Economics of small and medium enterprises - Essay Example

Revival of Small Firms in UK Rachna Jalan There is no single universally accepted definition of small business firms (Storey, 1994). Thesmaller firms are less fortunate to obtain significant financial aid to combat their insolvency problems. The successive governments in UK have been witnessing comprehensive policy initiatives for uplifting the small enterprises. Encouraged by the Enterprise Act 2002, the new regulated Administration procedure is more practical for rescuing small businesses than CVA. The Federation of Small Businesses, set up in 1974, working on behalf of the SMEs is the major association for theses small units (Industrial relations and SMEs). The small scale business units act as the accelerators of growth and opulence of the economy. This danger inevitably calls for the existence of revival of small firms. Lack of confidence amongst financial institutions regarding practicality of the small enterprises creates a financial barrier for the small units. Many services provided to small business units are often fragmented, inaccessible and not customer-focussed. This invites the measures for the revitalization of the small businesses. Revival of small firms in UK Introduction The small and medium scale enterprises (SMEs) act as one of the pivotal points in United Kingdom around which the growth and prosperity of the entire nation revolves. Any disturbance in this fundamental sphere of economy will inevitably influence the entire industrial setup, thereby retarding the opulence of the whole nation. There is no single universally accepted definition of small business firms (Storey, 1994). A firm may be defined on the basis of its capitalization level, employment and sales. According to Bolton Committee (1971), a small firm is economically defined as: (Kayanula & Quartey 2000) (i) one which occupies a smaller market share; (ii) one which is looked after by the entrepreneurs or owners personally rather than any interference of any formal management setup; (iii) it is free as it does not belong to any large scale business; and statistically its definition applies in three areas: (i) evaluating the size and contribution to GDP, employment, exports, etc in terms of quantity; (ii) comparing the extent of change of economic contribution brought upon by small firms; (iii) using the definition in cross country comparison of economic contribution brought upon by small firms. These small corporate houses are potential sources of employment and are vibrantly responsible for promoting innovative ideas and products. Of late, these SMEs have become serious victims of jeopardy due to various unfavourable factors making it difficult for them to sustain their existence. The threat to these crucial business units resulting into critical problems such as severe unemployment and decline in the economic growth has made the Government of UK to identify the urgency to rescue such SMEs from collapsing. Henceforth, the government along with other voluntary supportive corporate associations has started adopting numerous revival programs for assisting the downtrodden small units. In order to eradicate the vulnerability of these SMEs, a number of practices like supportive tax reforms, financial aids, agreements with creditors and banks, etc, have been embraced thereby ensuring all possible economic smoothness. However, the answer to, how far have they been successful in achieving the desired result, still remains a debatable issue. In spite of the endeavours for complete eradication of the barriers faced by the struggling small business firms, a viable implementation of actions for the revitalisation of the SMEs is still lagging far behind. Evidence followed by Theoretical Reasons Evidences reveal a number of sick enterprises that could have been saved if proper assistance would have been provided to them at an earlier stage.85% of the insolvent companies in UK embrace small scale enterprises (Small Business Service 2003a). This calls for prompt initiatives to eradicate the vulnerability of the small businesses. Among the primary causes of collapse, the failure of the management results into insolvency of the company. The smaller firms are less fortunate to obtain significant financial aid to combat their insolvency problems. Impeccable support amid the business support communities are already being recognised for the restoration of the handicapped small firms. A number of voluntary aids have therefore come up with a view to revitalise these small enterprises in UK. These might be accepted as significant means of providing some relief to the sinking SMEs. However, these small units cannot always avail themselves for accepting the rescue benefits because of the high cost hindrances. The successive governments in UK have been witnessing comprehensive policy initiatives for uplifting the small enterprises. These appeared in 1970s, gathered pace in 1980s and profusely strengthened in 1990s (Storey, 1994; Curran, 2000). Research suggests that there were around 200 such aid programs in 1990s, though the exact current data could not be ascertained (Gavron et al., 1998: 59). The industrial system of UK has been an observer of a revitalization of small enterprises participation in manufacturing and the entire economy (Storey, 1994). The authorities of United Kingdom have announced an assistance scheme for the recovery of the degenerating small industries in Northern Ireland by way of offering loans thereby providing sufficient time to plan out ways to come out of the dark (State aids 2002). Loan or loan guarantee is provided to theses sinking enterprises at certain interest rate against security if available upon the assets of the firm (State aids 2002). The aid offered to each such firm is not more than10 million Euros. or the minimum financial requirement of the firm to sustain its existence in six months, within which the enterprise is required to produce a viable restructuring plan (State aids 2002). Various down falling SMEs have reaped benefits under the Company Rescue Scheme pilots to combat with their deficiencies (Small Business Service 2003b). The Review of Company Rescue and Business Reconstruction Mechanisms in November 2000 followed establishing various ways of backing-up ceasing industries enabling them to sustain their existence (Small Business Service 2003c). In order to enable these units to overcome their tax debts, a joint single unit was set up by the Inland Revenue and Customs and Excise to manage Voluntary Arrangements (VA) (Small Business Service 2003c). Although these efforts showed positive results to some extent, majority of the SMEs found it inappropriate and beyond their reach. A belief was therefore formed that unless an informal rescue initiative is adopted the small firms with possibilities of survival will unnecessarily be shut down resulting into loss of employments and tax revenues. Of late, the government of United Kingdom has started participating in a “rescue culture” encouraged by the Insolvency Act 2000 and the Enterprise Act 2002 with the indomitable spirits of improving the conditions of the vulnerable business units (Frape, 2005). However, these revival approaches adopted by the overall industrial system has not turned out to be appropriate for rehabilitating the mini business units, the causes being either significant cost barrier or problematic implementation or lack of security to the firm from the creditors in the process of reforming the enterprise. Two principle methods are adopted to overcome financial crunch (Frape, 2005): 1. Company Voluntary Arrangement Negotiation is made between the enterprise and its creditors, where the latter’s consent to receive reduced amount of debt is acknowledged. The flexibility of CVA ensures sustainability of the business rather than becoming insolvent. 2. Reformed Administration process Encouraged by the Enterprise Act 2002, the new regulated Administration procedure is more practical for rescuing small businesses than CVA. This is possible because now the small entrepreneurs are permitted to appoint their own administrative rather than administrative appointed by banks. The chaotic situation can be then peacefully settled down once the creditors are bound. A successful example is the case of Cambridge United, in which the enterprise was saved from winding up by following this Administration procedure. Protection of small businesses from terminating is possible by adopting relevant practices for renewing the business or by reassigning the ownership. For saving a small enterprise without transferring the business to some other owner The common objectives of all small firm revival assisting schemes and policies in UK are chiefly the accessibility of the SMEs to various financial offerings, the aid in the decision making process ensuring understanding from the creditors, the recognition and assessment of the causes of failure and the recommendation of viable renewal plans. The Federation of Small Businesses, set up in 1974, working on behalf of the SMEs is the major association for theses small units (Industrial relations and SMEs). According to the study by Storey, direct financial aid like the Enterprise Allowance Scheme, 1982, is a more significant tool of assistance for the recovery of small firms rather than merely providing guidance to the SMEs (Industrial relations and SMEs). With the view to assist the restoration of small enterprises, Storey strongly demands greater attention for eradicating the difficulties of existing small scale industries rather than simply encouraging the new ones. Theoretical Reasons for the Supposed Revival The Bolton Report, 1971, not only accelerated the development of small businesses but also revealed the problems and struggles, thereby, ensuring constant and smooth flow of industrial economy in UK (Matlay, 2002). It went further to disclose the fact that there exists a remarkable dearth of vocational education and training (VET) among small entrepreneurs and their personnel (Matlay, 2002). It was therefore held, that such scarcity of skills will lead to losing competitiveness of the firms thereby resulting in the retardation of the long term economic growth of UK (Matlay, 2002). Further justification for the existence of this supposed revival of SMEs can be discussed as follows: The small scale business units act as the accelerators of growth and opulence of the economy. The existence of revival of these SMEs is thus inevitable for maintaining a stable economic growth. Winding up of small enterprises would reflect huge unemployment problems as these SMEs are frequently labour intensive providing livelihood to more workers per unit of capital as compared to large scale industries. This danger inevitably calls for the existence of revival of small firms. The small entrepreneurs are often not properly informed about the advantages of using external information as a result of information imperfections. For this, UK offers Personal Business Advisor service via Business Links since 1990 (Bennett and Robson, 1999). Lack of confidence amongst financial institutions regarding practicality of the small enterprises creates a financial barrier for the small units. The providers of funds find it riskier to invest in SMEs due to high risk factor which leads to the creation of the funding gap. To support this UK offers Loan Guarantee Scheme (KPMG, 1999). Many services provided to small business units are often fragmented, inaccessible and not customer-focussed. This requires the intervention of the government to provide viable and customer-focussed services to these small firms. Possibilities of excessive fiscal deficits and balance of payments problems due to small scale industries turning sick made the entry of revival schemes and procedures mandatory to keep the net revenue of the economy intact. SMEs aid in optimum utilization of available funds which otherwise would have remained unused. Hence, attempts are being made to save these funds mobilization means. Small scale enterprises often act as the base for the budding entrepreneurs providing them opportunities to put their ideas into action. This invites the measures for the revitalization of the small businesses. SMEs are looked upon as important means of encouraging technological information. Hence, renewal of these small firms is recommended. As the small entrepreneurs are primarily dependent upon domestic resources, they demand less foreign exchange requirements. Rehabilitation of these small enterprises therefore is but logical. SMEs are responsible for looking after the requirements of the poor who are very often neglected by large scale enterprises. This calls for the restoration of the small firms. The small and medium enterprises are capable of competing only behind defensive barrier. Hence, revival plans are required to sustain their existence. The small business units can comfortably cater to the diverse needs of the customers unlike the rigid characteristic of the large commercial firms. This calls for the resurgence of the SMEs. The small business units face a strong competition from the large scale industries that enjoy the already available facilities of finance, tax structure and subsidies. Hence, they too deserved to be supported at least to keep them going. A small business firm’s decline goes beyond its own extinction to adversely impacting the entire national economy. Failure to rescue an SME often results into either sale of the business to pay off the loans of the creditors, banks and other affected parties or bankruptcy of the company where the assets will be liquidated and the business will be terminated. Existence of restructuring of SMEs is required because otherwise their failure will accompany financial losses to the creditors, employees, customers, suppliers, banks, etc. Revival of SMEs, is therefore inevitable, as existence of healthy and vibrant small corporate houses not only reflects the economic growth and employment but also encourages new products and ideas. The small enterprises thus act as engines for meeting the growth objectives of the economy being outstanding sources for employment generation. Studies reveal that 22% of the adult population in developing economies are employed by small and medium enterprises (Daniels & Fisseha 1992). However, it is argued that intensive employment by SMEs does not necessarily result in increased productivity and growth. In spite of this, the small enterprises still play a significant role in the overall opulence of the economy. These business units chiefly concentrate in the rural regions and smaller urban areas thereby ensuring even distribution of business activities. This helps in restricting relocation to large cities. On having a view of the benefits provided by small enterprises, the necessity to protect these business units from termination can be well understood. Of late Northern Ireland have been revealing significantly low per capita GDP due to its various structural problems like too much dependence upon agriculture, mounting figures of unemployment and subdued stage of business firms (n718b pg 7). Hence, providing Government assistance, for revitalization of these small enterprises, facing such problems, is reasonably justified. The Select Committee on Trade and Industry introduced investigation of various factors affecting small and medium enterprises following which the Department published an “action update” enlisting Government’s accomplishments for small business firms (Huntingdon, 1998). It is true that the Government of UK has been preparing various revival programs for the preservation of the downtrodden small business units; requirement for indomitable spirits for successful implementation of plans still exists. It can be achieved by introducing supportive tax modifications, ideal management structures, strong financial assistances, adequate skills, improved technical know-how and better Business Link services, thereby offering a proper economic locale. The conclusion that can be derived from the above study suggests how vital the existence of SMEs is for the overall economic growth of the developing nation of UK. For preserving the economic opulence of the country, the existing small enterprises must be rescued from all hindrances of sustainability. Of late, this urgency for the precaution of keeping the growth rate of the economy has been realised by the Government of UK which has started taking up initiatives for the rehabilitation of the SMEs. Various action plans and schemes have been taken up by the government for protecting these crucial commercial units. However, the government itself, along with others, admits that a lot of work is yet to be performed for achieving the success of reviving small enterprises. There lies a wide gap between preparation of mere plans and measures, and putting them into appropriate actions thereby ensuring viable results. Impeccable efforts are still missing in order to bridge up this gap. A majority of the policies have been framed with consultation with the affected group of the small firms. However, it has been argued that the consultancy profession though having participation, has meagrely any contribution to the consultancy procedure. The objectives of the small and medium enterprise’ schemes have not yet been clearly defined. According to Storey and Curran, “Aims have been stated but usually in politician speak” (Curran, James. and Storey, D. J. 2000). A thorough study of the aid offer by the Government of UK discloses very limited amount of success far from viability. These policies are a combination of immature and temporary endeavours being implemented at an extremely low pace. Hence, we can conclude, that, no doubt that the Government along with other voluntary associations is coming up with indomitable spirits to achieve the target of a huge number of declining SMEs, the resulting figures of success it exhibits for rescuing the small businesses is still very small. Bibliography Benett, R. and Robson, P. (1999). Business Link: Use, Satisfaction and Comparison with Business Shop and Business Connect. Policy Studies. Matlay, Harry. (2002). “Contemporary Training Initiatives in Britain: A Small Business Perspective.”. http://www.skope.ox.ac.uk/WorkingPapers/SKOPEWP24.pdf, accessed 14th May 2006 Curran, J. and Blackburn, R. A. (2000). Researching the Small Enterprise. London, Sage. Curran, James. and Storey, D. J. 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