From the TUC

How important are small businesses?

13 Oct 2011, by in Economics

Yesterday’s Business Population Estimates from BIS allow us to take another look at one of modern politics’ magnificent pieties: the importance of small businesses to the economy.

What concerns me is not so much the small business people themselves – in my experience, most of them are nice enough – as the way in which their importance is used to justify any attack on workers’ rights.

Take, for instance, Mark Prisk, Minister of State for Business and Enterprise; in March, he addressed the Federation of Small Businesses. Noting that small and medium-sized businesses account for half of all private sector output and employment, he added:

But their importance goes beyond sheer numbers. They also embody the sort of capitalism that we should be promoting. Risk taking. Innovative. Flexible. Geographically balanced.

And one reason why SMEs are important in policy terms is that they are disproportionately affected by the institutional failures or regulatory costs of government.

A large company may be able to afford the dedicated compliance and HR personnel to cope with the large volumes of regulation that are part of commercial life. For the smaller firm, this may mean the owner herself having to waste hours on form filling.

To be fair to Mr Prisk, I could have chosen plenty of other politicians – and not just from the current government. The superiority of SMEs is so frequently asserted – “Risk taking. Innovative. Flexible.” – that it is often just assumed that it is the most efficient sector of the economy. The new BIS figures give us the chance to look again at the share of employment and output take by small and medium sized businesses. (It’s worth starting with a caution – these figures only deal with private sector organisations, if we included the public sector, the shares taken by large organisations would be much bigger.)

Now, one decision you have to make is how you are going to treat employment – if you look at share of employees, you don’t take account of the legion of self-employed people with no employees. On the other hand, if you look at share of employment, you don’t capture contributions to job creation. Here’s both:

Private sector enterprises in the UK, and their share of employment and of employees, start 2011, (%)

Number of employees Share of Employment Share of Employees
0 15.8 2.6
1 1.7 0.9
2-4 7.5 7.8
5-9 6.4 7.2
10-19 6.5 7.6
20-49 8.3 9.8
50-99 6.0 7.1
100-199 5.1 6.0
200-249 1.6 1.9
250-499 4.8 5.7
500 or more 36.4 43.4
All enterprises 100.0 100.0

Self-employment is very important, and I’m inclined to think that it’s more central to claims about the importance of SMEs than the share of employees. The BIS data also looks at share of turnover, and here the figures are more favourable to larger enterprises:

Private sector enterprises in the UK and their share turnover, start 2011, (%)

Number of employees Share of Turnover
0 6.6
1 0.9
2-4 6.0
5-9 6.3
10-19 5.7
20-49 9.3
50-99 6.4
100-199 5.4
200-249 2.0
250-499 6.7
500 or more 44.5
All enterprises 100.0

Larger businesses, with more than 250 employees, may only account for 41% of employment, but with that share they achieve 51% of turnover. Micro-enterprises, with fewer than ten employees, on the other hand, have over 30% of employment, but achieve just under 20% of turnover. In fact, if you look at the ratio of one to the other (a rough and ready measure of efficiency) you get this picture:

Number of employees A: Share ofEnterprises B: Share ofEmployment C: Share ofTurnover D: Ratio of C to B
<10 95.4 31.4 19.8 0.63
10 – 249 4.4 27.5 28.8 0.89
250+ 0.2 41.2 51.2 1.04

The large businesses look to me like a precious fifth of a percent – and a better candidate for protection and support!

One Response to How important are small businesses?

  1. George Irvin
    Oct 20th 2011, 1:43 pm

    THis is an important topic and the conclusions should be read carefully. Moreover, it’s backed by similar US and OECD date. See:
    http://www.cepr.net/index.php/blogs/cepr-blog/small-business-bust