Samenvatting Enterprise and small business: principles, practice and policy
First definition of Small business by Bolton: a small enterprise is so, if it met the following three criteria:1. Independent (not part of a larger enterprise),2. managed in a personalised manner (simple management structure),3. Relatively small share of the market (the enterprise is a price taker rather than a price maker).This definition was criticised because also a large company can run in a highly personalised manner and independent is a relative concept (legally independent, but reliant on other large companies for their economic activity) and the small business may operate in a niche and therefore have a large share of that market.Bolton came up with a second definition:The concern was to capture the heterogeneity of smaller enterprises, by adjusting measures of assets, turnover, profitability and employment for the sector the business is in.There were also problems with this definition. The measures eroded over time by inflation or productivity and the absence of a uniform definition makes it difficult.The EU has a more uniform definition but it is only binding for institutions seeking EU funding.
Labour Force Surveys (LFS) data is used for to estimate the number of self-employed individuals and unincorporated businesses. The problem is that individuals may choose, for whatever reason, tot misrepresent their economic status. It may underestimate young individuals since they are more mobile than older individuals. And another problem is that the data is coming from a survey.Another form is through Value Added Tax (VAT) registration. Only companies shift over and under the threshold for VAT and therefore it is not a reliable measure.The best estimate of the enterprise population is often derived from a mix of survey information and registration information.
1. A fast increase of small businesses in the 1980s and a gentle increase since 1995 (with an exception in the early 1990s recessionary period)2. A U-shaped pattern to ownership rates.The rest of the countries may be notable exceptions, in the way that they are ‘increasers’ or ‘decreasers’.
1. Cost disadvantagesBefore the 1980s smaller enterprises had a cost disadvantage. Larger enterprises would be able to produce goods much more cheaply (economies of scale). Bigger enterprises were also able to reduce uncertainty by vertically integrating their business with others in the supply chain. MES (minimum efficient scale) became important and drove small businesses away.2. Technological changesIn the 1980s business ownership rates generally began to increase. One reason is that technological change reduced the importance of economies of scale in production, greater flexibility and increased efficiency. De-scaling offered lower optimal sizes and smaller enterprises could enter sectors previously closed to them.3. InnovationIn parallel with the technological change arguments, some researchers have also argued that the re-emergence of enterprises had much to do with the innovatory capacity of smaller enterprises. In part, smaller enterprises are said to have a competitive advantage because they are less bureaucratic and, therefore, more flexible to changing market conditions.4. Large firm fragmentationSince the 1980s, there has been a radical shift in the business practices of larger enterprises. In response to challenges (for example riskier innovative products, difficulties to control large labour forces etc) larger enterprises sought to vertically disintegrate by hiving off enterprise activities into subsidiaries or franchised operations.5. Development of the service sectorThe nature of consumer demand has changed. Not only standardised mass produced goods, consumers have increasingly sought tailor-made goods and, in particular, individual services. Particularly smaller-sized businesses may have been able to exploit to these sectors because there exist few opportunities for the development of economies of scale given that consumption is often at the point of purchase.6. Changes in the labour marketPopulation change, increased wealth, immigration and, above all, unemployment may be explanations for the growth in business ownership rates.7. Public policyThe role played by the public policy changed. Faced with high unemployment, governments may choose to implement other public policy schemes that shift the risk preferences from individuals towards setting up their own businesses.
One explanation for this puzzle may be the use of the COMPENDIA dataset, this measure may be thought poorly to reflect the actual nature of entrepreneurship in de US. This measure looks at the rate of business-ownership rather than the contribution of particular businesses. Because there are much large enterprises in the US, the implication is that the economic growth of the US is due to the economic activities of larger enterprises.Another reason may have to do with the argument of Carree et al. He argues that there is an equilibrium rate between economic development and business-ownership. Countries that deviate from that equilibrium suffer, by and large; a five percent point deviation implies a growth loss of three percent over a period of four years. This means that the n-shape may be due to the economic performance of the US (i.e. the US is better able to balance its business ownership rates with economic development).The above two explanations are rather static: they point to what is happening, not why it is happening.A dynamic explanation may be: the rate of entry and exit. This is called the enterprise churn. Because there are fewer burdens to start a business, entry barriers are lower, there may be greater numbers of new enterprises. Stimulating efficiency and therefore inefficient enterprises will exit the sector. The overall effect is to drive up efficiency and innovation. This explanation is not supported by evidence tough.Another dynamic explanation may be that in the US there are high rates of growth among its enterprise population. Entrepreneurs may, due to lower regulation and stricter employment legislation, find it easier to expand when their ideas turn out to be novel of efficient.
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