Limited competitiveness and poor quality products affect the survival of SMEs in Kandy District (Richards et al., 2002), while business diversification into related sub- sectors improves industry performance (Riahi-Belkaoui, 1997). In addition, internal, task and general business environmental factors such as management, labour, credit, marketing and technological issues are important in gauging business performance (Silva, 2000; Edirisinghe, 2001; Richards et al., 2002). Several authors cite the significance of inter-firm alliances as a pervasive means for addressing the survival of SMEs (Ahuja, 2000; Barnir and Smith, 2002; Silverman and Baum, 2002; Tambunan, 2005). For instance, forming strong processor associations, encouraging SMEs to enter into forward contract agreements and facilitating the linkages between public organizations, the private sector and SMEs are cited as some of the alliance-based remedies to improve the survival of SMEs. In many cases, development Proc. II nd IS on Supply Chains in Transit. Econ. Ed.: P.J. Batt Acta Hort. 794, ISHS 2008