Small businesses merit more credit for success

Small businesses are being wrongly stereotyped as having failure rates of 70 per cent or more when they are actually survivors, new research shows.

David Tweed, from Massey University's business school, has called for a re-examination of the validity of commonly quoted statistics for small-to-medium enterprises (SMEs) after finding their survival rate over seven years was more than 77 per cent.

"The negative connotations of this focus on failure ... serve to skew the formation of effective policy for small enterprises," Tweed said.

"There is an urgent need for enterprise longevity to become the focus of research attention in order to redress an imbalance in the literature."

He said in a research paper, Seven Years and Still Trading, that Economic Development Ministry failure statistics "are fundamentally flawed".

In a 2003 paper referred to by Tweed, the ministry said survival rates were generally perceived to be lower for smaller enterprises.

"Of all small businesses started in 1995, 55 per cent were still active in 1997, 46.2 per cent in 1998. By 2002, only 27.4 per cent of these businesses were still active," the ministry said.

But Tweed said the SME failure "research myth" had been around since researcher David Birch reported "a foundation of massive, continual failure" at the base of North America's small business in the 1980s.

That triggered a raft of research and people trying to do something about the failures. Researchers using single methods of verifying data to draw conclusions on the failure of SMEs risked flawed findings.

The Massey study used six different methods to locate 1511 SMEs in New Zealand and looked at their survivability over seven years.

Researchers hunted them down using an internet search, a phonebook search, a telephone survey, a check of the Companies Register, and two different paper surveys, and with each additional method found more surviving businesses. After the first search, by internet, only 54.9 per cent of businesses were found to be operating. By the time the researchers had reached their second paper survey - their sixth check - 77.6 per cent of businesses had been found.

The paper, co-authored by Judy McGregor, was presented at the recent Hawaii International Conference on Business.

The small businesses were first studied in 1997 as part of a randomised nationwide study of SMEs by Massey University and the continuing research showed that at least 1173 enterprises (77.6 per cent) still existed after seven years.

It was a reversal of the pessimists' glass half-empty picture, Tweed said.

Because ministry reports had focused on failure, rather than the more accurate picture of the resilience of SMEs, a lot of effort was going into finding out why SMEs were failing, and how to deliver the help they needed to survive. "The negative bias resulting from a failure focus has resulted in an incorrect assumption that influences policy development, but the extent of this influence remains to be examined," Tweed said.

A ministry spokesman said its reports used to refer to business "births and deaths" but the latest reports had changed that to "entries".

Reasons businesses left the statistical database included not only business failure, but changes of ownership, moving, and having GST expenses or sales drop below a $30,000 threshold.

The ministry was improving data about SMEs and the way employment was measured had now changed from "full-time equivalents" to an employment count that would include working proprietors only if they paid themselves.

And from this year a new series of statistics will include a way to trace the number of true business start-ups and failures over time.

7-year survival
* Six different methods were used to find 1511 SMEs over seven years.
* These included internet and phonebook searches, a telephone survey, a check of the Companies Register and two different paper surveys.

- NZPA