SMALL FIRMS, ECONOMIC GROWTH AND PUBLIC POLICY: WHAT
EXACTLY ARE THE CONNECTIONS?
Professor Mark Hart
SBRC, Kingston University & NIERC1
1.
Introduction
In most Western countries, the share of employment in SMEs has risen during the
past two decades. This was mainly due to changes in production technology, in
consumer demand, the pursuit of flexibility and efficiency, which in turn led to the
restructuring and downsizing of large enterprises and the entry of new firms. SMEs
create relatively more jobs than large enterprises but also destroy more jobs. Only in
the case of very small enterprises does employment tend to grow faster than in larger
enterprises. New enterprises play an important role in the creation of jobs. In the EU,
approximately 1 million new enterprises are started each year. The European
Commission argue that the 18.5 million SMEs in the EU are the foundation of
economic strength and are crucial to the process of enhancing Europe’s
competitiveness and growth. For over a decade SMEs, especially smaller firms, have
been seen as the main source of future employment.
The relative significance of small and medium-sized enterprises (SMEs) in a market
economy can be seen in the UK where over 99 per cent of firms can be classed as
small or medium sized, employing less than 200 people. Since the 1970s there has
been a spectacular increase in the number of small businesses and a remarkable
revival in their role in the UK economy. It is estimated, for example, that the business
population is now 1.3m higher than in 1980, an increase of over 50 per cent (DTI,
1999). Given the extreme skewness of the size distribution, most of the additions will
have been small enterprises. The latest figures (Selden, 1998) show that of the 3.7
million businesses in the UK at the start of 1998, 2.3 million had no employees, and
that only 32,000 had more than 50 employees (6,650 firms employed more than 500
people). The vast majority of enterprises are small, 95 per cent of them “micro”
employing fewer than 10 people, and two-thirds of them not employing anybody.
Indicators of the increased importance of small businesses are their shares in
employment and business turnover. SMEs in 1998 were responsible for 56 per cent
of employment in the private sector and 53 per cent of turnover (the figures are 45 per
cent and 40 per cent respectively if small businesses employing less than 50
employees are considered). In other words, SMEs are now more important than large
firms in their contributions to employment and business turnover and have become a
formidable economic presence n the 1990s (Curran and Blackburn, 1999).
Nevertheless, in terms of employment the importance of small firms can be seen in
the number of firms rather than in their growth trajectories. Very few very small
firms grow to be large employers.
It is generally thought that government policy can make a significant difference to the
success or failure of SMEs. Since the late 1970s, the UK and many other advanced
1
I am indebted to my two colleagues Maureen O’Reilly and Seamus McGuinness at NIERC for their
contribution to the analysis of LEDU-assisted firms contained in this paper.
1
and developing economies have adopted policies highlighting the central role of the
entrepreneurial small firm in furthering economic prosperity. To underpin this policy
emphasis a panoply of support initiatives and structures have been put in place in the
UK, which has been estimated to total around 200 initiatives with a cost of
approximately £632m (Gavron, et al., 1998).
Ever since the Bolton (1971) report, however, there has been a recognition that
government policy intentions towards SMEs may not lead to expected outcomes.
This paper seeks to do three things. First, it revisits the debate on the economic role
of small firms. Second, it draws together and analyses recent empirical research on
this issue with respect to small firm policy in Northern Ireland. Finally, it concludes
with a discussion of Strategy 2010 and examines what it has to say about the
contribution and role of the small firm sector to faster economic growth in Northern
Ireland.
2.
Small Firms and Economic Growth: setting parameters to the debate
The link between business dynamics, in terms of the birth, death, expansion and
contraction of firms and economic well being at national, regional and local scales,
has been widely accepted as important. It is this link which is firmly imbedded within
industrial and competitive policy at EU level (e.g., CEC, 1998). In general, the
significant role of new firms in job generation, innovation and economic change has
been widely demonstrated (Storey, 1994). The emergence of computer-based
technology in the area of production, administration and information has decreased
the role of economies of scale. Increased standards of living and greater consumer
individualism have led to fragmented markets and shorter product life cycles. Finally,
large enterprises downsized their activities and returned to their core business in an
attempt to increase their flexibility and efficiency. These factors have led to an
increase of the employment share of SMEs.
However, the simple association of new and small firms with employment generation
has been the subject of rigorous investigation (Harrison, 1994; 1995; Acs, 1995;
Storey, 1995). One obvious outcome of this debate is that the economic impact of
new and small firms is uniform over neither time nor space. In particular, the pattern
of business dynamics varies considerably among countries and regions (Kidd and
Gallagher, 1994; Hart and Hanvey, 1994; Storey, 1994). Quite simply, Europe is a
much more small firm dominated economy that the US. Further, these studies
provide support for the assertion that significant employment creation takes place in
relatively few but growing firms, and that from a policy point of view, the best way of
generating employment in the longer term is to focus policy on those firms with the
greatest growth potential.
Recent evidence from the EU on SMEs and the creation of jobs provides some mixed
results (EIM, 1997). Although production in SMEs appears to be more labourintensive than in large enterprises the relationship between enterprise size and
employment growth appears to be stable. Only in very small enterprises does
employment appear to grow faster than in larger enterprises. This higher growth rate
of very small enterprises may well be related to the fact that they are relatively young.
The implication to be drawn from this is that removing barriers to entrepreneurship
2
could increase the number of enterprise and jobs. However, as Hart and Hanvey
(1994) conclude, the quality of the start, and not just the number of starts, is important
for regional development impact. It is this link which is firmly imbedded within
industrial and competitive policy at EU level (e.g., CEC, 1998).
There has been a lot of debate about the innovative nature of small firms compared to
large firms (Harrison, 1994). The debate has become very sterile on occasions as it
has simply focused on who has engaged in the most innovative activity. It is well
established that R&D intensive industries are eventually dominated by a few large
firms but that is surely not the point. The debate needs to recognize that the most
important policy issue should concern the ways in which innovation can be
encouraged within established small firms and emerging networks of small firms
engaged in new technologies.
3.
Small Firms in the Northern Ireland Economy
The total number of businesses, and hence mainly small businesses, has grown
substantially in Northern Ireland over recent years. At the beginning of the 1980s,
Northern Ireland had a lower number of small manufacturing businesses relative to
manufacturing employment than the UK as a whole (Gudgin et al., 1995). This gap
was closed in the early 1980s because of a more rapid expansion of small businesses
in Northern Ireland. Since 1990, the number of manufacturing businesses relative to
employment has pulled ahead of Great Britain where the collapse in the number of
small businesses has outstripped even the 14 per cent decline in employment. As the
1990s have progressed these trends have continued. At the beginning of 1997 just
over one-third of employment (33.8%) in Northern Ireland was in businesses
employing less than 50 employees compared to the UK average of 31.1 per cent
(Selden, 1998). Further, the proportion of manufacturing output from firms
employing less than 50 employees was 28 per cent in Northern Ireland compared to
25 per cent in the UK.
Table 1 presents data on the change in stock of VAT registrations between the years
1995 and 1998 for the UK regions. In this period the UK experienced a slight
increase of 0.7 per cent in the stock of businesses registered for VAT. Northern
Ireland, with an increase of 2.6 per cent, was one of only a few regions outside
London to increase its stock of businesses registered for VAT. Several regions,
however, suffered a decline in the stock of businesses registered for VAT,
particularly the North East, Yorkshire & Humberside and Wales.
Using Dun and Bradstreet data, made available by TrendsScan based at the University
of Newcastle, it is possible to examine regional trends in the growth of surviving
small firms in the UK over the period 1995-98. From Table 2 it can be seen that
Northern Ireland emerges as one of the top performing regions in terms of
employment growth within small manufacturing firms, outperformed only by East
Anglia and the South West and 2.3 percentage points above the national average.
With respect to the service sector the highest small firm growth rates are to be found
in the southern regions, particularly in the South East which is 2.5 percentage points
above the UK average (Table 3). Northern Ireland small service firms grew slightly
faster than in any of the other peripheral regions.
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An attempt to construct an explanatory framework for these regional patterns has been
undertaken by Hart and McGuinness (1999).
Using an OLS methodology
manufacturing and service sector equations, both of which are significant, reveal quite
distinct explanations of the spatial variations in small firm growth and each will be
discussed in turn. For the manufacturing sector, the formation rate of new enterprises in
the area, as well as the amount of government regional assistance were found to exert a
positive effect on small manufacturing firm growth. In other words the higher the
formation rate the higher the growth rate in surviving small firms. The explanation here
is that entry into the market place, as indicated by formation rates, reflects profit-earning
opportunities which existing firms are able to benefit from. Similarly, small firm growth
rates were higher in those areas which received a greater degree of government financial
assistance available under the Regional Assistance package, although it should be noted
that not all of this assistance is aimed directly at small firms. For example, there may
well be positive linkage effects as a result of support for FDI projects.
By contrast, a location in one of the 6 conurbations had a negative impact on small firm
growth and confirms much of the existing research findings on the detrimental effects of
urban locations on successful manufacturing enterprises - that is, higher operating costs
of land and labour (see for example, Keeble et al., 1992). Finally, those areas with a
relatively low level of capital stock utilisation, as proxied by the stock of enterprises in
1995, had a negative impact on small firm growth rates in the manufacturing - that is, the
lower the level of capital utilisation in an area the less likely existing small firms will
grow on the grounds that the local economy is relatively poorly developed. Together,
these four variables combined to explain just over one-third of the variance in small
manufacturing firm growth rates between the 44 counties and regions of the UK. The
importance of public policy support for the industrial sector is perhaps the most
important finding from this analysis as it is the only one of the four significant variables
which provides an opportunity for short-term impacts on the growth trajectories of small
manufacturing firms.
The service sector equation was rather different in form. Four variables were found to
have a significant impact of small service firm growth rates in the period 1994-97 (Table
6). Again the stock of enterprises in the area produced a negative effect on growth rates
in the service sector which reinforces the point that areas with relatively low levels of
capital utilisation experience difficulties in generating a dynamic small firm sector
irrespective of industrial sector. In addition, those areas with relatively higher average
earnings and levels of education produced positive effects as did the degree of success in
attracting non-manufacturing FDI projects. Overall, these four variables combined to
explain 70 per cent of the variance in small service firm growth rates between the 44
counties and regions of the UK. Therefore, local demand factors (as indicated by
earnings and the impact of the influx of large service providers such as international
insurance companies) and the supply of quality labour are seen as the key determinants
of growth among small service firms. The role of public policy, as for the
manufacturing sector, can again be argued to be of some importance, although albeit in a
rather different form. Rather than direct assistance (financial or otherwise) to small
manufacturing firms, for the service sector the role of government intervention manifests
itself in the creation, at national as well as local level, of the incentives and infrastructure
to attract large-scale investments in the financial and business service sectors. The above
4
analysis would seem to suggest that this has a positive knock-on effect for small service
sector firms.
In summary, the manufacturing sector in Northern Ireland is now more dependent on
small firms than that of the Republic of Ireland or that of the rest of the UK. The
manufacturing sector has been transformed from one largely dependent on externallyowned branch plants to a position where almost one in three people employed in
manufacturing now work in small companies with less than 50 employees (Gudgin et
al, 1995). The emergence of an expanding small-firms sector in Northern Ireland has
the potential to provide a basis for future economic growth through a more diverse
industrial base.
Three related issues arise from this evidence on the pattern of regional economic growth
in the UK in the 1990s. First, to continue to conceptualize the peripheral, less-developed
or industrially declining regions within traditional regional development theory as being
unfavourable or hostile to business growth is too simplistic and requires closer
examination. Second, with respect to the particular issue of small firm growth, it is
important to establish if there are regional variations in the set of factors which may
determine faster growth. Third, it is important to understand the role of public policy in
the economic growth process.
Vaessen and Keeble (1995, p.502), analyzing the Cambridge University national SME
databank for the period 1987-90, concluded that "economic conditions in peripheral
Britain do not inevitably adversely affect the performance and growth of SMEs located
in these regions". They argue that it is the nature of competition in the regions, the
degree of innovativeness and the type of company training provided to the workforce,
which enable certain small firms to overcome the disadvantages of peripheral regions
and achieve above-average growth rates. More precisely the study indicated that small
firms do not remain passive towards the constraints imposed by their regional
environments and that the more successful small firms are those that engage in strategies
designed to overcome them. Interestingly, the authors made no reference to the role of
public policy in their explanation of the differential growth performance of SMEs across
the regions. This is surprising given that the factors that they argue underpin small firm
growth do form an important part of public policy towards the small firm sector in the
UK.
4.
Public Policy and Small Firm Development in Northern Ireland
This section is a summary of a forthcoming paper by the research team at the
Northern Ireland Economic Research Centre (NIERC) and examines the relationship
between the performance of small firms and the scale, nature and intensity of public
policy designed to encourage small firm growth (Hart et al., 1999 forthcoming). Since
the mid-1980s the impact of small firm policy in Northern Ireland has been
investigated intensively by NIERC. In terms of the relative performance of the
Northern Ireland small firms sector, it has been possible to conclude that, in general,
Local Enterprise Development Unit (LEDU), the small business agency for the
regions, appears to have achieved remarkably good results in the first half of the
1990s (Hart et al, 1998). Between 1994 and 1998 LEDU created 10,789 full-time
5
jobs and the inclusion of part-time employment raises this job creation figure to
13,736 jobs. Therefore, over the four-year period an average of 2,697 full-time jobs
were created each year. Using estimates of deadweight and displacement calculated
from previous NIERC evaluations of LEDU-assisted firms this translates into
approximately 1,500 net additional jobs to the Northern Ireland economy every year.
Increasingly, it seems that LEDU is having an influence on the fact that the small firm
sector in Northern Ireland is outperforming the small firm sector in other parts of the
UK and Ireland (Hart and Gudgin 1997; 1999 forthcoming). However, one of the
questions to emerge from these comparative evaluations is the precise role that
selective financial assistance plays in the performance of the LEDU-assisted firms.
Are the observed differences between LEDU-assisted and non-assisted small firms
simply due to differences in their characteristics or can a clear “assistance effect” be
isolated? This issue is addressed by providing an initial assessment of the impact of
assistance on business performance of firms in receipt of financial assistance from
LEDU in the period 1991-97.
Using a specially created database on LEDU-assisted firms over the period 1991-1997
the analysis will focus on two related areas. In the 1990s LEDU have directed
assistance towards those firms who they regard as having the greatest growth potential
- the LEDU Growth Clients which number approximately 580 in 1998. Therefore, the
first task will be to examine the business performance of LEDU-assisted firms in
order to establish whether the scale, nature and intensity of assistance from the agency
may have been a factor in firm growth. Second, a multi-variate analysis will be
undertaken in order to examine more precisely the impact of the aggregate level of
assistance provided by LEDU on firm growth. This analysis will use a simple
measure of the scale of grants received in the period 1991-97 in order to determine
any relationship between assistance and employment, turnover and productivity
growth.
4.1
Business Performance of LEDU-assisted firms, 1991-97
The analysis presented here relates only to those firms in the LEDU Active Client
database who were in existence for the period 1991-97 and for which annual data on
employment and turnover was available. As a result of this constraint the number of
surviving LEDU-assisted firms included in the analysis of business performance was
reduced from 1,026 to 457 firms. How representative is this sub-set of surviving
LEDU firms? In terms of industrial activity they portray an almost identical sectoral
mix to the overall population of surviving LEDU Clients. However, in terms of
employment size this sub-set of 457 firms tend to be slightly larger with only around
one-third (35.4 per cent) employing less than 10 persons in 1991 compared to 50 per
cent for all surviving LEDU Clients. The main difference is evident in the next size
band where there are 10 per cent more of the 457 firms in the 10-24 employment size
band than for all survivors. These differences in employment size, although not
statistically significant, will nevertheless, tend to understate the level of growth
experienced by these firms in the period on the grounds that smaller firms will tend to
grow faster than larger small firms (Barkham et al, 1996).
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Table 4 presents the annual growth rates in employment, turnover and productivity for
all firms in this sample as well as the sub-sets of Growth and Established firms. From
the data it is clear that Growth firms recorded higher levels of growth than
Established firms and this is particularly the case in terms of employment
performance with Growth firms experiencing annual rates of growth of more than
twice that of Established firms.
It could be argued from this evidence that the more advantageous package of
assistance made available to Growth firms is effective in producing faster rates of
growth. However, another less generous conclusion would be to infer that LEDU has
merely targeted assistance towards those firms who were more likely to have
experienced faster growth irrespective of the existence of government grants and
subsidies. The relatively better performance of LEDU-assisted Growth firms may be
due to the fact that they are more likely to be faster growing businesses in the first
instance, because, either they are self-selecting in presenting themselves for LEDU
assistance, or else LEDU engages in a “creaming” process which results in assistance
being granted to the more successful firms in Northern Ireland. The subjective
selection criteria used for LEDU Growth businesses do not help refute this latter
assessment.
Figures 2-4 illustrate that the relationships between employment and turnover growth
have not been consistent over time. A general pattern of falling productivity emerges
after 1995 when rates of employment growth have increased quite markedly in LEDU
Clients, irrespective of whether they are Growth or Established firms. The extent to
which these trends are related to the nature of LEDU assistance or the influence of
external market factors is not possible to assess at this stage but further comment is
made later.
Table 5 takes this analysis a step further by focusing on the fastest growing firms
within each of the client types. For both categories of firms (i.e., Growth and
Established) annual rates of turnover growth for firms lags behind that of employment
growth over the period with the net result that there has been an actual decline in
annual productivity over the period. The trend is particularly noticeable for Growth
firms and, given their important status within LEDU’s Corporate Plan, must surely be
of some concern. Two obvious questions emerge from these results. First, to what
extent can the growth in employment and turnover that has been recorded in these
firms, and especially the Growth firms be sustained? Second, and related to the first
point, to what extent is the package of assistance provided by LEDU under, for
example, the Growth Business Support Programme in some way related to falling
levels of efficiency? The suggestion here is that financial assistance has been
provided to produce employment results in the first instance with increased sales as a
secondary concern. Therefore, although, one of the key elements of LEDU’s strategy
to the year 2001 is to “maximize the sustainable growth of small businesses in
Northern Ireland” there are clear indications from the evidence presented above that
in the past LEDU support to small business may in fact have affected their long-term
profitability through falling productivity levels.
Figure 5 demonstrates that the problem of falling productivity has been a consistent
one for the fastest growing 100 LEDU Growth Clients in the 1991-97 period. Over
this period these firms has been experiencing a steady year on year growth in
7
employment and turnover but the lower rates of growth in turnover have resulted in a
fall in productivity. Once these fastest growing Growth firms are removed from the
dataset the remaining firms reflect a pattern of turnover growth in excess of
employment growth with the resultant positive impact on productivity, although once
again the post-1995 period is characterised by rising employment growth and a
downturn in efficiency levels (Figure 6). It should be noted that the issue of falling
productivity does not arise if the 100 fastest growing LEDU Growth Clients are
defined in terms of turnover and not employment. However, the choice of
employment as a measure of growth is preferred on the grounds that it more
accurately reflects growth over time than turnover which is more sensitive to sudden
changes in demand.
Are the characteristics of these fastest growing 100 LEDU Growth firms markedly
different from the other firms in the analysis? For example, are they younger and as
result their higher growth rates are simply a result of a different position on their lifecycle? An examination of the age distribution of the firms revealed that the average
age of Growth firms in 1991 was 15 years compared to 9 years for Established firms
and, therefore, from this it is clear that age is not an explanatory factor in these growth
differences. However, an examination of Growth firm activities reveals that,
compared to the overall sub-set of survivors, they are more likely to be in Food and
Drink and Rubber and Plastics. Further, as noted earlier, they tend to be smaller in
size at the start of the period with just under half employing less than 10 persons
compared to 35.4 per cent for the sub-set overall.
Together, these two features of these firms might go some way to explain the issue of
falling productivity in that there may be specific sectoral influences at work, which
necessitate greater manning levels. Another explanation may be that as these firms are
smaller the response to any substantial increase in sales is to recruit staff rather than to
absorb the increased output within the existing production process. These firms were
not yet of a critical size that enables them to respond efficiently to market
opportunities. Clearly, a more detailed investigation of this issue involving
discussions with individual firms is warranted before moving beyond these rather
tentative conclusions based on limited anecdotal evidence. Nevertheless, a worrying
feature of the analysis is that this is a situation which has persisted throughout the
study period and begins to raise serious questions about the long-term viability of
these firms. There will be further discussion of this issue later. However, the next
section takes the analysis of these 100 fastest growing Growth companies a little
further with an investigation of the relationship between the scale of financial
assistance and employment, turnover and productivity growth.
4.2
Scale of Assistance and Business Performance of the Fastest
Growing Companies
To what extent does the actual scale of assistance to firms determine their rate of
growth? In the case of the 100 fastest growing Growth companies can an explanation
of the growth in employment in excess of turnover over the 1991-97 period be found
in the level of financial assistance received from LEDU? The analysis that follows
aims to investigate the degree to which business performance, as measured by
employment, turnover and productivity, can be related to the amount of financial
8
assistance received from LEDU, irrespective of the nature of that assistance (e.g.,
marketing or product development).
The aggregate amount of grants paid to the 100 fastest growing Growth companies
from 1991 to 1997 is given below in Table 6 and Figure 7. Over the period a total of
£9.8 million (1996 prices) was paid to these companies in the form of various grants
under the range of initiatives and programmes outlined earlier in the paper. It is
noticeable however, that the pattern of assistance has been somewhat unstable over
the 1991 - 1997 period. Total grant assistance fell by 47 per cent from £1.78 million
in 1991 to £0.95 million in 1992, and then increased by 93 per cent between 1992 and
1993 before declining steadily over the 1993 to 1997 period. This would tend to
reflect the shift in LEDU strategy over the period which moved away from direct
grant support towards more indirect ways of assisting firm growth (e.g., the use of
“Third Party” consultants to provide expert advice on growth opportunities and
strategies).
In order to determine if there was any direct relationship between LEDU assistance on
the levels of employment, turnover and productivity within the 100 fastest growing
Detailed
Growth company cohort a multi-variate analysis was undertaken.
disaggregated grant assistance data is only available for the fastest 100 growing
Growth firms. Further, as there are both cross-sectional and time-series components
to the data this requires special attention in relation to the construction of the multivariate model. It is important that both these elements are incorporated within the
analysis.
When the variables of a number of cross-sections are observed over a time span, as is
the case with the LEDU dataset, which includes data on employment, turnover,
productivity and grant assistance for 100 Growth firms for the period 1991 to 1997,
the resulting data matrix is referred to as a pooled time series. The analysis of pooled
time-series data involve techniques which allow the intercept term to vary across
individuals rather than the assumption of equality across all intercepts, which is
highly unrealistic. Put simply, within the cohort of 100 Growth firms it cannot be
assumed that each firm would have the same number of employees at the start of the
period. The models also generally assume that the slope parameters are constant
across individual firms. For example, it is assumed that the propensity to increase
employment as a function of grant assistance is the same across all firms. There are
several accepted techniques for analysing pooled time-series data, of which the most
elementary is the covariance model (Pindyck and Rubinfeld, 1991).
However, a more efficient technique is adopted called the error-components model,
which employs a Generalised Least Squares (GLS) methodology and is estimated on
the basis that the error term of the pooled regression can be decomposed into crosssectional, time-series and standard error components (Maddala, 1971).
We estimate the error-components model using employment, turnover and
productivity for each firm in each year T regressed on the first lag of itself and grant
assistance in years T-1 and T-2. This enables us to determine the impact of LEDU
assistance on the levels of employment, turnover and productivity within the fastest
100 Growth firm cohort. There is some supporting evidence that the impact of public
policy is likely to differ depending on the size of the firm (Wren and Waterson, 1991;
9
Storey, 1994) and for this reason three separate regressions were estimated for firms
depending on employment size: 1-9; 10-24 and greater than 25 employees.
Due to the inclusion of lagged grant variables in the model the regressions only refer
to the 1993-1997 period. The results from our analysis of the three size groups are
presented in Tables 7 to 9. Grant assistance lagged by one year on employment
growth is the only statistically significant relationship and relates to assistance to the
1-9 employment size cohort only (significant at the 95% level) and accordingly, it can
be assumed that all other grant coefficients are zero. There is, therefore, some
tentative evidence to suggest that the scale of grant assistance is associated with
growth in employment among the smallest of the 100 fastest growing LEDU Growth
firms. Despite the move away from a primary focus on job creation by LEDU these
results would tend to demonstrate that there still remains a correlation between grant
assistance and an increase in employment within assisted small firms.
Another way of interpreting the results would be state that the coefficient on Grant-1
(which is sufficiently significant to allow us to draw inferences) would imply that
within this Growth cohort one job was created in period T (say, 1995) within the 1-9
cohort for every £28,571 of public assistance provided in period T-1 (say, 1994). This
cost-per-job figure was derived as the reciprocal of the coefficient for Grant-1 (see
Felsenstein, 1992). However, it is probably not feasible to make broad assumptions
about the effectiveness of public sector assistance to small firms on the basis of these
results. It may well be the case that our dataset contains a natural bias in that we have
focused on a cohort of companies who may possess a naturally high growth dynamic
in employment terms. The implication is that this might obscure the impact of LEDU
financial assistance.
4.3
Summary
The analysis of the employment and turnover performance of LEDU-assisted firms
revealed that Growth clients grew faster than Established clients in the 1991-97
period and provides tentative evidence that a more intense and directed package of
assistance is clearly associated with faster business growth. Therefore, the shift in
LEDU policy in the 1990s towards a greater concentration of effort on firms with
growth potential would appear to have been successful. The extent to which this
differential growth performance is related to LEDU assistance and not simply to the
selection of better performing small firms as Growth firms in the first instance
remains a matter of some contention (Hart et. al., 1993).
Another important point to emerge from the analysis of LEDU-assisted clients is that
employment growth consistently outstripped turnover growth over the period 1991-97
with the resultant impact on productivity. This is particularly the case for firms
designated by LEDU as Growth firms, who, under the evolving strategy, were to be
the recipients of a more intensive and varied package of assistance. Indeed, the fastest
growing 100 Growth firms in terms of employment recorded a negative annual rate of
productivity growth in the period 1991-97. At a time when promoting jobs was no
longer the primary aim of LEDU assistance these trends are somewhat surprising.
10
Therefore, whilst it was reported at the outset that previous research had revealed that
LEDU-assisted firms were performing better in employment terms than their
counterparts elsewhere, this would appear to have been at the expense of productivity
growth. The implication is that this situation is not sustainable and that the long-term
profitability of firms will be affected. That scenario depends, of course, on what the
additional workers are being hired to do. As Roper and Hewitt-Dundas (1998) argue,
the more worrying situation is where grant support encourages firms to over-man in
their core activities. The withdrawal of financial support will, therefore, make it more
difficult for firms to respond to a decrease in productivity.
However, the fact that falling productivity has been a consistent trend for these LEDU
Clients over the period 1991-97 might suggest that the financial support provided by
LEDU may well be used as working capital and, in effect, maintaining profit levels
within these firms. Such an interpretation has already been suggested with respect to
government financial assistance to manufacturing firms in Northern Ireland (Roper,
1993). The study concluded that in 1988 government grants and subsidies were
raising profit rates in Northern Ireland relative to Great Britain above their expected
level. A detailed financial review of LEDU Growth Clients, focusing on such issues
as profitability (net profit on sales; return on net worth or return on investment) and
growth (increase in sales, net worth; gross and net profit), and the nature and scale of
financial assistance provided by LEDU, would be invaluable in order to provide
further insight into the impact of assistance on business performance.
The multi-variate analysis clearly showed that when tested for a direct link between
business performance and the scale of grant assistance received from LEDU the
performance of the 100 fastest growing Growth companies there is some tentative
evidence to suggest a link between employment growth and grant aid provided to very
small firms (less than 10 employees) assisted under the LEDU Growth Business
Support Programme.
The analysis has raised a number of questions about the role that public policy may
play in influencing the growth and efficiency of small firms in Northern Ireland.
However, a clear understanding of the nature of the relationship between firm growth
and public policy has not yet been fully developed. There are two methodological
developments which would contribute to a better understanding of the relationship.
First, it would be useful to construct a control group of similar firms over the same
period that had not been assisted by LEDU in order to identify any possible
differences in growth rate (Hart and Scott, 1994; Storey, 1998). Unfortunately, it has
not yet been possible to obtain annual employment and turnover data for such a
control group in Northern Ireland. However, as Storey (1998) argues, even with the
construction of control groups there still remains the difficulties of sample selection
bias stemming from motivation, whereby the more motivated firms apply, and/or
administrative selection which seeks to identify ‘best case’ firms to participate in a
particular scheme. It is important to address these issues in any comparative growth
rate analysis using control groups. Such techniques have not been used here between
Growth and Established clients due to the difficulties in isolating the effects of
previous LEDU assistance to the Established group of firms.
11
Second, it is important to undertake a more detailed assessment of the precise nature
of assistance received by LEDU Clients and the way it impacts upon business
performance. Such an assessment will require access to individual firm details on the
amounts and nature (e.g., capital grant, employment grant, marketing assistance or
R&R support) of financial assistance received from LEDU. This will move the
research beyond the broad quantitative overview presented here. Some progress has
been made on this front and preliminary results would indicate that, after controlling
for size, age and export orientation, marketing and management support is positively
related to turnover and productivity growth in a sample of 324 LEDU-Assisted firms.
Finally, the findings presented above on LEDU-assisted small firms in Northern
Ireland are relevant to the wider debate on the effectiveness of public policy and small
firm growth in the UK. It has highlighted that selective intervention (the Growth
Business Support Programme in Northern Ireland) by a well-funded business
development agency for the small firm sector (i.e., LEDU) can make a difference in
affecting some of the characteristics which were found to have a positive influence on
small firm growth - namely the availability of external finance, market research and
product and process innovation (Barkham, et al, 1996). This conclusion would seem
to have clear implications for the Regional Development Agencies within the English
regions and the current proposals for a Small Business Service (SBS) in the UK, as
the search continues for a clear role in the delivery of public policy towards small
firms at regional level. However, the difficulty will remain one of resources and the
commitment to adequately fund a suite of small firm policies.
5.
Conclusions: Moving the SME Agenda Forward in Northern Ireland
What the above discussion has illustrated is that the policy impact on small firms has
been important in employment terms and has been relatively cost effective. NIERC
has estimated that the average net cost per job year in LEDU-assisted firms in the
1990s has been approximately £3,500.
Given the fact that the Northern Ireland economy, in line with other economies
throughout the EU, is a small firm dominated economy then it is not possible to
formulate industrial and employment strategies without a central focus upon small
businesses. A cursory glance at the scale and nature of EU enterprise and SME policy
quickly reveals the central role afforded to small firms as a dynamic source of
employment, growth and competitiveness in the EU. Priority areas for policy
intervention
include
the
regulatory
framework,
innovation,
finance,
internationalization and the reduction of market distortions and inefficiencies.
By comparison, Strategy 2010: Report by the Economic Development Strategy
Review Steering Group on Northern Ireland (DED, 1999) is decidedly anemic when it
comes to provide a framework for future industrial policy and, in particular, how it
proposes to build on one of the most important recent dynamics of economic change
in the Northern Ireland economy – that is, the small firm sector. After acknowledging
the importance of the small firm sector to the Northern Ireland economy ( DED, 1999,
p72-73) there is no follow through in terms of a strategic framework for future
policies designed to build upon this base.
12
As noted above, between 1994 and 1998 LEDU created 10,789 full-time jobs at an
average of 2,697 jobs each year. Using estimates of deadweight and displacement
calculated from previous NIERC evaluations of LEDU-assisted firms this translates
into approximately 1,500 net additional jobs to the Northern Ireland economy every
year which is a significant contribution to economic development notwithstanding the
concerns in some quarters about the quality of such jobs. However, are these jobs
substantially different from those created elsewhere in the DED family of industrial
development agencies? It is also worth noting that this figure is only a partial
estimate of the job impact of the small firm sector as it is confined to the LEDU
Client group.
The criticisms leveled at Strategy 2010 to date, particularly those by Bradley and
Hamilton (1999) provide some explanation for the paucity of comment on the role of
small firms in future economic growth in Northern Ireland. They highlight three key
weaknesses which can be summarised as follows:
•
•
•
no detailed analysis of the Northern Ireland economy
no evaluation of past government policy
no broader economic dynamic/vision except that Northern Ireland is
linked to UK trends
If one accepts their assessment then it is perhaps easy to understand why the small
firm is a notable absentee from the strategic framework published by the DED. There
are, of course, a set of enterprise recommendations included within Strategy 2010, but
they are broad-based, not solely concerned with small firms and clearly not connected
to what we already know about the economic potential of small firms. Further, the
recommendations which outline the shape of future policy seem unconnected to an
agenda which includes such critical themes as economic impact and cost effectiveness
criteria. They do not, in my view, represent a celebration of “enterprising Small
Firms” which is central to the shape and form of general DTI and EU policy. Since
the Madrid European Council in December 1995 there has been a series of policy
statements and initiatives on EU SME policy which all address the importance of
stimulating “a truly entrepreneurial culture throughout the EU if the full job creation
potential of SMEs is to be unlocked” (DGXXIII, 1999)
Let me absolutely clear here. What is being advocated is an industrial policy
framework which facilitates growth and development for all sizes of businesses. Such
a policy framework has to also recognize that a small firm is not a scaled down
version of a large firm. The current discussions on the development of a Small
Business Development Plan (SBDP) for Northern Ireland is a important development
since the publication of Strategy 2010 in March 1999
There still remains a considerable job of work to be done on the way in which SME
support policies are developed in Northern Ireland and the UK. Whilst in general
intervention in the institutional area has met with some success (e.g., LEDU in the
case of Northern Ireland) the effects of government policy in the equilibrium domain
has been less than optimum. The indirect filter down effects of monetary and fiscal
policies have been difficult to identify within the SME sector (Booth, 1994). Further,
regulation issues still remains some of the most important constraints on the
development of small firms in the UK.
13
14
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333-335
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161-202
15
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Kingsley Publishers: London, pp 324-42.
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Hart, M and Hanvey, E (1994) “Job generation and new and small firms: some
evidence from the late 1980s” Small Business Economics 7 97-109
Hart, M and McGuinness, S (1999) “Small firm growth in the UK regions 1994-97:
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17
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18
Table 1:
Change in the stock of VAT registered businesses, 1995-98
Change in Stock 1995-98
Businesses
London
+17195
Northern Ireland
+1375
Wales
-1865
North East
-1610
Yorkshire & Humberside
-3220
North West
-2295
South West
-2050
West Midlands
-2000
East Midlands
-760
Scotland
-345
Eastern
+2545
South East (GOR)
+5060
+11980
United Kingdom
Source: DTI
Table 2:
0.74
Employment Change in Surviving Small Manufacturing Firms in
the UK , 1995-98
1995
(000’s)
East Anglia
East Midlands
North
North West
Scotland
South East
South West
Wales
West Midlands
Yorks & Humberside
Northern Ireland
UK Average
Percentage
7.12
2.63
-2.42
-3.71
-2.67
-1.44
-1.37
-1.46
-0.69
-0.29
1.62
2.10
1998
(000’s)
No. of
Firms
% Growth
22.4
55.5
19.4
68.5
32.1
177.8
41.2
20.8
76.6
54.4
26.6
64
22.7
77.4
36.7
204.5
48.6
24.1
89.7
61.5
1,551
3,691
1,268
4,611
1,918
13,107
2,906
1,381
5,052
3,524
18.7
15.2
17.0
13.1
14.3
15.1
17.9
15.7
17.0
13.2
12.4
14.6
770
17.6
582.3
671.7
39,849
15.3
Source: TrendScan (Dun & Bradstreet), Northern Ireland Economic Research Centre
19
Table 3:
1995-98
Employment Change in Surviving Small Service Firms in the UK,
1995
(000’s)
1998
(000’s)
No. of Firms % Growth
East Anglia
East Midlands
North
North West
Scotland
South East
South West
Wales
West Midlands
Yorks & Humberside
53.4
95.1
52.8
140.4
100.3
570.6
102.6
48.7
120.6
112.7
60.4
106.9
58.6
157.8
112.5
663.0
117.2
53.9
132.8
126.2
5,187
9,191
4,632
13,406
8,378
56,736
10,170
4,834
11,582
10,457
13.0
12.3
11.1
12.4
12.2
16.2
14.2
10.7
10.1
12.0
Northern Ireland
33.3
37.8
2,980
13.7
1437.2
1634.3
138,198
13.7
UK Average
Source: TrendScan (Dun & Bradstreet), Northern Ireland Economic Research Centre
Table 4: Annual Percentage Growth Rates of LEDU Clients, 1991-97
Growth Companies
(n=327)
Established Companies
(n=130)
All Clients
(n=457)
Employment
(%)
4.9
Turnover
(%)
6.5
Productivity
(%)
1.6
2.0
3.9
1.9
4.4
6.2
1.7
Source: LEDU Active Client Database
20
Figure 2
Employment, Turnover & Productivity for LEDU Clients 1991 - 1997
150
140
1991 = 100
130
120
Employment
Turnover
Productivty
110
100
90
80
1991
1992
1993
1994
Year
21
1995
1996
1997
Figure 3
Employment, Turnover & Productivity of Growth Companies 1991-1997
150
140
1991=100
130
120
Employment
Turnover
Productivty
110
100
90
80
1991
1992
1993
1994
1995
1996
1997
Year
Figure 4
Employment, Turnover & Productivity for Established Companies 1991-1997
140
130
1991=100
120
Employment
Turnover
Productivty
110
100
90
80
1991
1992
1993
1994
1995
1996
1997
Year
Source: LEDU Active Client Database
Table 5: Annual Growth Rates of the “Fastest Growing” LEDU Clients, 1991-97
Employment
Fastest Growing 100
18.8
Turnover
16.6
22
Productivity
-1.9
Companies
Fastest Growing 100
Growth Companies
Fastest
Growing
Established Companies
(n=41)
All Clients (minus the
Fastest Growing 100)
16.3
14.1
-1.9
16.3
15.8
-0.4
1.2
3.9
2.7
Source: LEDU Active Client Database
23
Figure 5
Turnover, Employment & Productivity of the 100 Fastest Growing Growth Companies 1991-1997
260
240
220
1991 = 100
200
Employment
Turnover
Productivty
180
160
140
120
100
80
1991
1992
1993
1994
1995
1996
1997
Year
Figure 6
Employment, Turnover & Productivity of LEDU Clients 1991 - 1997 Excluding the Fastest Growing
100 Firms
130
125
120
115
1991=100
110
Employment
Turnover
Productivty
105
100
95
90
85
80
1991
1992
1993
1994
1995
1996
1997
Year
Source:
LEDU Active Client Database
Table 6: Assistance to 100 Fastest Growing Growth Companies 1991-1997
Year
1991
(£ Million 1996 prices)
1.78
24
1992
1993
1994
1995
1996
1997
0.95
1.83
1.53
1.42
1.28
0.97
Total
9.8
Source: LEDU Active Client Database
25
Figure 7
Total Assistance to the Fastest 100 Growth Companies 1991 - 1997
1.90
1.70
£ Million (1996 prices)
1.50
1.30
Assistance
1.10
0.90
0.70
0.50
1991
1992
1993
1994
1995
Year
26
1996
1997
Table 7: The Impact of Grant Assistance on Firms with less than 10 employees
in 1991: Regression Results
R2
Intercept
Dependant(-1)
Grant-1
Grant-2
Coefficient
(S.E)
Coefficient (S.E)
Coefficient
(S.E)
Coefficient (S.E)
Employment
2.738
(0.593)***
0.9244
(0.0412)***
0.000035
(0.000015)**
-0.000009
(0.000015)
0.73
Turnover
82874
(49816)*
1.062
(0.031)***
1.768
(1.448)
1.581
(1.355)
0.87
Productivity
54926
(5664)***
0.104
(0.033)***
-0.017
(0.108)
0.163
(0.101)
0.34
• 90% significance level; ** 95% significance level; ***99% significance level
Table 8: The Impact of Grant Assistance on Firms with 10 to 24 employees in
1991: Regression Results
R2
Intercept
Dependant(-1)
Grant-1
Grant-2
Coefficient
(S.E)
Coefficient
(S.E)
Coefficient
(S.E)
Coefficient
(S.E)
Employment
5.938
(1.162)***
0.887
(0.043)***
0.000009
(0.000012)
-0.000006
(0.000013)
0.69
Turnover
214843
(48424)***
0.985
(0.029)***
0.292
(0.578)
0.077
(0.638)
0.87
Productivity
36831
(5644)***
0.477
(0.059)***
-0.073
(0.088)
-0.013
(0.097)
0.23
* 90% significance level; ** 95% significance level; ***99% significance level
27
Table 9: The Impact of Grant Assistance on Firms with more than 25 employees
in 1991: Regression Results
R2
Intercept
Dependant(-1)
Grant-1
Grant-2
Coefficient
(S.E)
Coefficient
(S.E)
Coefficient
(S.E)
Coefficient
(S.E)
Employment
12.29
(6.25)**
0.887
(0.111)***
-0.000018
(0.000068)
-0.000057
(0.000066)
0.61
Turnover
107861
(260924)
1.107
(0.068)***
-3.190
(3.688)
1.598
(3.557)
0.89
Productivity
26827
(7839)***
0.517
(0.116)***
-0.069
(0.082)
-0.024
(0.078)
0.60
* 90% significance level; ** 95% significance level; ***99% significance level
28
29