Small firms - myths and realities

Jan 06 2003 by Brian Amble Print This Article

A new report by the Trades Union Congress (TUC) challenges the widely-held belief that small and medium sized enterprises (SMEs) are the future of the UK economy and will create the majority of new jobs.

The report, Small firms - myths and realities argues that the key issue for the UK is not increasing the size of the SME sector but rather improving its performance, particularly in areas such as training, innovation, and productivity.

“We can see no evidence that having a bigger small sector than we do at present would improve economic performance. It would therefore be misguided to judge the success or failure of the government’s policies on crude indicators such as whether the total number of enterprises or the SME employment share in the economy is going up or down.”

As the report points out, while small firms are an important part of the UK labour market and the economy, even basic questions such as how many people work in small firms or whether the share of total employment is going up or down have until recently been obscured by an almost total lack of hard statistical evidence.

“As a result, the information gap has been filled by limited one-off studies and - less creditably - by assertion based on widely held misconceptions. It is still commonplace to hear that all the new jobs come from small firms, or that a big small firm sector is a necessity for a successful economy.”

Employment Myths

At the heart of the report’s argument is the fact that the share of employment in SMES has actually been falling since at least the mid 1990s. Comparing three year averages of 1994-1996 with 1999-2001, it shows that over this period total employment in SMEs has changed little, increasing by less than 2 per cent. In contrast, almost all the increase in total private sector employment has been in large firms, with an increase of 17 per cent. Meanwhile, the Small Business Service alone costs the taxpayer £360 million a year.

This analysis flies in the face of official claims that the majority of new jobs are created by SMEs. In addition, job creation among SMEs is more or less matched by job destruction, since some 10 per cent of all new businesses registered for VAT fail within a year, and about 35 per cent fail within three years. “The counterpart of easy entry is easy exit.”

Employment Patterns

The reality of employment patterns, the report argues, is that most people in the service sector now work for big enterprises in small workplaces, with the share of employment in small firms in the UK falling in the 1990s, as it has been in both the US and Europe.

Employment in small firms is heavily concentrated in three industrial sectors - distribution (23 per cent of all small firm employment), business services (19 per cent) and manufacturing (14 per cent). Employment in medium sized firms is strongly concentrated in manufacturing, which accounts for a third of all employment in medium sized firms.

But as the report points out, it is impossible to know exactly how much small firm employment grew between 1980 and 1994 because we have no official statistics.

"It is extraordinary that despite the big claims made for small firms and the billions of pounds spent by successive governments in supporting the SME sector, it is only since the mid 1990s that fully reliable and directly comparable official estimates of employment in small enterprises have become available.”

Quality, not Quantity

Taking this new analysis into account, the report argues that future policy towards SMEs should be framed in terms of improving quality, performance and compliance rather than crude quantity measures – better quality rather than more quantity.

Policies to promote small firms, start ups, and remove barriers to growth should focus on areas with low levels of entrepreneurial activity, ethnic minority business and high tech services where the biggest opportunities for dynamic small firm development exist. And, it stresses, we need to move away from the type of management culture that led to the Enron and WorldCom scandals.

“Better economic performance in the long run depends on the entrepreneurs and managers who grow and strengthen businesses for the long term by building high performance workplaces and investing in the workforce.”

A full summary of the report is available at