Think small—grow

Press, 3 July 1985, Page 33

Think small —grow

Throughout the 1980 s three aspects of economic life in the non-socialist world have gradually converged until today they are seen as critical aspects of a phenomen on which is being described as a second Industrial Revolution. There are the new technologies, growing unemployment, and the resurgence of small business. The increasing pace of technological change is seen most clearly in telecommunications and computing but increasingly in new industrial processes, novel materials, robotics, and biotechnology. The “Blue Revolution” in the use of the sea is expected to have as profound an effect on our habits and behaviour as the “Green Revolution” on the land. These changes are directly linked with the second area of change: the reshaping of the workplace. The most dramatic feature of this has been the increasing levels of unemployment in most of the developed world. Over the last few years, New Zealand has seen historically high levels of unemployment. In Britain and Europe double-digit unemployment is the norm. The only major countries which appear to be immune to this malaise are Japan and the United States. It has been the success of the latter in both creating new jobs and reversing the trend that has excited most recent interest. The key to America’s success appears to be the reawakening of a spirit of enterprise, which is showing itself through high rates of new-company formation and dramatic growth rates. Over the last five years the United States has created seven million new jobs — more than the rest of the developed world has managed since 1950. In the period 1968-1984 it is estimated that 20 million new jobs were created in the U.S. The vast majority of these are in small firms. There is a growing body of evidence from Britain, Europe, Australia which suggests that a similar pat-

tern on a much smaller scale can be seen there. There should be little surprise that these three sets of circumstances are converging. Small firms have long demonstrated a remarkable ability to innovate successfully. It has been estimated that over two-thirds of all significant innovations since the end of World War II emerged from smaller firms. Such familiar everyday products as Vacuum flasks, aerosol cans, polaroid cameras and the personal computer emerged from small enterprises. The firms that developed to exploit them grew into giants from these entrepreneurial origins. The short lines of communication, freedom of action, removal of bureaucratic constraints are vital aspects of the creative environment of the smaller enterprise. It is possible to achieve some of this in a large company, but a constant battle against the inertia and resistance often seems inseparable from size. Many

small business

with

Professor Tom Cannon

This is the first of three articles on the economic importance of small business. The writer, Professor Tom Cannon, has a chair in business administration at the University of Stirling, Scotland. He is a leading light in the remarkable high-technology industrial renaissance in Scotland. Professor Cannon was at the University of Canterbury for a month recently, and has helped with initial planning of the graduate enterprise scheme to be launched by the Canterbury Development Corporation and the business administration department at Canterbury. Professor Cannon has lectured on small business in the United States, Australia and Eastern and Western Europe. He has been a special adviser on small business to the Thatcher Government in Britain.

of the most dramatically successful of recent entrepreneurs have emerged, frustrated, from industrial giants. Companies such as Hewlett-Packard and Wang appear to be especially fertile environments for new entrepreneurs. The Tandem Computers story vividly illustrates this. It was founded in the late 19705. By the early 1980 s turn-over exceeded ?US6OO million. However, companies founded by former employees had achieved an aggregate turn-over of SUS4OO million by the same date. This pattern is seen most vividly in the new technologies which are increasingly shaping our lives. The rapid pace of change allied to the novelty of many of the uses and markets pose problems which smaller firms appear especially adept at handling. A comparison between two technologies can illustrate this. It has been estimated that, if the internal combustion engine had developed

at the same rate as the computer, the car engine of the 1960 s would now travel 500 miles on a litre of fuel, generate sufficient thrust to drive the QEII and fit into a matchbox. Traditional corporate structures and bureaucracies can merely struggle to keep up with this pace. These positive features of the small firm must be matched against specific problems. Company failure is the most dramatic. The late Mr Keith Allen, former Associate Minister for Trade, pointed out the inevitability of this process as the cycle of growth, decay and death are parts of a cycle of renewal. But this is not inevitable. For much of the developed world failure rates have exceeded formation rates as attitudes to entrepreneurship and outside interference in markets has deterred potential starters and made survival increasingly difficult. Many European commentators are contrasting the supportive attitudes to small firms in Japan with the indifference and hostility to the sector shown in much of Western Europe over the last 30

years. The “Big is Beautiful” approach failed to realise the interdependence of small and large enterprises. Small firms supply the components, the supplies, and services that the corporation requires to remain competitive. Small firms require healthy large firms to provide markets and support. A similar pattern can be seen in communities. The large firm may generate large numbers of jobs and contribute significant sums to the local economy. Small firms are less prone to cut jobs when markets are poor. They are less geographically mobile. They seem to be particularly important in providing jobs for the young. This may be in part because new business formation in today’s Industrial Revolution is increasingly a young persons ityOne of the most dramatic features of the current’crop of new firms is the youthfulness of their founders. Stimulating young entrepreneurs is becoming an increasingly important aspect of small business policy.