Enterprise and Small Business Principles

Trends in SME statistics

The economic importance of SMEs in terms of employment and output has not always been evident. In this section, consideration is given to empirical evidence from the UK and internationally which suggests that SMEs prior to the 1980s were declining both numerically and in economic importance. Since the 1980s, the numbers of SMEs have grown dramatically. This section goes on to show that this general or ‘U’-shaped increase is not common to all OECD countries. Notably, some countries such as France and Japan have seen their numbers of business owners decrease whilst the US has an ‘n’- shaped distribution to its rates of business ownership.

Looking first at the situation prior to the 1980s, early empirical evidence from UK manufacturing employment data shows that the employment share of small manu­facturing enterprises (<200 employees) declined from around 45% in the 1920s and 1930s until it reached around 30% in the 1960s and the 1970s (Figure 2.1).

Figure 2.1 Percentage of UK total manufacturing employment in small establishments (<200 employees), 1924-88

50 45 40

•35 S1 30 £ 25

g 20

15 10 5 0

1924 1935 1948 1958 1968 1978 1988

Year

Further evidence of the shift away from small-scale enterprises is shown in Figure 2.2. This shows the self-employment rate (as a percentage of workforce jobs) from 1959­

2004. It indicates that after 1959 the self-employment rate fell to below 8% but showed a modest recovery in the 1970s. Subsequent to 1979, the self-employment rate shot up in the 1980s and the 1990s: by 1995 the self-employment rate had reached nearly 14% which represents a slightly more than 50% increase in self-employment rates in 15 years.

These changes in the self-employment rate are also mirrored in the changes in the total UK enterprise population and are discussed in more detail in Chapter 3. Figure 2.3 shows that the number of enterprises in the UK increased from 2.4 million in 1980 to a level of 4 million in 2003. This represents more than a 50% increase in the UK enter­prise population. Much of this increase took place in the 1980s when the number of enterprises increased to around 3.8 million. Figure 2.3 further demonstrates, except for the recessionary period in the early 1990s, that the enterprise population has remained fairly constant since the 1980s. It would appear, at least for the UK, that SMEs who make up the vast bulk of all enterprises ‘re-emerged’ after the 1980s.

These dramatic increases in small-scale enterprise activity in the 1980s and early 1990s, and the subsequent stabilisation of the enterprise population, might be a pecu­liarly UK phenomenon. Early evidence from Loveman and Sengenberger’s (1991) study of six OECD countries in the 1980s (Japan, France, Germany, Italy, the UK and the US), however, showed that the employment share of SMEs in these countries broadly followed a ‘U’-shaped pattern. In the US, for example, small businesses’ share of

Source: Small Business Service (2005)

employment was 41,300,000 in 1958. This fell to 39,900,000 in 1967 before rising to

45,700,0 in 1982.

Blanchflower (2004) has nonetheless indicated that, in terms of self-employment (percentage of non-agricultural employment), the picture has not been consistent (Table 2.6). Blanchflower indicates that only certain economies (UK, Australia, New Zealand, Mexico and Ireland) have seen a steady increase in their self-employment rates over the last 50 years.

Other countries do not display this pattern. For example, the US has, with the excep­tion of the recovery of the 1970s, seen a steady decrease in its rate of self-employment. This is also common to the economies of Austria, Denmark, France, Japan and Norway. Other economies, perhaps more in keeping with the UK statistics, show a ‘U’-shaped self-employment pattern. Hence, Canada, Italy, the Netherlands and Portugal show rates falling in the 1970s and 1980s before returning to higher levels of self-employment more recently. Other countries (Belgium, Greece and Germany), could be further char­acterised as constants since the self-employment rates in these countries have remained relatively stable over the last 50 years.

Self-employment is only one measure of enterprise activity. A perhaps more com­plete measure is the evidence supplied by the COMPENDIA database, which contains business ownership rates (defined as the number of unincorporated and incorporated non-agricultural self-employed as a share of the labour force) for 23 OECD countries over the period 1972-2002 (only the even years). In Table 2.7 we can see that the aver­age business ownership rate for these 23 countries was 10% in 1972. This rate fell

throughout the rest of the 1970s and the early 1980s before returning to its 1972 level in 1986. Thereafter, the average rate of business ownership increased, reaching a peak in the mid to late 1990s. Overall, the average rate across all the 23 countries is ‘U’- shaped for the period 1972-2002.

Four groups are discernable from Table 2.7. The first of these groups are countries that saw gradual increases in their rate of business ownership over the period (see Table 2.8). These ‘increasers’ include three Mediterranean countries (Greece, Italy and Portugal) as well as countries as seemingly divergent as Finland, the UK, Canada and Switzerland.

Within this group, it is also clear that the countries with the highest rates of business ownership in 1972 tend to have the highest rates in 2002. Over the period, therefore, there is little sign of convergence within this group: the three Mediterranean countries have rates (ranging from 11.2% to 16.1% in 1972 and 13.7% to 19.3% in 2002) that are persistently above that of Finland and Switzerland (6.6% in 1972 and 7.6-7.9% in 2002). The only country to change its relative position in 1972 was Ireland. In 1972 it had a business ownership rate of 7.7% which was just below the UK rate. By 2002, Ireland had a rate that was 0.5% above that of the UK.

It is further evident from Table 2.8 and the data in Table 2.7 that there are a group of countries (France, Luxemburg, Japan and Norway) that have seen an overall decline in their rates of business ownership. For example, both France (11.3%) and Japan (12.5%) in 1972 had rates of business ownership that were well above the average rate

of 10%. These rates declined in the 1970s and the 1980s in line with the OECD aver­age but in the 1990s rates in the four ‘decliner’ countries did not improve. Each of the four countries by 2002 had rates of business ownership that were below the average rate of 10.8%.

A third group are countries also have a ‘U’-shaped pattern to their rates of business ownership. The Netherlands, for instance, began the 1970s with a rate of just over 10%, sank down to 8.1% in 1984 and then recovered to 10.8% in 2002. Other countries in this group display similar patterns although it is interesting to note some differences. First, Spain, unlike the other three Mediterranean countries, saw a marked fall in its business ownership rate in the late 1970s to the early 1980s.

Hence, from having a business ownership rate (11.9%) which was above Portugal (11.3%) in 1972, by 2002 the situation had reversed: Spain had a rate (12.9%) com­pared with Portugal’s rate of 13.7%. A similar situation is evident with Austrian rates. Data from Table 2.7 also show that Sweden had, in fact, two separate ‘U’-shaped periods. The first period was between 1972 and 1982. Rates here fell and then recovered to their 1972 levels. After 1982 rates again fell before returning to higher business ownership rates.

Table 2.8 suggests that there were three countries (Denmark, Australia and the US) that may be described as outliers in that they do not fit any of the patterns evident in the three other groups. Denmark is unusual in the sense that, although like very many other countries, business ownership rates decline in the 1970s and in the 1980s, they stabilised from 1988 at around 6%. Australia is also different from other countries because its rate of business ownership jumps from 12.6% in 1972 to 16% in 1978. Since then, Table 2.7 shows that business ownership rates in Australia have been, except for the mid-1990s, around 16%. The third outlier is the US. The pattern here may be described as ‘n’-shaped in that business ownership rates increased from 8% in 1972 to 10.7% in 1988 before falling to 9.5% in 2002.

This section has shown that smaller enterprises ‘re-emerged’ in the UK. In fact, from 1980 both self-employment and the more general business ownership data suggest that the UK enterprise population increased by 50% in the 1980s. Since then, with the exception of the recessionary period of the early 1990s, business ownership rates have gently increased since 1995. This evidence is in line with international data which sug­gests that the UK has seen its business ownership rates increase.

This section has also shown that the majority of other economies either follow this pattern or have a ‘U’-shaped pattern to business ownership rates. The section, however, has pointed to some notable exceptions such as ‘decreasers’ (e. g. France and Japan) or those with unusual patterns (e. g. the US’s ‘n’-shaped pattern).