Call to focus policy on small firms

GOVERNMENT aid for small firms should be aimed at the 'tiny proportion' that have the capacity for rapid growth, according to the co-ordinator of the largest-ever research programme on the sector.

David Storey of Warwick Business School's centre for small and medium-sized enterprises said some ministerial policies were ineffective or even counter-productive. Not only should the Government do 'less and better, rather than more and worse', but it needed to define policy objectives and targets, he added.

Professor Storey has written a book, Understanding the Small Business Sector, on the four-year study, which was sponsored by the Economic and Social Research Council, Barclays Bank, the Department of Trade and Industry, the European Commission and the Rural Development Commission, and covered 10,000 small businesses.

In the book, besides suggesting that the Government clarify small-firm policy objectives, he calls on ministers to concentrate on existing businesses rather than start-ups, encourage better dialogue between the financial sector and small business, address special interest groups, such as ethnic, technology-based or rural small firms, and concentrate on creating a suitable macro-economic framework.

At the same time, he says, the Government should reduce its emphasis on five areas of current policy that are counter- productive, ineffective or have an unproven impact.

These are tax incentives for small business owners, public provision of entrepreneurial training in small firms, assistance for start-up businesses, public provision of information or advice, and short-term tinkering at Budget time.

'Fixed-choice' assistance packages should be replaced by a more flexible system, to give growing firms the chance to have tailored help or overcome specific barriers to their expansion.

Meanwhile, Professor Storey recommends, owners of businesses should reinvest as heavily as possible and be frugal in what they take out for themselves. Firms should maintain good relationships with their banks, keeping them informed of what is going on.

In return, the banks should make better lending decisions, and need a clearer understanding of the characteristics of both successful and unsuccessful smaller businesses to do so.

They need to develop long- term 'relationship banking' with their small-business clients, with less emphasis on short-term overdrafts and more on long-term loans or even equity participation.

They should also avoid competing with each other for market share - a policy that tended to affect many of the lending decisions made in the late 1980s and contributed to huge losses and bad debts.