Small firms show road to future

Economic Review

It used to be fashionable, when they were a neglected species, to say that small businesses were wonderful. Then the official world caught hold of their importance and politicians began to have "initiatives" to help them.

The financial institutions, the banks in particular, spotted a new commercial opportunity and rushed in, too. Now, in the public eye at least, the wheel has almost come full circle: because everyone knows that small businesses are important the sector no longer attracts the attention it used to.

At least that would seem the best explanation for the quite muted response last week to the latest Small Firms in Britain report, published by the DTI. It is understandable, too, because as anyone who has tried to run a small business will know, Whitehall is not the most user-friendly of enterprises. So anything by a government department lauding its support for small businesses naturally gathers suspicion.

That is a pity because the information the report pulls together gives a useful snapshot of important and still-developing structural shifts within the economy. Two of these are highlighted in the graphs.

One is the steady growth of self-employment. In the 1970s we had about the lowest proportion of our work-force self-employed in the developed world. But as the graph shows, this started to grow at the end of the decade. Men in particular have increasingly chosen self-employment. We are now higher than the US, Japan, France and Germany. While the rise must to some extent be associated with the rise in unemployment during that period - people could not find jobs so they employed themselves - self-employment only fell back slightly at the beginning of the 1990s and growth may well have resumed.

The other graph shows how small firms are the main job creators. The graph shows changes in employment between 1989 and 1991. Companies with more than 500 employees shed labour, despite the fact that this was a period when overall employment rose. By contrast, firms with fewer than 500 employees on balance increased the size of their workforce, with tiny firms employing fewer than five people creating the most new jobs of all.

The report does not examine more recent trends in employment but data from Barclays and NatWest on the number of business start-ups suggest that these have picked up sharply from a low in 1992-93, implying that employment in tiny companies has continued to climb.

But if the growth of the sector is absolutely clear the reasons for it are less so. Part of the reason lies in the shift away from manufacturing to services. Manufacturing tends to require larger units than services. Within the manufacturing sector, industrial processes tend to require fewer people. Capital equipment has been substituted for labour and the unit size of many processes has declined for efficiency reasons.

But there are also managerial, rather than technical, reasons why large companies have cut their work-forces. For example the trend to "out-sourcing", getting small outside companies to provide services with would hitherto have been provided in-house, has been evident for at least a decade. Associated with that is the trend towards management buy-outs and the concentration of businesses on "core competencies".

Finally, and in a rather different vein, the development of the PC gives small companies the sort of data-processing power that previously was only available to the giants, thereby reducing big companies' relative advantage. But all this is already known. What we do not have much feel for is the dynamics of the situation: whether we are still in the early stages of a revolution, or whether change has more or less run its course. It is conjecture of course, but I'm fairly sure that we ain't seen nothing yet.

The principal reason for this is that two of the biggest forces for the down-sizing of business, the drive for out-sourcing and the advance of information technology, still have a long way to run. Out-sourcing is even taking a further twist: instead of management getting outside businesses to provide functions, the actual act of management itself is increasingly being out-sourced.

Companies find they have the management to run the business as it is, but not the skills to develop new areas. So they buy in those skills in the form of consultancy. As for technology, it is absolutely clear that the cost of information will continue to plunge and the capacity of delivery systems and processing power will boom. So even if large firms do still have some comparative advantage because of size, that won't last much longer.

Historically, the idea that people should work as employees for giant corporations is quite a recent one. The early stages of the industrial revolution were pioneered by small firms, and in the textile industry it took a while for out-working (self-employed workers operating in their own homes) to be replaced by the factory system. Now, the out-working structure is gradually reasserting itself in many of the new industries, particularly in communications.

Out-working can be combined with branding. For example, much of British (and US) TV production is carried out by small companies contracted to create programmes for the network. The network is the brand, but the work is done by small firms. Hollywood runs on a similar system, with the big studios essentially an assembly job, bringing together a series of individual firms (and individuals in the shape of the stars and key specialists) to produce a movie.

Obviously there are limits to the process. Some large companies will always be needed to assemble the goods or services and while there are considerable practical disadvantages to having a large work-force, if it can be managed effectively, there are also advantages. It is useful to have people who can do things without having to renegotiate with new firms all the while. But the trend is surely set. That little graph showing the fastest growth in jobs in firms with fewer than five staff shows the future.

PROMOTED VIDEO
News
REX/Eye Candy
science
News
A photo of Charles Belk being detained by police on Friday 22 August
news
News
i100
Sport
Alexis Sanchez celebrates after scoring his first goal for Arsenal in the Champions League qualifier against Besiktas
sportChilean's first goal for the club secures place in draw for Champions League group stages
Arts and Entertainment
Amis: 'The racial situation in the US is as bad as it’s been since the Civil War'
booksAuthor says he might come back across Atlantic after all
Extras
indybest
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
Google Doodle celebrates the 200th birthday of Irish writer Sheridan Le Fanu
tech
Arts and Entertainment
Vinyl demand: a factory making the old-style discs
musicManufacturers are struggling to keep up with the resurgence in vinyl
News
i100
News
In Eternal Sunshine of the Spotless Mind Jim Carrey and Kate Winslett medically erase each other from their memories
scienceTechnique successfully used to ‘reverse’ bad memories in rodents could be used on trauma victims
Arts and Entertainment
Singer Pixie Lott will take part in Strictly Come Dancing 2014, the BBC has confirmed
tv
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

C# Developer (C#, ASP.NET Developer, SQL, MVC, WPF, Real-Time F

£40000 - £48000 per annum + benefits+bonus+package: Harrington Starr: C# Devel...

C# Swift Payment Developer (C#, ASP.NET, .NET, MVC, Authorize.N

£45000 - £60000 per annum + benefits+bonus+package: Harrington Starr: C# Swift...

DevOps Engineer - Linux, Shell, Bash, Solaris, UNIX, Salt-Stack

Negotiable: Harrington Starr: A fast growing Financial Services organisation b...

Trade Desk FIX Analyst - (FIX, SQL, Equities, Support)

£50000 - £60000 per annum + excellent benefits: Harrington Starr: An award-win...

Day In a Page

Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone
Amazon is buying Twitch for £600m - but why do people want to watch others playing Xbox?

What is the appeal of Twitch?

Amazon is buying the video-game-themed online streaming site for £600m - but why do people want to watch others playing Xbox?
Tip-tapping typewriters, ripe pongs and slides in the office: Bosses are inventing surprising ways of making us work harder

How bosses are making us work harder

As it is revealed that one newspaper office pumps out the sound of typewriters to increase productivity, Gillian Orr explores the other devices designed to motivate staff
Manufacturers are struggling to keep up with the resurgence in vinyl records

Hard pressed: Resurgence in vinyl records

As the resurgence in vinyl records continues, manufacturers and their outdated machinery are struggling to keep up with the demand
Tony Jordan: 'I turned down the chance to research Charles Dickens for a TV series nine times ... then I found a kindred spirit'

A tale of two writers

Offered the chance to research Charles Dickens for a TV series, Tony Jordan turned it down. Nine times. The man behind EastEnders and Life on Mars didn’t feel right for the job. Finally, he gave in - and found an unexpected kindred spirit
Could a later start to the school day be the most useful educational reform of all?

Should pupils get a lie in?

Doctors want a later start to the school day so that pupils can sleep later. Not because teenagers are lazy, explains Simon Usborne - it's all down to their circadian rhythms
Prepare for Jewish jokes – as Jewish comedians get their own festival

Prepare for Jewish jokes...

... as Jewish comedians get their own festival
SJ Watson: 'I still can't quite believe that Before I Go to Sleep started in my head'

A dream come true for SJ Watson

Watson was working part time in the NHS when his debut novel, Before I Go to Sleep, became a bestseller. Now it's a Hollywood movie, too. Here he recalls the whirlwind journey from children’s ward to A-list film set
10 best cycling bags for commuters

10 best cycling bags for commuters

Gear up for next week’s National Cycle to Work day with one of these practical backpacks and messenger bags
Paul Scholes: Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United

Paul Scholes column

Three at the back isn’t working yet but given time I’m hopeful Louis van Gaal can rebuild Manchester United
Kate Bush, Hammersmith Apollo music review: A preamble, then a coup de théâtre - and suddenly the long wait felt worth it

Kate Bush shows a voice untroubled by time

A preamble, then a coup de théâtre - and suddenly the long wait felt worth it
Robot sheepdog technology could be used to save people from burning buildings

The science of herding is cracked

Mathematical model would allow robots to be programmed to control crowds and save people from burning buildings
Tyrant: Is the world ready for a Middle Eastern 'Dallas'?

This tyrant doesn’t rule

It’s billed as a Middle Eastern ‘Dallas’, so why does Fox’s new drama have a white British star?