Showing papers in "Small Business Economics in 1996"

Small firm growth, access to capital markets and financial structure: Review of issues and an empirical investigation

Abstract: This article investigates the financial structure of small firms with an emphasis on growth and access to capital markets Neo-classical economic, life cycle, pecking order and agency theory perspectives are reviewed in order to formulate testable propositions concerning levels of long-term, short-term and total debt, and liquidity Up-to-date financial data were collected from the UK Private+ database for a large sample comprising of both listed and unlisted small firms Regression results indicate significant relationships between financial structure and profitability, asset structure, size, age and stock market flotation but not growth except when rapid and combined with lack of stock market flotation Analysis of stock market flotation as an interactive dummy reveals major differences between listed and unlisted small firms The results indicate that the variety of financial structures observed in practice may reflect rational trade-offs of various costs on the part of small firm owner-managers but that the over-reliance on internally available funds and the importance of collateral, in the case of unlisted small firms, are likely to be major constraints on economic growth

Small business and job creation: Dissecting the myth and reassessing the facts

Abstract: This paper investigates how job creation and destruction behavior varies by employer size in the U.S. manufacturing sector during the period 1972 to 1988. The paper also evaluates the empirical basis for conventional claims about the job-creating prowess of small businesses. The chief findings and conclusions fall into five categories:

Gender as a determinant of small business performance: insights from a British study

Abstract: The performance of small businesses, that is the ability of small firms to contribute to job and wealth creation through business start-up, survival and growth, has been an important area of policy and academic debate in the 1980s. Surprisingly little has been written about gender and small business performance. Our literature search revealed only a small number of studies of any substance on this subject, though over forty made some mention of it, Most studies shied away from direct examination of quantitative performance measures (such as jobs created, sales turnover, annual growth), tending to concentrate on qualitative measures of success or failure. The paper examines small business performance and gender using data obtained from a survey of 600 (300 women, 300 men) Scottish and English small business ownermanagers, part of a three year study on the impact of gender on small business management. Analyses suggest that the relationship between gender and small business performance is complex, but that gender still appears to be a significant determinant even after other key factors are controlled for.

Growing firms and the credit constraint

Abstract: Restricted access to finance (either debt or equity or both) is potentially a significant constraint on the growth of small businesses. Financing problems arise primarily as a consequence of information asymmetries; the adverse effects of these may in part be counteracted by the use of collateral as a signalling and bonding mechanism and/or by the development of a good working relationship between lender and borrower. If the form of information asymmetry differs for growth firms or if the effects of information asymmetries are less easily ameliorated then growing firms may be more adversely affected by credit constraints. If growth is contingent upon access to credit then the generalised implications for the economy may be significant and detrimental. Using evidence from a survery of over 6,000 firms conducted in 1992, this paper addresses the extent to which growth firms are adversely affected by a credit constraint; the results suggest that the credit constraint for growing firms per se is no greater but growth firms may still experience a credit constraint as a consequence of their relative youth. However, there is evidence to suggest that firms expecting to grow in the future do perceive a rather tighter credit constraint but this may be partly or wholly offset by a generally better relationship with their bank.

The new wave of regional innovation networks: Analysis, characteristics and strategy

Abstract: Today, the number one priority for competitive advantage is innovation. A new approach to regional business development has been pioneered in Europe and the U.S.A. This involves building a regional innovation infrastructure. Learning through “networking” has proven to be a successful approach in some of Europe's more dynamic regional economics such as Baden-Wurttemberg and Emilia-Romagna. This involves maximising the complete range of regional innovation assets. The state of Pennsylvania and other older industry centres are showing that such an approach is transferable from Europe to the U.S.A. The paper assesses knowledge-transfer at the regional level and outlines the key elements for successful regional innovation networking practices. The major finding(s) are that business networking is an effective way of increasing company turnover; that not-for-profit organizations are excellent for setting up networks because they are trusted, and that innovation networks are perhaps the most difficult, thought-requiring but important of the types of business network conceivable.

The informational basis of entrepreneurial discovery

Abstract: Scholars have identified four different roles played by entrepreneurs in the discovery of new venture opportunities What each of these roles has in common is that the discovery process consists of the acquisition of specific, risk-reducing information Uncertain returns from such investments deter some would-be entrepreneurs from making discoveries This approach suggests that the vision to make entrepreneurial discoveries depends on making cost-effective informational investments, not on special talents possessed by only a few aspirants

Downsizing and productivity growth: Myth or reality?

Abstract: The conventional wisdom is that the rising productivity in the U.S. manufacturing sector in the 1980s has been driven by the apparently pervasive downsizing over this period. Aggregate evidence clearly shows falling employment accompanying the rise in productivity. In this paper, we examine the microeconomic evidence using the plant level data from the Longitudinal Research Database (LRD). In contrast to the conventional wisdom, we find that plants that increased employment as well as productivity contribute almost as much to overall productivity growth in the 1980s as the plants that increased productivity at the expense of employment. Further, there are striking differences by sector (defined by industry, size, region, wages, and ownership type) in the allocation of plants in terms of whether they upsize or downsize and whether they increase or decrease productivity. Nevertheless, in spite of the striking differences across sectors defined in a variety of ways, most of the variance of productivity and employment growth is accounted for by idiosyncratic factors.

Firms size and R&D spillovers: Evidence from Italy

Abstract: The recent emergence in the industrial organization literature of a wave of studies identifying small firms as more innovative than their larger counterparts poses something of a paradox? Where do small firms get their knowledge generating inputs? The purpose of this paper is to link innovative inputs to innovative outputs. This enables the identification of the extent to which spillovers exist from major sources generating new economic knowledge, such as the research and development (R&D) laboratories of private and public firms, as well as universities, to the innovative activity of large and small enterprises. Based on twenty Italian regions over a period of nine years, the emprical evidence suggests that, while firm R&D expenditures contribute to the generation of innovative output for all firms, as well as for large and small firms, the spillovers from university research are apparently more important for small-firm innovation than for large-firm innovation.

Firm size, small business presence and sales of innovative products: a micro-econometric analysis

Abstract: In our generalized TOBIT analysis we identify a number of variables which have an impact on a firm's innovation “output”. Among others we find that larger firms generally have a higher probability of selling some innovative products, although this probability increases less than proportionately with firm size. Given that a firm has some sales of innovative products, the share of such products in a firm's total sales tends to be higher in smaller firms. Moreover, a strong small business presence in a sector seems to enhance imitative innovation but has no influence on “true” innovations, whereas market concentration has no influence on innovation “output” in whatever definition. We also find evidence of regional knowledge spill-overs. Furthermore, our results are consistent with Schmookler's hypothesis that the growth of demand enhances innovation. The outcomes about the impact of R&D collaboration and technology transfer on innovation remain ambiguous.

Small business and job creation: A comment

Abstract: Davis, Haltiwanger and Schuh (1996) claim to dissect the myth and reassess the facts on the job creation prowess of small businesses. We disagree with the authors. In this comment we discuss their five chief findings and conclusions and in particular, the use of a “regression-to-the-mean” correction.

Technology policies and the growth of regions: Evidence from four countries

Abstract: Since the 1980s, all industrialized countries have established technology policies aimed at increasing economic growth through the development of scientific and technical resources. Most technology policy initiates are at the national level and are predominantly concerned with levels of funding. This is a problem because high-tech industrial development is observed to be regional in nature and national technology policies do not explicitly pursue regional goals. This paper tests two hypotheses. First, that the different explicit and implicit technology policies have had a significant, although unintended, impact on the development of a special type of space, the high-tech regions. Next, that the spatial effects of government technology policy promote high-tech regions over other regions, although this influence is primarily of an implicit or unintended nature.

Property rights and entrepreneurship in science

Abstract: This paper examines the evolving relationship in science between the reward structure and entrepreneurial activity. We draw a distinction between two types of property rights. Basic science is fostered by a mechanism of reputational rights; technological advances-and the products and processes they produce - are fostered by a mechanism of proprietary rights. The two forms of property rights differ markedly in terms of the incentives they provide to share information in a timely fashion. We argue that because of a host of factors university-based scientists in certain fields are more likely to “privatize” knowledge today than in the past, trading reputational rights for proprietary rights. Events in the life sciences serve as a case study. A discussion of how privatization affects basic science follows. Although the evidence is far from complete, we conclude that the movement towards privatization may be more beneficial to product development and the scientists engaged in the activity than to basic science.

Commitment lending under asymmetric information: Theory and tests on U.K. startup data

Abstract: U.K. business startup data is used to examine the role of contract parameters in solving the bank's problem of lending under asymmetric information. Margins are found to be a direct function of the probability of failure and an inverse function of security (for given loan size) consistently with collateral being invoked to solve the Moral Hazard problem. Business survival is also found to be enhanced by owner equity inputs (for given debt) again consistent with a requirement for owner financial inputs to enhance (unobservable) effort. Security rises along with loan size and survival chances, a finding consistent with (a) a firm loan size effect (larger borrowers have lower marginal admin cost to the bank), and with (b) positive borrower self-selection (better borrowers offer collateral because they are less likely to experience forfeiture.) Observable business characteristics are found to play an important intermediary role in the solution to the moral hazard problem. More mature proprietors have more experience, business commitment, assets for borrowing and the willingness to use them for loan collateral. Their contract parameters reflect these facts.

Pre-entrepreneurial income, cash-flow growth and survival of startup businesses: Model and tests on U.K. data

Abstract: A target income/human capital model of startup survival and growth is derived and tested. The objective of the entrepreneur is to produce an independent source of income for him/herself to replace income from previous employment. Target income is a function of pre-entrepreneurial income and human capital represented by age. The model predicts that higher pre-income entrepreneurs and more mature individuals will grow faster to achieve these targets and that growth is an ambiguous function of size. It also predicts that these same individuals, and businesses that start larger, will be more likely to survive. The key results of the empirical analysis are that (a) businesses run by proprietors with higher pre-entrepreneurial incomes do indeed grow faster than other startups but have no greater survival prospects, and (b) businesses run by mature proprietors possess greater longevity. We conclude that business income targets in practice constitute a significant motivation for startup growth, and that the human capital represented by age plays no additional role. However, proprietor age rather than pre-income determines survival, despite the fact that pre-income and age are positively correlated both with each other and with growth.

Fast growing small entrepreneurial firms and their venture capital backers: An applied principal-agent analysis

Abstract: First the empirical background of the U.K. venture capital industry is developed using a panel of major U.K. venture capital funds over the period 1988–92. Then a framework for applied principal agent analysis is developed, focusing on risk management and information. Under risk management it explores attitude to risk, risk sharing and bearing, and the effects of risk bearing on effort. Under information handling, it explores information systems, information asymmetries between investor (venture capitalist) and investee (entrepreneur), and ways of attenuating them, and information variance and costs. Finally, the contract between investor and investee is seen as a device for “trading” risk and information. The implications of this “trading” for risk bearing, effort and efficiency are explored. The whole analysis is supported by a detailed case study which reflects current practice in the U.K. venture capital industry. The evidence provides striking confirmation of the applicability of the principal-agent model to the venture capital financing of hightech ventures.

Financial structure and the growing small firm: theoretical underpinning and current evidence

Abstract: This paper introduces a special issue of small Business Economics on ‘Financing and Small Firm Dynamics’. It establishes a general underpinning for the analysis of small firm financing over time. This appeals to the control theoretic literature, and permits the specification of ‘master trajectories’ of key variables over time like output, debt, dividend and capital. Two trajectories (for cheap debt, and cheap equity, respectively) illustrate this type of analysis, showing how financial structure can vary over time, involving phases of growth, consolidation and stationarity. From this perspective, six papers on small firm dynamics and finance are reviewed. Issues addressed include: credit constraints (funding shortages), wealth as collateral, financial structure, target income modelling of start-up, and bank lending during financial liberalisation.

Mature micro-firms and their experience of funding shortages

Abstract: Funding shortages are analysed in the context of a simple neoclassical model of the micro-firm that uses financial capital for its operations. It predicts that a response to funding shortages is to substitute part-time workers for full-time workers, under the assumption that the latter are the more financial capital intensive employees. The experience of funding gaps in finance capital by long-lived micro-firms is investigated using data which were obtained by telephone interviews. The micro-firms examined had an average size of six full-time and two part-time workers, and an average age of fifteen years. Using probit estimators of the probability of experiencing funding shortages it is found that a strong and significant negative association exists between the number of part-time workers and the probability of experiencing funding shortages, refuting the simple neoclassical hypothesis, and suggesting an alternative hypothesis, emphasising the flexibility advantages of part-time embloyees in averting funding shortages. A ten per cent increase in part-time employees is shown to reduce the probability of experiencing funding shortages by two and a half per cent. A regional effect was also discovered, and bivariate probits gave results which were consistent with univariate probits.

Worlds apart: The changing market geography of the German machinery industry

Abstract: German producers of advanced machinery have long enjoyed a reputation for technical excellence and export success. The literature attributes much of the industry's success, inter alia, to various forms of interfirm cooperation between SMEs within spatial clusters such as that found in Baden-Wurttemberg. However, this industry entered a period of relative crisis in the early 1990s, experiencing stagnant or declining sales and growing competition from foreign firms. Among the reasons commonly advanced to explain this crisis are the decline of intraregional cooperation (especially with other machinery producers), the loss of domestic sales in the wake of the German car industry's downturn, and excessively costly wages and benefits for workers in the machinery industry. This paper offers an alternative interpretation, based on geographical shifts in the industry's markets and the difficulty of sustaining close, mutually beneficial interaction with customer firms abroad. Evidence comes from a study of the production and use of advanced manufacturing technologies, involving interviews with machinery producers in Germany and user firms in Canada. Interviews reveal that, in the light of less than satisfactory relations with German machinery firms, North-American customers are turning increasingly to domestic sources of supply. In responding to these challenges, the German machinery industry is now instituting changes to its spatial organization which may undermine the future integrity of its traditional “home” production regions.

Industry competition and firm human capital

Abstract: This paper argues that objective and subjective human capital may have substantial impact upon organizational performance in a competitive context. Objective human capital pertains to such features as education and experience, whereas subjective human capital relates to personality characteristics. The argument is illustrated by presenting the results of two empirical studies: (1) a cross-section 1990–1991 analysis of about 50 incumbents in the Flemish furniture industry-concentrating on the impact of subjective human capital, particularly the Chief Executive Officer's (CEO's) locus-of-control personality, on financial performance; and (2) a longitudinal 1970–1992 analysis of a cohort of 100 entrants into the Dutch audit industry-focusing on the influence of objective human capital, particularly education and experience, on exit by merger and acquisition (M&A) or “diaspora”. Both studies support the claim that objective and subjective human capital matters: for example, Flemish furniture firms headed by a CEO with an internal locus-of-control trait reach higher levels of financial performance, and Dutch audit firms with a high proportion of personnel with business experience are more likely to exit the industry over the years as a result of diaspora. Finally, the data of the Flemish furniture and Dutch audit industries are re-analyzed so as to compare the impact of human capital variables on small-firm performance in both industries. This re-analysis reveals that in both industries the impact of human capital variables is more pronounced in large firms compared to small businesses.

Innovation of Entrepreneurial Firms

Abstract: An empirical test is provided of the effect of the degree of obsolescence on the effect of firm size and monopoly profits on a firm's ability to innovate. Recent theory suggests that innovation depends on firm size and monopoly profits only if the firm conducts product improvement as well as new product innovation. This is due to the allocation of limited entrepreneurial attention between improving current products and innovating new products. Current products are subject to obsolescence and innovation requires technological opportunities. The firm conducts product improvement as well as new product innovation only if the degree of obsolescence is sufficiently low relative to the level of technological opportunity. This theory provides an explanation for previously unexplained empirical observations. We find preliminary support for the hypothesis that product improvement reduces the positive effect of firm size on new product innovation and sufficient product improvement may reverse the negative effect of monopoly profits on new product innovations. In addition, product improvement reduces the positive effect of technological opportunity on new product innovation.

Firm size and employment determination in dutch manufacturing industries

Abstract: This paper examines whether the determination of employment differs between large and small firms. An employment equation is estimated on panel data of 67 (35) three-digit industries in Dutch manufacturing (1974–1986). The conclusions are as follows. Firstly, employment adjustment appears to be faster in small firms than in large ones. Secondly, the elasticity of factor substitution and the real wage elasticity at constant output are nearly the same for large and small firms. Thirdly, the estimated output elasticities suggest constant returns to scale in large firms and increasing returns in small ones. Finally, the number of working hours has less impact on employment in small firms than in large ones.

The Comparative Organisation of Large and Small Firms" An Information Cost Approach

Abstract: The paper introduces the concept of information cost and explains its relevance to the organisation of the firm. A distinction is drawn between autocratic and consultative management styles, and the economic logic of each style is explained in terms of information costs. It is argued that autocratic management is a rational organisational response to a business environment that contains a single dominant source of volatility, while consultative management is a rational response to multiple sources of volatility. It is argued that small firms exploit the advantages of the autocratic style. Small firms are therefore to be found predominantly in industries dominated by a single source of volatility.

Small firms finance in France

Abstract: The data concerning interest rates paid by small and medium sized firms on credit and financial markets as well as the available balance-sheets confirm the idea that firms have difficulties to get financial resources. This paper tries to put in light the financial disparities among firms when a discrimination resting on size characterises the functioning of credit market. The first section presents the main financial characteristics of French SMEs: the low level of equities, the heaviness of short term debts and the over use of payment delays. Section 2 shows how French and European authorities reacted in order to improve the financial situation of SME's and to reduce their liquidity constraint, changing tax policy and promoting the creation of new means of financing.

Evaluating small firm performance in local context: A case study of manufacturers in Columbus, Ohio

Abstract: This research approaches corporate restructuring from a place-based perspective, departing from firm or industry-specific analysis and focusing instead on the performance and problems of a local economy. The study systematizes data from a survey of small manufacturing firms in Columbus, Ohio, offering a methodology that can be used for comparative analyses of sectors within or among communities.

Housing Wealth, Business Creation and Dissolution, in the U.K. Regions*

Abstract: A number of recent studies have suggested that access to collateral in the form of housing assets may be an important factor in the process of new firm formation. In particular, it has been suggested that variations in housing wealth may be able to account for a substantial proportion of the variation in rates of business creation within and between the U.K. regions. Re-examining this issue, the paper finds that once appropriate allowance is made for the presence of dynamics in the formation process, the evidence for a positive relationship between housing wealth and regional rates of new business creation disappears. However, there is evidence in favour of the proposition that access to external collateral in this form may help established firms to stay in business.

Small and medium-sized enterprises in the Republic of Korea: Implications for the development of technology-intensive industries

Abstract: Korea's miraculous growth and meteoric rise as a newly industrializing economy have carried with them considerable costs. Initial reliance on Korean large business groups, the chaebol, was an appropriate policy choice for creating competitive advantage through economies of scope for the export market. However, the neglect of the small and medium-sized industrial sector and resulting weak backward linkages with parts industries have become a burden on the performance of these same big businesses. This issue is particularly critical because Korea must make a transition into more knowledge- and technology-intensive industries in the face of a rising real wage level. This paper examines how the underdevelopment of the small and medium-sized industrial sector undermined the overall efficiency of the Korean economy, in terms of added costs and low quality of final products produced by big businesses, thus hindering Korea's transition into more technology-intensive industries.

Credit Access for High-Risk Borrowers in Financially Concentrated Markets: Do SBA Loan Guarantees Help?

Abstract: The Small Business Administration's (SBA) loan guarantee program was established to correct financial capital market inefficiencies and improve small business access to financial capital. However, the SBA loan guarantee program has been criticized for its failure to improve the performance of financial capital markets available to small businesses. This study considers the financial capital market failure created by lenders' monopoly power (specifically, financial market concentration) in financial capital markets. Based on this potential market failure, a model is derived to evaluate the behavior of lenders and borrowers in financial capital markets. Using the national Survey of Small Business Finance, this study compares the financial characteristics of small business borrowers with and without SBA loan guarantees, and provides a qualitative assessment of the SBA's ability to correct financial capital market inefficiencies. When considering only the interaction between borrower quality and the degree of financial market concentration, high-risk borrowers in high concentration financial markets have a higher probability of receiving an SBA loan guarantee than low-risk borrowers in low concentration financial markets. However, when other factors influencing the demand for financial capital are included in the model, only the borrower attributes (credit risk and age) are significant. While the SBA loan guarantee program appears to partially mitigate the effects of the market failure caused by financial market concentration for high-risk borrowers, the program appears to be better designed to address borrower risk, rather than credit market failure.

Introduction: Innovation and Small Business

Abstract: This paper introduces the special issue of Small Business Economics on Innovation. What binds the papers together is either their focus on the effect of firm size on the causes and consequences of innovation or their focus on the role small firms play in reshaping the industrial landscape.

Geography and regional economic development: The role of technology-based small and medium sized firms - Introduction to the special issue of small business economics

Abstract: Technological progress does not appear to proceed smoothly but indeed seems to involve various types of disequilibria. Most prominent among these is the uneven international and regional distribution of economic activity. For much of the past thirty years the idea that location did not matter for economic activity seemed to predominate in much of the economic literature. Beginning with the work of Borts (1960), there was a general acceptance of the belief in the eventual convergence of the rate of economic growth between nations and regions and a corresponding equalization of wages and skill levels. In a world of constant or decreasing returns to scale, any observation of regional disparities was dismissed as temporary disequilibrium and was not seen as particularly interesting. Recently, however, there has been a resurgence of interest among economists in questions relating to geography. Discrepancies between empirical observation and theory motivated trade economists to begin to re-examine the question of regional disparities (cf. Krugman, 1981) and to reconcile theories of economic growth and international trade (cf. Grossman and Helpman, 1991). In addition, theorists have considered the possibility of increasing returns to scale and the existence of other types of non-convexities which would lead