Barriers to Growth in Small Firms

John Barber, Stan Metcalfe, Mike Porteous, John Barber, Stan Metcalfe, Mike Porteous

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317191810
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Kleinbetrieb

This book, originally published in 1989, studies both the growth and the barriers to growth of small firms. It examines market and industrial structures, also the role of investment institutions and their handling of small business accounts. There are chapters on management attitudes and ability considered as a potential barrier to development, and other problems such as lack of finance and of a suitably qualified workforce. The book stresses the importance of communicating the latest advances in technology to small firms, and urges the need to re-think government tax and procurement policies.

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Barriers to Growth: The ACARD Study

John Barber, Stanley Metcalfe, and Mike Porteous

Increasing attention has been paid in recent years to the important role played by small and medium-sized firms in innovation and economic growth. Special emphasis has been given in particular to the important stimulus small firms provide to competition in markets that might otherwise be dominated by large, established companies; their role in the early development and exploitation of radical new technologies (Rothwell and Zegveld 1982); and the job-creating effects of small firms (Storey 1982). The significance of all these effects, however, depends to a great extent on the ability of small firms, once established, to grow. While much attention has been given to the start-up of small enterprises, comparatively little is known about the ways in which small firms are able to realize their full innovative and growth potential, what the most important factors are which constrain their development and growth, or how these might be most effectively overcome. Innovative ability is, of course, an important source of growth, but as a firm seeks to move into new activities it will often come up against difficult choices and constraints which it perceives only imperfectly.

For this reason ACARD recognized the need for an original study aimed at examining the barriers to growth of small, innovative companies in the UK and drawing out any lessons for policy making and issues for future investigation. The main concern was to understand the barriers inhibiting the transition of small firms into medium- and large-sized companies, particularly those companies which show signs of innovative potential or which operate in high-technology areas. Small firms appear to face a number of difficulties in making this transition. Thus it was felt that attention should be concentrated on the ability of firms once established to grow; the process of start-up was looked upon as relevant only in so far as it imposed constraints on subsequent growth.

It was clear from the outset that the complexities of the growth process should not be underestimated nor should too much credence be given to apparently simple, single-minded solutions to the growth problem, e.g. a lack of finance. Growth implies much more than the ability to invest in best-practice facilities. It requires an ability to adapt and change, to be aware of markets and technological developments arising outside the firm, to make use of internal resources and to combine them effectively and continually with resources drawn from the environment. If these growth barriers are not overcome, then no matter how efficient the firm and how attractive its products it will remain of limited economic significance. More generally, the issue of growth barriers is one vital aspect of the ability of UK industry to keep pace with its international competitors.

As a first step it was decided to undertake a series of literature reviews of what is currently known about the most important factors influencing the growth of small firms in the UK. The aim was to identify gaps in the knowledge, the needs for further research, and the most appropriate lines of enquiry for any future investigation by ACARD. This book draws together the seven expert review papers prepared for the ACARD study, and represents the findings at this preliminary stage. Taken together these add up to a useful overview of the state of knowledge. A number of significant gaps emerged, however. As expected, rather more was known about the problems involved in starting new businesses than about the barriers to subsequent growth. The issues of finance, skills and management appeared to be the more researched, but even here little attention had been given to the more dynamic aspects of how these and other factors interact as the firm seeks to grow.

In this introduction we shall summarize the findings contained in the various papers, draw together the principal implications of these findings and suggest areas for future work. Before doing so we will help place the papers in their appropriate perspective by elaborating briefly on several of the general issues surrounding the role and growth of small firms.

SOME BACKGROUND ISSUES RELATING TO THE GROWTH OF FIRMS

This study is not primarily concerned with the factors encouraging the start-up of new companies or enterprises nor with the reason why many of them are likely to fail. Rather it is concerned with the growth and development of new firms and enterprises once successfully established. We take it for granted that a market economy needs to generate a large number of business experiments in a wide range of fields and that public policy should be concerned with whether the economic environment and the framework of incentives encourage this to take place.

Like other industrial economies, the UK is predominantly an economy of small firms with 83 per cent of all enterprises in 1985 having a turnover of less than £1/4 million. This dominance is in part a reflection of the composition of the stock of enterprises. Roughly 65 per cent of all enterprises are in the services sector which is dominated by retailing and catering activities. Manufacturing, which is more prone to large-scale units, only amounts for 10 per cent of total enterprises. In the manufacturing sector itself, however, small enterprises also dominate. Statistics available from the 1984 census of production are summarized in Table 1.1.

Table 1.1: 1985 census of production statistics for small firms

Employees	No. of enterprises	% enterprises	% manufacturing gross output	% manufacturing employment
1–99	122,408	96.1	18.1	23.5
100–199	2,374	1.9	5.9	6.8
200–999	2,088	1.6	16.9	17.5
1,000+	560	0.4	59.1	52.2
Total	127,430	100.0	100.0	100.0

The firms with more than 1,000 employees have, on average, 13 establishments per enterprise, while the firms in the smallest size class are typically single-establishment enterprises. It will be apparent from these figures that gross output per employee rises consistently with the size class of enterprise, being some 50 per cent greater in the largest enterprises than in the smallest. Of course, these aggregate statistics conceal considerable variations between individual manufacturing sectors.

Sectors within manufacturing which had the largest number of firms with less than 200 employees in 1985 were, in descending order: printing and publishing, which had nearly twice as many as any other sector; clothing, hats, and gloves; miscellaneous machinery and mechanical equipment; hand tools and finished metal goods; and wooden furniture and shop fittings. At the three-digit level of the Standard Industrial Classification (SIC) it is possible to identify 15 sectors for which in 1985 over half of the output was produced by small firms. Those with the highest proportion were, in descending order: miscellaneous wooden articles; miscellaneous manufacturing industries; metal working machine tools; saw-milling, planing, etc. of wood; bolts, nuts, and washers etc.; and builder’s carpentry, and joinery. Not surprisingly many of the sectors in which small firms predominate tend to be drawn from the more traditional areas of manufacturing. However, 49 per cent of the output of measuring, checking and precision instruments was produced by small firms in 1985 while medical and surgical equipment (35 per cent of output accounted for by small firms), specialized chemical products industrial (33 per cent), and optical precision instruments (30 per cent) were among the more hightechnology sectors in which small firms played a significant role.

Small firms appear to account for a very small proportion of R&D undertaken in the UK. (In 1978 firms with more than 1,000 employees appeared to account for 96 per cent of the total R&D undertaken by UK enterprises.) The available data almost certainly underestimate the share of R&D accounted for by small firms. Partly this is because of die coverage of the data which is necessarily much less complete for small than for large firms and partly because of the nature of technological activities in small firms, which typically do not have specialized and separately accountable R&D departments, relying instead on design and production engineering activities. According to figures produced by Pavitt (1987), R&D is the source of about 80 per cent of the knowledge inputs into innovations made by firms with more than 50,000 employees but only 40 per cent in the case of firms with between 100 and 499 employees compared to 49 per cent from design, production, and operating staff. Moreover while firms with less than 1,000 employees account for a very small proportion of total R&D, they accounted for nearly 40 per cent of significant innovations in the UK during the period 1975 to 1983. It is certain that R&D statistics give a very incomplete picture of the innovative capabilities of small companies.

As far as foreign trade is concerned small firms are much less likely to be involved in export markets than large firms. A recent study indicated that within manufacturing about 14 per cent of the firms with a turnover of less than £lm are exporters compared to about 48 per cent of firms with a turnover of between £lm and £10m, 63 per cent of firms with a turnover of between £10m and £100m, and 72 per cent of firms with a turnover of over £100m (Bannock and Partners 1987). An interesting feature of these figures is they appear to suggest that of those growing firms which make the difficult transition to become exporters a majority appear to do so while they are still relatively small.

The reasons why the size distribution of enterprises takes the particular shape that it does has been much debated but it need not long detain us here. Suffice it to say that the small-firms sector enjoys a considerable turnover, with ‘births’ of all enterprises averaging 12.5 per cent and ‘deaths’ of enterprises averaging 10.5 per cent in the first half of the 1980s, and that recent evidence indicates that the probability of survival increases with the size and the age of the enterprise (Evans 1987). The problem concerning ACARD was why so few firms made a successful transition out of the small size category. In some cases this will be because the natural economic size of a competitive unit is small, in others it will be because the firm sells to geographically limited, or otherwise specialized niche markets. However, in many cases such explanations of limited size are unsatisfactory. Neither diseconomies of scale nor niche markets need necessarily limit the size of the firm. Selling in the same niches overseas or developing products for new niches are both viable ways of overcoming limitations imposed by the size of particular domestic markets. Of course, there are many partial, and typically untested, hypotheses as to the real limitations on the growth of firms. Some emphasize external limitations, e.g. an unsympathetic banking community, failures of business education, or constricting government purchasing policies, while others put the emphasis on internal factors, such as the ability to change management structure at critical stages in the firm’s growth (Grieve Smith and Fleck 1987) (Scott and Bruce 1987) or the, seemingly simple, unwillingness to increase beyond a certain size with all that may entail in terms of loss of independence and personal work relationships (Segal, Quince, and Partners 1985). What is clear is that we have little systematic understanding of which influences are important or how they might interact and bear upon different stages of the growth process.

An important related issue is the ability of the UK to exploit the commercial opportunities which new technology in the form of new products and processes will generate on a worldwide basis. In some sectors – for example, those producing specialized machinery – small firms tend to be the norm and enjoy important advantages. If the UK is to maintain an effective presence in these sectors the most important factors will be the ability to generate sufficient small firms which develop their specialist expertise in line with technological change and market needs. In these cases the success of firms will depend on adaptability, innovativeness, and successful qualitative change, while barriers to growth in size may have little relevance. Rather it is the capacity to transform the focus of the business at appropriate intervals which is crucial.

In many other sectors, however, while small firms may have an important role to play in the early stages of development of a new technology or product, market growth and the progress of technology soon shifts the balance of advantage to larger enterprises. Economies of scale in production, heavy upfront research and development costs, or the need for a global marketing network all require significance threshold investments which the smaller firm is not in a position to make. In some cases even firms which are large by UK standards may find it difficult to survive against foreign competition, particularly that emanating from US and Japanese firms, a factor which does much to explain the current interest in collaboration in both R&D and production. It is not altogether surprising to find (see p. 4) that R&D expenditures are concentrated in larger enterprises, as are UK exports.

The division between those technologies, products and markets in which small firms can play a major role and those in which large firms predominate is not a clear-cut one. Even in global markets dominated by giant multinationals, some smaller firms will be able to survive by exploiting particular market niches. There will indeed be many cases where this will be the most appropriate strategy for UK firms to follow and where an attempt to be a major producer would not be the best use of UK resources. Nevertheless, if the UK is unable to produce sufficient new businesses which can grow with, and maintain a significant share in, rapidly growing international markets in new products or processes, our ability to exploit the opportunities offered by new technology could be severely constrained and with it our ability to improve our standard of living.

Of course, only a small proportion of small firms can grow to be large or even medium-size firms by domestic, let alone international, standards. The important consideration is that conditions in the UK business environment should be sufficiently conducive to the growth and qualitative development of small firms, so that we can achieve an appropriat...