Small and Medium-Sized Enterprises - Essay Example

?A Review of Academic Research Undertaken In Relation To Small and Medium Sized Enterprises Executive Summary There is no precise definition of smalland medium enterprises (SMEs) as different countries define the term the business cluster in their own ways. However, the common perception about SMEs suggests that such firms involve less than 500 employees. It has been identified that SMEs in EU countries generally operate with less than 250 employees. SMEs are the prime indicators for the job creation and income generation opportunities for the economies of the world. In the study, United Kingdom’s SMEs have been observed. It has been identified that SMEs also have a role to play in the economy of the UK. However, there are underlying challenges and problems that the country’s SMEs face which need to be addressed by the government and other stakeholders involved. The paper intends to identify the current academic research into small and medium sized enterprises and the major issues faced by these firms. It also tries to present the role of SMEs in the UK. The paper will try to provide a brief summary of the overall scenario at the end and will provide recommendation based on the challenges that the SMEs in the UK face so that significant improvements in the SMEs can be introduced and better opportunities created. Table of Contents 1 Executive Summary 2 Introduction 4 Critical Review into Current Academic Research 5 Challenges of SMEs 7 Role played by SMEs in the United Kingdom 8 Conclusion and Recommendation 12 References 14 Introduction Small and medium-sized enterprises (SMEs) are those firms that do not have any subsidiary and are independent in nature thus employing a certain number of employees. The number of employees may be different in different countries. In European Union, the limit set for employing the employees has been set to 250 for SMEs. However, certain countries lay down the limit of employing 200 employees. The use of the financial assets is also evident in order to define SMEs. A new European definition of SMEs came into existence in the year 2005. The new definition offers increase in the financial upper limits and therefore it states that the turnover of medium-sized enterprises must not be more than EUR 50 millions. Similarly, the turnover of small enterprises must not be more than EUR 10 millions and for the micro firms the turnover must not go above EUR 2 million. Consequently, the balance sheet of the medium enterprises must not surpass EUR 43 millions. The balance sheet of small and micro enterprises must not go above EUR 10 million and EUR 2 million respectively (OECD, 2005). The SME sector comprises a wide range of firms such as recognized conventional family businesses that utilize nearly hundreds of workers. The SME sector also makes use of “survivalist” self-employed workers functioning in unorganised micro enterprises (International Institute for Sustainable Development, 2004). The main aim of the paper is to identify the role of the SME in the economy of the United Kingdom. The study will try to focus upon the current academic research on SMEs. Theories on SMEs will be identified and the role of SMEs in an international context as a mechanism for job creation, innovation and long term growth will be studied in detail in the sections below. Critical Review into Current Academic Research Small and medium-sized enterprises can avail innumerable behavioural benefits in comparison to their larger counterparts in the process of innovation. However, it has been identified that they also face certain material disadvantages. The problem they face has been evident in the process of developing suitable network of contacts with outside sources of both mechanical and technological expertise as well as advice (Rothwell & Dodgson, 1991). It is quite difficult to measure the importance of SMEs. However, it is a well known fact that small and medium enterprises are considered as the basis of most of the economies, generally in relation to influences on employment as well as overall development. The employees belonging to large firms are considered as part of the team and therefore innovation belongs either to the firm or to the team. The dispersal of the property right as well as bureaucratic inertia and other issues of large firms diminish the incentives of the innovators to be creative. Therefore, most of the authors argue the fact that smaller firms can better create radical innovations since they are capable of shielding the innovators property rights in a better manner. One of the reasons behind limited operations abroad by the SMEs is the barriers of entry. The barriers are found to be much higher in case of the smaller firms than in larger firms. However, smaller firms are considered as engines of global economic growth. It is the creative destruction wherein the continuous generation of novel ideas slowly destroy the position of stagnant firms, which has a part to play in the practice of economic development. Smaller firms contribute largely in the procedure of creative destruction (Acs & et. al., 1996). The practice of benchmarking in the sector of SMEs has been an emerging trend. However, the managers cannot make significant progresses until and unless they have overcome the barriers. It is quite vital for the managers of SMEs to develop numerous tools and methods so that they are capable of sustaining themselves amid the uncertainties of small businesses (Monkhouse, 1995). The researchers have revealed that SMEs have a pertinent role to play in the economic development of all the countries in the globe. However, if they want to survive in the market for many years in light of the competition that they face, it is prudent for them to overcome their size disadvantages. This is possible by means of forming alliances with the similar firms so that they can enhance the degree of market penetration and minimise financial risks. They can as well make use of the technologies so that they can overcome the diseconomies of scale and generate innovations that will distinguish themselves from large companies (Jones & Jain, 2007). In the recent times, one of the issues faced by the SMEs is related to environmental management. This is apparent in sectors where the presence of SMEs is quite significant in order to run the business successfully. Even though, the SMEs in a few of the sectors are coming closer to their larger counterparts so that they can minimise their environmental impacts, which are generally taking place because of the supply chain demands. Statistics reveal the fact that most of the manufacturing SMEs fail to incorporate formal environmental related management system in their firms (Burke & Gaughran, 2006). Challenges of SMEs There are many special features of small and medium enterprises in comparison to the larger firms. It is significant for the SMEs to take into account the enthusiasm, restraints as well as uncertainties that the smaller firms face in general (Omar & et. al., 2009). One of the features that differentiate smaller firms from that of the larger ones other than the size itself has been the factor of uncertainty. Smaller firms face the problems of uncertainty the most in the form of lack of power as well as influence in the market, lack of larger customer base along with vulnerability. It can therefore be stated that SMEs can be considered to be operating in an impulsive as well as ruthless market. In this context, it can be said that uncertainty is one of the major problems faced by the small organisations (Westhead & Storey, 1996). In the context of current development, alterations in the environment such as globalisation along with economic, political, technological as well as social aspects have posed several challenges to the SMEs which restrain them from preserving their position against that of larger firms. SMEs require management competencies for the purpose of growth in comparison to the larger organisations. It has often been noted that the small organisations at times fail to develop adequate skills, knowledge as well as competencies among the workers in the organisation. The reason behind this primarily has been the lack of adequate finance as well as that of training (Snell & Lau, 1994). The small firms also receive significant challenges from the larger firms. Most of the great innovations are generated by the SMEs, especially in the field of technology. However, the credit goes to the larger firms. Smaller firms owe more in the form of information, trade rules, tax, regulatory frameworks and other significant legal and advisory services. It is quite vital to assist the small firms to acquire the requisite finance. Since the small firms possess pertinent information, they prefer joining with the larger organisations, but financing is one of the major challenges for the small firms in setting up and staying in business (Gupta & Cawthon, 1996). In addition to these, the SMEs also face the challenge of attracting, retaining and motivating the best human resources in the organisation (Beaver & Hutchings, 2005). Role played by SMEs in the United Kingdom United Kingdom which is member of European Union has 1,659,946 SMEs. Its share in the United Kingdom has been 99.6%. Nearly one fifth of the employment as well as ‘value added’ factors are generated by SMEs. The figure below depicts the number of SMEs in the UK, its share, employment and value added provided in the United Kingdom (European Commission, 2011). Source: (European Commission, 2011). An average SME of the UK involves about 5.9 persons, which tends to be higher in comparison to the EU average of 4.2. The government of the UK aims to award SMEs 25% of the central government provided contracts. It has been identified that the UK SMEs are in better position in comparison to the EU when taking up credits. Because of the steps taken by the government to improve right to use of finance by the SMEs, it has been estimated that nearly 6000 SMEs will be benefited from additional lending by the year 2012 (European Commission, 2011). It has been observed that SMEs play a noteworthy role in the economy of the UK by offering new ideas, jobs and products along with services. 3.7 million small and medium enterprises of the UK accounted for nearly 40% of its Gross Domestic Product (GDP) till the year 2000. It has an annual turnover of nearly one trillion Pounds. It is the SMEs that play a vital role in the creation of job opportunities in comparison to the larger firms (Internet Money Foundation, 2001). The importance of the SMEs in the UK economy has been enormous. In the starting of the year 2004, the total number of private sector firms in the UK had been 1.16 millions where the main criteria was to have below 250 employees in each firms. Consequently, they employed nearly 36 percent of total employees in the UK. It can be mentioned that the characteristics of the workplace in relation to the economic activities belonging to the SMEs is distinct in comparison to the larger firms (Kakabadse & Kakabadse, 2005). For SMEs, two criteria are significant for success. They are personalized services and superior quality. It has been apprehended that SMEs’ reliance upon single product or service and small customer base may put increasing pressure upon them during the tough times than that of the large firms. This can be better demonstrated with the help of an example. It has been observed that during the London Olympics 2012, SMEs have huge number of contracts and one-third of the contractors are expected to be coming up with a business that belongs to SMEs category. However, it might be difficult for the entrepreneurs of SMEs to survive and adapt after the event gets over. Most of the economists have stated that under such circumstances, one of the solutions to the problem is outsourcing which offers specialised services at very low cost. By outsourcing the SMEs at the UK will be capable of tapping the best technologies and the globalisation. Outsourcing will also offer outstanding specific support at significantly competitive price (Kakabadse & Kakabadse, 2005). It is the SMEs that help the government to deliver local as well as national targets. It also contributes to efforts in the UK to international agreements that generally rely on obligations from businesses to make them turn into reality (Perron, 2005). The factors such as lack of finance and excessive red tape have been restraining the UK from growth (Hansford & et. al., 2003). The notion that the issues related to financing in the UK SMEs have obstructed the role they play in the overall performance of the economy of the country seems to be deep-rooted. The Wilson Committee in its report on matters of SME financing argued the fact that SMEs may confront higher interest charges and more harsh security conditions in comparison to the larger firms prevailing in the UK. The report also pinpoints the shortage of start-up capital as well as equity development capital for the purpose of fully mechanised established businesses that wish to expand. When the SMEs face the financial crunch, many of such firms may find it viable to sell their operations to larger firms (Hughes, 2011). The other underlying problems faced by the SMEs at the UK are shorter predictable life, existence of estate tax, inter-generational re-location problems as well as pervasiveness of implicit contracts (Michaelas & et. al., 2011). Federation of Small Businesses (FSBs) is one of the biggest campaigning pressure groups which endorses and protects the interests of nearly 200,000 individuals who are self-employed and are owners of small firms. The main function of FSB has been to offer free legal advice. The main objective of its campaign has been to intimate the government that it needs to assist the UK SMEs to hire staffs for the purpose of generating employment (Walker, 2011). Conclusion and Recommendation SMEs have been recognized as one of the significant engines of economic growth as well as development. It not only assists in developing the standard of living but also leads to capital formation and therefore attains high degree of output as well as capability. From the views of planning, SMEs are perceived as means to attain reasonable as well as sustainable industrial change and diffusion. SMEs are equally important for both developed as well as developing nations of the world. They can be considered as one of the noteworthy sources of technological as well as new product innovation. It has been noted that the SMEs make use of the poor and the low income employees, which assists in plummeting the rate of poverty from the society. Government has in due course realised the role that SMEs play in reduction of the poverty, generation of the employment and wealth creation. It has been allocating huge amount of fund for the SMEs so that the problems related to finance can be eliminated and increasing number of potential entrepreneurs can be encouraged towards the creation of SMEs (Fan, 2003). SMEs have found to have a significant impact on the economy of the UK as well. It has been successful at creating 3.7 million businesses. It has assisted in creation of massive job opportunities for the people of the UK. However, there are vital problems faced by the SMEs in the UK. One of them has been the issues related to finance. Therefore, these issues need to be addressed by the government so that SMEs in the UK can bloom with the pace of time and create better opportunities (McQuaid, 2003). Although the SMEs need to alter their thoughts as well as habits with regard to the entrepreneurial progress, it is also vital for the government to involve the SMEs in the process of policy generation along with implementation for maximum efficiency and effectiveness. It is also significant for the promoters of the SMEs to ensure the accessibility of managerial potential and shrewdness prior to investing financial resources in order to develop the respective enterprises. The problems as well as challenges faced by the United Kingdom in relation to the SMEs are pragmatic and therefore it can only be resolved by a multi-dimensional and concerted approach that needs to be followed by all the stakeholders such as the government, banks, regulatory authorities, and tax authorities and the employees of the SMEs among others. The government needs to promote the environment that is noticeably without corruption and bureaucracy, and also it must cultivate an atmosphere that is motivating as well as entrepreneurially friendly. Reforms in the educational system can help in generating the entrepreneurs. By revamping the SME sector, the government will be capable of reducing the level of deficiency and unemployment rate, enhancing the standard of living of the general public and also encouraging economic augmentation as well as development. Furthermore, it is significant for the entrepreneurs to consider the fact that funding is a compulsory factor but not the ultimate factor for the success of the enterprises. The promoters of the SMEs need to embrace the culture of learning in their everyday activity in order to increase their ability to sustain their enterprises (Onugu, 2005). References Acs, Z. J. & et. al., 1996. “The Internationalisation of Small and Medium-Sized Enterprises: A Policy Perspective”, Small Business Economics. Vol: 9, pp: 7-20. Burke, S. & Gaughran, W. F., 2006. “Intelligent Environmental Management for SMes in Manufacturing”, Robotics and Computer-Integrated Maufacturing. Vol: 22, Iss: 6, pp: 566-575. 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