The Role of Small and Medium Enterprises in the UK - Coursework Example

Introduction Small and medium enterprises (SMEs) are organizations or companies whose headcount or turnover falls under certain limits. SME sector plays a huge role in the general industrial financial system of UK. They are involved in major activities in the economy’s shaping and growth. Current SME sector in the UK economy The Department of Trade and Industry Small Business Service states that, the SME sector accounts for about 60% of UK Gross Domestic Product and 58% of UK employment. Big organizations with full time employees of about 250 account for just 0.2% in enterprises within the UK. Small companies with full employees approximately 50 account for a further 99% of the 4.3 million listed organizations (Johnson 2007). The SME sector plays a very significant role by supporting the bigger business sector by providing support services in the form of products and services-up costs involved in these sectors; financial firms are under-represented in the SME sector as a whole. It is predictable that in terms of worth, the sector is held responsible for about 39% of the manufacturing output and around 33% of the total export of the country. The major benefit of the division is its employment potential at low resources cost. As per existing data, this sector employs an expected 31 million personnel spread over 12.8 million companies and the labour force in the SME sector is predicted to be nearly 4 times elevated than the large enterprises. SMEs play a very important role in the economy, providing new ideas, goods, services and jobs (Johnson 2007). UKs three point seven million SMEs account for approximately 40% of our GDP and have an annual turnover of one trillion pounds. Employing over 12 million people in the UK, they also account for 85% of the 2.3 million more jobs formed by new businesses in the private sector between 1995 -1999 and more than 50% of the 3.5 million jobs added from growth over the same era. SMEs that engage themselves in manufacturing tend to be bigger, whereas those involved in business and monetary services or the building industry tend to be lesser. Women can now run about a quarter of UK enterprises, slightly up on 10 years ago. Women also own smaller SMEs and incline to the service sector. Data also show that firms that innovate more constantly and quickly employ more employees, insist higher skills, pay high salary and offer more firm prospects for their labor force. Across UK, between 30 and 60 % of the entire SMEs sector are known to be innovative, of whom only a small share is technology-based. Regardless of sector, innovators grow faster. Self-motivated entrepreneurs with the spirit of inventive SMEs have in history, naturally been male, aged 40-50, usually have a university degree, regard themselves to be trained professionals and rate themselves most highly on skills associated with general managing activities (Javed , Cindy & Harry 2006). Overview of SMEs Small firms have had rapid growth in UK due to a number of reasons. To start with they are the direct provider of the employment chances within the business sector despite the fact that they constitute a small proportion of small firms. As result they are the policy makers who maximize the creation of employment. It is argued that the relationship between the size of SMEs and their revenue will weaken, as in future the main driver of value-added will be insubstantial assets, such as intellectual property (Johnson 2007). It has also been noted that women and tribal minority own businesses that are normally expected to increase disproportionately in number. This estimates that SMEs firms account for 65% or 3 million of the entire 4.6 million private sector enterprises in the UK economy. The enormous majority of family enterprises are small and medium enterprises (SMEs) and 56% of them are sole traders without employees. Nevertheless it is estimated that there are over 1,000 family firms have more than 250 employees and this alone accounts for 20% of the revenue of the whole family business sector. As SMEs are more small organizations and firms, they account for a lesser share of turnover, employment and gross domestic product (GDP) than of the whole number of firms in the economy, but the share is still substantial. Family enterprises produce around 38% of turnover in the private sector and are twice as important for the economy as private equity-backed firms. We estimate that they also account for around 38% of GDP in the private sector and 31% of GDP in the overall economy. Their distribution of employment is a little higher, given that small firms tend to hire more personnel per unit of productivity than large firms. We estimate that family businesses account for around 42% of private sector employment providing a big percentage of employment. The involvement of the family business sector to the saving extends beyond its straight donation to output; it also acts as a crucial breeding ground for entrepreneurial talent and start-ups (Javed, Cindy & Harry 2006). Furthermore, we estimate that family businesses pay around £47bn per annum in taxes to the Exchequer, equivalent to almost 10% of the Government’s total tax receipts. If we include taxes paid by employees of family firms, this raises the contribution to tax revenues to £73bn or 15% of the total. In the meantime, there are valid reasons for family firms to be extra profitable and stable than other firms. Maybe their main advantage lies in aligning the benefit of managers and owners. Family firms also tend to have a longer time-horizon than other firms. The business and tax atmosphere has in general been supportive of family companies. However, further progress could be made in the development of a more favorable tax regime through extending the scope of business property relief and the protection of business asset holdover relief. Ways to advance the progression rate of family firms when it comes to passing the firm on from the current generation are also required (Johnson 2007) .The financing inclinations of owner or managers in the illustration have been influenced by their perception of the comparative strength and weakness to their domestic funding infrastructures. In the results, the research study shows of SME owner and managers' financing needs, attitudes and perception. Upcoming developments and the intensification of the legal and monetary infrastructure in UK could considerably reduce the proportional gap between owner or manager preferences in these two countries. Relationship between SMEs and large firms SMEs in general appear to play a larger role in job creation than large firms. They provide more employment that the large firms. Larger firms, in contrast, tend to expand through take-over. And also in general, high growth SMEs are twice as likely to innovate; they place greater emphasis on hiring skilled employees and motivating staff; they tend to be younger; they are more often involved in alliances; they are more likely to be partly or wholly owned by others, and also productivity in relation to turnover per employee is higher in large firms than SMEs. Larger firms tend to engage in more R&D. Moreover all nations show substantial variations in growth and innovation across sectors and regions. More reachable regions tend to perform better, but the sectors within which high increase is intense vary between nations indicating clusters of comparative benefit (May 2007). Contribution to the export sector In the UK, SMEs in the South Eastern parts do better on a range of performance indicators together with retained income and exporting than SMEs in other regions. At the aggregate level, SMEs in remote rural areas are less innovative, but this reflects the under representation of the more innovative sectors in such areas such as electronic engineering and business and computer services. SMEs in isolated rural areas are more inventive in some respects, such as market development, but fewer innovative in others, like the use of the internet. These differentials partly reflect a lack of awareness and partly a preference for more labour -intensive development based on lower labour costs in remote rural areas. Around four thousand UK SMEs stop to trade per year, over 10 per cent of all SMEs, with a similar number being formed. A typical SME has a ‘half-life’ of around three and a half years. At advance stages, managing capabilities are essential to survival. As the firm grows, human resource and innovation approaches increase in significance. By the time the firm is totally established, administration and human resource capabilities are well developed, and differences in enlargement are more closely connected with originality. Because SMEs are more small firms and organisations, they account for a lower share of turnover, employment and GDP than of the total number of firms in the economy – but the share is still substantial. Family enterprises produce around 38% of turnover in the private sector and are twice as important for the economy as private equity-backed firms. We estimate that they also account for around 38% of GDP in the private sector and 31% of GDP in the overall economy (Javed, Cindy & Harry 2006). Self employment and the economy of UK United Kingdom has different patterns in terms of self employment which have contributed to the growth of its economy. To start with, there was a fall in the importance of small firms in 1960s followed by a rise in the same in 1970 onwards. These changes had relative importance in others countries in the later periods. The increased importance of self employment form about 1975 onwards in the UK as it was in other nations. The most significant influence of self employment was unemployment where anyone without a job was looking for a way to sustain their selves. Employment was as a result of advancement in technology, which brought new products and new products. Fragmentation was also another reason for self employment as there may be an increase in cost advantages when one is self employed .Forced labour also contributed to self employment. Other reasons were education, enterprise culture economic development and benefits (Storey 1994, pp 16-50). Ways of measuring SME share. There are different ways of measuring SME shares; To start with, shares can be measured by the skills and innovation. This is where the value of the shares is determined by the new products in the market. The more skill one has the more innovative they are and hence there is improved performance in the section they are responsible for. Secondly, internationalization is another way of measuring SME share. The information derived form here indicates that the public procurement contracts and the proportion of the shares produced is significantly higher than the average. Thirdly, finances is another way of measuring SME share, the information available here states that available indicators have a heterogeneous picture and the best performing indicators are the ones measuring the share of structural funds dedicated to SME related issues. Impact of 2008-2010 recessions on SMEs The 2008-2010 recessions have had various effects on SME sector in the UK. First and foremost, unemployment is a key effect: unemployment is equally important and the potential for not being in education, employment or training over a long-term period. Many people lack employment due to lack of education, skills, motivation, self confidence and hence the risk of unemployment is getting high in the community and hence lack of means of survivor and as a result, the productivity in SMEs is being endangered, recession contributed to unemployment as many people lost their jobs as companies tried to minimise the expenses (Storey 1994). Secondly, recession has brought about local household financial stress due to lack of employment which is the sole provider of funds in a household. Hence the fall of income and therefore SMEs also loose as they have no customers to serve. Thirdly, the recession affected the growth of the local economy and thus the SMEs are greatly affected as they rely on the economic growth for their survivor and their growth too. SMEs in Innovations Many companies take innovations as an important tool to enhance good performance and strengthen the position they hold in the market. As a result many organisations pay most of their attention to a bigger focus on internal effectiveness of the developing process, structures of the teams, making of decisions and innovational process. However many organizations come up with innovations directly form their cooperate strategies. Innovation intensifies collaboration with other organisations as it brings them together to work on a certain project. SMEs are the main players in innovations. Moreover the firm size influences innovation strategy and the SMEs are at very good position to develop major innovations, this is because good ideas in a firm are distributed when the company doesn’t have a monopoly (Javed, Cindy & Harry 2006). Innovations help in technology exploration through various strategies of creating new ventures. Through technology, SMEs develop their commercialization process mostly when dealing with new products. To add to that innovations contribute to inter-organisational networking among the employees from different firms and organizations. This links the employees and creates a local boundary. In SMEs innovation skills should be high in the manufacturing companies and since there is advancement in technology. Innovation is high in SMEs because they come up with new ideas and knowledge of improving whatever they manufactured and hence continuous growth in economy. Perfect competition, imperfect competition and oligopoly in SMEs The reason as to why small firms in UK is due to lack of employment and hence people set up their own firms and organization. The large firms cannot run without the small firms as they act as manufacturers of goods and services in UK.I n the UK small firms’ statistics tend it be speculative. As a result of existence between the small firms and large firms there arise many beneficially (Storey 1994). Competition also is evident between these two forms of market. Small firms contribute to competition in that they are the manufacturers of the products and hence they are the sole distributor. If they don’t produce enough goods and services for the market, competition arises. SMEs seems to have the oligopoly competition which is a form of market in that the industry is occupied by small number of seller .Decisions of one firms affect all the other firms. This kind of competition yields different results as the firms may regulate trade practices, hike prices or even restrict production. SMEs also are involved in perfect competition where no particular firm has market power. This is because the conditions for perfect competition are very stern. Imperfect completion comes in the situation where the conditions for perfect competitions ate not met and fulfilled. This is a market that does not reach the conditions for a perfect competition. Business Churn Business churn is the percentage of contractual clients or subscribers who leave a supplier during a certain given period of time. It’s mostly as a result of customer dissatisfaction, cheaper or better offers from other competitors, better up sales or marketing by completion or reasons ho do with customers’ tastes ad preferences. The churn can be reduced by creating barriers which discourage customers change or by use of retention services. Business churn also can affect the SMEs if the quality of services they provide a re not satisfactory to their needs. In some other business terms, churn can be referred to as a high employee turnover in a company. For example when a fast food restaurant has many clients than the employees, its referred to a s a churn. Moreover, churn can also be termed as the number of employees that move within a certain period in another business scenario (Storey 1994). Current government policy towards the SME stratum The governments approach to SMEs relates closely to the key weak points in the UK economy. Despite having inflation and unemployment, the government continues to delay behind its main competitors on efficiency .When compared to USA, the output per worker is 45% higher and the gap is made wider by 19% in France. In UK there is also a al huge productivity gap .The strategy to minimize the productivity gap lies on two pillars which include delivering macroeconomic stability to allow organisations and people invest in the future and implementing microeconomic reforms to remove obstacles that prevent market efficiency (Storey 1994). To achieve this, the government has set up policies and reforms. For example getting basic rights, stabilizing the macroeconomic environment through independence of some organizations, implementing the fiscal policy and also enhancing improvement of basic skills. Other measures the government has put in place are for example creation of small business Service; tax credit for small affirms; 100% first years allowances for SMEs investing in ICT; relaxing regulations over work permits; increased real investment in UK science bases plus knowledge transfer funding and finally implementation of the social Invest Task Force it enhance enterprise in the less fortunate societies. Self employed people run most of the SMEs businesses in the UK. Moreover the SMEs occupy the large part of UK economy. They major mostly in small firms related jobs which include manufacturing,minig,quarrying,agriculture,hunting,fishing,forestry,electricity,water and gas supply ,construction works, service industry, wholesale and retail trade, transport and communication facilities, health sector, education and many others. From all this it is evident that SMEs are the backbone of UKs economy. Most of the above professions are self employed and self employed has had a big impact on UK economy. It has helped improve the infrastructure, improve trade, and bring in new goods and services in the market, advancement in technology, sustaining life and ecosystem, providing the basic necessities in the society, offer financial knowledge for money market reports, self employed people have also improved the relationship with other countries as a result of trade. It is therefore evident that the self employed people maintain UKs economic growth and they have played a big role in maintaining it too. When SMEs in UK is compared to other nations like India, there are few differences and similarities that are evident. The rise in occurrence of corporate devastation and scams in India like the Satyam fiasco and the recent case of embezzlement by a Wipro insider only brings out the need for India Inc, as well as the SME sector, to have tough corporate authority policies in place. Strengthening the organizational structure as well as re-examining the administrative strategies has become imperative for Indian SMEs to avert corporate frauds in future References Javed, H, Cindy, M & Harry, M 2006, Journal of Small Business and Enterprise Development, vol. 13,  Emerald Group Publishing Limited, pp. 584-599. Johnson, P, 2007, The economics of small firms: An introduction, London, Routledge. May, T, 2007, Small business in Britain, Routledge. Storey, D 1994, Understanding the small business sector, London, Routledge. Read More