The Foundations of Small Business Enterprise

An Entrepreneurial Analysis of Small Firm Inception and Growth

Gavin Reid

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781134302710
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This volume is an excellent addition to Routledge's Studies in Small Business series. In this extended and novel entrepreneurial analysis of small firm inception and growth, a leading authority in the field develops a new kind of 'micro-micro' analysis, applying rigorous methods from economics, accounting and finance to gain a deeper understanding of micro-firms. Reid examines performance, hierarchy, capital structure, monitoring and control, flexibility, innovation and information systems.

Using statistical, econometric and qualitative methods of empirical research, Foundations of Small Business Enterprise tracks and analyses the evolution of 150 small firms from their early years through to maturity.

This title will appeal to a wide range of students, specialists and practitioners in economics, accounting and finance.

Part 1
Background

1
Small firm inception and growth

1.1 Introduction

The theme of this book is small business inception and growth. The approach adopted is entrepreneurial. Thus the focus is on the entrepreneur, or more prosaically, on the owner-manager (Blanchflower and Oswald, 1990). But more than this, the methodology used is entrepreneurial. Whilst grounded in economics, and specifically in industrial organisation, it extensively utilises research methods from accounting (especially management accounting), finance (especially capital structure) and information systems (especially monitoring and control systems). Also much in evidence are ideas from business strategy (especially competitive advantage) and political economy (especially enterprise policy). Entrepreneurship is itself an inter-disciplinary field, and this book therefore deliberately reflects its sub-title, in being ‘an entrepreneurial analysis’.

A final distinctive feature of the book is to be noted. It is that every chapter is based on the same approach to evidence and its analysis; and indeed, the book is exclusively concerned with one body of evidence. Thus the wide variety of issues explored (e.g. financial structure, flexibility, business strategy) from an entrepreneurial perspective, is nevertheless through the use of the same body of evidence. This evidence is fieldwork-based (Woolcott, 2005; Burgess, 1984), and ‘the field’, in this instance, is the economy of Scotland. One of the privileges of living and working in Scotland is that it is the birthplace of economics (or, as it was first known, political economy). The writings of Smith (1776) and Hume (1752) are surely an inspiration to the analysis of the enterprise economy. As it turns out, Scotland has indeed deep roots as an enterprise economy, and this makes it an ideal ‘laboratory’ for testing a wide variety of small business hypotheses.

Finally, the compact nature of Scotland makes it well suited to fieldwork. Geographically, it is an almost contiguous reverse L-shaped set of centres of high population density (e.g. Glasgow, Edinburgh, Dundee, Aberdeen). This makes it possible to travel relatively easily to small businesses (as fieldwork ‘sites’) to conduct detailed interviews with entrepreneurs. Thus the final distinctive feature of this book is that all the analysis is based on primary source data. Data were obtained with a view to testing a variety of hypotheses, some of which were received hypotheses, and some of which were emergent. Most often this evidence was obtained by fieldwork, and occasionally (e.g. because of problems of access) by postal questionnaire or by telephone interview (see Chapter 5, for example). This conviction that primary source data are essential to testing theories of the small business goes some way towards the approach of ‘grounded theory’ (Glaser and Strauss, 1967), in its advocacy of fieldwork methods, but does not embrace their approach to ‘testing’ theories by ‘filling categories’. Rather, a more positivist approach is adopted to theory construction and testing, and methods of statistical inference and econometrics are used extensively.

To summarise, the approach adopted is well rooted in fieldwork methods. Though unfamiliar to some economists, it was in fact adopted by the greatest of economists, Adam Smith, Alfred Marshall (see Groenewegen, 1995) and Ronald Coase (see Coase, 1988), all of whom were highly creative theorists, but also inveterate fieldworkers. To that perspective is added a commitment to theory formulation and empirical testing. In treating theory in this way, the subject of entrepreneurship has been my guide, because, being inter-disciplinary in approach, it is well suited to being guided by influences from economics, accounting, finance, management and much more besides. Given the richness and complexity of small business activity, this diversity of approach seems essential.

This chapter will cover three things. First, an overview of the fieldwork undertaken is provided, which gives a preliminary account that will be more fully developed in Chapters 2 and 3. Second, an overview is provided of the key features (e.g. markets, finance, costs) of the small businesses analysed, over four successive years. There, reference is made to the preliminary evidence which was returned to entrepreneurs as a quid pro quo for their involvement in interviews. Such data were subject to correction, completion and revision, but they provide an interesting view, as shared with the subjects of the research, of small firm dynamics, in the early years after inception. Third, an overview is provided of the book itself, and of its essential structure (namely background, existing evidence, finance, performance, information and contingency, flexibility).

1.2 Sampling

As indicated earlier, the evidence on which the models of this book were estimated was obtained by fieldwork methods (Woolcott, 2005; Werner and Schoepfle, 1987). This fieldwork involved ‘face-to-face’ interviews (Willis, 2005; Sudman and Bradburn, 1982) with owner-managers of new business start-ups in Scotland. As is usual with fieldwork methods it is necessary to find ‘gate keepers’ who provide ‘ports of entry’ to the field (Burgess, 1984; Woolcott, 2005). Here, the gate keepers were directors of enterprise incubators, known as Enterprise Trusts (ETs) in Scotland (Reid and Jacobsen, 1988). They provide a range of business inception facilities including training, advice on sites, access to finance and more generally networking opportunities.¹ Directors of ETs were asked to provide random samples of new business start-ups from their case loads. The only restriction set was that the exact inception date of the enterprise needed to be known, and that not more than 3 years should have elapsed since inception. A random sample of approximately half of the ETs in existence in Scotland in 1993 was taken.

The sampling area extended from the main metropolitan area concentrations on the West Coast of Scotland (including Glasgow) through the Central Belt to the metropolitan areas of the East including Edinburgh and then up North through the main population centres including Stirling, Perth, Dundee, Aberdeen, finally extending as far north as Inverurie. Thus the main population concentrations of Scotland were largely covered by a sampling area which had, roughly speaking, a thick, reverse L-shaped configuration.

The initial sample size was 150 small firms in the base year of 1994. The same (surviving) firms were re-interviewed for three successive years under the same conditions, using three variants of an administered questionnaire (Oppenheim, 1992) (denoted AQ1, AQ2 and AQ3—see, for example, appendix to this book for the instrumentation of AQ1). Then a further year’s data were collected using the modified administered questionnaire (AQ4) which is re-printed in the appendix at the end of this book. Only the final year variant of the questionnaire is reproduced, for reasons of space, but it gives an accurate indication of how data were gathered for all years, including the last. Finally, in a set of long-term re-interviews, in 2002, data were gathered on a sub-set of surviving small firms, examining their flexibility and performance in the face of firm-specific turbulence. Results on the latter are reported upon in the final chapter of this book (Chapter 18).

For the main body of evidence, extensive data were gathered on a wide range of attributes, including markets, finance, costs, business strategy, human capital, internal organisation and technical change (AQ1, appendix to this book). Additional data were gathered on information systems, monitoring and control in a fourth annual round of interviewing in the fie...

Table of contents

• Routledge studies in small business
• Contents
• Figures
• Tables
• Preface
• Acknowledgements
• Abbreviations
• Part 1 Background
• Part 2 Existing evidence
• Part 3 Finance
• Part 4 Performance
• Part 5 Information and contingency
• Part 6 Flexibility
• Epilogue
• Appendix on instrumentation
• Administered questionnaire 1
• Administered questionnaire 4
• Index