The world of the smallest enterprises is "exceptionally turbulent" with only one in two surviving more than three years, and providing jobs which offer poor pay and minimal training, according to Alan Hughes, director of Cambridge University's ESRC Centre for Business Research.
He explicitly contradicts Ian Lang, President of the Board of Trade, who claims that "small firms have been the principal source of new jobs in this country for many years".
In a paper published by the Employment Policy Institute, Mr Hughes reports that "only a handful" of small and medium-sized enterprises (SMEs) show signs of consistent employment expansion. The chances of survival of the "micro-business" employing fewer than five people were "slim".
Innovative firms were more likely to survive, as were those who built up collaborative relationships with suppliers and universities.
The evidence, which parallels recent research in the United States, does not support ministerial assertions that the small business sector is the lifeblood of the economy, providing the new ideas, products and services.
"Do we really want to continue the recent trends in the UK of encouraging the creation of large numbers of micro-firms, which offer low wages, insecure jobs with low skills? Or do we want to foster an SME sector strong on innovation, stable growth and high skills?" Mr Hughes writes.
He said it was a challenge to Government to find out why so few enterprises succeeded. Ministers should discover ways of encouraging the firms to do better and to create businesses with the capacity to innovate and offer stable employment.
The research found that the overall net growth of 400,000 businesses between 1980 and 1991 was the difference between 2.1 million registrations and 1.7 million deregistrations. Around one in 10 businesses left the VAT registers in any one year in the 1980s. "Within this turbulent world the very smallest firms are six times more likely to leave the register than the rest," the report says.
Around 60 per cent of those leaving the register each year had done so because of business failure. Only 55 per cent of newly registered enterprises survived to three years and 35 per cent to six years.