It's a small business world, after all

Entrepreneurship, Small and Medium-Sized Enterprises and the Macroeconomy
January 21, 2000

Think of a small business. What springs to mind? The seedy car valet company operating from a near-derelict industrial unit? A team of university pharmacologists licensing a new method of drug delivery? A software company? A chip shop? While recent years have seen a welcome growth of research into small companies and business start-ups, academics still face the problem of getting a clear mental image of what exactly is under consideration. Saying sensible things about employment growth, innovation and causes of failure in the presence of such diversity is tricky; formulating coherent policy is even harder. In general, small firms are smaller than you might think; making sense of their role in the economy is a bigger challenge than academics often care to admit.

Research in small and medium-sized enterprises (SMEs) also faces some daunting problems of collecting and interpreting data: for example, how to differentiate between a firm whose life cycle ends with being sold to another company at the retirement of its principal and a firm whose acquisition signals a business failure? Even calculating the number of employees a firm has can be a complex task when, say, its work may be divided between family members who also hold down other jobs, or when - for tax or commercial reasons - a single substantive enterprise trades as several distinct legal units. In a field of such fiendish complexity, what does current economic research offer?

Arising from a 1996 conference, this collection of 13 papers is an impressive indication of the value of systematic analysis in this field. The editors provide a useful opening chapter that sets the scene, but decline the challenge of matching this with a closing synthesis. This is understandable, given that the substantive contributions - consistently well-written and often insightful - do not converge on a simple message. Indeed, the key lesson that emerges is the need for caution when attempting grand generalisations.

The first of the four sections offers a selection of papers loosely connected by the role of SMEs in the macro-economy and the scope for the use of economic theory to explain this. Of particular interest here is Mark Casson's essay on the application of the theory of the firm to the small company.

The second section tackles small-firm finance, and it includes two of the most convincing and succinct contributions. Robert Cressy examines the impact of human capital on small-firm failure rates, and, using a database of 2,000 British start-ups, points to the importance of the maturity and prior experience of the entrepreneur, suggesting that this dominates the effect of initial funding. The paper is a model of how empirical studies should be reported: future researchers are given enough detail to take this work further. Gavin Reid's cogent paper on business failure also points to the limited effect of early financing choices on small firms.

The third section considers the impact of small firms on job creation and illustrates the methodological difficulties of quantifying the net contribution to employment. John Haltiwanger's paper uses data from the United States to examine the effect of the age of the organisation on job destruction and creation in the context of cyclical business environments; interestingly, this seems more important than the effect of size among small firms. Other contributions look at data from Sweden and Holland. The book's final section analyses innovation and productivity growth and again emphasises methodological issues.

Overall, the volume is a testament to the principle that good research should focus on interesting problems, even if the domain is complex and defies simplistic conclusions.

Steve New is a fellow, Hertford College, Oxford.

Entrepreneurship, Small and Medium-Sized Enterprises and the Macroeconomy

Editor - Zoltan J. Acs, Bo Carlsson and Charlie Karlsson
ISBN - 0 521 62105 4
Publisher - Cambridge University Press
Price - £45.00
Pages - 405

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