Survival of small firms

While the majority of firms across the global economy are considered small, there is no universal definition of what constitutes a small business, and all countries have their own definition which can vary from sector to sector. For example, in the US, a small business in the manufacturing and mining sectors is one that employs 500 or fewer, whereas its 100 or fewer in wholesaling.

In other sectors, 'small' is defined by turnover, and in the EU, a combination of numbers of employees and turnover is used to distinguish micro business (fewer than 10 employees and turnover under £2 million) and small business (fewer than 50 employees turnover under £10 million).

Even within a country, definitions can vary depending on the organisation in question.

While small firms are common in the service sector, they can be found in all sectors.

WHY SOME FIRMS REMAIN SMALL
  1. Few or no economies of scale are available – such as with hairdressers
  2. Diseconomies could set in very quickly – for example, any gains from a restaurant growing in scale could quickly be offset by inefficiencies
  3. The principal-agent (PA) problem could be a limit to growth – for example, sole traders may be reluctant to grow because they may have to appoint an ‘outside’ manager to run operations. However, the appointed manager may not focus on profits, preferring to increase revenue. More time and money may be needed to monitor the work of managers, increasing business costs.
  4. The size of the market could be very limited, such as that for dog-walking services. This applies to many niche goods and services.
  5. The market may highly contestable, so that if one firm expands, and makes super-normal profits, new firms are encouraged to enter – possibly employing a ‘hit and run’ strategy. This might apply to plumbing or heating services, which are relatively easy to set up, with low sunk costs, and hence few barriers to exit.
  6. The market may be geographically dispersed. Most high streets have convenience store which satisfy local demand.
  7. Franchises have enabled many small enterprises to enter mass markets by exploiting the brand name, products, and business methods of the franchise provider. For example, while McDonalds is a global name, with many outlets owned centrally by McDonalds, many are franchised operations. This is certainly a popular business model, and one that explains the survival of small firms in many sectors of an economy.
  8. Access to government funding for small-business start-ups also contributes to the prevalence of small firms in many sectors.

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