Entrepreneurship and New Firm

Theory and Policy

David J. Storey, David J. Storey

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781134835058
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Pequeñas empresas

This book, originally published in 1982, review the resurrection of the small firm, partly by a multi-disciplined examination of the existing literature on small and new firms and partly by reporting the results of a study of firms new (in the early 1980s) to the North East of England. Part 1 deals with the role of small firms as sources of potential or actual competition, and their role in research and innovation. In Part 2 the theoretical foundations for the study of entrepreneurs and their new firms are laid, using concepts from a cross-section of the social sciences. Part 3 tests some of the theories outlined in Part 2 and reviews the problems which the entrepreneurs faced in starting and developing their business and the impact which such businesses had upon the local economy. Part 4 reviews the lessons of the preceding parts in the context of the regional and national economy of the UK.

PART ONE

THE SMALL FIRM

1	INTRODUCTION

Few readers of the biographies of the great entrepreneurs can have been unimpressed by the energy, talent and tenacity which such individuals directed towards the establishment and growth of their businesses. Several came from relatively humble backgrounds, whilst all had to battle against short-sighted bankers, hardhearted creditors and even wicked relatives. It is impossible not to feel admiration for their single-mindedness. The tradition of the Arkwrights and the Wedgwoods is maintained by the modern Sinclairs and Barretts.

For every Laurie Barrett there are, however, thousands of ‘plodding men of business’, some choosing to start their firms primarily to increase their income knowing that they have ‘a good idea’. Others may begin out of a sense of frustration with what they perceive to be the stupidity of their employer, whilst some are captivated by the notion of independence which they associate with forming their own firm and becoming their own boss. A final, but numerically significant, group recognises that in times of high unemployment, entrepreneurship is preferable to life on the dole.

This variety of motivations and aspirations is reflected in the variety of types of firms established. For every boffin businessman, intending to manufacture and market a wholly new and technically sophisticated product, there are scores of insurance agents, garage mechanics, hairdressers and carpenters who will begin in business providing very familiar goods and services. The experience of management which individuals bring to their enterprise varies considerably, as do their ages and their social background. Perhaps only those from the poorest sections of society, at least in most developed countries, are infrequently represented amongst the entrepreneurial classes.

A book which attempts to describe the process of new firm formation must, in many senses reflect, within its pages, this diversity of motivation, experience and achievement. It cannot be exclusively theoretical since this risks a loss of the richness which only description can provide. On the other hand it cannot be wholly descriptive. It must attempt to derive general patterns and themes which are of interest, in particular to those in the public sector who have a responsibility for creating an environment favourable to wealth creation. Decisions have to be made at local, regional and national levels on an appropriate mix of incentives and controls (if any) upon industry, to enable desired combinations of goods and services to be produced and employment generated.

Increasingly, the small and new firm sector has become regarded as an important vehicle for the production of goods and services. The final product is local, and thus more likely to be amenable to local public initiatives than that produced by a large multinational corporation. It is therefore not surprising that local governments should be making strenuous efforts to assist the creation of new enterprises. On the other hand national governments, having been disappointed with the employment consequences of assisting large enterprises, have also begun to reconsider the role of new and small firms in advanced economies.

This book reviews the resurrection of the small firm, partly by a multi-disciplined examination of the existing literature on small and new firms and partly by reporting the results of a study of firms new to the county of Cleveland, in north-east England. It attempts to combine the theory and the practice — the ‘blackboard’ and the ‘real’ economy, with the accent rather less upon analytical rigour and rather more on obtaining a broad view on trends and policies.

The book is divided into four parts, with Chapter 2 dealing with the role of small firms in the economies of the developed and less developed countries. It also deals with the role of small firms as sources of potential or actual competition, and their role in research and innovation are articulated, together with a review of empirical work testing the extent to which in practice, small firms fulfil this function.

Whilst virtually all new firms are small, according to almost any definition, the majority of small firms are not new. Indeed a sizeable proportion of the stock of small firms have been in existence for 20 or more years and are likely to have significantly different problems from the new, dynamic but probably highly unstable new enterprise. Parts Two and Three are concerned with this subset of small firms — the new enterprise.

In Part Two the theoretical foundations for the study of entrepreneurs and their new firms are laid, using concepts from a cross section of the social sciences. In economics, or at least to some economists, an entrepreneur may be both the owner and the manager of a firm; he may provide the capital, organise production and bear at least part of the risk of being unable to sell the output at a price which he feels rewards him with adequate profit. In large firms the owners of the firm (the shareholders) have little influence upon managerial decision taking, although in new and small firms ownership and control are often jointly combined in the person of a single, or a group of, individuals. In this book, however, it should already be clear that the term ‘entrepreneurship’ will be used to cover the establishment of a new firm by an individual or group. The contrasting approaches to entrepreneurship, or new firm formation, are illustrated in Part Two. Traditionally, economists have viewed the formation of new firms in a given industry as a response to the opportunities for profit-making in that industry. Entry rates are thus dependent upon expected post-entry profitability and the real or perceived entry barriers. In essence, according to Kilby (1971) economics has ignored the supply side of entrepreneurship assuming that if barriers fall, or profits rise sufficiently, entry will be induced. Conversely explanations, not having their roots in economics, have concentrated almost exclusively upon these supply-side characteristics, so that social psychologists have investigated the factors which motivate an individual to establish his own firm. Sociologists have observed that certain social groupings are more likely to enter entrepreneurship than others. The complexity of factors at work means that whilst explanations of the propensity of groups with certain attributes to be strongly represented amongst entrepreneurs is valid in some situations, it has no explanatory power in others. Nevertheless the purpose of Part Two of the book is to provide the reader with a view of matters to which it is possible, in principle, to have recourse to the facts provided in Part Three.

In Part Three some of the theories outlined in Part Two are tested on a sample of firms new to Cleveland in North East England. Chapter 5 describes the derivation of a representative sample of firms new to Cleveland, about half of which were wholly new firms. These firms were ‘born’ into what appeared at that time to be a fairly hostile environment, with unemployment in the area well above the average for the UK as a whole. The region as a whole could, at best, be described as antipathetic to the individualistic idealism of entrepreneurship. The remainder of the chapters in Part Three review the problems which these entrepreneurs faced in starting and developing their business and the impact which such businesses had upon the local economy. In discussing the characteristics of those starting their own firms an attempt is made to distinguish between successful and unsuccessful new firms.

Part Four reviews the lessons of the above chapters for both the regional and national economy of the United Kingdom. It suggests that governments at national and local level have unreasonably high expectations of the new firm sector as a source of wealth and employment in future. From these pages it should become clear that whilst today’s new firms will make a useful contribution to employment and wealth in the next two decades, the performance of the British economy will be determined by the ability of medium and large firms to be efficient and competitive. An emphasis upon small scale enterprises is no simple solution to reversing a century of industrial decline.

2	THE SMALL FIRM

The survival of small firms is thus dependent upon a series of factors not very creditable to our economic system; monopsonistic exploitation of labour, imperfection of markets due to ‘irrational’ reasons, unemployment and the gambling preference of small entrepreneurs, with all the waste of energy attendant on the high ‘turnover’ of small businesses. – J. Steindl (1945), p. 61

During the Afghan and Iranian crises President Carter cancelled all speaking engagements except that to 2,000 entrepreneurs attending a White House Conference on Small Businesses. This is an indication of the esteem in which the small firm and its owner is now held by the White House. – Anne Reilly in Duns Review, 1980, p. 69

2.1 Introduction

In virtually every country in the world the small firm is, and has always been, the typical unit of production. Small firms, however defined, constitute at least 90 per cent of the population of enterprises but in many developed countries the two decades following 1945 saw a decline in the proportion of total output produced by such firms.

There is now evidence to suggest that this decline has ceased and even been reversed. The last ten years has seen the small firm undergo a remarkable metamorphosis. In the fifties and sixties the emphasis of government policies in many countries was to create large enterprises which would be able to compete internationally. It was argued that modem industrial development was in industries where economies of scale were of paramount importance. Only large firms could hope to produce output in sufficient quantities to take advantage of these economies. It was believed that scale economies were at the plant (technical) level, so that larger establishments would have lower unit costs of production than small establishments. Managerial diseconomies were thought to be negligible, whereas large firms were more likely to have access to the capital necessary to undertake research and development and to finance advertising. Large firms were likely to be able to borrow money at lower interest rates because they represented a lower risk to the bank than did a small firm. The bank itself was likely to prefer to deal with several large customers since it would find monitoring company developments easier than a portfolio consisting of many small companies.

These factors suggested that the small firm was likely to become progressively less important. Indeed it seemed that the extent to which the small firm sector had declined represented an index of development. The small firm was equated with technological backwardness, and with barely competent management. The manager in the large enterprise, with his DCF, MBO and his job enrichment was contrasted with the ‘belt and braces’ approach of the small firm owner/manager. The quotation from Steindl, at the beginning of this chapter, summarises an attitude to small firms which pervaded popular opinion for at least 20 years after 1945. Matters have now changed for the small firm, with its owner becoming progressively more courted by governments, as is shown in the recent quotation from Duns Review. In some countries, notably Japan, small firms have always played a central role in economic development, whilst the independence and aspiration of the entrepreneur has always been part of the national culture in the United States. Nevertheless even these countries, as well as in Western Europe, have seen a resurgence of the small firm in the last decade.

This chapter begins with some definitions of the small firm and reviews the extent to which the number of small firms varies both between countries and between industries. It then outlines the functions which small firms serve in the economy. Finally, since this is a book about new, rather than small, firms, data on birth and death rates of firms from several countries is provided as background to the theoretical chapters of new firm formation in Part Two.

2.2 The Small Firm: Definitions, Importance and Trends

The term ‘small firm’ is in such common use that the unwary reader might be forgiven for thinking that there was some uniformly accepted definition of what constitutes a small firm. Nothing could be further from the truth! The distinction between ‘big’ and ‘small’ is arbitrary and, in those industries where definitions are according to value of work done, vary from year to year because of inflation. Neck (1977) quotes an American study in 1975 of small firm definitions which identified more than 50 different statistical definitions in 75 countries. Not surprisingly Neck suggests the criteria for ‘small’ vary according to the context, with an upper limit of small for financiers being based on fixed assets or net worth. Other definitions might be based on total employment (including or excluding ‘outworkers), total sales, energy consumption, number of customers, etc. Clearly firms which are small in some of these contexts are far from small in others.

It is therefore necessary to identify those characteristics of the small firm which epitomise its operations. First, the smal...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Copyright Page
• Table of Contents
• Acknowledgements
• Part One: The Small Firm
• Part Two: New Firm Formation: The Theory
• Part Three: New Firm Formation: Some Empirical Results
• Part Four: Implications for Policy
• References
• Index