Enterprise & Small Business: Principles, Practice & Policy, 2nd Edition

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Second Edition

Enterprise and Small Business Principles, Practice and Policy Dr Jonathan Lean, Principal Lecturer in Strategic Management, U n i v e r s i t y o f P l y m o u t h B u s i n e s s S ch o o l , U K .

Principles, Practice and Policy

Wa n t t o b e a t t h e c u t t i n g e d g e o f t h i s d y n a m i c a n d e x c i t i n g s u b j e c t ? T h i s t e x t d e l i v e r s t h e l a t e s t r e s e a rch , c u r r e n t t h i n k i n g a n d p r a c t i c e , a n d l o o k s a t f u t u r e t r e n d s , a s w e l l a s c o v e r i n g h o t t o p i c s s u ch a s e - c o m m e rc e , l e a d e r s h i p a n d v e n t u r e c a p i t a l . This highly successful book provides a comprehensive introduction to entrepreneurship, enterprise and small business for the undergraduate and postgraduate student. With over 30 specialist contributors from academic institutions in the UK, Europe and the USA, this second edition – while building on the foundations of the first – has been e x t e n s i v e l y r ev i s e d a n d u p d a t e d . Key Fe a t u r e s : • Tw e n t y - f o u r c h a p t e r s c o v e r i n g t h e m o s t e s s e n t i a l a n d contemporary topics taught on small business and enterprise courses • Contributions from leading international academics, e a ch a s u b j e c t s p e c i a l i s t i n t h e f i e l d • Strong theoretical and research pedigree ensures high degree of academic credibility • Encourages critical thinking through challenging discussion questions • Provides students with a guide to further study and weblinks

Sara Carter is Professor of Entrepreneurship in the Department of Management and Organization, University of Stirling, UK.

ISBN 0-273-70267-X

9 780273 702672 An imprint of

www.pearson-books.com

Cover Art & Design: Gary Thompson Studio

D y l a n J o n e s - E v a n s i s A d j u n c t P r o f e s s o r o f E n t r e p r e n e u r s h i p a t t h e Tu r k u S ch o o l o f E c o n o m i c s a n d B u s i n e s s A d m i n i s t r a t i o n i n Fi n l a n d , a n d D i r e c t o r o f t h e N a t i o n a l E n t r e p r e n e u r s h i p O b s e r v a t o r y a t C a r d i f f U n i v e r s i t y, U K .

Sara Carter Dylan Jones-Evans

Enterprise and Small Business is ideal for students taking courses in entrepreneurship a n d s m a l l b u s i n e s s m a n a g e m e n t a t u n d e r g r a d u a t e a n d p o s t g r a d u a t e l ev e l .

Enterprise and Small Business

"This book is probably the best general small business text available at present."

Enterprise and

Small

Business Principles, Practice and Policy

Second Edition

SARA CARTER DYLAN JONES-EVANS

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Enterprise and Small Business Principles, Practice and Policy

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We work with leading authors to develop the strongest educational materials in business, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk

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Enterprise and Small Business Principles, Practice and Policy

Second Edition Edited by

Sara Carter and Dylan Jones-Evans

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Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 2000 Second edition published 2006 © Pearson Education Limited 2006 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP. ISBN-13: 978-0-273-70267-2 ISBN-10: 0-273-70267-X British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress 10 9 8 7 6 5 4 3 2 1 10 09 08 07 06 Typeset in 10/12pt Sabon by 35 Printed and bound in Great Britain by Henry Ling Ltd, Dorchester The publisher’s policy is to use paper manufactured from sustainable forests.

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Contents

List of figures List of tables List of contributors Publisher’s acknowledgements

1 Introduction

xiii xv xvi xviii 1

Sara Carter and Dylan Jones-Evans

1.1 Background 1.2 The purpose of this book 1.3 Structure of this book

1 2 3

Part 1 THE ENTERPRISE ENVIRONMENT

5

2 Defining and measuring the small business

7

Francis Greene and Kevin Mole

2.1 Introduction 2.2 Learning objectives 2.3 Definitions of smaller enterprises 2.4 Numbers of firms 2.5 Trends in SME statistics 2.6 Explanations for the changes in business ownership 2.7 The ‘n’-shaped puzzle of the US 2.8 Chapter summary Questions Web links

3 Self-employment and the small business

7 7 8 10 14 20 24 28 28 28 30

David J. Brooksbank

3.1 Introduction 3.2 Learning objectives 3.3 The self-employed 3.4 Who are the self-employed and what do they do? 3.5 Personal characteristics of the self-emaployed 3.6 The jobs of the self-employed 3.7 Chapter summary Questions Web links

30 30 30 32 36 43 47 48 48 v

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Contents

4 Government and small business

49

Robert J. Bennett

4.1 Introduction 4.2 Learning objectives 4.3 The role of government 4.4 The case for government action for SMEs 4.5 Finding a niche for government action 4.6 Limitations on government action 4.7 Possibilities for targeting 4.8 Forms of government action for small business 4.9 National policy 4.10 Sector policy 4.11 Local policy 4.12 A case study of advice and support schemes – Business Link 4.13 Chapter summary Questions Web links

5 Innovation and the small business

49 49 49 52 56 57 58 59 60 66 67 70 74 75 75 76

Zoltan J. Acs

5.1 Introduction 5.2 Learning objectives 5.3 The knowledge production function 5.4 The role of firm size 5.5 The industry context 5.6 The geographic context 5.7 The knowledge production function reconsidered 5.8 Innovation and public policy in the US 5.9 Chapter summary Questions Web links

76 76 77 82 87 88 89 91 97 98 98

6 Growth and development in the small business

100

David Smallbone and Peter Wyer

6.1 Introduction 6.2 Learning objectives 6.3 Growth and development in the small firm 6.4 Explaining growth in small firms 6.5 Barriers and growth constraints – the external operating context 6.6 Barriers and growth constraints – the internal operating context 6.7 Managing growth 6.8 Chapter summary Questions Web links

100 101 101 102 111 113 117 123 125 125

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Contents

Part 2 THE ENTREPRENEUR 7 The entrepreneurial process

127 129

Per Davidsson

7.1 Introduction 7.2 Learning objectives 7.3 Steps in the entrepreneurial process 7.4 The discovery process 7.5 The exploitation process 7.6 The relationship between discovery and exploitation 7.7 The effectuation process: and alternative entrepreneurial logic? 7.8 Which process is better? 7.9 Chapter summary Questions Web links

8 The psychology of the entrepreneur

129 130 130 133 135 142 143 146 150 151 151 152

Frédéric Delmar

8.1 8.2 8.3 8.4

Introduction Learning objectives The entrepreneurial personality The development of the field of entrepreneurial personality and behaviour 8.5 Individual characteristics of entrepreneurs 8.6 Cognitive models of entrepreneurial behaviour 8.7 Chapter summary Questions Web links

9 Gender and entrepreneurship

152 152 153 153 161 166 174 174 175 176

Sara Carter and Dinah Bennett

9.1 Introduction 9.2 Learning objectives 9.3 Gender and enterprise 9.4 The growth of female entrepreneurship 9.5 The characteristics and experiences of female entrepreneurs 9.6 The management and financing of female-owned businesses 9.7 The performance of female-owned businesses 9.8 The neglect of female entrepreneurship 9.9 Chapter summary Questions Web links

10 Ethnicity and entrepreneurship

176 176 177 178 180 183 186 189 190 191 191 192

Monder Ram, Giles Barrett and Trevor Jones

10.1 Introduction 10.2 Learning objectives

192 192 vii

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10.3 Ethnicity and enterprise 10.4 Ethnic minority enterprise: an international perspective 10.5 Ethnic minority business activity: the British experience 10.6 The business entry decision 10.7 Family and co-ethnic labour 10.8 Restricted spatial markets 10.9 Funding ethnic minority enterprise 10.10 Ethnic minority business and enterprise support 10.11 Chapter summary Questions Web links

11 Family and entrepreneurship

192 193 197 199 200 202 203 204 206 207 207 209

Denise Fletcher

11.1 Introduction 11.2 Learning objectives 11.3 Family and enterprise 11.4 Family and business: an overview of key approaches 11.5 Family business: a strategic overview 11.6 Integrating notions of family and enterprise 11.7 Interpretive inquiry of family and enterprise 11.8 Chapter summary Questions Web links

12 Social entrepreneurship

209 209 210 211 213 216 217 219 219 219 220

Alex Nicholls

12.1 Introduction 12.2 Learning objectives 12.3 Introducing social entrepreneurship 12.4 What is social entrepreneurship? 12.5 The entrepreneurial dimension 12.6 The social dimension 12.7 Drivers of social entrepreneurship 12.8 Social enterprise 12.9 Chapter summary Questions Web links

13 Technical entrepreneurship

220 220 220 222 223 226 236 238 241 242 242 243

Sarah Cooper

13.1 13.2 13.3 13.4

Introduction Learning objectives The development of technical enterprise The study of technical entrepreneurship

243 243 243 244

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13.5 The emergence of technical entrepreneurship 13.6 The technical entrepreneur 13.7 Chapter summary Questions Web links

14 Corporate entrepreneurship

246 251 262 265 265 266

Dylan Jones-Evans

14.1 Introduction 14.2 Learning objectives 14.3 Intrapreneurship 14.4 Defining intrapreneurship 14.5 Entrepreneurial and intrapreneurial ventures 14.6 Climate for intrapreneurship within an organisation 14.7 Barriers to intrapreneurship within a corporate culture 14.8 Intrapreneurial characteristics – who is the intrapreneur? 14.9 Learning and the intrapreneurial firm 14.10 Chapter summary Questions Web links

15 Leadership, entrepreneurship and management of small businesses

266 266 267 267 268 271 276 278 282 288 289 290

291

David A. Kirby

15.1 Introduction 15.2 Learning objectives 15.3 Concepts of leadership and entrepreneurship 15.4 Theories of leadership 15.5 Leadership in practice 15.6 Leadership development 15.7 The entrepreneurial leader 15.8 Chapter summary Questions Web links

291 292 292 293 295 295 298 301 302 302

Part 3 THE SMALL BUSINESS

303

16 Networking and the small business

305

Steve Conway and Oswald Jones

16.1 16.2 16.3 16.4 16.5

Introduction Learning objectives Alternative foci of network research in entrepreneurship An overview of the social network perspective Re-telling the Dyson story from a social network perspective

305 306 306 307 311 ix

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16.6 What has research told us about entrepreneurial networks? 16.7 Chapter summary Questions Web links

17 Marketing and the small business

316 322 323 323 324

David Stokes

17.1 Introduction 17.2 Learning objectives 17.3 Marketing and the small firm 17.4 Characteristics of small firms and marketing problems 17.5 Is marketing different in small organisations? 17.6 Entrepreneurial interpretations of marketing 17.7 Entrepreneurial marketing 17.8 Chapter summary Questions Web links

18 Finance and the small business

324 324 325 326 328 330 332 335 337 337 338

Robin Jarvis 18.1 Introduction 18.2 Learning objectives 18.3 Finance and the small firm 18.4 The finance gap 18.5 Sources of finance 18.6 The capital structure decision 18.7 Financial reporting considerations 18.8 Chapter summary Questions Web links

338 338 339 340 344 352 354 355 356 356

19 Venture capital and the small business

357

Colin Mason

19.1 Introduction 19.2 Learning objectives 19.3 Financing entrepreneurial companies: a demand-side perspective 19.4 Business angels 19.5 Venture capital funds 19.6 Chapter summary Questions Web links

20 Labour management and the small business

357 358 358 363 373 381 383 383 385

Susan Marlow

20.1 20.2

Introduction Learning objectives

385 386

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20.3 Employment relations and the small firm 20.4 The changing economic context, 1979 onwards 20.5 Managing people in small firms 20.6 Employment regulation and smaller firms 20.7 Labour management in small firms in Europe 20.8 Chapter summary Questions Web links

21 Strategy and the small business

386 388 390 396 400 404 405 405 406

Colm O’Gorman

21.1 Introduction 21.2 Learning objectives 21.3 What is strategy? 21.4 Strategy making in the small business 21.5 Success strategies in small firms 21.6 The strategic problems of small businesses 21.7 Chapter summary Questions Web links

22 E-commerce and the small business

406 407 407 408 413 418 420 421 421 423

Nigel Lockett and David Brown

22.1 22.2 22.3 22.4

Introduction Learning objectives E-commerce in context Understanding e-business within small businesses – theory and practice 22.5 Importance and role of trusted third parties 22.6 Chapter summary Questions Web links

23 Franchising and the small business

423 424 424 431 437 439 439 440 441

John Stanworth and David Purdy

23.1 23.2 23.3 23.4 23.5 23.6 23.7 23.8 23.9 23.10

Introduction Learning objectives Franchising and enterprise The nature of franchising: entrepreneurship or dependence? The advantages and disadvantages of franchising Franchising in the US: history and more recent trends Ease of entry into franchising Franchisee success and failure rates The quality of jobs created in franchising Chapter summary

441 441 442 442 444 447 456 459 461 462 xi

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Contents

Questions Web links

24 Internationalisation and the small business

464 464 465

Kevin Ibeh

24.1 Introduction 24.2 Learning objectives 24.3 Internationalisation 24.4 Concepts, context and extent 24.5 Explaining SME internationalisation 24.6 Stimulating internationalisation 24.7 Barriers in SME internationalisation 24.8 Policy and institutional support for SME internationalisation 24.9 Chapter summary Questions Web links References Index

465 465 466 467 469 474 477 479 480 483 483 485 552

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List of figures

Figure 2.1 Figure Figure Figure Figure Figure Figure

2.2 2.3 2.4 2.5 3.1 4.1

Figure 4.2 Figure 4.3

Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure

5.1 5.2 6.1 6.2 6.3 7.1 7.2 7.3 8.1 12.1 12.2 12.3 15.1 16.1 17.1 17.2 18.1 22.1 22.2 22.3 22.4 22.5 22.6 23.1 23.2

Percentage of UK total manufacturing employment in small establishments, 1924–88 UK self-employment, 1959–2004 (seasonally adjusted) UK enterprise population, 1980–2003 EU–US entry and exit rates Employment gains of surviving firms after two years Self-employment in the UK, 1979–2005 (thousands) Number of self-employed and number of establishments (1930–2004) Expenditure on small firms by Government Bodies 2001/02 (total £2.5bn) Organisation of finance and department responsibility between central government, its agents, local government and small businesses International comparisons of business research and development International comparisons of patent numbers Growth in small firms An indicative ‘stages’ of growth/life cycle model Indicative steps in strategic analysis Locus of discovery and locus of exploitation The interrelation between discovery and exploitation Cost/value structures of different venture ideas The field of applied psychology in entrepreneurship The three estates of society Mapping social need and community involvement Funding dimensions of social entrepreneurship Creating a climate for continuous learning The social network of James Dyson Small organisations: characteristics and marketing issues The entrepreneurial marketing process: four + four I’s The relationship between risk and return US online sales by quarter Elements of e-business activities Architecture for e-business applications E-business engagement by small businesses Taxonomy of aggregations for SMEs eTrust Platform Trends in total US franchising sales, 1975–90 Trends in UK business format franchising, 1984–2004

14 15 16 26 27 33 52 70

71 80 81 103 107 118 139 142 147 154 229 230 238 299 316 328 336 342 424 426 428 430 434 436 448 450 xiii

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List of figures

Figure 23.3 Country franchise populations: number of franchisees vs total population Figure 23.4 Index of contractual control Figure 23.5 Main appeal of franchising by: current employment status Figure 24.1 Recommendations to assist SME internationalisation by SME categories

455 458 459 482

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List of tables

Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 2.5 Table 2.6 Table 2.7 Table Table Table Table Table

2.8 3.1 3.2 3.3 3.4

Table Table Table Table Table Table Table Table

3.5 3.6 3.7 4.1 4.2 4.3 5.1 7.1

Table Table Table Table Table Table Table

12.1 12.2 14.1 19.1 22.1 22.2 23.1

Table 24.1

The Bolton Report’s (1971) quantitative definitions of smaller enterprises EU definition of SMEs Number of enterprises, employment and turnover in the whole economy by number of employees, UK start 2003 SMEs in EU-15 SMEs in the EU, Japan and US Self-employment (% of all non-agricultural employment) in selected OECD countries, 1956–2002 Percentage business ownership rate (number of business owners/total labour force) Patterns of business ownership in 23 OECD countries Numbers self-employed by gender (thousands), 1979–2005 Age profile of the self-employed, 2001 Ethnicity and self-employment: England and Wales, 2001 Qualifications of employees and the self-employed: England and Wales, 2001 Self-employment by industrial sector: England and Wales, 2001 Self-employment by GB government office region, 2005 Self-employment and religion: England and Wales, 2001 Market imperfections: causes and areas of policy action required The Loan Guarantee Scheme Services to be provided in Business Links Small firm share of patenting by technology in the US Steps in entrepreneurial process as related to discovery and exploitation Defining the ‘social’ in social entrepreneurship Contexts for social entrepreneurship Managers, entrepreneurs and intrapreneurs A financial chronology of Amazon.com, 1994–99 Scoreboard of e-business technologies and applications Classification of e-business application complexity Key indicators for business format franchising in the UK, 1993–04 Estimates of the extent of SME internationalisation

9 9 12 12 13 17 18 19 34 38 41 42 43 45 46 54 63 72 86 136 227 229 279 362 427 429 451 468

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List of contributors

Zoltan Acs is University Professor at the School of Public Policy, George Mason University, Fairfax, VA, US. Giles Barrett is a Lecturer in Human Geography at Liverpool John Moores University, UK. Dinah Bennett is Project Director of ‘Women into the Network’ and Senior Tutor at Durham Business School, UK. Robert Bennett is Leverhulme Research Professor in the Department of Geography at the University of Cambridge, UK. David Brooksbank is Professor of Enterprise and Small Business and Head of the Department of Enterprise and Economic Development at the University of Glamorgan, UK. David Brown is Professor of Strategy and Information Systems at Department of Management Science at the University of Lancaster, UK. Sara Carter is Professor of Entrepreneurship in the Department of Management and Organization, University of Stirling, UK. Steve Conway is Senior Lecturer in Innovation at the University of Leicester Management Centre, UK. Sarah Cooper is Senior Lecturer in Entrepreneurship in the Hunter Centre for Entrepreneurship at the University of Strathclyde in Glasgow, UK. Per Davidsson is Professor of Entrepreneurship in the Brisbane Graduate School of Business at Queensland University of Technology, Australia, and at the Jönköping International Business School, Sweden. Frédéric Delmar is Professor of Entrepreneurship in the Department of Strategy and Organization at EM Lyon, France. Denise Fletcher is Director of Entrepreneurship Research, Nottingham Business School, Nottingham Trent University, UK. Francis Greene is Lecturer in Entrepreneurship at the Centre for Small and Medium Sized Enterprises, Warwick Business School, University of Warwick, UK. Kevin Ibeh is Senior Lecturer in International Marketing in the Department of Marketing, University of Strathclyde in Glasgow, UK. Robin Jarvis is Head of Small Business at the ACCA and Professor of Accounting and Finance at Kingston University, UK. xvi

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List of contributors

Dylan Jones-Evans is Adjunct Professor of Entrepreneurship at the Turku School of Economics and Business Administration in Finland, and Director of the National Entrepreneurship Observatory at Cardiff University, UK. Oswald Jones is Professor of Innovation and Entrepreneurship, Centre for Enterprise, Manchester Metropolitan University Business School in Manchester, UK. Trevor Jones is at the Centre for Research in Ethnic Minority Entrepreneurship at De Montfort University, UK. David Kirby is Professor of Entrepreneurship and Deputy Head of School at the University of Surrey Management School, UK. Nigel Lockett is Relationship Manager for InfoLab and E-Business in the Department of Management Science at the University of Lancaster, UK. Susan Marlow is Professor of Small Business and Entrepreneurship in the Department of Human Resource Management at De Montfort University, Leicester, UK. Colin Mason is Professor of Entrepreneurship, Head of Department and Academic Director of the Hunter Centre for Entrepreneurship, Strathclyde Business School, University of Strathclyde in Glasgow, UK. Kevin Mole is Lecturer in Enterprise in Warwick Business School at the University of Warwick, UK. Alex Nicholls is Lecturer in Social Entrepreneurship at the Skoll Centre for Social Entrepreneurship, Said Business School, University of Oxford, and Fellow of Harris Manchester College, Oxford, UK. Colm O’Gorman is Senior Lecturer in Entrepreneurship at UCD Business School, University College Dublin, Ireland. David Purdy is Research Fellow at Westminster Business School, University of Westminster in London, UK. Monder Ram is Professor of Small Business and Director of the Centre for Research in Ethnic Minority Entrepreneurship at De Montfort University, UK. David Smallbone is Professor of Small Business and Entrepreneurship and Associate Director of the Small Business Centre at Kingston University, UK. John Stanworth is Professor of Enterprise Studies at Westminster Business School, University of Westminster, UK. David Stokes is Research Fellow in Small Business Studies and Director of Innovation at the Enterprise Exchange, Kingston University, UK. Peter Wyer is Reader in Entrepreneurship at CEEDR, Middlesex University, UK.

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Publisher’s acknowledgements

We are grateful to the following for permission to reproduce copyright material: Crown copyright: Table 2.1 from the Bolton Committee (1971) Report of the Committee of enquiry on Small Firms, Cmnd 4811; Table 2.3 from Small Business Service (2004), SME Statistics, www.sbs.gov.uk/smes; Figure 2.2 from Office for National Statistics (2005) UK Workforce Jobs (seasonally adjusted), 1959–2004; Table 3.1 from Labour Market Trends (2005), Office for National Statistics; Table 3.2 from M. Daly, ‘The 1980s: a decade of growth in enterprise’, Employment Gazette, March 1991, Office for National Statistics; Tables 3.3, 3.5 and 3.7 from 2001 Census, www.statistics.gov.uk; Table 3.4 from 2005 Census, www.statistics.gov.uk; Table 3.6 from Labour Force Survey (2005), Office for National Statistics, www.statistics.gov.uk; Figure 4.2 from figure 2, ‘Cross cutting review of services to small businesses’, HM Treasury 2002. Crown copyright material is reproduced with the permission of the Controller of Her Majesty’s Stationery Office and the Queen’s Printer for Scotland. Other copyright: Figure 2.4 from D. Pilat, The Major Growth Regions in Comparison: Some Findings from Recent OECD Work on Growth Productivity and Productivity, OECD Breakfast Series in partnership with NABE, 18 Feb., © OECD, 2004; Figure 6.1 adapted from figure 5.1 in Understanding the Small Business Sector Routledge (Storey, D. 1994); Figure 7.1 from ‘The individual-opportunity nexus’ (Shane, S. and Eckhardt, J.) in Handbook of Entrepreneurship Research (eds. Z.J. Acs and D.B. Audretsch 2003), Kluwer Academic Publishers © 2003, with kind permission of Springer Science and Business Media; Figure 15.1 from Yukl, Gary A., Leadership in Organizations, 5th Edition, © 2002. Adapted by permission of Pearson Education, Inc., Upper Saddle River, NJ; Table 19.1 from Angel Investing: Matching Start-Up Funds with Start-Up Companies, Jossey Bass Wiley, (Van Osnabrugge, M. and Robinson, R.J. 2000); Figure 22.5 adapted from Brown, D. and Lockett, N., ‘The Potential of Critical Applications for Engaging SMEs in E-Business’, 2004, European Journal of Information Systems, Vol. 13 No. 1, Palgrave Macmillan, reproduced with permission of Palgrave Macmillan; Table 24.1 from Globalisation and Small and Medium Enterprises (SMEs), © OECD, 1997; Figure 22.6 adapted from ‘Engaging SMEs in E-Business: The Role of Intermediaries within E-Clusters’ in Electronic Markets, Vol. 11 No. 1, Taylor and Francis Ltd., http://www.tandf.co.uk/journals (Brown, D. and Lockett, N. 2001); Figure 23.4 from The Corporate Paradox – Power and Control in the Business Franchise, Routledge (Felstead, A. 1993); Mansueto Ventures LLC via the Copyright Clearance Centre for an extract from the article ‘Two men and a bottle’ by Tom Scott, published in Inc: The Magazine for Growing Companies 15th May 1998 © 1998 Mansueto Ventures LLC. In some instances we have been unable to trace the owners of copyright material, and we would appreciate any information that would enable us to do so. xviii

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CHAPTER 1

Introduction Sara Carter and Dylan Jones-Evans

1.1 Background Attitudes towards entrepreneurship have changed considerably in the past 30 years. Gone are the days when the entrepreneur would be viewed as a ‘deviant’ individual on the margins of society. Today, individuals such as Richard Branson and Bill Gates are world renowned for their entrepreneurial prowess and are revered as role models that many would wish to emulate. In the same way that entrepreneurs have become an accepted part of everyday life, the influence of the small firm has also grown considerably. While this has been driven by various factors, such as the decline of large businesses, the development of an ‘enterprise culture’, market fragmentation and technological development, the increasing regard for small firms has been fuelled by a widespread recognition of their crucial economic and social role. Small firms are, perhaps, most valued for their contribution to employment creation. While the abilities of an individual small firm to create a large number of jobs are restricted to a very few high growth ‘gazelles’, the sheer number of smaller enterprises ensures that their collective contribution to employment generation is substantial. For example, in the European Union, large firms have experienced employment losses in nearly every member state, whilst employment by small firms has grown considerably. In addition to creating employment, small firms also play a variety of other roles. For example, while the economies of scale in production and distribution enable large firms to make a significant contribution to the economy, many of them could not survive without the existence of small companies, who sell most of the products made by large manufacturers direct as well as providing them with many of the services and supplies they require to run a competitive business. Small firms have also introduced many products and services to the consumer, especially in specialised markets that are too small for larger companies to consider worthwhile. Finally, small businesses also provide an outlet for entrepreneurial individuals, many of whom would have found it almost impossible to work for a large organisation.

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1 • Introduction

1.2 The purpose of this book The increased importance of entrepreneurship and the small firm sector has led to considerable growth in interest in entrepreneurs and the companies they establish and grow. Although the study of entrepreneurship originated in the work of eighteenth-century economists, such as Richard Cantillon, the field has grown considerably during the past 40 years to encompass disciplines as varied as sociology, psychology, management studies and anthropology. Indeed, the chapters within this book draw on various approaches to explain broad issues relating to the enterprise environment, entrepreneurial processes and individuals, and small business management. The field of entrepreneurship and small business studies has always been diverse, and this book is intended both to reflect this diversity and to present an overview of each of the key themes relating to enterprise and small business. Contemporary interest in the subject essentially dates from the early 1970s, when a number of critical events saw both a loss of confidence in large-scale industry and growing popular and governmental interest in small businesses. Even before this period, however, there had been research analysing the small firms sector from historical, geographical and socio-economic perspectives. What changed in the 1970s was both the volume of research undertaken and its direct role in influencing national economic policy. For the first time also, academics researching the field from within different disciplines formed associations, held international conferences to advance research in the area, and established a number of university-based centres focusing on the study of small business and entrepreneurship. These early initiatives have developed considerably. The modern field of entrepreneurship is recognised as a distinctive division within the Academy of Management, while the range of scholarly journals dedicated to the field has increased both in number and in specialisation. A further development has been seen in the growing number of university-based enterprise and small business research centres. Importantly, many of these centres have increasingly sought to disseminate their work within the mainstream university curricula by offering courses to undergraduate and postgraduate students. At the same time, there have been an increasing number of business schools around the world now offering small business and entrepreneurship as an integral element of business and management studies. While the US was an early leader in this area, Business Schools in Europe, the Middle East, Asia and Australasia have followed in developing courses in entrepreneurship and small business studies. Despite these developments, entrepreneurship and small firms’ research is often described as a new and emerging research field. Clearly, this is no longer the case. As each of the contributions in this volume demonstrates, research undertaken over the past 40 years has led to substantial theoretical and methodological advances. The field is far from exhausted, however. Each chapter within this volume demonstrates the extent, and also the incompleteness, of our understanding of many issues surrounding the small business sector. The development of the subject has not been confined to research; it has also been seen in the teaching of small business studies. The growing trend to include small business studies as part of the mainstream university curricula reflects both popular interest in small firms and their importance in economic development. Like many management subjects, small business studies draws from a range of 2

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1 • Introduction

disciplinary sources including, among others, economics, sociology, psychology, history and geography. We have tried to reflect the broad base of the subject in the breadth of the themes covered in this volume. As the small business research field has grown and diversified over the past 30 years, so too has the number and content of small business courses taught in universities and colleges throughout the world. However, there is no single text book that encapsulates the range of small business themes in the depth required for undergraduate and postgraduate work. This book has been designed specifically to address the need for a single reference point for the growing number of students undertaking courses in small business and entrepreneurial studies. In determining the themes to be included in this book, guidance was taken from the syllabi of several university and college courses. Many of the initial small business courses taught in universities, such as the Graduate Enterprise Programme, were designed to encourage and enable students to actually start an enterprise. Increasingly, however, courses are designed to provide students with a more comprehensive insight into the small business sector. This reflects both the broad policy imperative to encourage students to start in business for themselves, and also the future careers of graduates who are increasingly likely to be employed within the small business sector or in occupations that directly or indirectly support the sector. Today, courses in small business studies are taught by a range of subject departments, including business and management, social sciences, arts and humanities. By including a broad range of themes in the required depth, we hope that this book will satisfy all students of the subject, irrespective of departmental affiliation. This book contains 24 chapters from 31 contributors. Each contributing author was asked to present an overview of the specific body of work and explain how the field had developed over time. Even in such a large volume as this, not all issues can be explained in the depth which may be required, but we believe that each chapter amply fulfils the criteria of providing a strong starting point for students. One of the advantages of an edited collection of work is the ability to draw on acknowledged subject experts to provide specialised accounts of their specific research areas. We would like to thank each contributor not only for their chapter contributions, but also for giving their time and enthusiasm so freely. This book represents a substantial body of knowledge which we hope will provide an excellent reference point for students, researchers and teachers alike.

1.3 Structure of this book The book is divided into three main parts that essentially reflect the three areas that concern the small firm today. These are first, the environment surrounding entrepreneurship and small business ownership; second, the various types of individuals who start and subsequently manage the venture; and thirdly, the various functions which have to be managed within the firm in order for it to succeed. As you will see when reading the various chapters, there are often no distinct boundaries between the issues discussed within the various chapters and, where possible, we have linked the relevant sections of chapters to those of others within the book. The first part – The enterprise environment – focuses on the enterprise environment, and starts with two chapters that define the context of the book. Chapter 2 examines the 3

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definitions of small businesses and provides an analysis of the overall trends in the number of small businesses in various economies. Chapter 3 provides an overview of self-employment, profiling the main characteristics of individuals engaging in selfemployment and business ownership. The three remaining chapters in this part extend beyond numbers and trends to explore first the role of government in supporting the small business sector (Chapter 4), the role of small businesses as contributors of innovation (Chapter 5), and issues of growth and development in the small business sector (Chapter 6). The second part – The entrepreneur – focuses on entrepreneurship within the small firm. One of the defining characteristics of entrepreneurs is their ability to recognise and develop opportunities. This theme is examined in Chapter 7 on the entrepreneurial process. A great deal of research interest has focused on the distinctive personality characteristics of entrepreneurs and their relationship with business success. Chapter 8 explores the various approaches to the psychology of the entrepreneur. The next six chapters in this part each examine distinctive types of entrepreneurs: female, ethnic minority, family-based, social, technological and corporate – each group demonstrating specific characteristics which differentiate them from other types of owner manager. The final chapter in this part examines the relatively under-explored issue of leadership, entrepreneurship and small business management (Chapter 15). The final part – The enterprise environment – focuses on the specific management functions within the small business. Mainstream management subjects such as strategy, HRM, finance and marketing are discussed from the specific viewpoint of the small firm and its stakeholders. Entrepreneurship and small business research has emphasised certain managerial functions as both central and specific to the small business. Thus, a chapter on marketing and the small business (Chapter 17) is preceded by a chapter focusing on the importance of networks in the small business sector. Similarly, a chapter on finance and the small business (Chapter 18) is extended by an accompanying chapter exploring venture capital and business angel investment (Chapter 19). The growing importance of e-commerce is discussed in Chapter 22, while Chapter 23 explores franchising, now seen as a long-established route into business ownership for many individuals. The final chapter in this part concludes the book by examining the internationalisation strategies of SMEs.

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PART 1

The enterprise environment

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CHAPTER 2

Defining and measuring the small business Francis Greene and Kevin Mole

2.1 Introduction This chapter begins by considering a sample of the definitions used by researchers and governments to describe smaller enterprises and shows that there is no single or uniform definition of smaller enterprises. It also examines the number of enterprises in the United Kingdom (UK), the European Union (EU) and internationally, and although there are measurement problems in calculating the number of smaller enterprises, this chapter demonstrates that smaller enterprises represent the overwhelming number of enterprises in any economy. Empirical evidence suggests that in the UK, and internationally, there has been a general increase in the numbers of smaller enterprises since the 1980s and whilst most OECD (Organisation for Economic Cooperation and Development) countries follow this pattern, there are notable exceptions such as France, Japan and the US. In this context, the various reasons why smaller enterprises have ‘re-emerged’ since the 1980s are considered, including changes in the cost structure of industry, rapid technological development, innovation, an increase in the service economy, changes in the labour market and shifts in government policy, although none of these explanations provide in themselves the single explanation for the growth of smaller enterprises. Section 2.7 looks at the US and explores the dynamic contribution of entry and exit and the importance of fast-growth enterprises.

2.2 Learning objectives There are four learning objectives in this chapter: 1 To outline the various international definitions of smaller enterprises. 2 To describe the methodological issues faced in measuring smaller enterprises. 3 To show that smaller enterprises constitute the vast majority of enterprises in any economy. 4 To account for the reasons why the number of smaller enterprises have increased over the last 30 years. 7

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Key concepts n definition of the small firm n small business trends

n

role of small firm in the economy

2.3 Definitions of smaller enterprises This section begins by looking at two early attempts to provide a definition of smaller enterprises and then considers how authorities in the UK, the EU and elsewhere have defined smaller enterprises. There is no simple or single definition of what constitutes a small enterprise. One of the earliest attempts to provide a definition was provided by the Bolton Report (1971). Bolton suggested two definitions for the small enterprise. First, he suggested a qualitative or economic approach that tried to capture the range and diversity of the smaller enterprise relative to the larger enterprise. This definition suggested that a small enterprise was so if it met three criteria: n n n

independent (not part of a larger enterprise); managed in a personalised manner (simple management structure); relatively small share of the market (the enterprise is a price ‘taker’ rather than price ‘maker’).

Such criteria are useful because they reflect central features of smaller enterprises. Other than size itself, one factor that distinguishes smaller enterprises from their larger counterparts is the nature of the uncertainty they face. As smaller enterprises are often reliant upon a limited number of customers and have a limited product portfolio (Cosh and Hughes, 2000), they tend to be exposed to greater levels of uncertainty in their markets. In contrast, larger enterprises are able to limit the uncertainty in their markets simply because they have diversified product portfolios. The independence and personalised nature of the smaller enterprise further promotes uncertainty. Keasey and Watson (1993) have argued that small enterprise owner-managers often run sole proprietorships or partnerships. This means that their fortunes are often tied up directly with the success or otherwise of the enterprise: without the protection of limited liability, owner-managers may end up personally liable for their debts if their enterprise fails. Owner-managers of smaller enterprises also face, relative to larger firms, higher fixed management costs. This, again, may make their situation precarious as they may not have the necessary ‘skill-set’ to attend to the various areas of the business (e.g. financial or human resource management) equally well. Bolton’s attempt to reflect the uncertainty situation faced by small enterprises does present problems. Storey (1994) has criticised Bolton as it is often unclear when exactly the locus of management control shifts from the owner-manager to a functional or hierarchical management structure in a growing business. Enterprises that run into the thousands of employees may be run in a highly personalised manner. Storey and Johnson (1987) have also argued that ‘independence’ is a relative concept: some enterprises, whilst legally independent, may be entirely reliant upon one large enterprise for their economic activity. On the other hand, some enterprises with two or more 8

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Table 2.1 The Bolton Report’s (1971) quantitative definitions of smaller enterprises Sector

Definition

Manufacturing Construction Mining and quarrying Retailing Miscellaneous Services Motor trades Wholesale trades Road transport Catering

200 employees or less 25 employees or less 25 employees or less Turnover of £50,000 or less Turnover of £50,000 or less Turnover of £100,000 or less Turnover of £200,000 or less Five vehicles or less All excluding multiples and brewery-managed houses

Source: Bolton Committee (1971)

establishments may expect each of these establishments to function independently. Finally, one or two employee enterprises may have a high degree of market power because they work in a highly specialised market niche. Bolton also proposed a more quantitative definition of the smaller enterprise. Again, the concern was to capture the heterogeneity of smaller enterprises. This is because no single measure such as assets, turnover, profitability or employment is likely to fully account for the size of an enterprise. For example, an automotive manufacturer may consider itself small if it employs 300 workers. An enterprise of the same size, however, may be considered to be large if it is in motor repairs. Bolton, therefore (Table 2.1), suggested a variety of measures to reflect sectoral heterogeneity. Hence, employment was used for sectors such as manufacturing, turnover for motor trades, assets for transportation and ownership for catering. There are obvious problems with such a definition. For a start, although it appears ‘grounded’ in the differences between sectors, many small enterprise owner-managers may not agree with such definitions either then or now (Woods et al., 1993). Perhaps a more pertinent problem is that measures such as turnover and employment are eroded over time by the influence of inflation and productivity, respectively. Equally, the absence of a uniform definition makes it extremely difficult to chart differences or similarities between countries. A more uniform definition has been adopted by the EU. This was first introduced in 1996 but was updated in 2004 to account for the impact of inflation and productivity changes. Table 2.2 shows that the EU considers there are three types of smaller enterprise: micro, small and medium-sized. Each of these have differing employee, turnover Table 2.2 EU definition of SMEs Enterprise category Micro Small Medium-sized

Head count

Turnover or

Balance sheet