The Importance of Entrepreneurs

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In the newly-elected New Labour Government which swept into power in 1997, the new mantra for economic renewal emanating from the then Iron Chancellor, Gordon Brown, was one of enterprise, enterprise and even more enterprise, to turn Britain into an economy driven by the entrepreneurial nature of its citizens well-versed in how to make money. In the government white paper, “Our Competitive Future: Building the Knowledge Driven Economy”, the economic aims of the new Labour administration were made absolutely clear: “Entrepreneurship and innovation are central to the creative process in the economy and to promoting growth, increasing productivity and creating jobs. Entrepreneurs sense opportunities and take risks in the face of uncertainty to open new markets, design products and develop innovative processes”.

Nowhere was this zeitgeist more clearly defined than in the advent of the revolution, with its young instant (New Labour-supporting) paper millionaires using technology to create the companies of tomorrow. The convergence of a new creative and innovative government, combined with the explosion in the possibilities for business and consumer use of the internet, was New Labour’s equivalent of Harold Wilson’s “White Heat of a second industrial revolution” thirty five years earlier. We had a Labour Administration introducing specific policy interventions to encourage enterprising behaviour, including programs for spin-offs within the university sector, financial inducements for entrepreneurs to invest in smaller innovative ventures, and the encouragement of share ownership by employees within smaller firms. This overshadowed anything previously introduced under Howe, Lawson, Lamont or Clarke during the various Conservative budgets of the 1980s and 1990s.

The last few years has seen entrepreneurial behaviour becoming increasingly acceptable within business life in the UK. Today, entrepreneurs are no longer relegated to the caricatures of Mike Baldwin, Arthur Daley and Del-Boy. In enterprising Britain, the majority of school children wish to become an owner-manager at some stage of their lives, dream of fortunes to be made from the Internet and name Richard Branson, the UK’s premier entrepreneurial personality, as the person to whom they aspire.

There was, as there always had been, a suspicion of the term ‘enterprise’, given the long history of exploitation by the entrepreneurs of the slate, iron and coal industries, the legacy of which still lived on in the hearts and minds of many of the population of industrial Britain. The mere association of the term ‘enterprise culture’ with the Thatcher era meant that entrepreneurs, and their development, were anathema to many policy-makers and politicians. However, led by the current Government’s love affair with entrepreneurs, a number of significant events have occurred that have begun to change the previously hostile attitudes towards enterprise.

There was the realization that we could not continue with the policy of concentrating much of our industrial expenditure on attracting inward investment. It has not been the actual policy of inward investment which has been problematic, rather the lack of targeting which meant that new jobs were more important than any other strategic consideration, such as the type of employment created, the sectors attracted, and the future of those industries in a quickly globalising economy.

While our neighbours in Ireland were busy attracting internationally-traded services in the financial and software sectors, we were begging companies in the maturing (and highly competitive) sectors such as automotive and consumer electronics to bring branch plant jobs, then repeated the same mistakes with call-centres. Whilst individuals spinning off from companies such as Microsoft and Intel were creating a vibrant indigenous Irish software sector, assembly workers in the UK continued to, well, assemble. All this while highly skilled (and highly paid workers) within the financial and software sectors in Dublin were demanding better restaurants, shops and leisure facilities, creating countless opportunities for local entrepreneurs.

Although we have previously looked to inward investors as the main source of new jobs, in many other regions the main contribution of the small firm to their economies lies in the creation of new employment opportunities. This began with work by David Birch in the United States 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 major source of new jobs. Instead, this role had now fallen to the small firm, with Birch estimating that firms with less than 20 employees had generated 66 per cent of net new jobs in the United States.

At the time, these findings were hard to believe for a number of reasons. They 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 (although clearly this did not stop such policies being implemented in the UK during the last twenty years).

It was mainly as a result of the Birch study that many governments regarded small firms during the 1980s as the panacea for high unemployment during times of recession. This was illustrated most clearly 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 European Community, large firms experienced employment loss in nearly every member state, whilst employment by small firms grew considerably. According to data from the European Observatory, SMEs accounted for 68 million jobs in the European Community in 1995, with large firms employing approximately 35 million people. Many of the smaller businesses were set up with the considerable support of governments, which had moved towards abandonment of expensive policies aimed at propping up large firms in industrially depressed areas. Instead, various incentives were being targeted at the small firm sector to encourage new firm formation as the more cost-effective antidote to the shedding of jobs by larger organizations.

Apart from the creation of employment, small firms play another important role by providing a productive outlet for enterprising and independent individuals, some of whom may be frustrated under-achievers in a larger, more controlled environment. Companies as diverse as the Ford Motor Company and Microsoft were started by creative individuals who perceived an opportunity in the market-place and, using a small company as a vehicle for their ideas, grew rapidly into international giants.

Small firms also have close symbiotic relationships with larger companies. Although large firms, through their economies of scale in production and distribution, contribute greatly to a thriving market economy, many of them could not survive without the existence of small companies. As well as selling most of the products made by large manufacturers direct to consumers, small firms provide large businesses with many of the services and supplies they require to run a competitive business. It is estimated that about 500 small suppliers and distributors and about 3000 retailers support each major manufacturing firm in the US. The largest industrial company in the world, General Motors, buys from more than 30,000 suppliers, most of which are small companies, and spends more than half of each sales dollar on purchases from small firm suppliers.

One of the main factors in the remarkable success of Japanese industry over the last decade has been the contribution of small businesses, with the high degree of international competitiveness being achieved through the creation of a strong subcontracting system, which has combined the flexibility of small firms with the economies of scale and market power of larger organisations. Without the close relationship that exists between small subcontractors and the large industrial conglomerates, the Japanese economy would not have progressed to its powerful industrial position today.

Small firms have also become important for technological innovation within developed economies, with research demonstrating their valuable contribution to technological innovation within a number of high technology industrial sectors, usually those characterized by fast changing markets, low capital intensity and small dependence on economies of scale. Such markets are thus better suited to smaller firms, due to the entrepreneurial nature and lack of bureaucracy in decision-making within such organizations. For example, comprehensive research into the relationship between firm size and the level of innovation in the UK has revealed that small firms’ share of innovations had increased by over 50 per cent since 1945 and now accounts for over a quarter of the total number of innovations in the UK.

Moreover, in certain sectors, such as computing services and scientific instruments, their contribution is highly significant, with small companies developing the majority of innovative products and processes. Indeed, within such ‘knowledge-intensive’ sectors of the economy, small firms have accounted for nearly all of the employment growth during the 1980s and 1990s. In addition, a number of studies show that technologically innovative SMEs in the UK have a higher-than-average growth in assets, retained profits and exports, lower closure rates than businesses in other sectors and have demonstrated high degrees of resilience, especially in times of recession.

Clearly, while small firms have been important in the past, this seems set to continue and grow in the future. For example, many of our business and consumer markets have changed to essentially reflect the strengths of smaller firms. In today’s business climate, economies of scale are no longer important as 20th Century standardization has disappeared in favour of 21st century consumer sophistication and business specialization. In many cases, small firms, with faster reaction times and closeness to the market-place, are perfectly placed to deal with an environment where businesses require specialist support and consumers demand customized products and services. Clearly, the age of Ford’s ‘any colour of car as long as it’s black’ has been consigned to the dustbin of industrial history as the small firm, whose decline was forecast only thirty years ago, drives forward today’s economies.

But the short-term nature of much of the funding for business support initiatives without co-ordinated dissemination of best practice, and the fragmentation of business support services with limited entrepreneurial content, means that the time is right for an overall national strategy for entrepreneurship. We sincerely hope that Entrepreneur Secrets will be at the forefront of this strategy.

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