Rules fear puts freeze on growth

By JIM EAGLES

Small businesses are often frozen into inaction by a fear of breaking some Government regulation, according to a new study by the University of Auckland Business School.

For example, it found, many businesses have "a genuine reluctance to hire strangers" because of worries about the impact of the various employment-related rules.

Lack of knowledge of such regulations, the authors conclude, is one reason so few New Zealand start-up companies reach the big time.

Other reasons pointed to include "a profound lack of management skills" and ignorance of essential topics such as finance, networking and internationalisation.

The research follows the publication last year of the Global Entrepreneurship Monitor, which ranked New Zealand second only to Mexico in the number of start-up ventures.

Unfortunately, the GEM report also found that very few of those start-ups ever went on to become significant businesses, and even fewer broke into exporting.

A team from the business school decided to find out why.

Rather than go to the myriad small businesses themselves, they interviewed representatives of 32 SME (small-to-medium enterprise) stakeholder organisations ranging from Government and semi-Government agencies to business associations and small business advisers.

Dr Barbara Simpson, a senior lecturer at the business school, said the respondents cited many of the usual problems, such as distance from markets, excessive Government regulation and lack of assistance.

"All of those are certainly issues for New Zealand companies," she said, "but they are outside the control of business. For the purposes of our study, we decided to focus on areas where, with appropriate assistance, they can take control of their own destinies.

"Owners and manager of small businesses often have high industry-specific skills and good knowledge of their businesses," Simpson said, "but they frequently lack basic business skills and rarely carry out business planning, human resource management or strategic thinking."

There was a vast array of courses available to fill such gaps, but - apart from some "sexy" topics such as marketing - they were usually "totally underwhelmed by demand from small business operators".

Simpson said part of the problem was that courses were often not tailored to the realities of business life, in which operators were free for only a couple of hours in the evening.

"Perhaps those providing them should do more talking to the business operators themselves and find out what the needs are."

Another difficulty was a lack of information to "help business people make intelligent choices between the huge range of courses on offer. Perhaps that's an area where an agency like the Ministry of Economic Development could help".

The study also found that small business operators lacked financial knowledge and often had little idea of how to access funds for expansion.

In recent years, Simpson said, there had been a considerable improvement in the availability of opportunity funds - although there was still an absence of angel funds - but SMEs had problems accessing them.

Industry New Zealand's Investment Ready scheme was designed to help small business owners identify appropriate funding sources and meet their criteria.

But the primary source of financial information to a small business was its chartered accountant and, although many did a good job, there were gaps in the level of service provided by some.

"Maybe," she said, "part of the solution would be to provide more training for the chartered accountants."

Another crucial failure was a lack of networking.

In part, Simpson said, that was due to the typical individuality of the NZ entrepreneur. But it also followed from the inadequacies of some business and industry associations.

"We certainly got a sense, particularly outside the big cities, that if you were a small business your association didn't really do much for you beyond collecting the money and maybe putting out a monthly magazine.

"There is actually a lot more potential for industry associations to promote networking and getting people talking."

Lack of knowledge of Government regulations also emerged as a major problem.

"It came up a number of times where people were saying, 'We would like to grow but we don't want to employ anybody else, because we don't understand ACC, we don't understand the ERA [Employment Relations Act], we don't really understand what we would be taking on if we employed someone," Simpson said.

"Owners and managers of SMEs are faced with a complex array of statutes and regulations and it's very scary for people. In many instances SMEs are frozen into inaction by their fear of penalties arising from non-compliance."

That, she said, was certainly something the Government should consider carefully when introducing regulations, but that aspect was not the thrust of the study.

"The regulations aren't there to increase costs for business. They're there, supposedly, to guide best practice. But what people are seeing is that the regulations are like a big clobbering stick.

"There clearly is a whole educational programme needed to back up the regulatory programme, so people understand what the requirements are and what the regulations are trying to achieve."

The study also found that small businesses were held back from expanding into exports by a lack of knowledge of what was involved in developing overseas markets.

A lot of effort was already being put into this area, Simpson said, but there was still a need for more information both on the opportunities overseas and the resources available to pursue them.

"Trade NZ, in particular, has been very successful in helping some businesses to get into exporting, but they interact with quite a limited number of organisations. Obviously they're limited by their resources, but ideally they would expand their activities."

Overall, Simpson said, the various problems identified by the study would be best solved through "a degree of collectivity.

"I see networks as absolutely essential to this, though I do worry about the New Zealand attitude to networking, the rugged individualism, which is something we have to overcome.

"Industry associations also have a big role to play, as do any business associations, chambers of commerce, Rotary Clubs, or anywhere that brings people together.

"The bottom line is that it needs to come in a ground-up way. Businesses themselves need to start to demand better support."

Unfortunately, she said, small businesses did not have a loud voice. "There are 300,000 SMEs and you never hear from them."

Worse still, by their very nature they all had different needs. "How do you do anything with 300,000 discrete entities?"

* In Dialogue tomorrow, Auckland Chamber of Commerce chief executive Michael Barnett and the National Party's commerce spokesman, Tony Ryall, discuss how to boost small business.