Small & Medium Sized Enterprises in an International Environment - Essay Example

? SMALL BUSINESS Small & Medium Sized Enterprises in an International Environment …………………. and Number …………….. …………. Table of Contents Table of Contents 2 Introduction 3 International Contexts of Small Business Enterprises 3 Importance of Small Businesses in International Business Contexts 4 Small Businesses as Engine for Job Creation 4 Small Businesses as Mechanism for Innovation 7 Small Businesses: ensuring long-term growth 8 Role of SME to UK 9 Small Businesses in UK 9 Conclusion 11 References 13 Introduction Small and medium sized businesses are imperative to the economy of a country mainly for their roles in job creation, innovation and technological advancement. In recent years, small start-up and even smallest of businesses, particularly those from the high-technology industries are internationalizing at an increased rate. Most of the small businesses are launched with a plan of conducting cross-border business activities (Longenecker, Moore, Petty and Palich, nd, p. 443). Within the free trade zone of European Union, more efforts are put in to unite the countries both economically and politically and this transition has made tremendous changes in the international business contexts. For small and medium sized businesses, it has become easier for them to broaden their business activities globally, bringing newer opportunities as well as threats (Gankema, Snuif and Zwart, 2000, p. 15). This piece of research paper addresses the importance of small business in the international contexts, mainly in relation to their roles in job creation, innovation and long term growth. This paper chooses UK as an example for how efficiently that small businesses play its roles and affect the economy of the country. International Contexts of Small Business Enterprises Basically, there are three approaches to the internationalization of small businesses; they are stage approach, network approach and the born global approach (Oviatt, McDougall, Simon, and Schrader, 1995, p. 111). Stage approach states that internalization of small businesses occurs gradually from the domestic marketing through the export as primary mode of entry to another country. The network approach states that internalization of small businesses occurs through developing successful networks of business relationships to facilitate global business operations (Hynes, 2010, p. 90). Born Global firms are those small businesses that are launched with cross-border business activities in mind (Longenecker, Moore, Petty and Palich, nd, p. 443). In recent years, small businesses that are launched with a view to gradually internationalize the firm’s activities and this has tremendously impacted the roles that are played by the small business in international business contexts. Importance of Small Businesses in International Business Contexts Small Businesses as Engine for Job Creation Out of the 30.23 million businesses in the United States, around 99.7 percent as accounted to be 30.14 million are considered as small businesses (Scarborough, 2011, p. 23). Though they are generally termed as ‘small’ as they employ fewer than 100 employees their contribution to the economy is greater both nationally and internationally. Small and medium sized businesses employ more than 51 percent of the nation’s total private sector workforce, but the assets these small businesses posses are considerably less than big multinational and other businesses (Scarborough, 2011, p. 23). Small businesses are critically important to the economy of a country and the international economy in general due to the roles it plays such as job creation, innovation, long term growth etc. Malchow-Moller, Schjerning and Sorensen (2009, p. 16) asserted that entrepreneurs, especially of the small businesses, are widely believed to play pivotal roles in terms of job creation and wage growth. The father of entrepreneurship, Schumpeter, explained this concept through ‘creative destruction’ as entrepreneurship replace old and less productive firms in an economy. National Academy of Engineering (1995, p. 78) found that small firms create around 80 percent of new jobs. Small businesses are creating newer jobs and thence they are the engine for economic growth as well. National Academy of Engineering (1995, p. 79) listed the findings of Charles Brown, James Hamilton and James Medoff that: New firms, that may be small at birth, are found to generate newer jobs as they grow, Small establishments owned by large firms also play an important role in employment creation, Growth of small business industries is more impressive than the job creation of small businesses, The share of employment of small businesses has remained relatively unchanged since 1958, more specifically, about 35 percent of jobs are in those firms that employ less than 100 people, and 50 percent of employments are in those businesses with less than 500 employees. But, Brich’s (1979) findings were more appealing than the above mentioned figures. According to the findings of Birch, small firms are the primary generators of the job in an economy, based on the facts he identified from the US economy (Davies, 2010, p. 19). According to his reports, on an average, about 60 percent of the total jobs in the United States are created by firms that employ less than 20 employees. It means even very smaller firms are highly critical to the job creation and thus to the economic development. Small business that employed 100 employees or less than that had been found to generate 82 percent of all net new jobs from 1969 to 1976. But, large firms with around 500 employees are accounted for less than 15 percent of net job growth (Davies, 2010, p. 19). Though these statistics show quite different data about new job creations of small businesses, it is very obvious that small businesses play an extremely important role in new jobs creation and therefore they are very imperative to the economic growth. As and when the small businesses internationalize their businesses or they run their business activities in a globalized business environments, it is obvious that small businesses are playing very significant roles in the growth and development of international economy too. Davis, Haltiwanger and Schuh (1996, p. 302) criticized the way many researchers exaggerated the data regarding the job creation of small businesses. He argued that business size in terms of people that the business employs must be considered and evaluated in order to find accurate information about the job creation capability of small business in different sizes. Their assessment is depicted below: As he concluded, gross job creation rates are substantially higher for smaller businesses, but gross job destruction as well. They also concluded that larger employers offer greater job security, even though smaller firms contribute considerably greater percentage of gross jobs. Small Businesses as Mechanism for Innovation Theoretically, small businesses foster innovations. According to Schumpeter’s theory of entrepreneurship, innovation is an important element to the skills of an entrepreneur. An entrepreneur can be said to have met his required skills if he is able to set up a small business, by identifying the better opportunity, developing an idea and seizing the opportunity through effective business practices. Very recently, it has been widely recognized that small businesses are the engine of innovation and thus bring positive economic change. Small businesses represent an increasingly important share of the highly innovative firms (Davila, Epstein and Shelton, 2007, p. 196). In the European Union, small business is the biggest activator of the economic development is each state since small businesses innovate and bring greater advances in ideas, strategies and technology advances (Bistricic and Kuzman, 2011, p. 146). With special reference to Croatia, Bistricic and Kuzman (2011) explained that small businesses in European Union are potential; sources of creative energy production and in providing most of the dynamic workplaces as well. They detailed that small in Businesses in Croatia and other EU countries strengthen the competitiveness, foster balanced regional development, increase quality of business infrastructure, reduce administrative imbalances and strengthen the investment opportunities. Innovation, which is the ability of a firm to apply creative solutions to problems and opportunities to enrich people’s lives (Scarborough, 2011, p. 330) is the key to future success. Markets are getting changed every day and competitors are moving very fast in competitive strategies in a way that small businesses face difficulties even to stand strong. It is therefore highly important that small businesses, mainly to survive in the market, are to innovate (Scarborough, Wilson and Zimmerer, 2009. P. 306). The contribution of small businesses to the innovation and thence to the economic development is a function that is sensitive to the industry. According to the research findings, the contribution of small businesses to innovation is greatest in immature industries, whereas it may not be the same in matured industries (Acs, 1999, p. 160). It is also found that small business owners more often observe where the newer technology, newer idea, latest strategic dimensions, a dynamic opportunity etc can be applied more effectively for generating maximum results out of it. This is how small businesses become capable of enhancing technological or otherwise innovation. Small Businesses: ensuring long-term growth Small businesses represent an important segment of the economic growth and development of a country. Though small businesses employ fewer numbers of people and are considerably small in size, they represent more than 99 percent of the total numbers of all the businesses around the world. More specifically, they play essential role in ensuring continuous economic growth and development to a nation. Small businesses bring innovation, create jobs, find newer business opportunities and thus they help the economy grow. Majority of the small businesses are retailers and service businesses. Both the retailing and service businesses fulfill an economic and social goal of providing right goods or services to the right customers in right place and for right price. Large businesses focus on manufacturing of bulk goods, but small businesses help them get their goods to customers’ hand. As Acs and Audretsch (2010, p. 588) pointed out, small businesses generate growth since they serve as vehicle for innovation, change and progressive business activities. The present business environment is largely affected by globalization, but still, small businesses ensure ongoing economic growth through dynamic entrepreneurial activities. Role of SME to UK This part of the paper presents a brief report on the role of Small Business Enterprises in UK, a member country of the European Union since 1973. UK has been chosen for this report as UK is one of the most economically advanced member countries of the EU. Small Businesses in UK Analoui and Karami (2003) estimated that there are around 3.7 million small businesses in UK and the economy of the country is largely impacted by these small businesses. Around 400,000 new small businesses are launched in the UK every year. 99 percent of all the businesses in UK are small (A&C Black, 2010, p. 1). People at some time become inspired to take the challenges transforming a business idea or opportunity in to a real business and thus they become the owners of small businesses. These business people turn their dreams to reality. As A&C Black (2010, p. 1) noted, with around 4 million small businesses in the UK, they are employing nearly two thirds of the total private sector workforce and they turn over around half of the total UK’s GDP as well. There may be differences in the statistical data observed by various literatures, but these differences seem less important since it is widely accepted that the role that small businesses play in any country is extremely significant to the economy of that country. Hughes (2009, p. 116) reported the statistical information about small businesses in UK based on the study and research conducted by Official Statistics of UK. According to their findings, there are a total of 4.3 million enterprises of all sizes, and around three million of them have no employees. There are another one million small firms that employ less than 10 people. Only around 200,000 small firms employ 10 to 249 people, but the firms that employ more than 250 people are considerable less as accounted as 8000 in numbers. When it comes to the job creation and innovation roles that are played by small businesses in UK, it is very evident that small businesses create large numbers of jobs and they bring more dynamic and innovative technology as well as ideas. Hughes (2009, p. 116) argued that 1.2 million small businesses alone account for 40 percent of total employment while enterprises that employ more than 250 people account of around 60 percent of total employment. This data can be justified in the ground of literatures like Davis, Haltiwanger and Schuh (1996), but cannot be justified in the views of literatures like Brich’s (1979), Davies, (2010) and National Academy of Engineering (1995). Small businesses are generators of innovation, but may not be more efficiently than that of large businesses. Hughes (2009, p. 116) argued, based on UK’s official statistical information, small businesses that employ less that 250 people brought innovation of around ?448 million out of the total ?30 billion expenditure on UK’s Research and Development. It means, small business with less than 250 people account for only 3.3 percent of the total business expenditures on R&D. Innovation and its outcomes will be evident from the total business expenditures, R&D figures, business diversities, business development etc. large firms like those businesses that employ more than 250 people are more likely to foster product innovation through product differentiation, and therefore it is argued that they account for relatively higher share of the total employment (Hughes, 2009, p. 117) According to some earlier research literatures, small firms are found to be the primary generators of the job in an economy (Brich, 1979). 60 percent of all the jobs are found to be generated by small firms in countries including the United States (Davies, 2010). But, Hijzen, Upward and Wright (2010, p. 622) claimed that job creation and job reallocation are also the contributions of large businesses. According to their findings, it is large but not small businesses account for the bulk of job creation and destruction. They also argued that the conventional opinion that small businesses disproportionately contribute to the job creation is purely based on the fallacy and incorrect data about the job creation and small businesses. Small firms represent around 99 percent of total numbers of businesses in most of the countries worldwide except that a good majority of small businesses employ no jobs at all. Instead, large businesses create large numbers of jobs throughout the country. Hijzen, Upward and Wright (2010, p. 645) concluded that around 50,000 jobs were created in the UK and around 47,000 jobs were destructed each week. Service sector industry accounts for around 70 percent of this job turnover, creating 38,000 jobs and destructing 33,000 jobs a week. They concluded that small firms within the UK account for around 65 percent of job creation and 45 percent of jobs destruction, and hence, the net job creation rate is much less than what has long been exaggerated by various literatures and researches. Conclusion This research paper has explained the theoretical and empirical aspects of the roles that are played by small businesses in economic growth through job creation and innovation. Small businesses are small in size, but larger in numbers and they are considered to be generators of jobs and channel for innovation in business field. This paper presented various literatures about the roles of small businesses in job creation and innovation. Earlier researchers argued that small businesses play an important role in economic growth by generating more than 60 percent of total jobs, but when it comes to the case of UK, recent statistical data showed that large businesses are critically playing an important role in creating jobs than that of small businesses. Large businesses have been found to be the biggest channel for innovation as they are innovating in product differentiation and other major business strategies. References Acs, Z.J, 1999, Are small firms important? Their role and impact, Illustrated reprint, Springer Acs, Z.J and Audretsch, D.B, 2010, Handbook of Entrepreneurship Research: An Interdisciplinary Survey and Introduction, Illustrated edition, Springer Analoui, F and Karami, A, 2003, Strategic management in small and medium enterprises, Cengage Learning EMEA A & C BLACK, 2010, Good Small Business Guide: How to Start and Grow Your Own Business, Illustrated edition, A & C BLACK, Davies, P, 2010, Sizing Up Job Creation: Are small businesses truly the engine of job growth? It depends on how you look at it, The region, EBSCO database Gankema, H.G.J, Snuif, H.R and Zwart, P.S, 2000, The Internationalization Process of Small and Medium-sized Enterprises: An Evaluation of Stage Theory. Journal of Small Business Management, EBSCO data-base Davila, T, Epstein, M.J and Shelton, R.D, 2007, The Creative Enterprise: Strategy, Illustrated edition, Greenwood Publishing Group Davis, S.J, Haltiwanger, J and Schuh, S, 1996, Small Business and Job Creation: Dissecting the Myth and Reassessing the Facts, Small Business Economics, Kluwer Academic Publishers, Netherlands, EBSCO database Hijzen, A, Upward, R and Wright, P, 2010, Job Creation, Job Destruction and the Role of Small Firms: Firm-Level Evidence for the UK, Oxford bulletin of economics and statistics, EBSCO database Hughes, A, 2009, Hunting the Snark: Some reflections on the UK experience of support for the small business sector, Innovation: management, policy & practice, EBSCO database Hynes, B, 2010, International Small Business Growth: A Process Perspective, Department of Management and Marketing, Kemmy Business School, University of Limerick, EBSCO database Longenecker, J.G, Moore, C.W, Petty, J.W and Palich L.E, (nd), Small Business Management, Launching and Growing Entrepreneurial Ventures, Fourteenth Edition, Cengage Learning, USA Malchow-Moller, N, Schjerning, B and Sorensen, A, 2011, Entrepreneurship, job creation and wage growth, Small Bus Econ, EBSCO database National Academy of Engineering, 1995, Risk & innovation: the role and importance of small high-tech companies in the U.S. economy, National Academies Press Oviatt, B.M., McDougall, P.P., Simon, M. and Schrader, R.C, 1995, ‘Heartware International Corporation: A Medical Equipment Company “Born International”, Part A’, Entrepreneurship Theory and Practice, Scarborough, N.M, 2011, Essentials of Entrepreneurship and Small Business Management, Sixth Edition, Prentice Hall, pearson Education, Inc. Scarborough, NM, Wilson, D.L and Zimmerer, T.W, 2009, Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, Prentice Hall, Pearson Education, Inc. Treffinger DJ, Isaksen SG & Stead-Dorval K.B 2005, Creative Problem Solving: An Introduction, Illustrated fourth Edition, Prufrock Press Inc Zimmerer, T. W, Scarborough, N. M, and Wilson, D, 2008, Essentials of Entrepreneurship and Small Business Management, Fifth Edition, Prentice Hall, Pearson Education Inc Read More