UK: Monday Briefing: In Praise Of Small – And Big - Business

Last Updated: 25 July 2013
Article by Ian Stewart

Most Read Contributor in UK, August 2017
  • The term "big business" is often used in an unflattering way. "Small business", by contrast, almost always has positive connotations. In much, if not most, of the western world it is fashionable to de-cry the supposed excesses of big business and sing the praises of small business.
  • But is such enthusiasm for small firms justified by the data?
  • Certainly small firms create jobs on a far greater scale than large ones.
  • In the UK small and medium sized enterprises (SMEs) have been the engine of job creation for many years, and, indeed, since the financial crisis. Employment in SMEs rose by 2.0% between 2008 and 2012 while large firms reduced their headcount by 1.8%. Cost cutting and redundancies in large companies and the public sector have acted as a spur to self-employment and business start-ups. 
  • But surviving and expanding are tough for SMEs. The great majority of small businesses are sole traders or employ a handful of people. Small firms tend to stay small and have a high mortality rate. In 2011, 261,000 firms employing fewer than 100 people were formed in the UK - and 229,000 died. Most new jobs in SMEs come with the initial creation of the business, not from subsequent growth.
  • Despite a high mortality rate, the number of UK small firms has increased to reach 4.8 million by 2012, a rise of 39% over 12 years. Over the same period the number of large businesses employing more than 250 people fell by 19%. What is driving the growth in small businesses?
  • The expansion of services – the dominant sector in Western economies – has been a boon for entrepreneurs. In many service industries capital costs are low, making it easier for small players to enter. Changing consumer tastes and rising incomes have led to growing demand for customisation which favours nimble, niche players. Among those of working age a desire for greater independence has helped boost the ranks of the self-employed. Advances in the internet, computing and telecommunications have eroded some of the advantages of scale previously enjoyed by big business.
  • Yet for all this, scale continues to matter. On average large companies are more productive than small ones, in part because of their ability to specialise and invest, and because of their diversified revenue streams.
  • As a result large companies punch above their weight in their contribution to the economy. In the UK revenue per employee in large firms is 40% higher than in SMEs. As the Economist remarked last year, "Big firms are generally more productive, offer higher wages and pay more taxes than small firms". It is telling that an increase in the number of large internationally competitive companies is seen as a sign of development in lower income countries.
  • In reality, large and small companies are mutually dependent. The auto industry relies on networks of small companies providing them with components. Small companies are a source of new ideas which, in sectors such as technology and pharmaceuticals, are often exploited by large businesses. Small firms in turn benefit from knowledge 'spillovers' generated by larger firms and rely upon larger suppliers for business and, at times, credit.
  • The relatively low productivity of small firms also proves to be more complex than at first it appears. A substantial numbers of SMEs, especially in so-called knowledge industries, are highly productive. Small firm do dominate many labour intensive sectors, such as cleaning, catering and construction, where the scope for productivity growth is limited. Revenue per head is lower in such sectors than in capital intensive ones like car production and banking, but they are equally important to national welfare.
  • Meanwhile, the high failure rate of small businesses can be seen as a dynamic process, a necessary form of creative destruction which, in time, allows a few winners – the Apples, Googles and Facebooks – to become behemoths. 
  • The mundane reality is that a vibrant economy needs large and small businesses. The challenge for policy makers is to create the conditions which help businesses of all sizes achieve their potential.

MARKETS & NEWS

The UK's FTSE 100 ended the week up 1.3% following positive economic data from the UK and US.

Here are some recent news stories that caught our eye as reflecting key economic themes:

KEY THEMES

  • Detroit became the largest ever US city to file for bankruptcy, seeking protection for creditors as it restructures more than $18bn in debt.
  • $17.5bn was invested in US equity funds in the week to 19th July according to data from EPFR, the most since June 2008.
  • Britain's ageing population will create a £19bn gap in the public finances by 2018, due to rising health, pension and social care costs, according to the Office for Budget Responsibility (OBR).
  • The UK government announced that it will offer producers of shale gas a 30% tax rate, compared to the 62% rate for oil and other gas production, in order to encourage exploration.
  • The UK's annual rate of consumer price inflation rose to 2.9% in June, from 2.7% in May, its highest rate rise since April 2012.
  • The average UK house price rose by 2.9% in the year to May, up from an annual rate of 2.6% in April.
  • According to the Financial Times, the European Union (EU) has drawn up plans to introduce a ceiling for charges on all consumer debit and credit card transactions.
  • UK sports goods retailer Sports Direct announced a record-breaking year, with pre-tax profits up 40% annually, and 2,000 staff sharing in a £126m bonus pool.
  • The Greek parliament narrowly approved a public sector reform bill that will potentially cut public sector employment by a further 4,000 jobs this year, with 25,000 further workers placed in a "mobility pool" to seek redeployment.
  • A report from the UK's National Institute of Economic and Social Research estimates that the UK has at least 270,000 digital companies, more than twice the number estimated by the government.
  • Britain's heat wave led a tripling of barbecue meat sales at Waitrose compared with a year ago, a seven fold increase in charcoal sales and a three fold increase in sales of ice cubes.
  • In an effort to help residents lose weight local government officials in Saudi Arabia have announced a 30-day challenge in which it promises to pay participants a gram of gold for every kilogram of weight lost - worth the weight.

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