In this guest article for Clear Books, business journalist Nick Huber looks at the impact that small and medium sized businesses are having on the UK economy.
They may not be household names or normally get as much attention in the media as large companies, but small and medium sized enterprises (SMEs) and entrepreneurs are the backbone of the UK economy.
In 2014, there were 5.2 million businesses in the UK according to figures published by the Department for Innovation Business and Skills.
Over 99% of businesses are small or medium sized enterprises − usually defined as fewer than to 250 people.
What effect are the UK’s SMEs having on the economy, society and its geography?
In the UK, the vast majority of businesses employ fewer than 10 people, accounting for 33% of employment and 19% of turnover, according to a briefing paper in the House of Commons library published in May 2015.
The Forum of Private Business, a business group representing SMEs, says that small businesses are responsible for 15.2 million jobs.
Within SMEs, micro-businesses (with less than 10 employees) are booming. There are now 5 million of these businesses in the UK, up from 3.5 million in 2000, according to a report published in June by the Royal Society for the encouragement of Arts, Manufactures and Commerce.
In contrast, the populations of all other sized businesses have either increased only marginally or fallen in number. The RSA describes this trend as the “second age of small”, in reference to the fact that cottage industries were once the norm in pre-industrial Britain.
Research has suggested that a small number of SMEs produce a dis-proportionate amount of growth.
Research by National Endowment for Science, Technology and the Arts published in 2009, found that 6% of UK SMEs with the highest growth rates (across the UK and in disparate industries) generated half of the new jobs between 2002 and 2008.
These high-growth SMEs, or “gazelles” as they’re also called, are those growing at more than 20% and with more than 10 employees, according to one measure by the Organisation for Economic Co-operation and Development.
But according to David Molian, senior lecturer and director of a course for entrepreneurs at Cranfield School of Management, another equally important measure of SMEs’ economic health and value to the economy is how many survive.
“Fewer than half of SMEs last beyond 10 years,” Molian says. “If you can get to year five your chances are pretty good and if you can get to year six your chances of getting to year seven are even better.”
How can government help SMEs survive and thrive?
Governments often use tax breaks to encourage employment and research and developments, or offer free advice, support and networking opportunities. But Molian is sceptical about how much government policy can help SMEs. Getting out of the way of small business is more effective, he says, echoing a quote by former US president Ronald Reagan.
Start-ups have become a social movement. 30 or 40 years ago people who started their own business were typically seen as people who couldn’t get a job or had been fired, Molian says. Now, it’s hip.
Rates of entrepreneurship (the founding of companies) have increased globally during the last 20 years, Molian says.
The growth of self-employment and technologies such as broadband and devices like smartphones have also blurred the distinction between work and private life and leisure. Lots of us have checked our work emails in the evening or at the weekend. It’s a mixed legacy. We have more flexibility about when we work, which is particularly useful for parents or people with other dependants.
On the downside, it can also be harder for many of us to fully un-wind outside normal working hours.
Home working has become more popular, partly due to rise of entrepreneurs and small businesses and again due to technology.
In the first quarter of 2014 there were 4.2 million home workers in the UK –a record number, according to figures published by the Office of National Statistics.
Of these home workers, around 1.5 million (or 5% of those in work) worked within their home or its grounds, while the remaining 2.7 million people (8.9% of those in work) used their home as a base but worked in different places.
The number of home workers has grown by 1.3 million since 1998, the ONS says.
Perhaps more importantly, today’s SMEs and entrepreneurs now find it easier than ever to expand into new countries and continents by marketing and selling their products and services online.
Globalisation isn’t just for global multi-nationals. It’s also feasible for even the smallest businesses. Technologies such as 3D printing may create more opportunities for SMEs by allowing them to do more of their own specialised manufacturing at low cost and high precision in the UK, rather than having to outsource some of production to lower cost countries in developing markets.