Small and Medium Size Enterprises and Regional Development

Maria Giaoutzi, Peter Nijkamp, David J. Storey

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781134826445
• Edition: 1
• Topic: Business
• Subtopic: Small Business
• Index: Business

This book, originally published in 1988, analyzes the regional importance of small and medium sized enterprises, supplmenting a discussion of key issues in both regional development and th eeconomics of small firms with a wide range of national case studies from Sweden, the Netherlands, the UK, Greece, Spain, Israel and Indonesia.

1

Small is Beautiful — The Regional Importance of Small-scale Activities

Maria Giaoutzi, Peter Nijkamp and David J. Storey

PROLOGUE

In recent years the economies of most countries have gone through a phase of structural change. In this context, Bluestone and Harrison (1982), amongst others, refer to the deindustrialisation trend in America, by which they mean a widespread, systematic disinvestment in the nation’s basic productive capacity. Clearly, in other countries different definitions of deindustrialisation are used, reflecting the differences in the perceived nature of the problem. In the UK, for example, a variety of different definitions have been used. Some cite 1966 as the beginning of de-industrialisation since it was in this year that manufacturing employment peaked. Others may regard deindustrialisation as occurring when a country’s share of world trade in manufactured goods declines, whilst others may regard it as the time when imports of manufactured goods exceed exports (cf. Blackaby, 1979). In addition, the primary sector (agriculture, resource extraction) also shows signs of dramatic qualitative changes, while finally the tertiary sector is increasingly influenced by the products of technological progress (telecommunication, computerisation etc.). Altogether our era exhibits drastic change patterns in its production base.

This observation is certainly not a new one, as it is in perfect agreement with Schumpeter’s view that capitalist economies can only evolve to higher levels of prosperity through a process of creative destruction. In order to survive, a healthy economy requires a permanent transformation, a reincarnation leading to a higher qualitative level. Without such a morphogenetic transformation, the economy will stagnate and eventually crumble.

In the light of the above-mentioned qualitative evolutionary patterns of our economies, it is no surprise that in many countries industrial revitalisation is regarded as a source of new progress, reflected in the current emphasis on industrial innovation and technological change (cf. Planque, 1983, Piore and Sabel, 1984, and Nijkamp, 1986).

As certain regions and cities encompass – either in a spontaneous or in a planned way — the seedbeds for specific new technologies (cf. Silicon Valley, Greater Boston, Sophia-Antipolis), it is evident that new structural developments will have serious implications for the distribution of welfare over the regions of a national economic system. It turns out that in many cases the first fruits of technological changes (which sometimes take the form of technological ‘revolutions’) are mainly beneficial to the major agglomerations, thus creating a widening gap between central and peripheral world regions.

Many of these peripheral areas are often characterised by small and medium-sized activities (tourism, traditional services, handicrafts, etc.), and the question is often raised as to whether such activities provide a satisfactory platform for a solid and stable economic progress. On the other hand, it is increasingly realised that the small and medium-sized industrial and service sector encompasses an enormous employment potential, which is — unfortunately — not fully recognised nor exploited in most countries. Consequently, it is an important research task to assess the regional employment perspectives provided by the small and medium-sized industrial and service sector.

In recent years, when the economies of most industrialised countries have shown various signs of stagnation and structural decline, a variety of studies have been undertaken which demonstrate clearly that small and medium-sized firms may be regarded as generators of new growth, as primary sources of technological change and, via job creation, as one of the major factors in maintaining socio-economic stability (see Rothwell and Zegveld, 1982).

Small and medium-sized enterprises (SMEs) have increasingly become the focus of attention by public policy-makers in a variety of countries with very different political traditions. It is our purpose to investigate the reasons which underlie these changes. Several explanations can be provided, notably technological changes, increased levels of unemployment, the growth of the service sector, changes in cultural attitudes and value systems, and political pressures exerted by changes in governments in Europe and North America.

The key question for policy is the extent to which these developments are a reflection of the world recession of the 1970s and 1980s, therefore being expected to disappear in the event of improved world economic conditions; and how much they reflect fundamental changes in the sectoral, technical and value systems in developed economies. If we believe the former to be the prime explanation, then policies to promote the small-firms sector should be primarily short-term palliatives designed to mitigate the ravages of unemployment. On the other hand, if we believe that there are major structural changes taking place, then policies to promote the small-firms sector need to be of a long-term and fundamental nature.

It is also increasingly realised that new economic growth does not uniformly take place on a nation-wide scale. Specific places provide a specific incubator function for specific new activities. Research on this so-called incubator hypothesis already has a long history since the early attempts of Hoover and Vernon (1959). A review of discussions and arguments on this hypothesis can be found in Davelaar and Nijkamp (1988). Incubator hypotheses have not always turned out in the ways expected: for example, it was argued that inner cities would be good incubators for the establishment of new firms since there was a close market and abundant cheap premises, both of which were very important for the new firm. It was also argued that once these firms began to grow, they were likely to move outside the cramped environs of the inner city. Empirical testing of this hypothesis, however, has demonstrated that firms do not always develop in the manner suggested. Sometimes, both rates of new firms in the inner cities were no higher than in the outer areas, while the growth rates of firms in the outer areas were actually greater than those in the inner city areas (primarily because they were initiated by middle-class founders who lived in the suburbs). In fact, very few firms which began in the inner city moved to larger premises in the outer areas. This was because the firms founded in the inner city were located there because of the specific locational advantages which the site or sites provided. The main question here is the identification of favourable locational conditions that act as attractors of new activities. While conventional regional policy has primarily addressed itself to providing various incentives to firms to locate branch plants in development regions and to subsidising establishments already located in such regions, local authorities are nowadays increasingly focusing attention on the revitalisation of indigenous regional resources which may trigger off the creation of new, often knowledge-based, activities, particularly in the small and medium-sized firm sector (see also Storey, 1982, Keeble and Wever, 1986). Thus, the regional development potential offered by SMEs deserves closer attention.

SMALL AND MEDIUM-SIZED ENTERPRISES IN PERSPECTIVE

The role which SMEs play in the economy varies from nation to nation and reflects the cultural background of the different countries. In the US economy, for example, SMEs are considered to be the cornerstone of a free market economy where free entry into business is a central element. SMEs are seen here as major forces for economic dynamism. Thus, socio-political support for (both existing and new) small businesses in the US has been — and still is — normal practice (see Bannock, 1981).

In Japan the situation is rather different. SMEs in Japan play a more indirect role as suppliers of low-cost, high-quality and often innovative product components to larger firms (see Anthony, 1983). Larger Japanese corporations seem to demonstrate — in contrast to large American and European firms — a remarkable degree of internal flexibility and technical progressiveness (especially with respect to new technological areas such as bio-technology, video systems, etc.).

In Europe, even though there are large differences between different countries, the focus has been primarily on the socioeconomic position of the existing SMEs in the traditional and medium-technology sectors of the economy (for more details on this issue see Rothwell and Zegveld, 1982).

SMEs do not only play a different role in different countries, but also in different time periods in different industries in a national economy. In this respect it is useful to consider Rothwell’s (1981) simplified scheme for the patterns of post-war industrial development in which the role of SMEs in an industry varies as the industry develops from newness to maturity. In this model of industrial evolution three major stages are distinguished.

(a) Dynamic growth stage (1945 to about 1964): emergence of new industries such as electronics, synthetic materials, pharmaceuticals, petro-chemicals, agro-chemicals based on new technological capabilities that emerged during the pre-Second World War period; production initially in small units; introduction of many new products; rapidly growing new markets; new employment generation (output growth greater than productivity growth).

(b) Consolidation stage (mid to late 1960s): increasing industrial concentration; growing static scale economies; increasing emphasis on process and organisational innovations; rapid productivity growth; markets still growing rapidly; output growth and productivity growth in rough balance (manufacturing employment).

(c) Maturity and market saturation stage (early 1970s to date): highly concentrated industry; very large production units; increasing production process and organisational rationalisation; growing automatisation; stagnating and replacement markets; productivity growth higher than output growth; rapidly growing manufacturing unemployment.

In the early stage of the Rothwell typology, SMEs are seen as seed-corn of the new industry. Their role over time as a major force of industrial development diminishes, partly through the entry of already-established larger corporations from other areas, partly through take-overs and mergers, but also through successful growth. In the later stages such firms can play another, nevertheless important role as subcontractors to large firms, as suppliers of specialised services and for narrow market niches.

It is worth mentioning that, whilst the Rothwell taxonomy may apply to certain sectors, most small firms are not in those sectors. Firstly, most firms are in the primary and service sectors (and always have been), so that the taxonomy does not apply to them. Secondly, even within the manufacturing sector, most small firms are in very traditional sectors such as textiles, furniture, mechanical engineering, food, etc. Thirdly, when one talks about the small-firms sector one must be absolutely clear that whilst the sector may change relatively modestly over a period of time, the individual firms that comprise the sector change very rapidly. In the UK, for example, the annual failure rate of all businesses registered for VAT is 10.8 per cent. More importantly, the failure rate of firms with a turnover of less than £13,000 in 1980 was 25 per cent annually. It is the high failure rate of small firms which is an important feature distinguishing small from large firms. Hence, whilst in principle small firms are the seed-corn of tomorrow’s large firms and new industries, the probability of any individual firm experiencing substantial growth is very modest. Perhaps 50 per cent of firms which began in year t will not be in business in year t+5, while the chances of a firm established in year t growing to 100 employees by year t+10 is smaller than 0.5 per cent.

Even so, one of the ways to reverse the evolution of industry from a state of saturation may be the generation of new industries based on new technologies such as, for example, energy-related technologies (solar and wind energy systems, heat pumps, etc.), bio-technology (bio-engineering, biomass), robotics technology, electronic office equipment and advanced information and communication technologies. In the area of these new technologies, existing and new technology-based small firms may enjoy many innovative opportunities (see Rothwell and Zegveld, 1982, and Bollard 1983).

The important role of SMEs as triggers of development is often explained in terms of the specific entrepreneurial spirit in this sector, characterised inter alia by independence, responsibility, simple organisational structures, rapid decision-making, tailor-made production organisation, and so on (see also Fischer and Nijkamp, 1988).

During the past decade the interest in SMEs has increased in most European countries. Much of this interest is based upon the belief in the ability of these enterprises to generate employment and innovations in a period of economic stagnation. A very interesting contribution to the discussion on employment generation of small firms can be found in Birch (1979). Birch studied employment change in 5.6 million business establishments (82 per cent of all manufacturing and private sector service establishments) in the United States between 1969 and 1976. His major conclusions from this study, based on a component of change (or job accounting) framework, were (see Storey, 1982):

(a) gross job loss through closure and contraction was about 8 per cent per year;

(b) about 50 per cent of the gross job gains were created through expansions of existing companies and about 50 per cent through new openings;

(c) about 50 per cent of gross jobs created by openings were produced by independent, free-standing entrepreneurs and 50 per cent by multi-plant corporations (in-moves);

(d) firms with less than 20 employees generated 66 per cent of net new jobs in the United States.

When the Birch results for the 1969–76 period were published, they caused great controversy. For this reason the US Small Business Administration (SBA) issued a research contract to the Brookings Institution to look at the 1978–80 period using the same Dun and Bradstreet data base that has been used by Birch. They found that, for this period, firms with 100 employees or less created about 38 per cent of all jobs in the US economy. The Brookings results therefore suggested that small firms were growing no faster in terms of employment than other sizes of firm in the economy (Armington and Odle, 1982).

Since the original Birch study covered the period 1969–76 and the Armington and Odle study covered 1978–80, there was the possibility of conflicting results. For this reason the SBA then provided a copy of the Dun and Bradstreet data tapes for the 1978–80 period to Birch and asked him to compute his estimate of the contribution to job creation made by firms with less than 100 workers. Using the identical input data to Armington and Odle, he obtained a figure of 70 per cent.

In Storey and Johnson (1987), the authors examined the causes of the results and broadly concluded that they reflect a different treatment of firms which are not included in the data base. They also suggest that Birch significantly overestimated the role of small firms, but that if anything, the Brookings procedure led to an underestimate. In their view the data support a result that about 50 per cent of new jobs in the US were created by firms with less than 100 workers, at a time when this sector employed 38 per cent of the labour force. This suggests that small firms are creating jobs faster than other sizes of firms, but at a lower growth rate than suggested by the Birch report.

In many European countries, there is also some empirical evidence that particularly small firms (up to 100 employees) contribute considerably more than proportionately to the net growth of jobs and that employment expectations decrease with increasing firm size. The shift of employment growth to small firms can be observed in nearly all sectors. There are several explanations for this phenomenon. Firstly, because of their strong engagement in standard mass production, larger firms had — and still have — more opportunities to substitute capital for labour. Secondly, small firms are much more engaged in producing specialities and supplying products for market niches and spatially limited markets which are not so strongly affected by international competition. Thirdly, the new international divisions of labour affects especially the mass production of mature goods and, thus, the activities of larger firms. Fourthly, larger firms tend to be more strongly affected by labour market regulations which have been strengthened in the 1970s in most European countries (see Ewers, 1986).

In general, SMEs may exhibit relative growth for a variety of different reasons and these reasons may vary over space. In areas such as Birmingham, UK, for example, the relative growth in small firms may be attributable to the decline and rationalisation of the large firms in the area. These firms are shedding labour, which, having no alternative employment opportunities, means that the only option to unemployment is to start a small firm. The large firm also sheds functions so that activities which were formerly undertaken within the firm are now either undertaken by subcontractors, or in the hived-of...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Abbreviations
• List of Contributors
• Preface
• 1. Small is Beautiful — The Regional Importance of Small-scale Activities
• Part One: The Regional Importance of Small and Medium-sized Enterprises
• Part Two: Case Studies
• Index