Enterprise and Small Business Principles

Growth and development in the small firm

Much of the literature that has been written about small business growth defines growth in terms of employment (Storey, 1994; Keeble, 1993; Barkham et al., 1996; Schutgens and Wever, 2000). Part of the reason for this is the interest of public policy makers in facilitating growth in employment opportunities. In this context, various studies have demonstrated the disproportionate contribution of a minority of fast growth firms to employment generation (see Chapter 2). For example, among new firms, it has been suggested that ‘out of every 100 created, the fastest growing four firms will create half the jobs in the group over a decade’ (Storey et al., 1987). Another study which was concerned with the development of a group of 306 mature manufacturing SMEs over an 11-year period showed that 23% of the firms (i. e. those achieving high growth) con­tributed 71% of all new jobs created in the panel (Smallbone et al., 1995).

Although employment generation may be an appropriate growth criterion for pub­lic policy, for most SME owners/managers it is a consequence of growth rather than a prime objective of business development. Where owners seek to expand their busi­ness, this is more likely to be in terms of profitability, sales turnover or net assets than employment per se, since few have set up their businesses primarily to create employ­ment for others. At the same time, a number of studies have demonstrated the close correlation that typically exists between employment growth and sales growth in small firms over a long period of time (Storey et al., 1987; Smallbone et al., 1995), although increased employment is less clearly related to a growth in profitability.

Although the policy context is one of the reasons why many academic studies define small business growth in terms of increased employment, another reason is related to data availability and reliability. Financial data (such as sales turnover or profits) are notoriously less reliable in small firms than in large firms and also less commonly avail­able, particularly in countries (such as the UK), where the smallest firms are exempt from annual financial reporting requirements. This means that researchers typically have to rely on self-reported financial data which presents both confidentiality and reli­ability issues, particularly with respect to sales and profitability.

One of the issues that needs be recognised in any discussion of small business growth is that not all owners see growth as an important business objective. One of the reasons is that there are a variety of factors that contribute to individuals starting and running businesses, which means that lifestyle and non-business objectives may result in a lack of growth orientation (Curran, 1986a). Moreover, the importance of business growth in relation to other goals that individual entrepreneurs may aspire to can change over time. The growth orientation of an individual small firm can also vary at different stages of business development, as well as in response to changes in external factors. For example, in a newly established business, some growth is likely to be a necessity for survival, although a period of rapid growth may need to be followed by a period of consolidation, if expansion is not to outstrip the ability of the firm’s resource base to support it. For these reasons, the extent to which the owner of a small firm is seeking to grow (i. e. its growth orientation) can vary over time as well as between firms.