The Growth of SMES in a Small Economy Adreene Staines Doctoral Student Lancaster University, UK November 4, 2004 ISISA, Islands of the World VIII Kinmen Island

FIRM GROWTH IN SMALL STATES Firm growth is independent of firm size Firm growth is independent of firm size –Law of proportionate effect Firm growth is inversely related to firm size Firm growth is inversely related to firm size –Minimum efficient scale Firm growth is positively related to firm size Firm growth is positively related to firm size –Market concentration Firm growth is inversely related to firm age Firm growth is inversely related to firm age –Jovanovic (1982) learning model The Antecedents

Size of firms Size of firms –Strong bias towards large entities The Size Assumption The Size Assumption –Firm size is the main determinant of firm growth Origins in large developed economies Origins in large developed economies –Ignores specific characteristics of developing economies Limitations of Existing Theories on Firm Growth FIRM GROWTH IN SMALL STATES

Prevalence of small firms Prevalence of small firms –Constraints to small firm survival and growth Sector specialisation Sector specialisation –Limited industrial policy choices Developing country traits Developing country traits –Undeveloped capital markets, high input costs Openness to trade Openness to trade –High export and import levels The Case of a Small Developing Economy FIRM GROWTH IN SMALL STATES

If the observed negative relationship between firm size and firm growth is independent of domestic market size, Jamaican small firms will exhibit higher growth rates than their larger counterparts. If the observed negative relationship between firm size and firm growth is independent of domestic market size, Jamaican small firms will exhibit higher growth rates than their larger counterparts. The sector in which a firm operates in a small economy is expected to influence its growth rate. The sector in which a firm operates in a small economy is expected to influence its growth rate. Exporting is expected to influence the firm growth process. Exporting is expected to influence the firm growth process. Key Hypotheses FIRM GROWTH IN SMALL STATES

1997 Sales Levels # of FirmsMean Size Std. Deviation All firms: By sector: Manufacturing Financial Services Other By Export Status: Exporters Non-exporters Sales Size Class Small (< J$160Mn) Medium(J$161 – 900Mn) Large (>J$901Mn) Classification of Data Sample

Basic Growth Model Basic Growth Model –Firm Growth = F(Firm Size, Firm Age) Expanded Growth Model Expanded Growth Model –Firm Growth = F(Firm Size, Firm Age, X) –Where X represents certain institutional and structural variables that are expected to influence the firm growth process in small developing economies. Firm Growth Models FIRM GROWTH IN SMALL STATES

Dependent Variable Dependent Variable –Average annual logarithmic growth rate of CPI deflated sales for period Explanatory variables Explanatory variables –Firm Size (log CPI deflated sales for 1997) –Firm Age (year of establishment to 1997) –Size Class (size class of firm based on employment #) –Export status –Export sales (income from exports) –Type of ownership –Sector classification –Location –Information technology communication usage Variables

BasicExtendedFinal Size (.026) (.032) Age ** (.053) (.063) Export (.051) Expsales (.032) Web (.042) Local (.049) Location (.049) Finserv (.052) *** (.035) Manu (.050) Small (.178) *** (.124) Large (.051) * Significance at 10% level ** Significance at 5% level *** Significance at 1% level Standard errors are in parentheses. Econometric Results for Sales Growth over Period

CoefficientStandard Error Size *** (.014) Location.118***(.057) Finserv.141***(.048) R Small and Medium Sized Firms Only FIRM GROWTH IN SMALL STATES

Firm size in general does not influence firm growth Firm size in general does not influence firm growth Firm sector classification matters Firm sector classification matters –Financial services is associated with positive growth –Manufacturing is associated with negative growth Size (measured by employment numbers) matters. Size (measured by employment numbers) matters. –Firms with less than 10 employees experience high growth Concluding Comments FIRM GROWTH IN SMALL STATES