Focus on SMEs: Small firms a drag?

Catherine de Groot, left, and Sarah Gibbs of Trilogy. Photo / Mark Mitchell

New Zealand does not have enough big companies to sustain the thousands of small businesses in the economy, says the New Zealand Institute of Chartered Accountants' chief executive, Terry McLaughlin.

The fact that so many Kiwi businesses seemed content to stay small might be restricting the country's economic growth, he said.

A report by the Ministry of Economic Development found 90 per cent of New Zealand enterprises employed five or fewer people, and 69 per cent were one-person organisations.

Massey University said only about 1200 businesses in New Zealand employed more than 100 people. SMEs accounted for 31 per cent of all Kiwi workers.

The report found SMEs, particularly those with fewer than five employees, were more likely to remain the same size over time than larger firms. They were also less likely to survive - the report showed almost half of SMEs were less than six years old, with very few older than 20 years old.

McLaughlin said: "Small businesses play a vital role in every country's culture and economy ... However, the crucial point is that many other countries can afford to have large numbers of small businesses because they have a lot of big businesses, too."

New Zealand could not afford for businesses to stay small. "When measured by turnover, New Zealand is near the bottom of the OECD for the percentage of high-growth enterprises."

Business NZ chief executive Phil O'Reilly was reluctant to draw such a connection between the fortunes of small and big business, but said one of the key reasons New Zealand struggled to grow was a lack of big companies. Big firms attracted big capital and would spend it in ways that benefited the country's small businesses.

"Businesses that are in the same supply chain gain new capital, new business and grow more capable of going overseas." He said the country also suffered a lack of management capability because of the limited experience available in New Zealand.

O'Reilly said New Zealand had to be seen as a good place to do business, both to attract international firms and to convince smaller firms that they could grow at home.

Some small-business reluctance to grow could be put down to the economic downturn, McLaughlin said, but there was a danger businesses could be stuck in a rut.

He said getting the right advice was key to avoiding that. An example was Trilogy, a New Zealand-based skincare company founded in 2002 by sisters Catherine de Groot and Sarah Gibbs. "They used the advice provided by their chartered accountant to inform all their decisions as they grew the company, which they sold for $20 million in 2010."

But David Deakins, director of Massey University's New Zealand Centre for SME Research, said getting down on SMEs was unfair.

"SMEs are the driving force in any economy, as substantiated by OECD reports, and they are always the first ones to pick up after a prolonged recession."