My Small Firm Essay, by request of sniper - enjoy the read!

[john kane]

if you don't want to read it, no problem. hit that back button. it's now 5.45am here in uk, and ive finished my essay. disclaimer: it is 1650 words and can only be 1500 words (im sure some of you can find at least 1000 words worth deleting!). i think i need to develop my counter argument as to why small firms are not as important as one may think.

any thoughts on it very much appreciated, hopefully may be a slighly interesting read:

‘Small firms are each so small, why should we be interested in the part they play in the economy?’ Discuss.

The significance of small firms on the economy has been of growing interest primarily since the 1970s. It is not the impact of an individual small firm upon an economy which is of note, as they are each too small to impact on an economy, instead it is the cumulative effect of them. Before the 1970s, small firms impact on the total economic activity was in progressive decline. This was a consequence of the belief that larger firms would provide a more efficient and effective economy. The argument for such reasoning was that larger firms could improve domestic economic efficiency through economies of scale, preventing foreign multinational takeovers and having the financial capital to excel in research and development. This led to the passing of government legislation to aid mergers and consolidations within the industries. However, in 1971 the Bolton Committee, set up to inquire into the role of small firms in the national economy, concluded that in fact small firms would halt their decline and prove to be an important element in an economy. Such conclusions would prove to be correct for a number of reasons.

Before analysing such reasons, it is important to note that there is no single, uniformly accepted definition of a ‘small firm’. However, a general underlying consensus from definitions from the Bolton Committee Report (1971), the European Commission, the Department of Trade and Industry in addition to a number of respected academics is that a ‘small firm’ is one that has less than 50 employees or it is small in comparison to its sector.

The initial reason to explain the significance of small firms in the economy lies within empirical data. In 2005 in the UK, small firms generated 56% of total turnover, employed 58% of private sector workers and accounted for over 99% of the total number of UK firms due to the inverse monotonic relationship between firm size and frequency. In addition, after a period between 1989 to 2001 where the total number of small businesses remained at approximately 3.8 million, the past four years has witnessed steady rise of 13% to 4.3 million small businesses. Small business are evidently very influential upon employment, turnover and the structure of business in the UK, and as these are all key factors to the state of the economy, so small business are paramount to the economy.

Secondly, small firms play a vital part in keeping an efficient economy . They provide a source of competition for larger firms, which ensures they must limit price rises and use their factors of production efficiently. It may be argued that it is competition between large firms, not by small firms that keep the market sector efficient. For example, in the supermarket sector one could argue competition between the major supermarkets such as Tesco and Waitrose ensures the large supermarkets have to be efficient in terms of offering good quality products at low prices, rather than the competition offered by the local grocery store. However, the counter argument holds true, a small firm can enter a market and provide strong competition for a market which is failing to offer the consumers. For example, in the airline industry both Easyjet in 1995 in the UK and Southwest Airlines in 1967 in the US began as very small firms within the industry. Both firms showed that within a highly competitive industry, a more economically efficient and strategically wiser smaller firm can succeed. Both airlines have had a huge impact on the airline industry; Southwest Airlines are now the third largest airline in the world, despite entering the market with only 3 air routes when faced with such large firms to compete with as Continental, who had already been established since 1934 and had a number of international routes during the 1970s. This shows that large firms cannot afford to provide a sub-optimal service to its consumers, as otherwise a more efficient small firm will offer that service and eventually become a large firm itself. Therefore, this ensure the large firms must provide an optimal efficient service or else the small firm will take their market position, and so just the presence of small firms ensures an efficient market for consumers, which is crucial to any successful economy.

Small firms do not just act as a means of ensuring just current markets are competitive, they more likely to be innovative than large firms. They can create new markets due to their flexibility of being a smaller firm in addition to their lower opportunity and failure costs. For a large firm, if they make an error of judgement in diversifying into a new market, they are risking their reputation in addition to spending time and capital which could be invested into a better project in terms of risk-return ratio. Whereas a small firm does not have a reputation to protect and often only have a limited number of investment opportunities due to their limited capital. This also acts as a Darwinian process for both the new market and the entrepreneur. The weaker markets and entrepreneurs will fail, whereas the successful markets will prosper and the capable entrepreneurs will run the large firms in the future, ensuring the future economy should prosper. An example of successful innovation by a small firm generating improvements to the economy is Innocent, the fruit smoothie company. It was set up in 1999 by two entrepreneurs attempting to tackle the highly competitive soft drinks industry. By 2006 their company had made a huge impact with annual turnover of $150 million and employing over 100 workers. An existing large company may not of risked this type of venture in fear of the product failing and their reputation being damaged. However, with the presence of a small firm and entrepreneur, so a new market is successfully set up, generating a new product, turnover, employment and therefore greater efficiency within the economy.

There are social aspects of small firms which improves the state of an economy. Firstly, the small business working environment typically results in better relations between the employer and employees due to easier and more frequent communications and interaction. This in turn should increase the efficiency of employees. Also, smaller firms have a lesser likelihood of engaging in industrial action due to workers being more content at work due to better relations with employers, but also due less likelihood of engaging in industrial action due to the less bargaining power it would have.
For example, the London tube network has suffered a number of strikes by the Rail Maritime and Transport Union throughout recent years. Most recently a strike was averted on the 13th April 2007 over a dispute which was solved by transfer of 49 staff. The RMT had the bargaining power of inflicting millions of pounds on to London business in addition to causing problems for hundreds of thousands of commuters. As small firms do not have such bargaining power, they cause less threat to destabilising the economy.

Despite a number of key strengths to small firms in an economy, the exact reasoning of their increased importance in the economy must be questioned. Their increased importance may in part be due to recent weakness of large firms in the past few decade due to the impact of globalisation on the UK and other developed countries’ economies. In recent decades, the economic improvement within a number of developing countries has led to competition problems for developed countries, such as the UK, as the developing countries combine low wages with high labour productivity to entice large firms away from them. This decreases the reliance of a developed economy on large firms, therefore increasing the relative impact of small firms. For example, in March 2003 British Telecom followed a number of other large firms, such as Aviva and Prudential, to locate call centres in India, where the costs can be 30% lower than in the UK. The manufacturing sector has also suffered from relocations, with a recent example of Peugeot closing their factory in Coventry to relocate to factories in Eastern European due to the significantly lower labour costs.

It must also be noted that in the UK, the Chancellor of the Exchequer in his Budget in March 2007 announced a rise from 19% to 22% for corporation tax on small business whilst cutting mainstream corporation tax from 30% to 28%. The Chancellor stated the rise in small business taxation is to prevent those self employed from fraudulently claiming the lower tax for small businesses. However, while simultaneously lowering mainstream corporation tax to maintain and attract large firms to the UK economy, it is possible the Chancellor believes that the emphasis must once again be on the large firms.

In conclusion, when the combined effect of individual small firms are considered, they are of great interest due to their impact on the economy. Firstly in statistical terms in the UK, they employ over half the private sector, generate over half of total turnover and account for over 99% of businesses. Secondly, they provide competition for the large firms to ensure efficient pricing and use of production inputs. Thirdly, they are more innovative and flexible than large firms meaning they can explore new markets and opportunities for wealth creation with less risk than large firms. Finally, there are the positive social aspects small firms bring to the economy, by increase relations within a firm and lowering the likelihood of damaging industrial action.
However, it must be noted that despite these evident advantages, some of the growth of small firms since the 1970s could be attributed to the increased ease of large firm mobility to move to from developed industrial economies to developing industrial economies, attracted by lower wages and higher labour productivity.

[majesty2009]

WOW, thanks for taking the time to write that out. Im not going to actualy read the whole thing at the moment, but Im sure it will be a good read later tonight.

I got to say thanks just for the effort.

[john kane]

there are a few bits and bobs i need to alter such as "but also due less likelihood of engaging in industrial action due to the less bargaining power it would have.", having 'due' twice, and inflicting 'damage' on london business, plus a few other minor bits and bobs, but any feedback on the essay as a whole i'd be interested in. if not no worries.

[john kane]

thank my parents for making me not quit my economics degree. this is due in on friday. tomorrow i need to pick a public finance essay title and ideally get the readings done today (as in go to bed soon, wake up around midday, decide on essay title, get readings, make notes, then write tomorrow).

tbh i think my essay is one of my better ones, but you never know what your lecturer is thinking.

[Sniper]

Thanks for posting this... I think it would be great if more students posted their class essays.