Causes of the UK Small Firm's Revival - Coursework Example

The Economics of Small and Medium Size Enterprises Outline: The clear evidence of the small firm revival in the UK economy is required to be analysedfor finding out the degree of revival and its contribution to the economic development of the nation. The theoretical evidence providing supportive factors to the revival of the sector are also discussed. The sustaining ability of the revival is also examined for assessing the future growth of the sector. The outline for the study is states below; 1. Introduction: 2. Argument on the SME revival in UK: 3. Theoretical support: Theoretical basis for the revival of the small scale sector in the UK economy 4. The evidence of small firm revival: 5. The effect of small firms on the UK economy and Government policy: 6. SMEs and government intervention: 7. Has the revival been maintained? 8. Small firm growth and public policy in the UK 9. Findings and analysis 10. Conclusion The Economics of Small and Medium Size Enterprises Introduction: Small scale sector plays a very important role in the economic development of any country and this is particularly so in the case of UK. Small firms have emerged in UK because of the focus on industrial growth and mainly due to reciprocity of the structure of the national economy and the unique characteristics of small scale industries. Emergence of SMEs in the economy has facilitated balanced regional growth by promoting entrepreneurship among all economic fields. It contributes towards foreign exchange earnings, by stimulating the export of quality and standardised products and services. 2. Argument on the SME revival in UK: The argument on the revival of SMEs in UK economy is described below; In UK economy there should exists clear evidence for the small firm revival exists and it really needs to be maintained in future also. The theory of economies of scale is determining the size of the business and its growth. Through the combined effects of technical efficiencies and the economies of scale, SMEs showing evidence of revival in the UK economy. Greater interest shown by the UK government for the boosting of the SME sector is a clear evidence of the revival of the economic sector. Contribution from the part of the small scale sector to the economy of UK is larger than that of in previous decades and there is a clear evidence for the revival in the SMEs in the UK. (SME innovation survey analysis). As small enterprise sector were on secular decline in the past decades resulted from lower productivity and incomes, poor working conditions, today in the UK economy, there has been a revival of interest in small scale sector from the part of the investors and the government. As a result of the revival, the sector is showing upward movement in terms of contribution to the economy and profitability. (SME 2009).  Theoretical support:  Economic determinants that explain revival: Existence of small firm revival in the UK economy can be explained with the theoretical reasons. Innovation capability as learning organisations is the major economic determinant of revival of the sector. SMEs should be capable of adapting the technological and managerial changes in the environment. Internal resources occupied by the small scale firm are capable of extracting knowledge and contributing to innovation generating knowledge and skills. Operate and develop technologies is another determining factor and the SMEs are possessing greater technological skills and operational efficiency. (SME 2009). There exist large numbers of internal and external factors that contribute to the small firms’ revival. These factors are the basic elements that boost the SME revival. External resources available for the firms in the SME sector should be capable of better co- ordination with the suppliers, customers and public institutions. According to Storey D (1994), in developed economies, small firms have greater importance in terms of their contribution to the total economy, through creating employment opportunities. International revival that results from emerging SMEs also has to be considered while discussing the case of revival in the small scale sector in UK. In case of revival of small scale firms, two major theoretical approaches have been developed. Technical Efficiency Theory: This theory is based on the economies and diseconomies of scale. In case of economies of scale, corresponding to the increase in the falling long run average costs, output expands. Economies of scale are important in firms, where there are large fixed costs and require specialisation. Along with the advancement in technology, firms have to change their production process in more effective ways. In order to achieve higher productivity in business, positive technological change has to be adopted by the firm besides ensuring effective utilisation of infrastructural facilities. (Parameswaran 2002). Formal structure of authority can diminish the organization’s competitive position in the technical environment. Institutional efficiency theory – This theory was formulated by Meyer and Rowan. They emphasized that institutional environment have a powerful influence on the development of formal structure of organisations. This theory is based on the concept that revival of the firm is related to the institutional efficiency of the firm, to maintain a balance between the organisation cost and the transaction costs (TC). In order to exist for a long term, firms are required to internalise transaction costs for ensuring lower average costs. In countries where the transaction costs have been kept at a low level through support from the government, by way of reduction of taxes and other legal requirements, it can be seen that more small firms exist. In case of an imbalance between transaction cost and organisation cost among the small firms, the larger firms can replace smaller firms through economies of scale in operation. “Meyer and Rowan argue that often these institutional myths are merely accepted ceremoniously in order, for the organization, to gain or maintain legitimacy in the institutional environment. Organizations adopt the vocabularies of structure prevalent in their environment such as specific job titles, procedures, and organizational roles.” (Meyer et al). Porters five force analysis on the SMEs sector in UK: Existing conditions in the UK market can be analysed with the Porter’s Five Force model Rivalry between firms: In the UK economy the rivalry between firms is of intense in nature. Intense competition force companies to maintain their market share and profitability by competing with their rival firms for sustaining in the industry on a long term. Threat of entry: Threat of new entry firms is high in the UK economy. Due to the potential opportunities and the limited restrictions from the government, new firms can successfully launch in the market and it increases the threat of entry. Product differentiation: Product differentiation is possible in the SME market as there involves number of products that can be produced and marketed. Threat of substitutes: Threat of substitutes is present in the SME sector. There are large number of firms offering similar products and services at relatively same pricing and quality features. Power of Buyers: Buyers in the UK SME sector have bargaining power over its suppliers as there are large number of sellers offering same type of products and service at relative equal qualities and pricing. Power of suppliers: Suppliers in the SME have bargaining over its customers as the resources are of limited and its requirements are of large. Causes of re-emergence of the small firms: The following are the factors contributing to the re-emergence of the small firms in the UK economy: 1. Re-affirmation of the business culture of the enterprises. 2. Emergence of advanced technologies in the SME field. 3. Restructuring of the economy as a part of the global economy. 4. Increasing un-employment in the large scale sector. 5. Changing culture of the large scale business characterised by outsourcing, subcontracting and vertical disintegration. 6. Reduction in the regulatory issues. 7. Privatisation. (Mulhern). The evidence of small firm revival: In UK, SME sector has significant position in provision of job opportunity as well as contribution to the economy. It is the most effective business structure for strengthening the economic growth. As a simple decision making unit, SMEs have the capability to change according to the transformations occurring in the business environment. In the UK economic scenario, it is evidenced that the SME sector is showing a booming trend. The number of new business units in the sector has increased by 200000 last year and it has reached to approximately four million. It is evidenced that about 500 new business units are emerged in the sector on daily basis. Moreover, SME sector is showing higher growth rate in UK economy, and more than 3 million businesses in the economy get handled on small scale self employment basis. It is more evidenced in the IT sector. The statistical figures on UK economy reveal that approximately, £178 billion comes to the UK economy, from the micro business sector. The Government is committed to small business sector. (SMEs booming in UK PLC 2004). Share of different enterprises in the economy: (High level summary of statistics 2008, p.2). The effect of small firms on the UK economy and Government policy: UK Government is highly interested in the small scale sector growth, in its economy, as it is essential for ensuring a stable position for the economy. Entrepreneurs are supported with government aids and revival funds. To boost the sector, by stimulating innovation, government has declared a £50m fund to back up budding entrepreneurs. Government has recognized the importance of the sector in the stable economic growth of the nation. “There are 3.6million SME’s, which employ less than one hundred people, in UK. These firms play an increasingly important role in the success of the economy, and government policies are currently being implemented to encourage entrepreneurs to become self-employed making this subject topical at the moment.” (The effect of small firms on the UK economy and government policy research paper 2006). During the 1980’s there was a significant rise in the number of self-employed people in the UK. In 1991, 96 per cent of firms in the UK employed less than twenty people and these firms accounted for around one third of non-government employment. Self employment trend among the individuals, have been increasing over the years. (The effect of small firms on the UK economy and government policy research paper 2006). UK GDP growth rate ( 2006 to 2009): (United Kingdom GDP growth rate 2009). Small scale firms are considered as drivers of industrial change and innovation. As a better source of employment generation, small scale sector is characterised by pioneering high value added products and services through assembling of limited resources. In order to ensure business growth, market demand is essential along with positive attitude towards changes in the environment. Financial growth is another factor that supports the survival of the business. In the small and medium scale business sector in UK, there is clear evidence of revival and it account for 99.8% of the total business population, 56.8% of the employment and 53.7% of the economic activity. There is increased recognition of importance of small scale sector, re emergence of the topic, on the academic modules. (Poutziouris 2003). UK economic growth (2001 – 2005) (UK economy records strong growth 2006). SMEs and government intervention: The contribution of SMEs in the economic growth seems to be increasing over the years. In the UK, the contribution of SMEs to the economy is now more important than larger companies. “From 1980 to 2000, the number of businesses operating in the UK has risen by 1.3 million to an estimated 3.7 million (DTI, 2001). SMEs, including sole traders, account for 99 per cent of all businesses, 55 per cent of non-governmental employment and 51 per cent of turnover (SBS, 2001).” (Tilley & Tonge, p.4). In between the period from 1945 to 1960s, the small scale sector had no significance in the growth of the economy and thus the government support has not been made available for the boosting of the sector. There was a notion that this business sector provides only inferior quality products and services by applying outmoded technologies combined with poor managerial skills. As per the research result of Bolton on the small scale in the year 1969, it is revealed that the small scale sector in the UK economy is showing a declining trend at a faster level than in the other Western countries. The main reason for this is the challenging and unfair business policies of the government apart from the administrative and financial burdens. The report also gets focused on the importance of revival of the sector for the economic growth and competitive position of the country. As a result of the stagnation, of the UK economy in 1970s, characterized by high inflation and unemployment rate, complicated by trade union militancy, a supportive environment was generated for self employment opportunities. The economic success attained by countries such as Japan and West Germany, through their thriving small firm sector, has stimulated the UK government to nourish the SMEs in the economy. Government policy and economic growth: The Thatcher government’s policies have been supportive of the small industries sector. For economic liberalization, “The small firms sector is recognized by government as having a vital part to play in the development of the economy. It accounts for a significant proportion of employment output, and it is a source of competition, innovation, diversity and employment.” (Tilley & Tonge, p.6). Contribution of SMEs on sectors of UK economy Growth of SME business (2008 – 2009): Has the revival been maintained? The business environment, characterized by supportive policies of government and with greater financial assistance, assures the maintenance of the revival in the small scale sector. The data relating to the UK economy shows that there is a continuous growth in the SMEs sector of the economy. The market figures reveal that at the beginning of 2007, there were 4.7 million businesses which is over 950 thousand (25%) more than in 2000. In the economy of UK, 59.2 per cent of the total private sector workforce has come under the SMEs sector. 50 per cent of Gross Value of the economy derived from the SMEs. Productivity growth in the economy has been greatly stimulated by the small businesses by means such as, investment, innovation, skills, competition and enterprise. Small firms have certain competitive advantage in the economy such as flexibility, quality of service, production efficiency and low overheads, product development and innovation etc. Though small firms enjoy the aforesaid advantages, on the other hand they suffer from certain challenges such as difficulties to access finance, less ability to gain economies of scale, delayed payment from larger firms, power of larger firms over them, poorer management skills, selling and marketing difficulties and funding R&D. Small firms mainly concentrate on innovation, which means to create new ideas and technologies. Besides they provide more opportunities to the employees. The number of people are limited, so decisions can be reached speedily apart from the fact the employees can be a part in the decision making process. The infrastructure facilities such as availability of technologies, sufficient working conditions, future forecasting etc are not always or adequately available to small firms. Besides, small firms, the budget provisions often tend to be stringent. Small firms further get limited by the handicap that the employees lack broader work experience. (Advantages and disadvantages of managing a small firm 2007). Growth of service and manufacturing sectors in the UK economy: (UK manufacturing in transitions, p.7). Small firm growth and public policy in the UK: Public policies promote the performance of small enterprises. Business links provide every help to solve the problem of small firms in UK. In 1980 the business link got first introduced. The main objective of these business links has been to develop small firms and provide full support to them. This has also helped to promote the value of support services and to diminish the repetition of small firms. (Roper & Hart 2005). Findings and analysis: Overall, the discussion on the revival of small scale firms in the UK economy reveals that there is clear evidence of revival that this sector has undergone, as a result of which progress in this segment has been boosted up. The economic contribution from this sector has increased over the years which, in turn, enhanced the economic development of the country. The study further brings to fore that the publication of Bolton report in 1971 has highly influenced the revival of small scale sector. It has helped to inform the government about the importance of the sector in the economic stability of the nation on long term basis. The problems that have affected the sector, such as lack of managerial and technical skills and financial instability have been solved with the support from the government. Policy initiatives of government have further had a positive influence on the competitiveness of the small scale firms. Besides, employment generation became another growth measure. Financial assistance, by way of tax concessions and incentives, has further helped the growth of this sector and there exists a booming trend for future growth. The employment opportunities created by the sector are another evidence of the sector revival. As per the technical efficiency theory, small scale firms are highly flexible to adapt to the changes in the environment which provide them the ability to compete. There exists clear evidence that the SME policies implemented by UK government have improved the conditions for this sector and solved specific problems. The UK government has further to promote the growth and competitiveness of the SMEs. Moreover, many plans have been created to improve the growth of SMEs and small firms are growing quickly with the financial assistance of the government. Liberal loans to purchase machinery and equipment for setting up new industries or modernization of the existing ones also have geared up the progress of small industries. Banks provide short term and medium term loans as financial assistance to small firms besides the endeavour from government to extend modernization programs for the small industry. The policies, in general, aim at the up-gradation of the obsolete technology of small industry, in the area of product development and design, production facilities, quality control, management, marketing etc. These types of assistance, from the government will ensure that the revival of the sector on long term basis remains sustainable. Conclusion: The introduction of small firms initially implied that a number of factors limit the competitiveness and growth of SMEs. On considering the proportion of SME sector in the total national turnover and employment opportunities of UK, it becomes clear that the contribution of this sector is showing a high growth rate. It is a clear evidence of the small firms’ revival in UK. The small scale sector has re-emerged as an important phase in the economy. The involvement of innovators in the sector boosts the growth of the sector with flexible operations creating new job opportunities. It is expected that the revival shall be maintained consistently over the future years also. Appendixes: Explanation for the Graphs 1.Graph showing the share of different enterprises in the UK economy: Explanation: In the X axis the size of the enterprises is pointed out and in the Y axis their corresponding proportion in the economy is pointed out. 2. Graph showing the UK GDP growth rate From the January 2006 to January 2009: Year Mar Jun Sep Dec Average 2009 -4.10       -4.10 2008 2.60 1.80 0.40 -2.00 0.70 2007 2.90 2.90 3.10 3.10 3.00 2006 2.70 2.80 2.80 3.20 2.88 (United Kingdom GDP growth rate 2009). Explanation: In the X axis the figures represent the years and in the Y axis the figures represent the percentage GDP growth rate. 3.Graph showing Contribution of SMEs on different sectors of the UK economy: Different sectors of the UK economy SMEs Percentage Total employment opportunity Total economic activity Total Non government employment Total turn over Total Gross value of the economy 56.8 % 53.7 % 55 % 51 % 50% Explanation: In the X axis the figures representing the different sectors of the economy and in the Y axis the figures are representing the percentage of contribution of the specific sector towards the economy. 4. Graph showing Growth of SME business from 2008 to 2009: Explanation: In the X axis, the figures indicate the Years, and the in the Y axis the figures indicate the total growth of the SME sector. 5.. Graph showing the economic growth of service sector and manufacturing sector in the UK economy: Explanation: In the X axis the figures represent the Years and in Y axis the figures represent the gross value added by category. 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