SMEs, keys to recovery ( 400,84 KB )

 

  The most famous porcelain firm in Spain, and probably the world over, started out as a small business in the region of Valencia. After firing their first plates, tiles and the odd jug in the family courtyard, the Lladró brothers founded their own company to produce classic figurines in the middle of the last century. This firm would grow non-stop, eventually creating a fabulous corporate network and exporting its products to more than a hundred countries.

  The Lladró case illustrates the huge potential of a small firm but, nevertheless, not all SMEs complete this journey. In spite of growing more quickly than their larger peers, the vast majority never cross the threshold of 249 workers, the limit that distinguishes a medium-sized firm from a large one. Nevertheless, the value of SMEs is irrefutable and not merely because of them being a «potentially large firm» but also because of the intrinsic value entailed by their particular weight in today's business world. In Spain, 99.9% of the firms censored are SMEs, contributing more than two thirds of value added and employing more than 75% of the total workforce. Moreover, their format also affords them certain advantages compared with a large firm, such as a greater capacity to adapt to their surroundings and being more dynamic in creating jobs which, in turn, improves the diversification and flexibility of the economy they form part of. Hence the interest, both theoretical and in practice, in understanding what actually determines the birth and growth of a small or medium-sized enterprise.

  Economic theory has linked the start-up of small firms to a number of qualities possessed by the entrepreneur and certain conditions in the environment in which the firm is created or inhabits.(1) Classic economists and the Austrian school already recognized the entrepreneur as an individual with special traits: in 1921, Frank H. Knight attributed entrepreneurs with a greater determination and ability to take decisions, secure capital and accept the risk of failure; years later, Schumpeter highlighted their skill in spotting business opportunities and innovating. Over time, new hypotheses have gradually extended this list of skills that supposedly expand the capacity of entrepreneurs to start up a firm, such as experience in the sector and a greater tolerance for uncertainty, as well as other character traits that intensify their motivation to take on the business world, such as a desire for independence or the need for self-realization. It has also been suggested that business is easier to carry out in stable macroeconomic environments, with access to capital and a skilled workforce, better infrastructures and a favourable regulatory framework, among other factors (see the table below for a more exhaustive list).

  Empirical evidence notes the influence of the environment on start-ups. The regulatory situation is particularly illustrative: as shown in the graph below, the ratio of new firms per inhabitant tends to be lower in those countries with more regulatory barriers to starting up a business. Unnecessary external barriers (bureaucracy, complex tax regulations, etc.) are particularly detrimental to SMEs as they lead to a higher relative cost, both in terms of time and money, than for a large firm. This makes it difficult not only to start up a company but also to expand it later on.

  Growth may be considered as the second big goal of a firm, the first being its survival. In any case, both objectives go hand in hand for small companies: young firms that grow the most are also the most likely to survive. It's therefore no surprise that the literature on business dynamics has invested a lot of effort in understanding why some firms grow and others don't. Although no theoretical consensus has been reached, different hypotheses have been put forward that are based on two broad approaches. The first takes the perspective of the company life cycle (they are born, grow, mature, decline and die) and sees expansion as a natural phenomenon in their evolution; the second, however, sees growth as the result of strategic choice. In both cases, the entrepreneur's attitude and aptitude and the business choices and opportunities provided by the environment are deemed to be as crucial for a company's growth as they were for its creation. But, moreover, new elements come into play that are related, on the one hand, to the attributes and resources of the firm itself (age, size or sector) and, on the other, to how the business is run and the strategic choices made by the entrepreneur.

  (1) The universe of SMEs is highly diverse so that, given that most recently created firms are small in size, we are focusing here on the small firm.

  For some, the key to company expansion lies in the very essence of the entrepreneur-manager and what sets him or her apart from the entrepreneur-owner: commitment to growing the business. According to Clark et al. (2001), the owner's unwillingness to grow is the main internal barrier to the growth of a small firm and the principal reason why most SMEs stagnate and decline.(2) For others, the crux lies in the planning, how well the management team matches the size of the business, the continued training of the workforce, the systematization of decision-making and a sufficiently flexible business strategy to adapt to the changing conditions of the environment in terms of competition, market dynamics or technological change. Similarly, getting over barriers of an external nature that slow up growth, such as limited access to additional resources, a market with little potential for expansion or an unfavourable regulatory framework, is put forward as crucial for a firm to achieve sustained growth.

  Recently, empirical studies that have attempted to test these hypotheses have focused their attention on a very particular group of small firms known as gazelles or high-growth firms. These stand out because they grow faster than the rest and account for the largest share of net job creation. Although no definite conclusions have been reached in this area either, a recent study by the Bank of Spain characterizes this kind of firm in the Spanish case.(3)Its findings confirm the existence of huge inertia in terms of business growth: if a firm is a gazelle today, then it's more likely to be one tomorrow as well. Similarly, a young firm is more likely to be a gazelle than an incumbent, so getting rid of barriers to entry would encourage more gazelles to emerge. It also concludes that these firms, in addition to being more productive, also have a higher level of human capital and initial debt, so that making it easier to access these resources should also encourage such firms to develop.

  (2) Clark, D., Berkeley, N., Steuer, N. (2001), «Attitudes to growth among owners of small and medium-sized enterprises and the implications for business advice». International Small Business Journal 19(3).

  In short, no-one doubts that having a good base of small and medium-sized firms benefits any economy. The SME format is not only the most suitable in certain sectors and circumstances but, moreover, provides dynamism and flexibility, especially in times of crisis. Consequently, if there's the chance to minimize the barriers that stop such firms from being created and growing, then it's worth making the effort. And, in a few years, instead of one Lladró there might be three.

  (3) López-García, P. and S. Puente (2009), «What makes a high-growth firm? A probit analysis using Spanish firm-level data». Bank of Spain Documento de Trabajo No. 0920.

  This box was prepared by Marta Noguer

  International Unit, Research Department, "la Caixa"

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