Manchester Metropolitan University Business School Working Paper Series

Jane Tonge
Centre for Corporate and Public Affairs
Manchester Metropolitan University Business School

A Review of Small Business Literature

Part 1: Defining The Small Business
WP01/18

November 2001
ISSN 1471-857X

The Business School of the Manchester Metropolitan University is one of the largest business schools in
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Working Paper Series brings together research in progress from across the Business School for publication
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http://www.business.mmu.ac.uk/wps/
Jane Tonge
Centre for Corporate and Public Affairs
Manchester Metropolitan University Business School
Aytoun Street
Manchester
M1 3GH
Tel: 0161 247 6970
Email: j.tonge@mmu.ac.uk

Biography

Jane Tonge is a full-time PhD student funded by a studentship provided by

Manchester Metropolitan University. Her research area is public relations, and her
current research interest is public relations and small businesses, in particular the
business relationship between public relations agencies and small professional
service firms. She previously gained an MA in Public Relations from Manchester
Metropolitan University, with a particular focus on the strategic role of public
relations in local government. Prior to joining MMU's Business School, she worked
for seven years as a public relations practitioner. Jane also teaches on the full-time
and part-time MA in Public Relations course in the Department of Retailing and
Marketing.
Foreword

This is the first of two papers which form part of an initial literature review
concerned with small business in preparation of a thesis which aims to examine the
development of business relationships between small professional service firms and
public relations agencies. This paper, Part 1, considers the role and importance of
small business, and the various attempts at definitions offered from a number of
quarters, such as commercial, political and academic. Part 2 examines the birth,
growth and death of the small business and considers the range of factors identified
as impacting on these aspects of small business development.
Abstract

Small and micro businesses have a vital role to play (Stanworth and Gray, 1991) with
small business accounting for 99% of all businesses in the UK. The following paper
examines the debate concerning the definition of small business, considering those
put forward by the Bolton Committee Report (1971), the European Commission and
the Department of Trade and Industry, as well as the academic community.

A review of the literature reveals that there is no single, uniformly acceptable

definition of a small firm (Storey, 1994). In practice, various meanings can be found
which apply in different contexts. The heterogeneity of the small firm sector means it
is often necessary to modify the various definitions advanced according to the
particular sectoral, geographic or other contexts in which the small firm is being
examined, by using such as ‘grounded’ definitions. The implication for research is
that researchers are likely to have to continue using their own definitions of small
enterprises which are appropriate to their particular ‘target’ group (Storey, 1994).
1. The Role And Importance Of Small Businesses

It has long been recognised that small and micro businesses have a vital role to play
in the economy (Stanworth and Gray, 1991) with small business accounting for 99%
of all businesses in the UK, and an estimated 3.7 million active businesses in 1998.
Collectively, small and medium enterprises (SMEs) are responsible for 65% of
employment and 57% of Gross Domestic Product within the UK (Madsing, 1997).
They play a particularly important role in areas such as the North West of England
that have seen a decline in traditional heavy industry and a growth in the service
industry.

During the past several decades, the majority of organisational research has been
undertaken in large companies. One reason for this is that, until the 1970s, economic
development was primarily achieved through mass production in large firms. Since
that time, there has been a continuous trend towards ‘downsizing’ and this has
significantly increased the commercial importance of the smaller firm (Lèbre La
Rovere, 1998). For a long time, there had been a tacit assumption that organisational
theories and models developed in large firms were directly applicable to SMEs.
However, there is now a greater understanding that smaller organisations differ
significantly from their larger counterparts (de Berranger and Tucker, 1999).

There is no doubt that small businesses remain economically important in every free
enterprise industrial society (Curran et al., 1986). In the UK, SMEs are strongly
represented in almost every major sector of the economy, and continue to provide
substantial employment not only in traditional established industries such as
construction but also in the newer sectors such as professional and scientific services
(Binks and Coyne, 1983).

Small firms, however they are defined, constitute the bulk of enterprise in all
economies in the world. These firms also make a major contribution to private sector
output and employment, a contribution which appears to be increasing over time
(Storey, 1994). More than 95% of all firms in the economies of the European
Community are classified as ‘small’ – in short, it is the firm with more than 100
employees that is the exception rather than the rule.
The fact that there are so many small firms in most developed economies leads to a
number of issues, most notably that of measuring precisely how many exist in an
economy at any one point in time. Many small firms deliberately do not register with

the state authorities. Others have such a short lifespan that the state authorities do not
have time to register their existence before the business ceases trading. Finally, many
of the businesses are so small that the state may not deem it worthwhile to register
their existence, and such enterprises are exempt from registration on the grounds of
size. This causes problems in terms of estimating the size of the small firm sector, its
contribution to output and employment, measuring whether this has changed over a
period of time and making comparisons with other countries. For all these reasons,
small firm statistics tend to be somewhat speculative (Storey, 1994).

2. Defining The Small Business: Introducing The Debate

There is no single, uniformly acceptable definition of a small firm (Storey, 1994). In

practice, various meanings can be found which apply in different contexts. Indeed,
Curran et al. (1986:3) refer to the ‘great deal of agonising’ over the issue of
definition by small business theorists and researchers, such as Bolton (1971); Binks
and Coyne (1983); and Curran and Stanworth (1984) from which no satisfactory
solutions have emerged. One reason for this relates to size – for example, where a
‘small’ firm in such as the petrochemical industry will probably have much higher
levels of capitalisation, sales and possible employment than a ‘small’ firm in the car
repair trades. Therefore, definitions at sectoral level which relate to ‘objective’
measures of size - such as number of employees, sales turnover, profitability and net
worth - may mean that in some sectors all firms may be regarded as small, while in
other sectors there are possibly no firms which are small (Storey, 1994).

The following sections examine the debate concerning the definition of the small
business as advanced by a number of sources, including the Bolton Committee
Report (1971), the European Commission and the Department of Trade and Industry,
as well as interpretations put forward by various academics.
3. The Bolton Committee Report (1971)

The Bolton Committee’s Report on Small Business (1971) is one of the most widely
quoted sources of definitions and understandings of the small business sector. Bolton
(1971) attempted to overcome the problem of small firm definition by formulating
what it called an ‘economic’ definition and a ‘statistical’ definition.

The economic definition regarded firms as being small if they satisfied three criteria:
• they had a relatively small share of their market place
• they were managed by owners or part-owners in a personalised way, and not
through the medium of a formalised management structure
• they were independent, in the sense of not forming part of a larger enterprise.

Bolton then devised a ‘statistical’ definition which was designed to address three
main issues. The first was to quantify the current size for the small firm sector and its
contribution to economic aggregates such as gross domestic product, employment,
exports and innovation. The second purpose was to compare the extent to which the
small firm sector has changed its economic contribution over time. Thirdly, the
statistical definition, in principle, would enable a comparison to be made between the
contribution of small firms in one country with that of other nations.

The definitions used by the Bolton Committee are shown in Table 1. This illustrates
the use of different definitions of a small firm in different sectors. It also reveals that
the criteria upon which the judgement of ‘smallness’ was made also varied
sectorally.

Thus, in two groups of sectors – manufacturing and construction, and mining and
quarrying – the criterion was unemployment. In the three service sectors, the
criterion was sales turnover, and in one sector – catering – it was based upon
ownership. Finally, in road transport, it was based upon the physical assets of the
business, in terms of the number of vehicles (Storey, 1994).
However, despite its status regarding the small business sector, the Bolton
Committee’s Report has drawn a number of criticisms of both its ‘economic’ and
‘statistical’ definitions (Storey, 1994).
Table 1. Bolton Committee (1971) Definitions of a Small Firm

Sector Definition

Manufacturing 200 employees or less

Construction 25 employees or less

Mining and quarrying 25 employees or less

Retailing Turnover of £50,000 or less

Miscellaneous Turnover of £50,000 or less

Services Turnover of £50,000 or less

Motor trades Turnover of £100,000 or less

Wholesale trades Turnover of £200,000 or less

Road transport Five vehicles or less

Catering All excluding multiples and brewery-managed houses

Source: Bolton (1971)

3.1 Criticisms of the Bolton Committee’s ‘Economic’ Definition of Small

Firms

Taking the ‘economic’ definition first, the Bolton criterion that a small business is
‘managed by its owners or part-owners in a personalised way, and not through the
medium of a formal management structure’ is incompatible with its ‘statistical’
definition of small manufacturing firms as having up to 200 employees (Storey,
1994).

While Bolton recognised that some smaller firms may have one or more intermediate
layers, such as supervisors or foremen to interpret their owner-manager’s decisions
and transmit them to employees, it still regarded small firm owners as taking all the
principal decisions and exercising the principal management functions. However, the
work of Atkinson and Meager (1994) demonstrates that managerial appointments are
made when firms reach a size between ten and twenty workers. At that size, owners
are no longer the exclusive source of managerial decisions (Storey, 1994). Once a
business has over 100 employees, the owners of businesses are starting to assemble
significant teams of managers and have to devolve responsibilities to those teams.

It is unlikely that a firm with more than 100 employees could be managed in a
‘personalised way’, and would require a more formal management structure,
suggesting that the Bolton ‘economic’ and ‘statistical’ definitions are incompatible
(Storey 1994).

While Bolton recognised that some smaller firms may have one or more intermediate
layers, such as supervisors or foremen to interpret their owner-manager’s decisions
and transmit them to employees, it still regarded small firm owners as taking all the
principal decisions and exercising the principal management functions. However, the
work of Atkinson and Meager (1994) demonstrates that managerial appointments are

made when firms reach a size between ten and twenty workers. At that size, owners
are no longer the exclusive source of managerial decisions (Storey, 1994). Once a
business has over 100 employees, the owners of businesses are starting to assemble
significant teams of managers and have to devolve responsibilities to those teams. It
is unlikely that a firm with more than 100 employees could be managed in a
‘personalised way’, and would require a more formal management structure,
suggesting that the Bolton ‘economic’ and ‘statistical’ definitions are incompatible
(Storey 1994).

The second questionable aspect of the Bolton ‘economic’ definition is the emphasis
on the inability of the small firm to affect its environment – most notably its inability
to influence, by changing the quantity which it produces, the price at which a product
or service is sold in the marketplace. Here, Bolton is clearly influenced by the
economist’s concept of perfect competition (Storey 1994). In practice, however,
many small firms occupy ‘niches’. They provide a highly-specialised service or
product, possibly in a geographically isolated area, and often do not perceive
themselves to have clear competition. As a result, in the short and possibly medium
term, they can maintain higher prices and higher profits than the general industry
‘norm’. In the United States, while large firms are generally more profitable than
small, in heterogeneous industries where niches are more likely to exist, this
relationship is reversed (Bradburd and Ross, 1989).

3.1.1 Caterpillars and Butterflies: How Small Firms Differ from Large

Wynarczyk et al (1993) provide an alternative ‘economic’ perspective on defining a

small firm to that provided by Bolton. Building upon the observation of Penrose
(1959) that small and large firms are as fundamentally different from each other as a
caterpillar is from a butterfly, they attempt to identify those characteristics of the
small firm, other than size, which distinguish it from the larger enterprise. Here,
Wynarczyk et al (1993) argue that there are three central respects in which small
firms are different to large firms – uncertainty, innovation and evolution

i. Uncertainty

With regard to ‘uncertainty’, three dimensions are identified:

! The first is the uncertainty associated with being a price-taker, which can be
considered to be the inverse of the Bolton definition, which emphasised the small
share of the market place.
! The second source of uncertainty for small firms is their limited customer and
product base – a classic example being where small firms simply act as
subcontractors to larger firms. Such firms are open to ‘subcontractor
vulnerability’ (Lyons and Bailey, 1993), which is created not only by dependence
on dominant customers, but also upon the extent to which output is specialised to
particular customers, the specificity of investment decisions made, and the
probability that the customer will withdraw the custom. Even for subcontractors
as whole, the smaller firm clearly perceives itself to be more vulnerable than the
larger firm and acts accordingly (Lyons and Bailey, 1993).
! The third dimension of uncertainty relates to the much greater diversity of
objectives of the owners of small firms, compared with large firms. Many small
business owners seek only to obtain a minimum level of income rather than
maximising sales or profits (Storey 1994). Small business owners do not have to
concern themselves with reporting their actions to external shareholders and so
‘performance monitoring’ effectively does not exist. For a small firm, the
relationship between the business and the owner is very much closer than it is
 between the shareholder and the large firm, and so the motivation of the owner of
the small firm is a key influence upon the small firm performance (Storey, 1994).
This contrasts with the large firm literature, which emphasises the importance of
control. Here, the central issue is how the owners of the business ensure that the
managers of the business act in their interest, and how senior managers exert
control over more junior managers. This form of ‘internal’ conflict is largely
absent in small firms (Storey, 1994) where ownership and control are located in
the hands of a few people or even a single individual.

Therefore, the central distinction between large and small firms is seen to be the
greater external uncertainty of the environment in which the small firm operates,
together with the greater internal consistency of its motivations and actions (Storey,
1994).

ii. Innovation

A second key area of difference between small and large firms is their role in
innovation. Conventionally, the role small firms play in innovation relates to their
‘niche’ role where: “it is the ability of the small firm to provide something
marginally different, in terms of product or service, which distinguishes it from the
more standardised product or service provided by the larger firm” (Storey, 1994: 11-
12). Small firms are more likely to introduce fundamentally new innovations than
larger firms, a feature often attributed to small firms having less commitment to
existing practices and products (Pavitt et al. 1987).

iii. Evolution

The third area of difference between a large and small firm is the much greater
likelihood of evolution and change in the smaller firm (Storey, 1994). Management
theorists (e.g. Scott and Bruce, 1987) see the transitions made by small firms into
becoming larger ones as a multiple-stage change, unlike Penrose (1959) who views it
as a single-stage change. Thus, small firms that become larger undergo a number of
stage changes which influence the role and style of management as well as the
structure of the organisation (Scott and Bruce, 1987). Here, the key point is that the
structure and organisation of the small firm is more likely to be in a state of change,
as the firm moves from one stage to another, than is the case for larger firms (Storey,
1994).

Uncertainty, innovation and firm evolution are thus the essential dimensions in
which small firms differ from larger. They should be explored as a ‘bottom-up’ way
of theorising about small firms, rather than implicitly assuming that a small firm is a
‘scaled down’ version of a larger firm (Wynarczyk et al., 1993).

3.2 Criticisms of the Bolton Committee’s ‘Statistical’ Definition of Small

Firms

Five points emerge in the criticism of the Bolton Committee’s ‘statistical’ definitions
of small firms (Storey, 1994):
! The first is that there is no single definition or even any single criterion of
‘smallness’. Instead, four different criteria are used in the definition – employees,
turnover, ownership and assets.
! Three different upper limits of turnover are identified for the different sectors, and
two different upper limits of employees are identified. These make the definitions
too complex to enable comparisons to be made either over time or between
countries (Storey, 1994).

! Statistical definitions based upon monetary units also make comparisons over time
very difficult, since appropriate index numbers have to be constructed to take
account of price changes. They also make international comparisons more difficult
because of currency value fluctuations (Storey, 1994).

4. The European Commission (EC)

To overcome a number of the problems outlined above, the term ‘small and medium
enterprise’ (SME) was coined. This followed the lead of the European Commission
(EC) in February 1996 which adopted a communication setting out a single
definition of SMEs to be adopted after 31 December 1997. The Commission applied
this across Community programmes and proposals. The communication also
included a non-binding recommendation to Member States, the European Investment
Bank and the European Investment Fund encouraging them to adopt the same
definitions for their programmes.
Note: to qualify as an SME:
both the employee and the independence criteria must be satisfied, and
either the turnover or the balance sheet total criteria

As shown in Table 2, the SME sector is itself disaggregated into three components:
micro-enterprises: those with 0-9 employees
small enterprises: those with 10-99 employees
medium enterprises: those with 100-499 employees.

Table 2: Definition of SMEs – the European Commission

Criterion Micro Small Medium

Max. number of employees 9 49 249

Max. annual turnover - 7 million euros 40 million euros

Max. annual balance sheet total - 5 million euros 27 million euros

Max. % owned by one, or jointly - 25% 25%

by several, enterprise(s) not
satisfying the same criteria

(independence criteria)

Source: DTI (2000a)

A number of scholars (e.g. Dunne and Hughes, 1989) argue that there are also
problems with employee-based criteria in comparing small and large firms over time,
as the results can be unreliable.A final criticism of the Bolton Committee’s statistical
definitions is that it treats the small firm sector as being homogenous (Storey, 1994).

4.1 Advantages of the EC Definition

The SME sector is taken to be enterprises – except agriculture, hunting, forestry and
fishing – which employ less than 500 workers (Storey 1994). In several respects, the
EC definitions reflect the ‘break points’ in SME development which researchers have
identified. For example, Atkinson and Meager (1994) found the appointment of non-
owner managers tends to take place when the firm has between ten and twenty
employees. Lyons (1991) found that subcontracting firms with less than 10
employees are unlikely to have formal contracts with their customers, and more
likely to have them as their employee numbers rise above 10. Both these findings
suggest that there is a marked shift to formality around the ten or twenty employee
mark, and that it is important to subdivide the SME sector in this way (Storey, 1994).

The major advantage of the EC definition is that, unlike Bolton, it does not use any
criteria other than employment and it does not vary its definition according to the
sector of the enterprise (Storey, 1994). The only exception is that at the EC level, a
‘special’ group of firms is identified – those in the craft trades. These are small-scale
businesses that are heavily dependent on a handicraft, professional, traditional or
artistic base. All European countries, with the exception of Spain and the UK, have
some definition of craft trades, although the nature of that definition varies
considerably from one country to another.

In almost all senses, Storey (1994) argues that the EC definitions are more
appropriate than those of the Bolton Committee. This is because:
- The EC definitions are exclusively based upon employment, rather than a
multiplicity of criteria.
- The use of 100 employees as a small firm limit is more appropriate, given the
rises in productivity which have taken place in the last two decades.

- The EC definition recognises that the SME group is not homogenous, in the
sense that distinctions are made between micro, small and medium-sized
enterprises.

4.2 Disadvantages of the EC Definition

A key problem with the EC definitions of an SME however, is that for a number of
countries it is too ‘all embracing’ (Storey 1994:14). Virtually all firms and the vast bulk of
employment and output in countries such as Greece, Ireland, Spain and Portugal fall
within the definition of SMEs. Thus, for ‘internal’ purposes within these countries, the
SME definition is not helpful. In these cases, it is the categories within the SME
definition that are most relevant.
5. Academics’ Approach

As demonstrated, there are a number of problems with the official definitions of a

small firm. Academic researchers have attempted various ways to resolve these
difficulties, as explored below. However, criticism is also levelled at these attempts
in turn, with such as Storey (1994) pointing out that the strategy employed by small
business researchers when faced with the difficulty of definition has been to tailor or
adjust the definition according to their particular topic of research.

5.1 ‘Grounded’ Definitions of Small Business

One such attempt at defining small business lies in the ‘grounded’ definitions
advanced by Curran, Blackburn and Woods (1991). In their work on small
enterprises in the service sector, they argue that the use of a single size criterion leads
to an exceptionally heterogeneous collection of businesses being included as small,
yet including owner-managers who have little in common with each other in terms of
the problems they encounter or the business relations in which they engage. Curran
et al (1991) argue that ‘smallness’ is a multi-dimensional concept which is closely
linked with legal independence, type of activity, organisational patterns and
economic activities. Their operational approach is to select enterprises as small on a
‘grounded’ definition. Here, consultation takes place with owner-managers, industry
representatives and trade associations, and a consensus emerges as to what this group
envisages as being a ‘small enterprise’ within its particular sector (Storey, 1994).

Curran et al.’s (1991) grounded definitions of small firms in the services sector are
seen in Table 3. This shows seven sectors or groups of sectors which the researchers
investigated, and identifies four criteria which generally vary from one sector to
another to identify the characteristics for the smaller firm. These four criteria are:
! the number of outlets
! the upper employment limit
! the lower employment limit, and
! special conditions.

Table 3 shows that the maximum number of outlets is only specified for four of the
seven major sectors and that, where specified, the number of outlets may be one, two
or three. The upper limit for employment is specified for most sectors, but not all;
this upper limit may either be ten, twenty or twenty-five workers. The only
consistency is that the minimum number of employees is a full-time equivalent of
one worker other than the owner. Finally, the fourth criteria shows any special
conditions which are imposed on the firms in order that they should qualify as small.

Therefore, Table 3 demonstrates that a ‘grounded’ definition of a small firm has to be

multi-dimensional (Storey, 1994). It illustrates that the ‘statistical’ definitions which
apply a single criterion of, for example, maximum employment number, often cannot
encapsulate the subtleties required by researchers investigating managerial and
behavioural issues in small firms (Storey, 1994).
Table 3. ‘Grounded’ Definitions of Small Firms in the Services Sector
No. of Employment Minimum Special conditions
outlets (FTEs) employment
(FTEs)

1. Free house One None 1 Not brewery-owned

Wine bar One 10 1 Premises owned or

rented

Restaurant One 10 1 Premises owned or

rented

2. Video hire Up to None 1 -

three

Leisure services One 10 1 -

3. Vehicle repair and Not 10 1 Car franchises excluded

servicing specified but other franchises
allowed

4. Market research One 25 1 Must not be in top 50

agencies

Advertising One 25 1 Must not be in top 50

agencies

Design One 25 1 Must not be in top 300

agencies

5. Employment agency One or 10 1 -

two

Secretarial agency One or 10 1 -

two

Training agency One or 10 1 -

two

6. Computer services Not 20 1 -

specified

7. Plant, skip, Not 10 1 -

equipment and specified
vehicle hire

Source: Curran, Blackburn and Woods (1991)

Note: FTE = full-time equivalent

However, it would also be virtually impossible to collect comprehensive data on
smaller firms according to the ‘grounded’ definitions in this table to enable
comparisons to be made between countries and over periods of time. In short,
‘grounded’ definitions are appropriate for researchers to investigate managerial and
behavioural aspects of small firms, and the ‘statistical’ definitions constitute practical
and operational approximations to the measurement of ‘smallness’ (Storey, 1994).

5.2 ESRC Small Business Initiative Definitions of the Small Business

Table 4 also shows the variety of different operational definitions of a small firm
which were employed by researchers on the ESRC Small Business Initiative.
Table 4. ESRC Initiative – Definitions and Sample Size
Researcher Institution Definitions Sectors Sample Data Data Response Geography
Location No. of Source Collection Rate
Firms

1. Curran et al. Kingston ‘Grounded’ Services 350* Yellow Pages, trade Face-to- 56.1 Nottingham, Guildford,
University and local directories face, north-east Suffolk,
telephone Doncaster, Islington
2. Hughes et al. Cambridge 1-500 employees Manufacturin 2,028 Dun & Bradstreet Postal 32.9 England, Scotland,
University g and Wales
business
services
3. Atkinson Sussex Establishments All sectors 3,309 Business connections Postal and 29.8 North Cornwall,
University with <200 face-to-face Shrewsbury, Brighton,
employees Manchester, Newport,
Slough
4. Townroe Sheffield Small start ups All sectors 559 Rural Development Postal 23.3 Northumberland,
Hallam Commission Derbyshire, Norfolk,
University Devon
5. North et al. Middlesex Independent and < Eight 306 Prior contact, Rural Face-to- _ London, Derbyshire,
University 100 employees manufacturin Development face Hertfordshire, Essex,
g sectors Commission, local Cumbria, North
directories Lancashire, North
Yorkshire
6. Sheffield <300 employees Manufacturin 467 Local authority and Postal 25.5 Sheffield, Hainaut
Owen Hallam g and mobile chamber of (France/Belgium)
University services commerce
7. Bristol Self-employed All sectors N/A General Household Government N/A UK
Rees University Survey
8. Bristol Co-ops and ‘matched’ All sectors 200 Business associations Face-to- N/A Emilia Romagna (Italy),
Bartlett University private firms face Catalonia (Spain)
Table 4. Continued.
9. Jones Liverpool White, Asian, Retailing, 403 Rateable Face-to-face N/A Wards in the North,
et al. John Moores Afro- Caribbean wholesaling, valuations list Midlands, and south-
University owned firms manufacturin east England
g
10. Freedman/ Institute of Incorporated and All sectors 429 Yellow Pages, Telephone, 29% Bath, Sutton,
Goodwin Advanced unincorporated companies postal and Darlington, Derby
Legal Studies small firms register/Jordans face-to-face
(<£1m. turnover)
11. McGregor Glasgow Community All sectors 346 _ Face-to-face _ Belfast, Glasgow,
University enterprises and Bristol, Manchester,
firms in managed London, Newcastle
workspace
12. Davies University of <100 employees Subcontracto 102 Benchmark Postal 8% † UK
et al. East Anglia rs
13. Nenadic Edinburgh Family-owned All sectors 781 Post Office _ _ Edinburgh
University businesses Directory
1861-1891
14. Nayak Birmingham <10 employees All sectors, 200 Redditch Face-to-face _ West Midlands
University engineering, Enterprise
electrical Agency
15. May Manchester <100 employees All sectors 294 Local authority Telephone 73% Oldham, Stockport
Metropolitan
University
16. Mason/ Southampton Users of informal All sectors 297 VCR guide, Postal 12% † Rural areas, Northern
Harrison / venture capital (3 brokers’ contacts Ireland, Leicestershire,
Ulster surveys) Hertfordshire, South
University Hampshire
Source: Storey (1994: xvi-xvii)
Note: *274 of these firms were interviewed in 1992 and 204 re-interviewed in 1993.
†Response rates do not take account of ineligible firms.
This demonstrates that, in practice, researchers have to tailor their definitions of a
small firm according to the particular groups of small firms which are the focus of
their interest (Storey, 1994). The factors that influence the inclusion of the firms are
the nature of the premises in which they operate, or their use of certain types of
finance, or their legal status. The same table also makes it clear that a wide variety of
different sources of information are used to identify individual small firms.

6. Department of Trade and Industry (DTI)

The Department of Trade and Industry (DTI) defines business size according to the
number of employees in the organisation, an approach which is commonly used both
in academia and in the field. Here, a micro business has 0-9 employees, a small
business has 10-99 employees and a medium size business has 100-499 employees.
According to The DTI’s (DTI, 2000a) statistical information concerning SMEs, there
is no single definition of a small firm because of the wide diversity of businesses. It
maintains that the best description of the key characteristics of a small firm remains
that used by the Bolton Committee in its 1971 Report on Small Firms (DTI, 2000a),
although various criticisms of this have already been noted above.

Section 248 of the Companies Act 1985 states that a company is “small” if it satisfies
at least two of the following criteria:
! a turnover of not more than £2.8 million
! a balance sheet total of not more than £1.4 million
! not more than 50 employees.

A medium-sized company must satisfy at least two of the following criteria:

! a turnover of not more than £11.2 million
! a balance sheet of not more than £5.6 million
! not more than 250 employees
For statistical purposes, the DTI use the following definitions:
! micro firm – 0-9 employees
! small firm: 0-49 employees (includes micro)
! medium firm: 50-249 employees
! large firm: over 250 employees.
However, in practice, schemes which are nominally targeted at small firms adopt a
variety of working definitions depending on their particular objectives (DTI 2000a).

7. SMEs In The UK

7.1 Lack of Estimates

The lack of a single, uniformly acceptable definition of a small firm is further

compounded by there being no single source of estimates of the business population
in the UK (DTI, 2000b).

Given the problems identifying a small firm, it is perhaps not surprising that in the
UK there is no single definitive statement about the total number of firms in the
economy, or the proportion of those which, however defined, could be regarded as
small (Storey, 1994). Part of the reason is the lack of consensus about what
constitutes ‘small’. However, even more serious is the absence of any single
comprehensive database covering all firms in the UK economy. This is not to say
that databases on UK firms do not exist. Daly and McCann (1992) noted that a study
by Graham Bannock and Partners (1989), which reviewed existing official statistics,
identified forty-four sources of information on firms which were categorised by size.
Unfortunately, none of these forty-four official sources were able to provide
comprehensive coverage of all firms in the economy (Storey, 1994).

Table 5 identifies the seven main official data sources on employment and smaller
firms in the UK. It shows that two of the data sources – the Annual Census of
Production and the Census of Agriculture – are restricted sectorally, while the data
on company accounts is limited to businesses choosing that particular legal form.
Sectoral restrictions are also apparent, although less significant, for firms registering
for VAT, since some sectors are tax-exempt. The bulk of the data sources
underestimate the total number of firms (Storey, 1994), whereas others, such as
companies data, are likely to overestimate the total number of operational businesses,
since a large proportion of firms on the Register have either ceased trading and not
been excluded, or never traded (Scott, 1982).
Table 5. Main official data sources on employment and smaller firms
Source Frequency Measuring Coverage Data held Classific Main exclusion Main weakness HMSO
unit (UK unless -ation publication
stated SIC
otherwise)
Census of Triennial Reporting unit PAYE scheme Employees by 1980 Self-employed, firms RU neither DE Gazette
Employment sample FT/PT and by without employees establishment nor firm
(300,000) gender on PAYE
1978 - 1987
Annual Annual sample Establishment Divisions 1-5 Average 1980 All 1-20 employees Estimates of Business
Census of (20,000) enterprises employment, and 50% of 20-40 employment in smaller Monitor PA
Production output, wages employee establishments 1002
establishments
Census of Annual census Individual All UK Numbers employed _ Minor holdings with _ Agricultural
Agriculture holding agricultural by FT/PT and no regular full-time Statistics
holdings gender, whether workers, forestry and
family or hired fisheries
New Earnings Annual sample Individual Employees with Industry, gender, 1980 Part-time workers No analysis of numbers New
Survey (1 per cent) employee NI number, hours worked, size below NI earnings of firms by size Earnings
PAYE members of UK organisation limit Survey
(1979, 86 only)
Labour Force Annual sample Adults (16+) All private Employment status, 1980 Institutions Self-assessment of DE Gazette
Survey (0.5 per cent) in private households in economic activity, employment status, size
households Great Britain workplace size, of workplace error-
industry, region prone
Company Annual sample Companies or UK industrial Employment, 1980 Non-incorporated Employment data Business
Accounts (3,000) groups of and commercial turnover, financial (approx. businesses imputed for many small Monitor
companies companies variables ) companies MA3
VAT Register Continuously Registered Business above Turnover, form of 1968 Businesses below Delays in registration & Business
updated traders threshold plus organisation threshold (and not deregistration, turnover Monitor PA
register voluntary voluntarily data not reliable and no 1003, British
registrations registered) employment Business DE
information Gazette
Source: Bannock and Partners (1989)
The clear picture which emerges from Table 5 is that there is no data source which
covers all firms in the economy and which is able to specify the proportion of total
employment in the various class sizes (Storey, 1994). The problems arise primarily
for firms in the construction and service sector, where Curran and Burrows (1988)
located almost 90% of all UK small businesses employing between one and twenty
workers.

7.2 DTI Statistics

Although there is no data source that covers all firms in the economy and which is
able to specify the proportion of total employment in the various class sizes, one of
the main sources of statistics for UK SMEs used by both government and academics
is the DTI’s SME statistics.

i. Sources

The DTI’s SME statistics are compiled using a variety of sources, the main source
being the Inter Departmental Business Register administered by the Office for
National Statistics. The SME statistics are published 18 months after the start of the
reference year, with estimates taking into account the very small businesses that do
not appear on the official business register. These are estimated using survey data,
and therefore the reliability of the statistics is lower for the smallest size class of
business (DTI, 2000b).

Using the EC definitions of micro, small and medium-size enterprises, the DTI’s
current estimates (DTI 2000b) are that of the entire business population of 3.7
million enterprises in the UK in 1999, only 24,000 were medium sized (50-249
employees) and less than 7,000 were large (250 or more employees). Small
businesses, including those without employees (approximately 2.3 million),
accounted for 99% of businesses, 45 % of non-government employment and
(excluding the finance sector) 38% of turnover (DTI, 2000b). In contrast the 7,000
largest businesses accounted for 45% of non-government employment and 49% of
turnover.
ii. Industry Patterns

At the start of 1999, at least 98% of businesses in all but electricity, gas and water
supply were SMEs. The share of employment provided by SMEs varies greatly from
one industry to the next (DTI, 2000b). In construction, 84% of employment is
accounted for by SMEs, while finance is only 21%. Of the 2.3 million enterprises
with no employees, 24% are in the construction sector and 18% in business related
services (see Table 6).
Table 6. SME share of business, employment and turnover by industry, start 1999.

Businesses Employment Turnover

Total Number SME Total SME SME
Percentage Employment Percentage Percentage
Share Share Share

All industries* 3,676,940 99.8 21,746 55.4 51.0

A.,B. Agriculture, forestry and fishing 185,305 100.0 452 97.6 97.6
C. Mining 3,860 98.4 83 30.8 29.4
D. Manufacturing 332,070 99.2 4,334 49.6 35.6
E. Electricity, gas, water supply 325 86.9 139 2.6 6.9
F. Construction 683,530 100.0 1,524 83.7 69.8
G. Wholesale, retail and repairs 533,140 99.8 4,416 52.1 54.8
H. Hotels and restaurants 154,400 99.8 1,598 55.6 52.9
I. Transport, storage and communications 225,725 99.8 1,538 39.8 39.9
J. Financial intermediation 59,455 99.4 1,043 21.1 35.5
K. Real estate, business activities 800,515 99.9 3,146 69.6 73.1
M. Education 107,850 99.9 255 83.8 86.5
N. Health and social work 203,465 99.7 2,107 41.7 33.7
O. Other social/personal services 387,295 99.9 1,111 76.7 64.1

Source: DTI (2000b)

*Finance sector excluded from turnover

iii. Regional Analysis

Small and medium enterprises accounted for over 99% of businesses in all regions. The
share of employment amongst SMEs was highest among Northern Ireland based
businesses and lowest among those based in London. The share of turnover in SMEs
was also highest among Northern Ireland based businesses and lowest among those
based in London, the South East, North East, and Yorkshire and the Humber (see
Table 7).

The statistics for 1999 show that for there were a total number of 356,180 businesses
in the North West of which 98.8% were SMEs. The share of employment in SMEs in
the North West was 60.3% of a total of 2,098,000 employed by all businesses. This
ranked fourth highest alongside Scotland, and behind Northern Ireland, the South
West and Wales. The share of turnover was 57.4%, which ranked third highest
behind Northern Ireland and the South West.

In summary, over 3 million SMEs in the UK account for about half of private sector
employment but just one-quarter of GDP (DTI, 1995). The majority of these firms
are either self-employed sole traders or micro firms with less than five employees,
with the share of employment provided by SMEs varying greatly from one industry
to the next (DTI, 2000b).
Table 7: SME share of business, employment and turnover by Government Office Region, start 1999.

Businesses Employment Turnover *

Total Number SME Total SME SME
Percentage Employment Percentage Percentage
Share (000s) Share Share

North East 91,250 99.8 671 55.2 44.9

North West 356,180 99.8 2,098 60.3 57.4
Yorkshire & the Humber 259,225 99.8 1,927 49.4 47.9
East Midlands 234,920 99.8 1,522 56.8 54.1
West Midlands 288,715 99.8 1,935 54.9 51.5
East of England 352,200 99.8 2,019 56.1 49.0
London 665,725 99.8 4,300 42.5 47.7
South East 606,010 99.8 3,071 58.2 47.5
South West 360,530 99.9 1,574 68.6 58.0
England 3,214,750 99.8 19,117 54.1 50.1
Wales 144,135 99.9 728 66.1 57.2
Scotland 233,430 99.8 1,486 60.3 55.2
Northern Ireland 84,620 99.9 415 78.7 74.7

Source: DTI (2000b)

*Excluding VAT. Finance sector excluded from turnover.

8.0 Summary: Implications for Researchers

Despite the importance placed by government upon the small firm sector as a source
of economic development, the above statistics reveal that only rough estimates can
be made of the total number of small firms in the UK (Storey, 1994). A number of
varied sources are used to gather the data, yet there is no single source of estimates of
the business population in the UK (DTI, 2000b).

Although there is no uniformly satisfactory definition of a small firm, small

enterprises constitute at least 95% of enterprises in the European Community
(Storey, 1994). The definitions employed by Bolton (1971) can be seen to be no
longer satisfactory and have been effectively superseded by the EC definitions of a
small and medium enterprise (SME). The value of the EC definition is that it uses
only one criterion - employment - but can be subdivided into three categories –
micro, small and medium-sized enterprises (Storey, 1994).

While the debate concerning definitions continues, what are the implications for
researchers? Broadly acceptable and consistent definitions are needed for
international and time series comparisons, yet small firm researchers need not be
restricted by these parameters. The heterogeneity of the small firm sector means it is
often necessary to modify these definitions according to the particular sectoral,
geographic or other contexts in which the small firm is being examined. This can be
done using such definitions as ‘grounded’ definitions which ask those in the industry
to identify what they regard as being a small firm.

“Ultimately, debates about definition turn out to be sterile unless size is shown to be
a factor which influences the ‘performance’ of the firm. If it were possible to
demonstrate that firms below a certain size clearly had a different performance from
those above that band, then the definition has real interest. In practice, however, such
clear ‘breaks’ are rare and size appears to be a ‘continuous’ rather than a ‘discrete’
variable.” (Storey 1994:16).

Indeed, as Storey (1994) further points out, researchers are likely to have to continue
using their own definitions of small enterprises which are appropriate to their
particular ‘target’ group.
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