The Formation and Development of Small Business

Issues and Evidence

Peter Johnson

• Publisher: Routledge
• Year: 2008
• Print ISBN: 9780415394093
• eBook ISBN: 9781134161034
• Topic: Business
• Subtopic: Business General
• Index: Business

This book brings together thirty years of original empirical research on key aspects of the formation and development of small firms from selected articles authored or co-authored by Peter Johnson. Complete with a comprehensive introduction from the author placing the work in relation to the contemporary debates on the subject and providing a cohes

1
Introduction

Some background

The last 30 years or so have been a good time in the UK to be involved in research into new and small business and entrepreneurial activity. During this period, research in these areas developed rapidly across the world: see Landström (2005: chs 4 and 5) for a comprehensive survey.

This development has expressed itself in numerous ways: for example, through the establishment of many chairs and research centres and through high profile annual conferences, such as those of the Institute for Small Business and Entrepreneurship in the UK and Babson College in the US. Numerous specialist journals have also been launched including the Journal of Small Business Management (1964); Entrepreneurship Theory and Practice (1976); International Small Business Journal (1982); Journal of Business Venturing (1986); Entrepreneurship and Regional Development (1989) and Small Business Economics (1989). By the end of 1999, there were 44 English language refereed journals operating or announced on entrepreneurship or small business (Katz 2003).

All this has provided a supportive environment for researchers in the UK, where several factors have favoured entrepreneurship and small firms research.¹ A key one has been a policy environment that became much more supportive after the publication, in 1971, of the report by the Committee of Inquiry into Small Firms (Bolton Committee 1971).

The Committee’s report had at least four features that encouraged research. First, it was widely regarded as a very thorough analysis. It thus provided a robust starting point and framework for further investigation of the small firms sector. Second, it pursued its own extensive research programme, using where appropriate outside investigators, under the able guidance of Graham Bannock, the Committee’s Research Director. Much of the research was published through eighteen separate reports. This demonstrated a substantive commitment to the contribution that research could make to the analysis and understanding of small firms.

Third, against a background of long-run substantial decline in the relative share of small firms in economic activity, the Committee very effectively highlighted the important economic functions attributable to small firms, particularly in manufacturing (p. 343). It took the view that some of these functions were absolutely central to the preservation of the economy’s dynamism. For example, it saw the small firms sector as ‘… the traditional breeding ground for new industries – that is for innovation writ large.’ Even more importantly, the committee argued – in words strongly reminiscent of Alfred Marshall² – that ‘… small firms provide the means of entry into business for new entrepreneurial talent and the seedbed from which new large companies will grow to challenge and stimulate the existing leaders of industry’ (p. 343). Such public commitment to the economic importance of small firms inevitably enhanced the attractiveness of research in the area. It also served as a counterbalance to the widespread view, especially dominant in the 1960s, that larger size, particularly in manufacturing, was likely to be a key source of additional efficiency.

Finally, the Committee itself underlined the scope for more research: ‘The field offers enormous scope for further research: our own work and that of our commissioned researchers has suggested many avenues that could be fruitfully pursued and which lack of time alone has prevented us from attempting’ (p. 353).

Since Bolton, other inquiries have served to maintain the public policy profile of small firms. For example, the Committee to Review the Functioning of Financial Institutions (Wilson Committee 1979) devoted significant attention to the financing of smaller firms. In more recent years the Bank of England has published a series of Annual Reports on the Financing of Small Firms.³ In addition, it has also published studies on particular aspects of small firm financing, including technology-based small firms, ethnic minority businesses and social enterprises.⁴

At government level, the Bolton Committee report led to the establishment of a specialist unit, responsible for small firms policy and advocacy. This unit is now contained within the Department for Business, Enterprise and Regulatory Reform. In terms of industrial policy pronouncements, ‘enterprise’, ‘enterprise society’, ‘enterprising behaviour’ or ‘enterprise culture’ have been popular terms in recent years: see for example HM Treasury (2002). The nature of ‘enterprise’ and its relationship with small or new firms or indeed with entrepreneurship are never fully spelt out, although it is clear that small scale enterprise and business formation figure very prominently in policymakers’ deliberations. All these developments have provided a very supportive policy environment for small firms research in the UK in recent decades. (It remains to be seen however whether the downgrading in 2006 of the government’s small firms unit, in terms of its staffing, budget and status, represents any weakening of that policy commitment.)

Another factor that has been encouraging for UK small firms research has been the availability of databases. These databases, often refined and developed by researchers, have enabled various aspects of the dynamics of the small firms sector to be studied in some depth. Establishment-based Factory Inspectorate data was widely used in the early days (see e.g. Gudgin 1974). Firn and Swales (1978) were able to utilise data from the Employers Register. Creedy and Johnson (1983) (see Chapter 3) utilised data from the (then) Department of Industry on openings in manufacturing industry. Following the pathbreaking study by Birch (1979) in the US (see below) based on Dunn and Bradstreet records, Gallagher and colleagues put this same database to good effect in their analysis of job change in the UK (Gallagher and Stewart 1986, Daly et al. 1991). Perhaps the most widely used data set in recent years has been that based on VAT registrations and deregistrations, e.g. in Ganguly (1985); Keeble and Walker (1994); Black et al. (1996); Robson (1996a and b); and chapters 6, 7 and 15 in this volume. Some use has also been made of company data (Johnson and Cathcart 1979a and b: see chapters 2 and 5; and Johnson 2003), the Census of Employment (Hart 2007) and the Inter-Departmental Business Register (Hijzen et al. 2007).

As is well known, each of these data sources has limitations, in terms of coverage and the range, reliability and suitability of the information provided. They are not set up with specific research uses in mind. They have nevertheless proved a valuable facilitator of empirical work. In addition some researchers have of course developed their own data sets through survey work or have obtained special tabulations of official data. An example of the latter is given in chapter 10. Perhaps the most exciting recent development in terms of data has been the Global Entrepreneurship Monitor (GEM), a very substantial international comparative exercise in the measurement of early stage entrepreneurial activity. In the latest report that uses these data (Bosma and Harding 2007), 42 countries were included.

A final development that has favoured small firms research in the UK in recent decades may be mentioned. It is the recovery in the relative importance of small firms. As Storey (1994:25–34) has shown, both the share of small firms in manufacturing employment and the percentage of the labour force who are self-employed bottomed out in the mid 1960s, after which both measures started to rise again (see also Stanworth and Gray 1991). This reversal of decline meant an increased profile for small firms as an economic force and a consequent increased interest in their management and role.

Against this background it is hardly surprising to find a very substantial increase in academic articles in the area. Table 1.1, which is based on the Social Sciences Citation Index® (SSCI®), provides a very crude measure of publishing trends since the 1960s. These data must be used very cautiously. An important obvious limitation is that the number of journals included in the SSCI changes over time. It also takes time for a new journal to get onto the books.

Inevitably the particular words used for the search have an arbitrariness about them; no doubt other possibilities might have been used. Nevertheless the table does have some interesting insights to offer. Column 1 suggests that small firm(s)/business(es) publications grew very significantly from the 1960s, but that they might have peaked in the 1990s. New firm(s)/business(es)

Table 1.1 Data from Social Science Citation Index®: articles on new and small firms and entrepreneurship

publications (column 2), although on a much lower absolute level, have continued to grow throughout the period and there is no sign yet of any decline in absolute numbers.

In columns 5 and 6 an attempt to normalise the data is made by relating the small/new firm(s)/business(es) data to more general mentions of firm(s) and business(es). Column 5 suggests tha...

Table of contents

• Routledge Studies in Small Business
• Contents
• Preface
• Acknowledgements
• 1 Introduction
• Part I Business formation
• Part II Regional issues
• Part III Employment
• Part IV Growth and development
• Part V Policy
• Index