Small firms can be more flexible, resilient and responsive, writes David Deakins.
The dominance of small businesses in New Zealand has been under discussion recently. What are the pros and cons, and is New Zealand really so unusual with its broad base of SMEs?
Why do small businesses tend to be the first to come out of recession?
It has been known for some time that entrepreneurs and small firms are responsible for being the important source and creators of net new jobs in any economy. As well as the growing evidence of the importance of entrepreneurial activity and the role of small firms in economic development, theoretically small firms are arguably better placed than large firms to take advantage of the unexpected.
They can be more flexible, resilient and responsive than large firms and therefore respond quicker to opportunities or quickly adjust resource inputs, prices and products. In a research report published by the centre last year, from our BusinesSMEasure survey on small firms in New Zealand, "Managing under Recession", we found that more than 60 per cent of small-firm respondents reported making changes, both in products or services offered, and in changes in marketing.
This indicates, importantly, that the majority of small-firm owner-managers were investing in the face of the continued post-global financial crisis recession during 2009 and 2010.
What other countries in the world have such a high percentage of small businesses?
It is a bit of myth that New Zealand has a very high proportion of small businesses by international comparisons.
For example, a 2011 report by the OECD indicates that nine OECD countries actually have higher proportions of enterprises employing fewer than 10 employees, including Sweden and Australia. They certainly do not complain about having too high a proportion of small enterprises.
Secondly, whether we have the right mix and type of small businesses is a much more fundamental issue. For example, the lack of internationalisation by New Zealand's small businesses, and indeed NZ enterprises in general, could be seen as a failing.
A recent report by Statistics NZ, from their 2011 Business Operations Survey, indicates that only 18 per cent of businesses surveyed generated some form of overseas income last year and that 77 per cent of businesses had never generated overseas income.
This lack of internationalisation may be a reflection of New Zealand's distance from major overseas markets.
For example, Australia dominates as an overseas market and source of income for those businesses that do report international activity, reflecting the relative proximity of our nearest neighbour.
Should more small businesses be setting out with the ambition to grow big?
Some small businesses will have more growth potential than others.
For example, those with high growth potential, such as technology-based small firms, are likely to be in global markets from day one.
Relative narrowness of the sources of finance in New Zealand, such as an immature and fragmented venture-capital market, limits the capability of such firms to achieve their growth potential.
Easier access to finance may help such firms to achieve growth.
Not all small firms will wish to grow, but New Zealand does not have enough firms that achieve world leading growth, but remain here.
This is a more important issue than any debate about the proportion of large versus small firms in the economy.
It is an issue that will be taken up at a forthcoming small firms' conference, ICSB 2012, in Wellington, where creative high-growth entrepreneurs who have achieved world leading companies will discuss how they have overcome challenges of achieving high growth entrepreneurial firms.
Professor David Deakins is the director of the New Zealand Centre for SME Research at Massey University.
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