Growth and profitability of small and medium-sized enterprises: Some Welsh evidence

Abstract

Foreman-Peck J., Makepeace G. and Morgan B. (2006) Growth and profitability of small and medium-sized enterprises: some Welsh evidence, Regional Studies 40, 307–319. Policy-makers throughout the Organization for Economic Co-operation and Development (OECD) are keen to promote the development of small and medium-sized enterprises (SMEs) by a wide variety of means. The present study of over 1600 Welsh SMEs casts doubt on the effectiveness of doing so by grants, by encouraging trade associations, by pursuing current initiatives in training or by stimulating innovation as defined by SME management. On the other hand, it finds that support for selective Information Technology investment and for marketing planning could be beneficial. Additional results that might be addressed by policy are short-termism by older managers – preferring current to future profits more than younger managers – signs that fixed costs of tax compliance bear substantially more heavily on the profitability of smaller SMEs, and evidence for a substantial partnership and sole trader ‘risk premium’ between SMEs, suggesting considerable entrepreneurial risk aversion.

Foreman-Peck J., Makepeace G. et Morgan B. (2006) La croissance et la rentabilité des Petites et Moyennes Entreprises: étude de cas du Pays de Galles, Regional Studies 40, 307–319. A travers l'OCDE, les décideurs tiennent à encourager le développement des Petites et Moyennes Entreprises (PME) par tous les moyens. Cette étude auprès de plus de 1600 PME au Pays de Galles émet des doutes sur l'efficacité de le faire en octroyant des primes, en encourageant les associations professionnelles, en poursuivant les measures en vigueur dans le domaine de la formation, ou en stimulant l'innovation comme la définit la direction des PME. D'autre part, on conclut que le soutien en faveur de l'investissement sélectif dans la technologie de l'information et pour le planning de la commercialisation pourraient s'avérer avantageux. Des résultats supplémentaires que pourrait aborder la politique sont la tendance des managers plus âgés à mettre l'accent sur le court terme–aiment mieux engranger des bénéfices à court terme, plutôt qu'à plus long terme, que ne le font les managers moins âgés–des signes qui laissent supposer que les frais fixes de mise en conformité fiscale pèsent plus lourdement sur la rentabilité des PME plus petites, et des preuves en faveur d'un partenariat important et d'une ‘prime tous risques entreprise individuelle’ entre les PME, ce qui laisse supposer une tendance non-négligeable à ne pas prendre des risques commerciales.

Petites et Moyennes Entreprises (PME), Croissance, Rentabilité, Politique, Risques, Périodicité

Foreman-Peck J., Makepeace G. und Morgan B. (2006) Wachstum und Rentabilität kleiner und mittelgrosser Unternehmen: Beweise aus Wales, Regional Studies 40, 307–319. Parteiideologen in der ganzen OECD sind darauf bedacht, die Entwicklung kleiner und mittelgroßer Unternehmen (small and medium-sized enterprises = SMEs) auf die verschiedensten Arten zu fördern. Die vorliegende Studie einiger 1600 SMEs in Wales läßt Zweifel an der Wirksamkeit aufkommen, dies dadurch zu erreichen, daß man Zuschüsse gewährt, Handelsverbände fördert, aktuelle Ausbildungsinitiativen verfolgt oder Innovationen der von der SME Verwaltung definierten Art anregt. Andrerseits läßt sich feststellen, daß Unterstützung ausgewählter IT Investierungen und Planung der Vermarktung vorteilhaft sein könnten. Zusätzliche Ergebnisse, die Bestrebungen ansprechen könnten, sind kurzfristiges Denken älterer Bestriebsleiter, die, im Gegensatz zu jüngeren, momentane Gewinne zukünftigen vorziehen, Anzeichen, daß Fixkosten der Einhaltung der Steuervorschriften sich weitaus härter auf die Rentabilität kleinerer SMEs auswirken, und Beweis einer wesentlichen Partnerschaft und Alleinganghändler ‘risikoprämie’ unter SMEs, die damit weitgehende Abneigung gegen unternehmerische Risikos andeuten

Small and medium-sized enterprises (SMEs), Wachstum, Rentabilität, Politik, Risiko, Ungeduld

Foreman-Peck J., Makepeace G. y Morgan B. (2006) Crecimiento y rentabilidad de pequeñas y medianas empresas: El ejemplo de Gales, Regional Studies 40, 307–319. Los responsables políticos en la OCDE están muy interesados en fomentar el desarrollo de las pequeñas y medianas empresas (pymes) mediante toda una serie de mecanismos. El presente estudio, llevado a cabo con más de 1600 pymes de Gales, pone en entredicho la eficacia de este fomento, tanto si se pretende conseguir mediante subvenciones como mediante el estímulo de asociaciones comerciales, la aplicación de iniciativas actuales para la formación o el estímulo de la innovación, definida por la gestión de las pymes. Por otra parte, se observa que el apoyo a la inversión selectiva en TI y la planificación comercial podrían ser beneficiosos. Otros resultados que podrían ser útiles a la hora de decidir sobre una política son la perspectiva a corto plazo que siguen los ejecutivos más mayores, que, a diferencia de ejecutivos más jóvenes, prefieren obtener beneficios presentes y no futuros, lo que sugiere que los costes fijos de cumplimiento fiscal suponen un mayor peso en el beneficio de las pymes más pequeñas, y es muestra de una importante ‘prima de riesgo’ sólo para las sociedades y los comerciantes entre las pymes, lo que indica una marcada aversión al riesgo empresarial.

Pymes, Crecimiento, Rentabilidad, Política, Riesgo, Preferencia de tiempo

Keywords:

• Small and medium-sized enterprises (SMEs)
• Growth
• Profitability
• Policy
• Risk
• Time preference

Acknowledgements

The authors gratefully acknowledge the support of the EDF and WDA as well as the comments of Julia Smith, John Parr, the participants at the 2003 Porto European Network on Industrial Policy conference, and the anonymous referees.

Notes

1. Defined here as businesses employing 250 or fewer people.

2. For example, in 2000, Ireland launched the Empower initiative for e-commerce in small businesses; in Wales, the Information Society Awareness programme has demonstrated new technologies to more than 10 000 firms; and Italy is planning a project to promote networks of firms using e-commerce.

3. Over 620 000 clients are helped annually in the USA's 1000 small business development centres.

4. Business incubators usually comprise a physical workspace and advisory facilities. France has over 200 of them.

5. These include Australia's Innovation Investment Fund; Germany's Venture Capital for Small Technology Companies programme; and the UK's Regional Venture Capital Funds.

6. Even so, Wales had 678 SMEs per 10 000 of the adult population in 1997 and 656 in 2001. The corresponding figures for the UK as a whole are 791 and 785, respectively.

7. Aggregating a number of such indices therefore introduces an element of arbitrariness into the performance measure.

8. This can be derived as equilibrium conditions from output-choosing Cournot–Nash firms (Cowling and Waterson, 1976).

9. Management may also make mistakes of judgement or adopt different standards of, say, what constitutes ‘medium growth’. This will reduce the explanatory of any growth equation and the precision with which coefficients can be estimated, but it does not invalidate the exercise.

10. Since respondents were not offered a negative growth category, they cannot be convicted of ‘over-optimism’.

11. Since there is a large number of missing values for profits/turnover, the question arises about whether firms with this information are typical. A Heckman test suggested that they were.

12. When the flow of information managers must process is too large, there is information overload.

13. The analyses suggested, however, that networking was associated with high growth in the geographic extension of markets.

14. The Standard is based on four key principles: commitment to invest in people to achieve business goals; planning how skills, individuals and teams are to be developed to achieve these goals; taking action to develop and use necessary skills in a well-defined and continuing programme directly tied to business objectives; and evaluating outcomes of training and development for individuals' progress towards goals, the value achieved and future needs. These principles are broken down into 12 indicators, against which organizations wishing to be recognized as an ‘Investor in People’ are assessed.

15. When demand is additive in price and the source of uncertainty and marginal costs are non-decreasing.

16. Being ‘young’ in this context might mean as old as 20 years. A ‘micro’-firm, beginning with five employees and achieving an average of 20% per annum growth in employment, would need to maintain this average for 22 years before ceasing to satisfy the definition of an SME, that is exceeding the employment of 250 people. After 21 years, employment would be 5*(1.2)21 = 230.

17. The data include other size firms because the sampling frame was not perfect.

18. The target was about 41% of the sample in manufacturing and 32% in the professional and financial sectors with about 1% in each of Agriculture and Fishing, and Mining and Quarrying. Most firms should have come from Cardiff and the Vale of Glamorgan (30%), Newport (11%) and Swansea (12%).

19. In the present study, businesses in the non-trading sector are omitted because they may pursue different objectives from the others.

20. Another explanation would be differences in accounting practices, but there seems no reason why there should be such differences.

21. Appendices giving the full statistical results are available upon request from the authors.

22. The coefficients on ‘profession’ and ‘manufacturing’ sectors in this specification were, respectively, −0.05 (SE = 0.08) and −0.02 (0.07), while the negative coefficient on ‘trade association’ remained significant at the 1% level. A ‘Manufacturing*Trade association’ variable was also not significant. Some combinations of sector and trade associations could not be estimated because of multicollinearity.

23. Replacing the Likert scale variable with a binary measure of zero for ‘innovation not important’, otherwise ‘1’, raises the marginal probability of being in the high growth category to 6.4%. This modified ‘innovation important’ variable remains significant at the 1% level.