Rules hit the bottom line

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Amid all the excitement about the growth of entrepreneurial activity in Britain, there has been much soul-searching lately about why so few of these small fry grow into big fishes.

Everybody, from government ministers to the officials compiling the statistics on the UK's research and development spending, has been lamenting the lack of ambition among British entrepreneurs. While their counterparts in the United States seem to strive ever onwards, the domestic variety is reckoned to be content with a business that makes the founder and his or her family comfortable rather than wealthy.

But the reason for this might be simpler than all these experts think. The Better Regulation taskforce says there is evidence that firms are deliberately restricting growth in order to avoid crossing the thresholds at which regulations start to apply.

Lord Haskins, the taskforce's chairman, said at last week's launch of the progress report on small firms and regulation: "Our research suggests that regulations bite at a particularly crucial stage of a firm's growth. During the initial start-up stage, businesses are more concerned with survival than regulation.

"But as they develop and take on employees, they breach regulatory exemption thresholds and come to the attention of enforcers, yet are still too small to justify employing a regulatory expert."

Sarah Anderson, chief executive of the Mayday employment agency and the taskforce member primarily responsible for the report, suggested that one solution was for firms to pool professional resources by sharing the likes of human resources specialists with other, non-competing small firms.

The taskforce also called for more of these firms to join trade associations, which would be able to battle on their behalf, and it made a strong case for compensation when "regulation impacts disproportionately on smaller businesses".

What large companies take in their stride can engulf smaller entities, said Lord Haskins. He therefore called on the Small Business Service proposed by the Government to direct its efforts at the growth stage. Although such a focus might upset those who would like to see the agency offering a safety blanket to all small firms, it is in accord with the thinking of accountants and other business advisers.

Nevertheless, this does not mean that the service should stop lobbying for small businesses. Aida Alvarez is the head of the US Small Business Administration, upon which the SBS is based. As she pointed out while visiting London earlier this month, such a body can have a powerful financial impact. The SBA itself has spent billions of dollars since it was established in the early 1950s on providing finance and other sorts of assistance to small firms.