Small and medium-sized enterprises role in shaping regional economic prosperity

Examine the role played by small and medium-sized enterprises in shaping regional economic prosperity (1,500 words)

Small and medium-sized enterprises (SMEs) have played a leading role in resurrecting regional economies since the 1980s (Cooke et al, 1989; cited in Blackburn et al, 1996). SMEs have become more independent due to specialization and less tied to a locality due to modern communications since the 1990s (Curran et al, 1994). However, SMEs still generate profits based on products derived from manufacturing. SMEs use ecommerce as a 'means to an end' (Taylor et al, 2004). In light of this and the recent collapse in the financial and retail service sectors (although this is debatable) most data used in this essay will be from the manufacturing industry. Drawing largely on the research by Robert Blackburn and Peter Jennings this essay will examine how SMEs prosper certain regions. Long term survival, growth, employment and the local community are presented as key factors.

The long term survival of a SME benefits the economic region(s) in which it operates (Blackburn et al, 1996). The reasons are many. SMEs are more bound to a locality and if they do relocate it is usually within the locality (Blackburn et al, 1996). Therefore any economic support they offer a region can be accessed in the long term if the SME survives (Blackburn et al, 1996). SME survival in the long term is usually not threatened by mergers or acquisitions (Blackburn et al, 1996). Only ten-percent of three-hundred and six surviving firms from 1979-1990 had ownerships changes (Blackburn et al, 1996). This suggests SME loss to large parent companies as a result of ownership changes is sparse. SME survival in the manufacturing sector has been shown to occur despite recessionary periods in the past. According to the Economic and Social Research Council's Small Business Research Initiative eighty-two percent of three-hundred and six SMEs trading in 1990 survived until 1994 (Blackburn et al, 1996), despite the recession in the early 1990s. This is suggestive particularly during the current period of sharp decline in the services sector. In fact survival rates in the manufacturing industry have demonstrated historic stability. From 1979 - 1990 fifty-eight percent of three-hundred and six SMEs had survived (Blackburn et al, 1996). But a look behind the figures and there are aides to SME survival. In Kenya faith-based organisations (FBOs) provide economic support for SMEs as enterprise of any kind offers a sustainable alternative to aid (Ndemo, 2006). However in India unproductive SMEs can survive with help from the interventionist government (Mead, 1991). In the UK, government initiatives help new SMEs to survive but they neglect established SMEs as their growth rate is more likely to have leveled off (Blackburn et al 1996). UK government policy makers help SMEs survive as they offer a way for regions to regenerate economically (Blackburn et al, 1996). The evidence provided by Blackburn and others suggests that in the manufacturing industry at least, survival rates among SMEs are high (fifty-eight percent and eighty-two percent) providing long term stability for the regions they inhabit.

If an SME survives then it will have a chance to grow over its first ten years in business (Blackburn et al, 1996). The evidence shows this; out of three-hundred and six SMEs fifty-four percent increased their real turnover from 1979 -1990, thirty-seven percent doubled their real turnover in the same period and twenty-three percent were consistently profitable (Blackburn et al, 1996). This doesn't just apply to new firms. Fifty-seven percent of the three-hundred and six SMEs that reported high growth in the 1980s were created before the 1970s suggesting established firms do grow (Blackburn et al, 1996). Nor does this just apply to regions favourable to growth. SMEs can grow under the most unfavourable circumstances (Vaessen et al, 1995). Particularly unfavourable conditions can be exploited to gain favourable sets of circumstances (Schumpeter, 1994). SMEs, then, are capable of over-coming barriers to growth in their environment (Vaessen et al, 1995). However SME growth, wherever that happens to be, does not benefit an entire region. SMEs occupy different 'shapes' within a locality that are the subject of growth (Curran, 1994). The local market served by small advertising, marketing and design agencies is far larger, geographically, than that served by small video hire outlets (Curran, 1994). Such shapes are becoming ever more dynamic. Newer SMEs are less likely to be tied to a locality due to a revolution in communications, specialization and outsourcing (Curran, 1994). This post-fordist shift in operandus modi renders the idea of SMEs as local beneficiaries increasingly useless (Curran, 1994). Even in Kenya as SMEs grow they are internationalizing their production instead of exporting domestic products (Ndemo, 2006). SMEs, then, benefit different parts of regions in ever more dynamic ways. But it should be remembered that the ecommerce boom which Curran et al hail as revolutionary is really a 'means to end' which is cited by 'nave' government policy makers as a modern operating stucture for SMEs (Taylor et al, 2004).

SME growth is closely linked with its potential to create jobs (North et a, 1994l; cited by Blackburn et al, 1996). Out of three-hundred and six firms from 1979-1990 the twenty-three percent that were most productive created seventy-one percent of all new jobs (Blackburn et al, 1996). This supports the idea that only a few SMEs create most of the new employment in whatever region they happen to be in (Storey, 1982; Storey et al, 1987; cited by Blackburn et al, 1996). But others disagree. Evidence to the contrary suggests that many SMEs collectively contribute to large-scale job creation (Daly et al, 1991; cited by Blackburn et al, 1996). But all is not so simple. Blackburn divulges further data that presents a more general picture. From 1979-1990 fifty-two percent of surviving firms increased their employment whilst thirty-six percent decreased employment (Blackburn et al, 1996). These figures mask the fact that twenty-three percent of the most productive SMEs created seventy-one percent of the new jobs. Yet Blackburn uses those same figures[1] to advance his general argument that if SMEs can survive they can generate new jobs over an extended period (Blackburn et al, 1996). Surviving SME firms which did generate jobs over an extended period (1979-1990) outnumber those that did not by mere two percent. In reality this does not support one way or the other the argument that if an SME survives it can create jobs. Despite this confusion, Blackburn provides useful data relating to the effect of age on an SME's ability to create jobs:

Firms created in 1970-79 created five-hundred and eleven more jobs than those created in 1950-69 and lost three-hundred and ninety-four less jobs than those firms created in 1950-69 despite the number of firms in each group differing by two. There are clues as to why this was from a different study in Scotland 1968-1977. From 1968 - 1977 seventy-eight percent of new plant founders in Scotland came from the South East or West Midlands (Cross, 1981). At a time of growth in manufacturing, entrepreneurship was not local and this may have affected the success of a firm. The existing stock of plants in Scotland from 1968-77 dominated employment from inner city areas while new SMEs, dependent on their larger competitors hovered in metropolitan areas (Cross, 1981). Fringe metropolitan areas were no more than 'incubator' areas for new SMEs from 1968-1977 in Scotland and local authorities had no plans to encourage entrepreneurship as none was stemming from Scottish localities (Cross, 1981). A disparity between government policy and the entrepreneurial motivation of the Scottish population may have made things difficult for SMEs. At the time of writing, Cross noted that local authorities in Scotland had no future support plans for SMEs in place (Cross, 1981). Although the study was confined to Scotland it gives a feel for attitudes in the UK at the time and suggests that factors other than age may have hampered older SMEs in creating jobs. This directly contradicts Blackburn's assertion that age alone may be responsible for variations in job creation. SMEs do create jobs over the long-term then but by how much and why is still unclear. SME creation in the period from 1950-1969 seems to have been hampered by a lack of government initiative.

SMEs also bring social prosperity to their local community. This is less obvious than the benefits of employment or growth. The informal role SMEs have in supporting social endeavors in their localities has been called 'silent social responsibility' (Medina Munoz et al, 2001; cited by Newberry, 2006). But other sources are more explicit. An average of 67.5% of European SMEs engaged in regular external social support such as providing for a local charity (European Commission, 2002; cited by Newberry, 2006). There are reasons why SMEs engage in such responsibilities. SMEs foster stronger ties to local communities as there is a greater need to protect their standing and relationships in a locality (Newberry, 2006). The European Commission cites 'improvement of the loyalty of customers' and 'better relations with the community' as key motivators (cited by Newberry, 2006). There are then, a wide range of data sources detailing the social benefits SMEs bring to their regions. However more research needs to be done to understand 'silent social responsibility'.

SMEs seem to be able to survive in quite high numbers and so contribute to regional prosperity through growth and employment. There are some social benefits associated with SMEs. However that is about all that is clear. Blackburn is ambiguous when he talks about the benefits of SME employment and his argument does not fit with the supporting evidence. Cross (1981) further contradicts Blackburn's argument that the age of firm impacts on its ability to create jobs. Newberry talks of 'silent social responsibility', an academic research field of SME socio-economics that has yet to be fully explored. There are other issues too. Newberry highlights the definitional issues surrounding the term SME, which for the sake of convenience has not been explored in the essay (Newberry, 2006). Curran points to the deficiencies in the use of the term 'region' as a relevant abstraction in the wake of increased firm mobility since the 1990s (Curran et al, 1994). There seems to be a gulf in understanding between academic literature and government policy with Cross (1981) versus Blackburn (1996) and Taylor (2004) versus the 'nave' UK government which fails to see ecommerce as a 'means to an end.' There are issues with the essay itself as well. The way SMEs prosper regions through innovation has been left unexplored. If a single conclusion can be drawn it is that the field of SMEs and regional geography is complex, unclear and ever-changing.

Bibliography

  • Vaessen P., Keeble D., 1995 Growth-Oriented SMEs in Unfavorable regional environments, Regional Studies Volume 29 Issue 6 pp.489-505
  • Curran J., Blackburn R., 1994 Small Firms and Local Economic Networks Paul Chapman Publishing Limited, London
  • Cross M., 1981 New Firm Formation and Regional Development, Gower Publishing Company, Westmead, England
  • Blackburn R., Jennings P., 1996 Small Firm Contributions to Economic Regeneration Paul Chapman Publishing Limited, London
  • Ndemo E.B., 2006 Assessing Sustainability of Faith-based Enterprises in Kenya International Journal of Social Economics 33(5-6) pp 446-462
  • Schumpeter J. A., 1994 Capitalism, Socialism and Democracy George Allen & Unwin Publishers Limited, USA
  • Taylor M., Murphy A., 2004, SMEs and the Take-Up of E-Business, Urban Geography, 25(4) pp315-331
  • Newberry B., 2006 The Role of Small- and Medium-Sized Enterprises in the Futures of Emerging Economies, World Resources Institute
  • From 1979-1990 fifty-two percent of surviving firms increased their employment whilst thirty-six percent decreased employment - therefore 48% of companies created none or negative amounts of jobs.

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