Enterprise and Small Business Principles

The role of government

The first point on which it is important to be clear is that entrepreneurs and managers, not governments, develop small businesses. But government can have a profound effect on how all firms, particularly small firms, operate and their opportunities to grow. Indeed, government policy and its influence on the ‘institutional environment’ of a country, region or locality has become a key focus of efforts to help improve how small firms develop and economies compete. As a result, almost all countries now have an active policy for improving competitiveness within which is a strong element focused on what, in policy terms, are usually referred to as small and medium-sized enterprises (SMEs). There are three main dimensions to the government role:

4.3.1 Government as regulator

Government and legal rules determine how trade rules operate (nationally and interna­tionally) and the legal form of companies, the extent of legal limits on company liabil­ities and the strength of anti-trust, restrictive practices and anti-monopoly regulations. Government also influences regulation on conditions at work, consumer protection, food, health, safety, environmental and planning regulation and licensing.

4.3.2 Government as economic agent

Government taxes, charges fees, raises debts and spends. The way in which this oper­ates has a profound effect on business finance and risk taking:

■ Taxation and fee levels affect entrepreneurial incentives and market entry; govern­ment debt levels severely affect the economic climate.

■ Spending influences the competitive environment and procurement rules for govern­ment contracts influence markets; the growth of government services (particularly education, health and transport services) influences the factor inputs for SMEs.

■ As a significant employer, government wage rates and employment conditions impact on local and national pay bargaining, the role of trade unions and employment conditions.

■ Government redistribution policies and social engineering influence work incentives and the labour market.

4.3.3 Government as strategic planner and promoter

Government finance can be used to offer grants, subsidies, loans, or information and advisory support to SMEs; and can seek to improve the infrastructure of business factor inputs. Notable examples are:

■ education and skills

■ research and development

■ marketing and productivity initiatives

■ international trade protection or barriers.

Over time, the consensus on the extent and form of government policy in each of these areas has changed radically. Up to the early nineteenth century, government sanctioned large monopolistic companies (charter companies such as the East India Company). Few other limited liability companies could exist and hence most businesses were very small traders who had limited scope to grow because they could not compete with the few large monopolies. The industrial revolution and the creation of laws to allow the establishment of limited liability companies (in Britain in 1844 and 1856) at first allowed a large number of small companies to be established, but as time progressed there was consolidation of economic power into a small number of large concerns. By 1910, 16% of British manufacturing output was generated by the 100 largest companies; by 1970 the 100 largest companies accounted for 47% of output and covered 36% of employ­ment (Hannah, 1976; Prais, 1976).

The large firm dominance of the economy was encouraged by government in several ways. First, planning of supply during both World Wars led to considerable consolida­tions. Second, until the 1960s, government policy encouraged price cartels and collu­sion between firms, which frequently led to amalgamations and takeovers. The scope for SMEs was limited by these growing behemoths. Third, and at the same time, the growth of socialism and the Labour Party led to an ideological decision to nationalise many strategic industries, to provide them with large subsidies and to control politic­ally the means of production through extensive economic committees. By 1960, 13% of GDP was produced by nationalised industries and they employed 10% of the work­force excluding dockyards and munitions factories (Pryke, 1981). Inevitably the scope for SMEs was limited by both these large firms and nationalised industries in terms of market entry and scope to compete.

The result was a significant long-term decline in the number of business, particularly small firms, up to the 1960s, with major waves of merger occurring in the 1920s and 1930s, and in the 1950s and 1960s, (Hannah 1976, Table A.1). This evolution is shown in Figure 4.1, which also shows the relatively limited development of self-employment (single person businesses).

The apogee of this period was the establishment in 1962 of the National Economic Development Council (NEDC) which was to be a means ‘to seek agreement on ways of improving economic performance, competitive power and efficiency’ (Selwyn Lloyd, Chancellor of the Exchequer, 1962; quoted in Middlemas, 1983, p. ix). This led to a network of tripartite committees between trade unions, government and businesses (generally represented by the Confederation of British Industries (CBI)) to inform negotiations on wages and economic policy, which were modelled on the French Commissariat du Plan and the Japanese MITI. These committees covered 60% of all manufacturing industry. The collapse of the committee-driven approach was inevitable as one industry after another suffered increased international competition, its manage­ment was unable to respond, its sales collapsed and, as its profits fell, subsidies increas­ingly became necessary. In Middlemas’ words (1983, p. 66), this national process of economic planning was ‘too close to government, too dependent on what government did or did not do, too subject to the (political) pendulum’. Most importantly it could not cope with rapid change, increased global competition, and it ignored small firms.

From the late 1960s a significant and rapid change began to occur. The Restrictive Practices Act prevented cartels and price fixing; joining the European Community in 1976 restricted state aids to industry; privatisation of former nationalised industries after 1979 reduced government control radically; and new technologies increased the scope for innovative management by small and innovative businesses and their ability to compete with large businesses. A rapid growth in small firms has been the result, so that in Britain SMEs are now 150% of their number in the 1960s and self-employment has nearly doubled.