Showing papers in "Small Business Economics in 1995"

Learning, market selection and the evolution of industrial structures

Abstract: Industrial economics is a rich source of ‘puzzles’ for economic theory. One of them — certainly the most discussed — regards the co-existence of firms (and plants) of different sizes, displaying rather invariant skewed distributions. Other ‘puzzles’, however, concern the sectoral specificities in industrial structures, the persistence of asymmetric corporate performances and the dynamics of entry and exit. The paper reports some preliminary results on evolutionary modeling of the links between the microeconomics of innovation, the patterns of industrial change and some observable invariances in industrial structures.

Exports, firm size, and firm dynamics

Abstract: This paper explores the relationships between exports, firm size, and firm dynamics. It is based on a unique longitudinal data set collected at the establishment level, covering some 7000 manufacturing German firms. We present stylized facts on exports and firm size, showing that the probability that a firm is an exporter increases with firm size; however, there are many successful exporters among small firms, and non-exporters among larger firms, too, while most of the exports are from the top size groups of firms. An econometric study shows a picture that is consistent with theoretical considerations: The impact of firm size on exports is positive but decreasing, while human capital intensity, domestic market share, and advanced technology all have a positive influence on the export performance of a firm. Firm growth and export performance are positively related, as is expected from a model of a price-discriminating monopolist.

Explaining regional variation in business births and deaths: U.S. 1976–88

Abstract: Linear models are developed to determine the relative impact of 15 start-up processes on the annual regional birth rate of new business organizations for all industry sectors in the U.S. over 6 two-year periods. These stable linear models explained from 50–70|X% of the variation in regional firm birth and death rates up to 16 years into the future. Start-up processes that have the most impact involve regional economic diversity; population growth; greater personal wealth; presence of mid-career adults; low unemployment; and greater flexibility in employment relationships. There was a complete absence of any impact of regional variation associated with higher densities of customers, suppliers, workers, RD costs of production; or access to national transportation facilities.

Closing the regional equity capital gap: The role of informal venture capital

Abstract: There is evidence from a number of countries that small firms encounter a shortage of long-term investment finance, particularly at start-up and initial growth. Expansion of the institutional venture capital industry has done little to fill this “equity gap” on account of its preference for making large investments in established companies and management/leveraged buyouts. Moreover, the supply of venture capital exhibits a high level of spatial concentration. Initiatives by state/provincial and local governments, most notably in economically lagging regions, to increase the supply of risk capital for start-ups and early stage businesses have at best provided a very partial, and often costly, solution. A more appropriate approach to increasing the supply of start-up and early stage finance is to facilitate the more efficient operation of theinformal venture capital market. Informal investors, or “business angels”, are private investors who provide risk capital directly to new and growing businesses in which they have no family connection. Most business angels are unable to find sufficient investment opportunities and so have substantial uncommitted funds available. There is also considerable scope for expanding the population of business angels. The most cost-effective means of closing the equity gap is therefore for the public sector to underwrite the operating costs of business introduction services whose objective is to overcome the two main sources of inefficiency in the informal venture capital market, namely the invisibility of business angels and the high search costs of angels seeking investment opportunities and entrepreneurs seeking investors, by the provision of a channel of communication between informal investors and entrepreneurs seeking finance.

Employment change in independent owner-managed high-technology firms in Great Britain

Abstract: There is a growing volume of literature that points to the potential for small technology-based firms to achieve substantial employment growth. As a direct consequence of such work this sector of any economy has attracted increasing attention from national and local Governments concerned with finding ways of revitalising economically deprived localities and creating employment opportunities. This paper provides up-to-date empirical evidence surrounding the ability of small high-technology firms to create additional jobs in Great Britain. In addition, key founder and business characteristics are isolated which are significantly associated with employment change in growing high-technology firms over the 1986 to 1992 period. With respect to factors influencing these high levels of employment growth, a high firm size (in 1986) was found to act positively on employment growth, as was a graduate level education for the key founder. On the finance side firms which had access to and used a multiplicity of sources of start-up finance tended to grow faster. Futher, on the basis of our results we would suggest (and recommend) a Government policy which at the firm level actively encourages high-technology firm start-ups (who record higher rates of survival than firms in more ‘conventional’ sectors) as well as providing support for existing high-technology firms who have already demonstrated the inclination and ability to grow in employment size.

The capital structure and investment decisions of the small owner-managed firm: Some exploratory issues

Abstract: In the burgeoning literature on small firm financing, the problem of underidentification in respect to the supply of, and demand for, capital has not been fully resolved. In an attempt to progress this issue, the current paper looks at some of the issues influencing the demand for finance in small firms which are owner-managed. The paper is primarily exploratory in nature and argues that a greater emphasis might usefully be placed on the cost of capital dimension in future research into small business financing. In particular, it is suggested that where the objective of an owner-manager is to maintain control of the firm, interdependent investment and financing strategies may be chosen to control the small firms cost of capital. This in turn indicates that the tendency for some small firms to invest sub-optimally and exhibit slower than average growth may not be primarily determined by limitations on their supplies of finance. On the demand side, it may well be that in addition to equity aversion, a suboptimal capital structure decision is made in the form of a reduced demand for debt. In other words, given the level of equity that an owner-manager chooses, debt may not be fully expanded to the capacity limit consistent with value maximisation.

Networks and small business growth: An explanatory model

Abstract: To date, there has been limited empirical research related to network theory. With this article, we have tried to fill this gap by testing an explanatory model of the impact of networks on small business growth. To analyze this causal relationship, the log-linear technique was used. The results suggest that networks have an influence on the growth of a small business, especially through contacts with national and international entrepreneurs.

A comparison of franchise and independent small business survival rates

Abstract: Aspiring entrepreneurs choosing to become franchisees certainly expect to improve their chances of survival during the turbulent early years of business startup and operation Alignment with a franchisor parent company offers the franchisee managerial assistance, access to financial capital, and access to markets via the right to utilize the parent company trademark This study examines survival patterns among franchise and nonfranchise small firms started between 1984 and 1987: survival through late 1991 is tracked for all firms Although the franchise operations are larger scale, better capitalized young firms, the independent business startups are found to be more profitable and their survival prospects are better than those of franchises

Employment generation by small producers in the Canadian manufacturing sector

Abstract: This paper uses job turnover data to compare how job creation, job destruction and net job change differ for small and large establishments in the Canadian manufacturing sector. It uses several different techniques to correct for the regression-to-the-mean problem that, it has been suggested, might incorrectly lead to the conclusion that small establishments create a disproportionate number of new jobs. It finds that net job creation for smaller establishments is greater than that of large establishments after such changes are made. The paper also compares the importance of small and large establishments in the manufacturing sectors of Canada and the United States. The Canadian manufacturing sector is shown to have both a larger proportion of employment in smaller establishments but also to have a small establishment sector that is growing in importance relative to that of the United States.

Business borrowing and control: A theory of entrepreneurial types

Abstract: A formal model of the bank borrowing decision by the small firm is provided to explain why some entrepreneurs borrow and others do not, and why some businesses grow and others remain stationary over long periods. Loan capital is productive and increases the firm's revenue but brings the business under the control of the bank. Profits generated by borrowing are a ‘good’ increasing owner utility whereas control is a ‘bad’, reducing it. The consequent tradeoff between borrowing and control implies that the business' optimum will involve borrowing less than the amount that maximises profits. If owner control-aversion is strong enough equilibrium may involve a corner solution with the business being entirely self-funding. The above result holds under conditions of symmetric information and zero credit rationing. Dynamic analysis distinguishes one group of entrepreneurs (Movers) whose preferences towards control evolve through time and their control-aversion diminishes, from another group (Stayers) whose preferences remain stationary. For the Movers borrowing increases over time up to a profit-maximising optimum whereas for the Stayers independence of control is maintained but at the expense of non-growth.

Small and medium-sized transnational corporations: Salient features

Abstract: This second half of a series on small and medium-sized transnational corporations (TNCs) describes their main features in terms of such variables as the markets and industries in which they operate, ownership, forms of investment, performance and competitive advantages. It also deals with strategies that small and medium-sized enterprises (SMEs) tend to take in their foreign operations.

Firm size and job creation in Germany

Abstract: This paper reports new results on the role of firms from various size classes in the job generation process in Germany It is based on a unique longitudinal data set covering all manufacturing establishments that existed in at least one year between 1978 and 1993 in the German federal state Lower Saxony We find that gross job creation and destruction rates tend to decline with firm size, while net job creation rates and firm size are not systematically related when firms are classified according to their average number of employees in the base and end year Small firms create (destroy) quite a large share of all new (lost) jobs

Entrepreneurship in the Soviet Union and post-Socialist Russia

Abstract: This article advances the understanding of the present and future of Russian entrepreneurship. Based on secondary information published in the West and in contemporary Russia, empirical research and personal interviews, general characteristics of Russian entrepreneurship within different controversial periods that occurred during different periods of this country's history are presented. Also discussed are the influences of ethnic and religious minorities and foreign businesses on entrepreneurship development as well as the relatively low social status of the entrepreneur. The vitality of entrepreneurial response is discussed in terms of recent events in post-Socialist Russia including the transformation of its economy and society and its integration into the global market. In so doing, the article presents the latest trends in entrepreneurship in the country as well as a profile of the Russian entrepreneur.

Early life-cycle behaviour of micro-firms in Scotland

Abstract: The paper reports on the behaviour of young (less than three years old) micro-firms (less than ten employees) in Scotland, with an emphasis on life-cycle effects. Two main tests were carried out. The first took Gibrat's Law (that growth is independent of size) as the null hypothesis, and a life-cycle effects model as the alternative. The Gibrat's Law model was rejected in favour of the life-cycle model. Smaller micro-firms grow faster than larger micro-firms. Robust nonlinear variants of the life-cycle model were discussed and shown to display stable equilibrium characteristics which were consistent with the sample evidence. The second took a Classical simultaneous equations model as the null hypothesis, for which growth and profitability were mutually reinforcing. A Managerial model was set up as the alternative for which growth and profitability were in a trade-off relationship. The Classical model was rejected in favour of the Managerial. In the short-run, young micro-firms experience a trade-off between profitability and growth. The Managerial model was shown to imply a stable equilibrium, with characteristics consistent with sample evidence.

Small and medium-sized transnational corporations: Trends and patterns of foreign direct investment

Abstract: This paper provides an analysis of small and medium-sized transnational corporations (TNCs). Statistical evidence is provided on trends and patterns of foreign direct investment (FDI) by small and medium-sized enterprises (SMEs). There are virtually no countries for which consistent and systematic FDI data are available by firm size, but data complied by or made available to the author for the UNCTAD Programme on Transnational Corporations allow an analysis of broad characteristics, trends and patterns. FDI by SMEs is more concentrated in developed countries than that by large TNCs. However, small and medium-sized TNCs, especially those from Japan, are increasingly investing in developing countries. Although absolute size of FDI is still small, SMEs account for a large share in terms of the number of investment cases and the number of parent firms. South and East Asia became the primary host region of small and medium-sized TNCs during the 1980s and early 1990s. The industrial distribution of FDI by SMEs in developing countries is quite wide, but concentrated in electrical goods, chemicals, textiles and some services industries. SMEs also engage in non-equity investments.

Job generation and new and small firms: Some evidence from the late 1980s

Abstract: This paper adopts a components of employment change methodology and examines the process of job generation in the late 1980s for three contrasting regions of the United Kingdom. The emphasis in the analysis is on the contribution of new and small firms to regional manufacturing employment growth. The results indicate the important role of new and small indigenous firms in the job generation process, particularly in Northern Ireland, in the period 1986–90. However, the level of displacement associated with these job creations is sufficiently high to cause concern about the longterm sustainability of these trends. The paper concludes by arguing that policies designed to stimulate new firm formation and small firm growth are not in themselves sufficient to promote growth.

Gross job flows and the evolution of size in U.K. establishments

Abstract: This paper analyzes a relationship between establishment size and gross job creation and destruction in the U.K. during the 1980's. I find that the gross job creation rate is highest in small plants and lowest in large ones. In contrast, the gross job destruction rate is lowest in small plants and highest in large ones. In absolute numbers, however, large plants create, but also destroy most jobs. I test convergence in plant size by computing Markov transition matrices. The advantage of this approach is that it avoids Galton's fallacy of regression towards the mean and that it reflects job creation and destruction between size classes. I find no evidence of convergence, hence no regression towards the mean.

Flexible Specialisation, The New Competition and Industrial Districts

Abstract: Flexible specialisation, the new competition and industrial districts are concepts reviewed in this article to determine whether they can provide an alternative for the description of the industrial sector as a system of mass production. The concepts mentioned are discussed and criticized in this article. All three concepts stress the importance of a certain division of labour, of interfirm relations, of cooperation (versus competition), of technological development and innovation diffusion, of flexibility, the role of small enterprises and a local value system. However, a number of differences between the concepts are also highlighted, as well as the problems to use them in empirical research. It is concluded that the three terms are complementary and could be used in combination. The ‘flexible competitive districts’ would provide an alternative type of industrial organization, somewhere between the large scale integrated enterprise and the atomized self-contained individual firm. The challenge lies in turning the positive theory into a normative one. How can industrial development in Eastern Europe and Third world countries be turned into the development of flexible competitive district, which contribute significantly to the development of these countries and allow for an important role for micro, small and medium enterprises? It is argued that this can be done in the framework of urban and regional development policies, but this requires a different role for the government and the provision of an adequate infrastructure.

The determinants of firm start-up and entry in Italian producer services

Abstract: In this paper the determinants of new firm formation in the producer services are studied by using National Security data on firms with at least one employee. Two ratios are computed and analysed for the 95 Italian provinces: an index of fertility represented by the share of new enterprises on employees, and a birth rate represented for each province by the ratio between new enterprises and resident population. On examination of the determinants of this process, we found that the average wage rates and the ratio of utilized credit to the total line of credit negatively affect both indexes, and that both indexes are affected positively by sector growth and by a measure of small firm presence. The index of fertility is also explained by a dummy variable which identifies for each province those policies which are aimed at fostering the process of new firm formation. The birth rate is instead affected by a dummy variable which is equal to one for the provinces in which the chief towns of each region are located and zero otherwise, and by the potential demand for new producer services arising from the industrial sector.

The internationalization process in the small and medium sized firms: A case study on the Italian clothing industry

Abstract: In this research we use a data-base that reveals the propensity for contractual ventures and direct investments (1051 operations) of the clothing Italian companies during the period 1987–1991, on a national (342 operations) and international level (709 operations) The latter were analyzed with reference to the internal (412) and external growth strategies (297), cooperative (362) and non-cooperative (347) deals Our analysis focuses on the different strategies that SMEs, on one hand, and large companies, on the other hand, show in the internationalization process Main results of the study are:

Firm-size wage differentials in the Netherlands

Abstract: An unsolved problem in modern labor economics is the positive relation between the size of the firm in which a worker is employed and his wage. One line of research that has been developed quite recently in this field is the application of endogenous switching regression models. In this paper we utilize such a model to investigate firm-size wage differentials in the Netherlands. The principal findings are that larger firms pay higher returns on schooling whereas smaller firms tend to reward IQ. Combined with the finding that high IQ-workers are sorted into the largest firms, the results are consistent with a model of job screening. Furthermore, we find that employed sons of self-employed fathers are more likely to work in small firms and that wage prospects for all types of workers are indeed most favorable in larger firms.

Small firms, business dynamics and differential development of economic well-being

Abstract: In recent years a growing stream of research has examined the relationships between structural characteristics of regions and their levels of new firm formation. This empirical study aims at supplementing such findings with analyses that include other forms of business dynamics, and also the possible well-being effects of such dynamics. From a unique and comprehensive data set that tracks all births, deaths, expansions, and contractions of commercial business establishments in Sweden 1985–89, six groups of regions with different patterns of dynamics are extracted by means of cluster analysis. The clusters' structural characteristics and their development of economic well-being are also compared. The results suggesta) that the patterns of business dynamics are contingent on the structural characteristics of regions,b) that high formation and turnover of establishments are associated with a relative increase in economic well-being, andc) that small, autonomous firms have a vital role in this process.

New firm formation and regional economic development : An introduction and review of the Scottish experience

Abstract: This paper introduces this special edition ofSmall Business Economics on ‘New Firm Formation and Regional Economic Development’. It integrates the articles appearing in this volume with others presented at the Economic and Social Research Council Urban and Regional Economics Seminar Group conference on this theme in January 1994 in Ayr, Scotland. Many of the studies are derived from a Scottish Enterprise research programme on the contribution of new enterprises and entrepreneurs to economic development, and the factors explaining the low levels of business start-ups in Scotland. Comparative data, research and experiences from across the UK, European Union and US are called upon to improve the understanding of the processes involved. The findings are sometimes unsuspected, challenging the super-structure of business development agencies and their attitudes and behaviour towards indigenous potential entrepreneurs.

The remuneration of non-owner managers in UK unquoted and Unlisted Securities Market enterprises: An empirical analysis of firm specific, human capital and job history influences

Abstract: This paper examines the extent to which the remuneration levels of non-owner managers employed by UK small and medium size enterprises (SME) can be explained empirically by a number of firm specific, human capital and job history characteristics. The UK SME sector is very heterogeneous and we test for possible differences in the determinants of remuneration for two distinct groups of firms. One group consists of high-growth firms that achieved an Unlisted Securities Market (USM) listing within 10 years of start-up. The second group consists of similar firms, matched with the USM firms in terms of age, sector and location, that have remained unquoted businesses. The empirical analysis, based upon data obtained from interviews with non-owner managers and the published financial records of their employing firms lodged at Companies House, focuses on comparing the separately estimated remuneration equations for the two groups of managers.

Problems and Environment of Small Businesses in the Czech Republic

Abstract: The impressive and spontaneous build-up of the private small and medium-sized enterprises (SMEs) in the Czech Republic in 1990–93 coincided with the similarly dramatic changes in the public administration and in the whole environment for decision-making. The resulting problems of SMEs in the Czech Republic seem to be common to all economies in transition. A lot of the problems are caused by the macroeconomic policy for which this sector is not the most important part of the national economy. The paper shows some conflicts between macroeconomic anti-inflationary (monetary and fiscal) policies, and interests of small businesses. The authors stress the importance of SMEs during the period of transition. Informal aspects of the functioning of small firms are discussed, especially their relation with banks and public administration. The paper offers some empirical evidence and available statistics on SMEs developments during 1990–94 focusing particularly on manufacturing.

Factors influencing take-up rates on the Loan Guarantee Scheme

Abstract: This paper uses time-series analysis to model explicitly the take-up rate of the UK Government's Loan Guarantee Scheme over the 1980s. In doing so we consider the rationale for the scheme in the context of empirical and theoretical research into the financing of small businesses and in particular the nature of the small firm/bank relationship. To begin we discuss the history and evolution of the scheme from its inception in 1981. A theoretical model is then outlined in which LGS funds are used to maximise the utility of capital constrained entrepreneurs.

The use of literature-based innovation output indicators for research evaluation

Abstract: This paper discusses the appropriateness of literature-based innovation output indicators in the evaluation arena, and it sets forth criteria against which to judge such appropriateness.

Symposiun on Harrison's "Lean and Mean": A Job Generation Perspective

Abstract: The publishers of Bennett Harrison's book describe it as "myth shattering". The particular myth they have in mind is that small business is nowadays the engine for economic growth and development, not only in the United States, but also in most other developed countries. The problem for this reviewer is that carefully conducted research has rarely offered any foundation for these myths. The value of the Harrison contribution, alongside that of other U.S. heavyweights in recent years such as Brown, Hamilton and Medoff (1990), Davis and Haltiwanger (1993), is to underline key research findings and lay them squarely before politicians and policy makers. The problem is that, despite this accumulation of evidence, policy makers continue to close their ears and eyes to the evidence. This review identifies six key research findings highlighted by Harrison which deserve emphasising, if only because the evidence is more general than Harrison recognises in his text. Five of these six areas, at least amongst scholars, can now be considered "straw men". Only influential policy makers still appear to believe evidence exists to support them. In the sixth area clear differences seem to emerge between the U.K. and the U.S.A. It is not clear whether the U.K. is, or is not, characteristic of Europe more generally in this context. i) The international review by Sengenberger, Loveman and Piore (1990), suggesting there was

Small local firms inside the supply chain: Challenges and perspectives

Abstract: The authors provide the results of an empirical research carried out in north-east Italy and completed in 1992, which was aimed at investigating the rapport between large manufacturers operating on the multidomestic and global markets and the small local supplying concerns. This research identifies that the globalization process has had a strong impact in the relations with suppliers. The purchasing firms have adopted a particular approach when selecting the suppliers. This has involved widening their previous geographic areas of contact, even making use of foreign sources. Consequently, the local micro units either will become excluded from future business relations with the purchasing organizations, or will be relegated into lower levels of the supply chain. Today small and very small units working as suppliers with direct link with large-scale clients, face many challenges: they should now renew their know-how and skills, develop a new managerial and organizational sense, and recognise the need to invest in new forms other than machinery and processes. The empirical study clearly showed both the limits and the structural weakness of such small units and provided some indications for growth in their technical-productive potential.