Economic Environment of Business Lecture Three: The Small Firm Sector

Important considerations for industrial policy makers What Defines a small firm? What defines a small firm? What is a small firm? Why are small firms important to an economy? What problems do small firms face? What can policy makers do to help small firms overcome those problems? How much are small firms contributing to the Economy?

What determines firm size? The scope for economies of scale The size of the market The degree of competition The stability of market demand The nature of the customer-supplier relationship.

What is a small firm? Difficult to define- Bolton Committee (1971) emphasised the importance of the characteristics of small firms, not numbers employed. Has a relatively small share of its market Absence of formal management structure Independent of outside control in decision making

Statistical Definitions employed Manufacturing: Up to 200 employees Services: Up to £200K turnover (Motors) Road transport: Up to 5 vehicles These may be updated periodically

Problems defining small firms In catering, for example, all firms are defined as small except: Multiples; and Pubs owned by breweries

Why are small firms so important for the economy? Tend to be labour intensive Often in sunrise industries Tend to be more innovative and source of ideas (R&D) Source of competition Seed-bed for managers Help to re-generate inner cities and depressed areas Opportunity in de-industrial society to find new source of employment The big firms of the future

What difficulties are faced by small firms? Lack specialist skills Cash flow problems Lack of diversification Reliance on bank loans Competitive markets Face Red Tape

Furthermore Nature of debt finance: O/D repayable on demand Shorter-term loans make for shorter-term strategies Lack of flexibility of banks providing liquidity

What has been done to help small firms over the years in the UK Over 100 Schemes have been introduced by successive UK governments since 1979! These include: Business Start-Up Loan Guarantee Scheme Enterprise Initiative Scheme Unlisted Securities Market Lower Corporation Tax Training and Enterprise Councils (TEC’s)

EU Policy for Small Firms Agencies provided £85million (Euro 51Million) for SMEs to Enhance competitiveness between 1997 and 2000 Set up business school network Helped start-ups Enterprise DG set up January 2000 to oversee activity Enterprise DG set up January 2000 to oversee activity European Investment Bank (EIB) provided £700 million to set up new SMEs in the technology sector, and provide guarantees for loans from financial institutions of a medium- to long-term nature. European Investment Bank (EIB) provided £700 million to set up new SMEs in the technology sector, and provide guarantees for loans from financial institutions of a medium- to long-term nature.

Just how much are small firms contributing to the Economy? We want to investigate how much economic activity is carried out by the small firm sector. This can be done in terms of the percentage of small firms in the economy, their percentage contribution to total employment and their percentage contribution to the income generated in an economy

Summary We established: What determines the size of a firm It is difficult to define a small firm The advantages of a strong small firm sector The problems faced by the small firm sector Government initiatives at the UK and EU level to help small firm The contribution of small firms to employment and turnover in the UK and EU