Economic Environment of Business

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Economic Environment of Business

• Lecture Three
• The Small Firm Sector

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Important considerations for industrial policy
makers
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 Defines a small firm?

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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.

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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

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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

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Problems defining small firms

• In catering, for example, all firms are defined
  as small except
• Multiples and
• Pubs owned by breweries

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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
  (RD)
• 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

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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

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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

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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 (TECs)

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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
• 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.

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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

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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