Contribution of the Small Business Sector to the Uk Economy free essay sample

What can be defined as a small business depends on various factors of which two are vital: the industry segment and market in which the business runs. There have been many attempts to define the small business. For example the Bolton Committee (1971) came to conclusion that there should be: †¢statistical definition the size is important factor (number of employees and annual turnover or value of assets), and †¢economic definition qualitative measure of small business. This is explained more in detail in the Table 1 and Table 2 on the next page. Table 1 – Bolton’s statistical definition of small business The Statistical definitions Manufacturing200 employees or less Construction, mining and quarrying25 employees or less Retail and miscellaneous servicesTurnover of ? 50 000 or less Motor tradesTurnover of ? 100 000 or less Wholesale TradesTurnover of ? 200 000 or less Road transport5 vehicles or less CateringAll excluding multiple and brewery managed houses Source: Deakins, D. and Freel, M. (2003) Entrepreneurship and small firms Table 2 – Bolton’s economic definition of small business The Economic definition Small firms are those which: 1. We will write a custom essay sample on Contribution of the Small Business Sector to the Uk Economy or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Have a relatively small share of their market place 2. Are managed by owners or part-owners in a personalised way, and not through the medium of formalised management structure 3. Are independent, in the sense of not being part of a large enterprise Source: Deakins, D. and Freel, M. (2003) Entrepreneurship and small firms European Commission (EC) considers any entity regardless of its legal form but engaged in economic activity to be an enterprise, Deakins and Freel (2003). To overcome issues around identifying a definition for small business in particular, EC has decided to use the phrase small and medium-sized enterprise (SMEs), and it includes micro enterprise, small enterprise and medium enterprise altogether. To be classed as SME business must have less than 250 employees and must meet one of other two factors: †¢Annual revenue (turnover) must not exceed 50 million euro, or †¢Annual balance sheet total must not exceed 43 million euro. This is to ensure that all SMEs get fair treatment independent on the environment and type of the economy they operate in. More in detail the new definition from 2005 by European Union is explained in Table 3. Table 3 – EU SMEs definition Source: Storey, D. J. and Greene, F. J. (2010) Small Business and Entrepreneurship UK generally accepts the EU definition from 2005 and to be in line with it Euro values are converted to Sterling Pound. The Companies Act 2006 however, for the need of accounting requirements, has its own definition (sections 382 and 465), UCL (2012). According to this a medium size company has 250 employees or less, with turnover of ? 25. 9 million or less and balance sheet total of under ? 12. million, where as a small company has 50 members of staff or less, with annual turnover of ? 6. 5million or less and balance sheet total of no more than ? 3. 26 million. There is no mention of micro size business in this. There is also a definition that divides small and medium businesses relating to Value Added Taxation (VAT) registration, as every company must be registered for VAT if the y meet a threshold. This is a relative measure of business population as it is sensitive to changes of thresholds. For the UK it is currently at ? 77 000, the highest registration threshold in the EU, Seely (2012). Many other definitions of SMEs can be found as many different organisations and bodies in the UK come up with their own definitions to suit their purposes. Different countries also have their own definitions: in USA and Canada small business can have up to 500 employees, in Germany limit is 255 employees, while in Belgium it is 100 employees. Overall, everybody agrees that SMEs are companies whose employee headcount or annual turnover falls below certain threshold, as well as that it must be autonomous. In 1924 Census of Production data started being published periodically and this is considered to be the oldest reliable source of statistical information on SMEs. This data was very much imperfect mainly for the reason that it was referring only to the manufacturing sector, Storey and Green (2010). Earliest records show that 45 per cent of employment within the manufacturing segment was coming from small business establishments. In 1960s and 1970s it decreased to only 30 per cent. Reasons are of political nature. There was an evident dominance by large firms of the economy during the mid and late twentieth century. Large factories were the main suppliers of resources needed during and after World War 1 and World War 2 because of the fact that mass-production carries lower costs. In the 1960s there was a growth of socialism and labour party found it was easier to politically control larger businesses and nationalised industries than small ones, so there wasn’t much room for SMEs to develop in those circumstances, Carter and Jones-Evans (2012). For about two decades 60 per cent of manufacturing was covered by government committees running large business establishments. It was believed that large businesses were the future and that small companies will fade away with time. Things started to change a little bit when United Kingdom joined the European Community in 1973, as Government power was somewhat restricted by European policies. Big changes, however, started to happen with Thatcher’s Government (1979-1991), when previously nationalised industries were privatised again. It was the first Government in the UK to promote self-employment and, consequently, increase in self-employment was noted, Storey and Green (2010). Other reasons, apart from the political support, were big development of new technologies in 1980s, evolution of service sector and increase of competitiveness, which altogether contributed to the restructure in labour market and changes in business practice. The number of small and medium enterprises increased from 2. 3 million in 1979 to 4. 8 million at the beginning of 2012, Carter and Jones-Evans (2012). Although the Government doesn’t develop small businesses, entrepreneurs do, it has got a reflective effect on how they operate and their opportunities to rise and develop further. Carter and Jones-Evans (2012) mention three key magnitudes of government role: †¢Government acts as a regulator (standardizes legal forms, sets rules and limits as well as regulations of customer protection, licensing and environment related issues), †¢Government acts as economic agent (controls taxes, charges, debts and spends), †¢Government acts as strategic planner and promoter (offers grants, loans, support and guidance). USA was first to recognise the extent of the importance of SMEs and it is believed this is the exact reason for the higher development of their economy comparing to other parts of the world. UK and Europe are trying to follow footsteps of the USA and they are making efforts to encourage entrepreneurship. The first EU document that recognised entrepreneurship as the driver of the economy was The Green-Paper in 1984, ec. europa. eu (2012). Ever since there was a growing interest in this subject and it is becoming more of priority to ensure means and support for people willing to get involved as a way for unemployment to be reduced. Different policies are established to promote entrepreneurship. There are many established organisations in the current environment offering their services for this purpose throughout the UK. The major national financial package available to small businesses and offered by Government is the Small Firm Loan Guarantee Scheme (SFLGS), which was started in 1983 but became more significant in late 2000s. Enterprise Allowance Scheme and Business Start-up Scheme were also set up in 1980s, Carter and Jones-Evans (2012). UK Business Angels is another strong association of now days running in the UK that offers funds in early stages of setting-up a business through external third party investments. But obtaining funds isn’t the main concern that people who decide to set-up their own business have, as many surveys on SMEs revealed. They are more worried about the economic stability and this is what they want the Government to ensure, Storey (1994). Department for Business, Innovation and Skills (BIS) comes to place here, as their primary purpose is to create the best conditions for the growth of private sector, BIS (2012). General aim of Global Entrepreneurship Monitor (GEM) is to explore on the national level the extents of the connection between the economic growth and entrepreneurship. There are expressions of growing interest by GEM in the importance of women’s enterprise. The data from UK’s Annual Population and Labour Force Surveys is historical evidence that there has always been around half of self-employed women comparing to the number of self-employed man, Storey and Green (2010). Table 4 contains extracted cells from the Annual Population Survey published by Office for National Statistics, NOMISweb (2012), for the purpose of this report, relating to self-employment by gender. Table 4 – Self-employment by the gender, Annual Population Survey 2012, NOMISResource: NOMIS website, (2012) It shows that there is only 5. 6 per cent of self-employed women comparing to 13. per cent of men in 2012, which is even less than in past. This topic has received very little attention until the 1980s. Since then, more and more research is being done to try and understand the circumstances surrounding this matter, with the hope that it would produce results in a higher rate of start-ups by women. Another interesting fact is that even with all the effor ts that the Government is doing to educate and target young people to get involved, the proportion of over 45 year old self-employed people has increased instead, Storey and Green (2010). Table 5 shows that small and medium enterprises accounted for 99. 9 per cent of total 4. 8 million private businesses, while employing 59. 1per cent of people out of 23. 9 million in private sector and generating a turnover of ? 1 500 billion, which is about the half of the total private sector’s revenue (48. 8 per cent precisely). 99. 2 per cent of these businesses had less than 50 employees. It is very important to highlight that 74. 2 per cent of private companies had 0 employees and consisted of owner only (3. 6 million out of 4. 8 million businesses), White (2012). Self-employment is a massive factor and big opportunity for creating new jobs and more attention should be appointed to that direction. The private sector has increased by 38. 6 per cent coming up to its highest level since year 2000 when the comparable data started to be recorded. The number of SMEs in this period has increased by 38. 7 per cent giving them all the recognition for the improvement, while the number of large enterprises decreased by 10. 2 per cent for the same time. These figures prove the great role they have in the economy’s growth as they take most of the credit for the progress of the private sector, White (2012). Only 44. 7 per cent of businesses are registered for VAT, more than half aren’t as their turnover is less than ? 77 000 a year, Seely (2012). Disadvantages for SMEs are, because of their size, they have no influence on the environment and very much depend on it, which is why they are surrounded by a very high element of risk of market failure. On their own they can’t have an impact on the Government policies. They specialise on a high level in certain products or services and have a close connection with their customers, as they rest principally on local loyalty. Most often they are run by their owners who are more focused on a short term endurance and cash, so they must be able to be flexible and respond quickly to changes. Fees for setting-up a business are not little. On rare occasions they are funded by external equity, because of much higher interest rates they are required to pay comparing to large companies, so the most common funds used are owner’s savings and short term loans. Because of it, there is a general concern that their restricted means may slow down their expansion as they might have less contact with new technologies and innovations. Therefore, it becomes more and more Government’s priority to give them guidance and financial support. As mentioned earlier, there are many organisations in the UK offering this kind of service to encourage starting own business and reduce the unemployment to ensure economic, social and political security. SME’S BY THE REGIONS IN THE UK The entrepreneurship policy has got a large domain that incorporates activity at a few elevations of government, from local to national to international level, Huggins and Williams (2009). As a culture is seen to be a central role to development of local entrepreneurship, it isn’t a surprise that there are substantial differences in economic performance across regions within nations. The subnational level is an important dimension for SMEs in particular, because they are very neatly related to the local environment and the community, which they critically depend on. Different regions have different culture, therefore have different needs, as well as different resources, possibilities and opportunities. Space, place and local environment play a big part. This is where difference in regional and local business start-up rates and the rate of success of those businesses comes from. This is considered to be a positive factor as it encourages competition between the regions, and competitiveness is the important element for economy growth. Regions compete by achieving high levels of innovation and upgrading and developing new business ideas. Business population estimates (BPE) for the UK and regions, statistical release by BIS (2012), suggests that out of estimated 4. 8 million private sector businesses in the UK at the beginning of the year 2012, 86. per cent were in England (around 4. 2 million). Table 6 – Number of businesses in the UK private sector, by UK region and country, start of 2012 (figures representing thousands). Source: White, S. (2012) Business population estimates for the UK and regions 2012 The information presented in Table 6 has been extracted out of BPE 2012 and it shows that London alone had 806 000 businesses leading the way with 16. 7 per cent of total number in the UK. South East had the next largest number, accounting for 15. 7 per cent of total, while North East had the lowest share of businesses in England. Northern Ireland with 114 000 was at the bottom of UK’s league. A big variation of entrepreneurship on local levels is detectable. Interesting thing to mention, Storey and Green (2010) collected statistical data which shows that positions of mentioned regions were pretty much static over a 30 year period, with London always being at the top and the North East always at the bottom. One of the reasons for some locations gaining competitive advantage over others and growing at a faster rate is that not all locations manage to change in line with changes in the economy. Also, successful cities are more attractive for innovative people who are seeking for an opportunity, and this helps further growth of already developed region. Competitiveness varies depending on different drivers of growth, but it is seen to be the key for the entrepreneurship, Sautet and Kirzner (2006). SUMMARY AND RECOMMENDATIONS Although there is no a single definition used to describe them, the Small and Medium Enterprises in the UK are considered to be the ones with less than 250 employees. This report highlighted evident indications of enormous importance of SMEs to the UK’s economy through historical evidence and current facts from statistical data. They present 99. 9 per cent of total number of businesses in private sector, while employing nearly 60 per cent of private sector’s staff and taking nearly a half of its annual revenue at the same time. They can be fragile, as they are in more danger of market failure than large companies and very dependable on immediate environment, but that didn’t prevent their growth with numbers doubling over the past 30 years. They are drivers of the competition, innovation and the economy development and they are seen to be a solution for the growth of the economy and source of new job creation. Many factors were mentioned that affect SMEs in both good and bad ways, but overall the clear message is that they do need a lot of Government’s help. Many organisations and associations now days are available to ensure support and guidance they require, some of them are named earlier in the report. Local differences encourage competition between regions and this contributes to growth of the entrepreneurship. But there is uncertainty that comes from the economic instability day to day and high fees and charges they need to pay. As the way forward the Government should find a way to inspire more women and younger population in general to use their skills in a productive manner and start their own business, because there lays a big opportunity. It should also look in maybe changing some policies to reduce costs of starting-up businesses and find ways to release more resources and grants to make the process easier for people who have potential and want to do it, but simply can’t afford it.