Governments have recognised that one of the main contribution of the small firm to economies around the world may be in the creation of employment.
This began with work by the American economist David Birch during the late 1970s, who demonstrated that large firms, despite their influence on the volume and nature of world trade, could not be regarded as the only major source of new jobs, and that this role was increasingly falling to the small firm sector
His research contradicted the assumptions of most businesses and governments during the 1960s and 1970s that healthy big business meant a healthy economy, predominantly because of the assumed efficiency of large firms through the use of economies of scale to keep down costs.
As a result, doubts were raised about the policies, pursued by Western governments of all political persuasion, of encouraging mergers between companies to form large corporations, keeping afloat large companies in trouble, and attracting large firms to economically depressed areas, all of which were seen as possibly an expensive and inefficient way of creating employment.
It was mainly as a result of the Birch study that small firms during the 1980s became regarded by many governments as a panacea for high unemployment during times of recession. In the United States, although 34 million jobs were lost in the period 1980 to 1986, 44.7 million new jobs were created, with 32 million of these being generated from the birth of new businesses.
During the recessionary period of 1980-82, small firms provided almost all of the new jobs in the US economy. Similarly, in the UK and Europe, large firms experienced employment loss in nearly every member state, whilst employment by small firms grew considerably. Currently, the UK enterprise population numbered just over 4.5 million in 2006, an increase of 125,000 on the start of 2005.
In this context, it is interesting to see a research paper released by the Assembly Government which has examined the change in employment by business size, 2003-2006.
It shows that, during this period, half of the increase in employee jobs was accounted for by large businesses (i.e. those employing more than 250 employees) and that the 23,300 net jobs created by large firms were due equally to new openings and expansion of existing businesses.
It is also worth noting that the small to medium sized firm sector (those firms with between 10 and 249 employees) created as many net jobs as the micro-business sector (less than ten employees). However, micro-businesses showed the biggest percentage increase in growth of any size category of business.
In terms of geography, the increase in employment in West Wales and the Valleys was dominated by micro-businesses, which created over 9,400 jobs in the poorest areas of Wales, more than any other type of business. In contrast, East Wales was more heavily dominated by large businesses, which accounted for 63 per cent of the employment increase.
Clearly, further analysis is needed of this data but an initial scan suggests a number of worrying trends in the light of recent Assembly policy to abandon support for new businesses and lifestyle firms.
For example, the success rate of new micro-businesses in creating jobs, especially within the poorest parts of Wales, seems to have been seriously underestimated if the policy responses of the Assembly are anything to go by. In indicating that it will abandon its support for new firms, the Assembly could be risking the employment creating prospects of this fragile part of the Welsh economy, Indeed, if there was a greater focus on ensuring the survival of such businesses, their job creating potential would be even higher.
Many will also be asking why the more prosperous parts of Wales have attracted over 22,000 jobs from new openings by large firms as compared to only 13,000 in West Wales and the Valleys? Are grants such as regional selective assistance being used effectively to attract businesses into the less developed parts of Wales? The evidence from this data suggests otherwise.
Certainly, this research suggests that the small to medium sized sector of the economy is underperforming in terms of job creation. However, any specific focus on developing these ‘growth potential’ firms through different business support programmes, whilst removing all support for new and micro-businesses, may not actually result in any net new jobs in Wales. Worst of all, any policy which penalises new firms in terms of support could jeopardise any employment gains in the future from new business creation.
This paper has certainly raised some fundamental issues on employment creation and perhaps it is time for the policymakers within the Assembly to a long hard look at their own evidence base to justify any future decisions on business support, and more importantly, its removal as a key tool in generating jobs in the poorest part of our economy.
This began with work by the American economist David Birch during the late 1970s, who demonstrated that large firms, despite their influence on the volume and nature of world trade, could not be regarded as the only major source of new jobs, and that this role was increasingly falling to the small firm sector
His research contradicted the assumptions of most businesses and governments during the 1960s and 1970s that healthy big business meant a healthy economy, predominantly because of the assumed efficiency of large firms through the use of economies of scale to keep down costs.
As a result, doubts were raised about the policies, pursued by Western governments of all political persuasion, of encouraging mergers between companies to form large corporations, keeping afloat large companies in trouble, and attracting large firms to economically depressed areas, all of which were seen as possibly an expensive and inefficient way of creating employment.
It was mainly as a result of the Birch study that small firms during the 1980s became regarded by many governments as a panacea for high unemployment during times of recession. In the United States, although 34 million jobs were lost in the period 1980 to 1986, 44.7 million new jobs were created, with 32 million of these being generated from the birth of new businesses.
During the recessionary period of 1980-82, small firms provided almost all of the new jobs in the US economy. Similarly, in the UK and Europe, large firms experienced employment loss in nearly every member state, whilst employment by small firms grew considerably. Currently, the UK enterprise population numbered just over 4.5 million in 2006, an increase of 125,000 on the start of 2005.
In this context, it is interesting to see a research paper released by the Assembly Government which has examined the change in employment by business size, 2003-2006.
It shows that, during this period, half of the increase in employee jobs was accounted for by large businesses (i.e. those employing more than 250 employees) and that the 23,300 net jobs created by large firms were due equally to new openings and expansion of existing businesses.
It is also worth noting that the small to medium sized firm sector (those firms with between 10 and 249 employees) created as many net jobs as the micro-business sector (less than ten employees). However, micro-businesses showed the biggest percentage increase in growth of any size category of business.
In terms of geography, the increase in employment in West Wales and the Valleys was dominated by micro-businesses, which created over 9,400 jobs in the poorest areas of Wales, more than any other type of business. In contrast, East Wales was more heavily dominated by large businesses, which accounted for 63 per cent of the employment increase.
Clearly, further analysis is needed of this data but an initial scan suggests a number of worrying trends in the light of recent Assembly policy to abandon support for new businesses and lifestyle firms.
For example, the success rate of new micro-businesses in creating jobs, especially within the poorest parts of Wales, seems to have been seriously underestimated if the policy responses of the Assembly are anything to go by. In indicating that it will abandon its support for new firms, the Assembly could be risking the employment creating prospects of this fragile part of the Welsh economy, Indeed, if there was a greater focus on ensuring the survival of such businesses, their job creating potential would be even higher.
Many will also be asking why the more prosperous parts of Wales have attracted over 22,000 jobs from new openings by large firms as compared to only 13,000 in West Wales and the Valleys? Are grants such as regional selective assistance being used effectively to attract businesses into the less developed parts of Wales? The evidence from this data suggests otherwise.
Certainly, this research suggests that the small to medium sized sector of the economy is underperforming in terms of job creation. However, any specific focus on developing these ‘growth potential’ firms through different business support programmes, whilst removing all support for new and micro-businesses, may not actually result in any net new jobs in Wales. Worst of all, any policy which penalises new firms in terms of support could jeopardise any employment gains in the future from new business creation.
This paper has certainly raised some fundamental issues on employment creation and perhaps it is time for the policymakers within the Assembly to a long hard look at their own evidence base to justify any future decisions on business support, and more importantly, its removal as a key tool in generating jobs in the poorest part of our economy.
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