5 Small firms Flashcards
Reasons for shift from large firms to small firms
Implementation of new flexible technology (e.g. computers) has facilitated the movement towards more decentralised, small-scale production Modern era as ‘the end of mass production’
Deindustrialisation and expansion of service sector (characterised by lower economies of scale) has facilitated growth in the number of small firms
Shift in pattern of consumer demand away from mass-produced manufactured goods towards personalised products
Restructuring strategies of large firms e.g. contracting out as a determinant of growth in number of small firms.
Government policy also shifted away from encouragement of large firms (or ‘national champions’) and toward the promotion of small firms
How is small firm defined in UK?
any two of the following:
- employs max 49 employees
- turnover is max £2.8m
- total balance sheet is max £1.4m
Why does economic theory generally look favourably on small firms?
high level of competition
lower prices and higher output
firms operate closer to
Minimum Efficient Scale (minimum average cost point)
consumer’s welfare is assumed to be maximised
Advantages of small firms?
Source of actual or potential competition
Originate new ideas and technology
Fill niche markets not catered for by large firms
More flexible and responsive to changing market circumstances
Provide cost savings for larger firms through contracting-out
Create jobs – today’s small firm is tomorrow’s large firm
Disadvantages of small firms
Lack of scale economies due to limited size
Limits to growth – many small firms have a single product focus and operate in niche markets
Owners of small firms tend to have an undiversified portfolio (single customer) and tend to be risk averse. Many small firms are highly dependent on large customer firms limiting flexibility and the scope for innovation
Low aspirations of small firm owners may limit employment and growth opportunities
Individuals start and operate small firms for non-pecuniary reasons such as ‘being one’s own boss’ and have no ambition to grow a large firm
‘Resource poverty’ in terms of managerial skills and expertise
Access to finance and the terms on which it is available limits growth of SME.
High failure rate – many small firms either stay small or die: very few small firms grow into large firms
Variation in quality of jobs: high tech start-ups vs. window cleaning
What is clustering?
formation of ‘industrial districts’, where a strong network of small firms operate successfully in the joint manufacture of particular goods
Economic benefits of clustering
Lower search costs and access to cheaper inputs
Lower marketing and advertising costs
Knowledge and technology spill-overs
Development of a common pool of specialised labour, reducing hiring and training costs
Possible joint bidding for finance and for projects
a well-functioning cluster of small firms can have a competitive advantage over large firms and can be a catalyst for growth at the regional as well as national level
measures to support small firms in UK
Loan guarantee schemes
Lower rate of corporation tax
Advisory and support services
Small profits rate
(companies with profits under £300,000) 19%
Main rate
(companies with profits over £300,000) 30%
measures to support small firms in EU
European Investment Bank (EIB)
European Investment Fund (EIF)
European Technology Facility (EFT)
