An inverse relationship between efficiency and profitability according to size of (Upper-)Austrian firms? Some further tentative results

This paper examines the relationships between profitability and firm size, and efficiency and firm size, based on firms in Upper Austria. There is considerable evidence suggesting that the average profitability of small enterprises exceeds that of large firms. However, productivity tends to be positively related to firm size. These empirical findings present something of a paradox.An earlier version was presented at the ICSB 36th World Conference on Small Business and Partnership, June 24–26, 1991, Vienna, Austria. The authors gratefully acknowledge the most helpful comments on and suggested improvements of this paper by Professor Robert E. Kuenne (Princeton University) and the participants of the ICSB World Conference.     

Small-v-large firms in Australian manufacturing

The measurement of the relative efficiency of the sub-groups of large and small enterprises in each Australian manufacturing industry is undertaken in this study using two concepts of efficiency. Technical efficiency is assessed in relation to an estimated frontier production function while economic efficiency is expressed in terms of a sales based price-cost margin — a proxy for profitability. The large enterprises were found, for the most part, to be more technically efficient than the small. In terms of the profitability measure the small firms were just as likely to be the more efficient in any industry. They were generally more dispersed around the mean of both efficiency measures than were the large. The industries in which the large (or small) firms were found to be more technically efficient were not necessarily the industries for which the large (or small) firms were the more profitable. The study highlights the relationships between technical and economic efficiency and emphasises the need for careful definition of the concept efficiency when making comparisons of performance among enterprises.     

New firm growth and bank financing

This paper examines the extent to which Lucas' ideas on human capital and Jovanovic' theorising on learning can provide further insights into the development of small firms. It focuses exclusively upon newly established independent firms. Our evidence from two surveys is that bank lending to new firms is unrelated to many of the personal characteristics of founders which have been argued by other researchers to relate to small firm performance. Instead lending appears to be more related to whether or not the founder can or chooses to use personal savings, and the legal status of the business.     

Firm performance and size: Explanations from the small firm sectors

Conclusion This paper has presented the case that small firms deserve greater attention from economists who, in the past, have been interested primarily in larger firms.It is argued that it is unjustifiable to regard the small firm as simply a scaled-down version of a large firm. Instead, in several important areas of economics the small firm behaves in a way which is the opposite to that proposed by conventional theory, calibrated upon the large firm sector. For example it is shown that Gibrat's Law does not apply to the small firm sector. It is also argued that entry by new firms does not necessarily take place when profitability in that industry increases.Given that the small firm sector is becoming of increasing importance in the creation of wealth and employment in most developed countries the paper begins to sketch out the factors which influence the motivations and aspirations of the owners of these businesses and explores their implications for conventional economics.In particular it discusses the role of multiple ownership of small businesses by entrepreneurs. It argues that this little researched topic requires more investigation by theorists to investigate the factors influencing entrepreneurs decisions on the appropriate portfolio of businesses to be owned.This paper has benefitted from the many helpful comments received from Zoltan Acs, Hans-Jurgen Ewers and others attending the symposium. The views expressed, however, are those of the author alone.     

Firm size,small business presence and sales of innovative products: A micro-econometric analysis

In our generalized TOBIT analysis we identify a number of variables which have an impact on a firm's innovation output. Among others we find that larger firms generally have a higher probability of selling some innovative products, although this probability increases less than proportionately with firm size. Given that a firm has some sales of innovative products, the share of such products in a firm's total sales tends to be higher in smaller firms. Moreover, a strong small business presence in a sector seems to enhance imitative innovation but has no influence on true innovations, whereas market concentration has no influence on innovation output in whatever definition. We also find evidence of regional knowledge spill-overs. Furthermore, our results are consistent with Schmookler's hypothesis that the growth of demand enhances innovation. The outcomes about the impact of R&D collaboration and technology transfer on innovation remain ambiguous.     

Are women owner-managers challenging our definitions of entrepreneurship? An in-depth survey

In the Quebec city area, 400 women owner-managers of business in the three industrial sectors answered a detailed questionnaire, and 75 of these subsequently underwent in-depth interviews. The main dimensions explored were the characteristics of the entrepreneurs and their firms, the experience of starting a business, the success criteria used, and their vision for the future of their firms. The results suggest the importance, to these women, of a model of small and stable business. This is not a transitory phase for their firm: most choose and value such a scale of business, and they seek recognition for what they do. This model seems to represent an innovative adaptation to their professional, social, family and personal demands and challenges our definitions of entrepreneurship and of serious business.Dr Hélène Lee-Gosselin is associate professor of Management at Université Laval. She has directed a variety of research projects on women in business, entrepreneurship and the effect of stress on the mental health of nurses, and has co-authored two books on personnel management.Dr Jacques Grisé is professor of management at Faculté des sciences de l'administration of Université Laval, Quebec City. He is currently Director of Undergraduate Studies in business administration. Professor Grisé has been involved in extensive research on woman entrepreneur over the last 4 years and he has co-authored several articles on the subject with Dr Lee-Gosselin.     

Unravelling the facts about job generation

The purpose of this paper is to provide some new and useful perspectives to assist our understanding of the job creation process; especially of the relative capacities of small and large firms to create jobs.Through an initial discussion of components of change analysis, it is shown that (dynamic) job change can often be attributed to (static) size cohorts of firms in an illogical fashion. Also, change which results from firms oscillating in and out of neighbouring size cohorts has continued to be confused with shifts in employment levels which are of a long term nature.Job generation analysis has tended to ignore the role of the stable firm. However, both small and large firms, which tend to exhibit low levels of internal job change, are performing a fundamental and important task in terms of simply sustaining jobs.In the author's opinion, traditional methodologies used to investigate job creation in any economy have tended to distort our understanding of job creation and loss. Recommendations for alternatives, especially those which incorporate a temporal element into the job variable, are put forward.     

Entrepreneurship,Innovation and Economic Growth: Evidence from GEM data

Studies on the impact of technological innovation on growth have been largely mute on the role ofnew firm formation. Using cross-sectional data on the 37 countries participating in GEM 2002, this paper uses an augmented Cobb–Douglas production to explore firm formation and technological innovation as separate determinants of growth. One area of interest is the contrast between different types of entrepreneurial activities as measured using GEM Total Entrepreneurial Activity (TEA) rates – high growth potential TEA, necessity TEA, opportunity TEA and overall TEA. Of the four types of entrepreneurship, only high growth potential entrepreneurship is found to have a significant impact on economic growth. This finding is consistent with extant findings in the literature that it is fast growing new firms, not new firms in general, that accounted for most of the new job creation by small and medium enterprises in advanced countries.     

Closing the regional equity capital gap: The role of informal venture capital

There is evidence from a number of countries that small firms encounter a shortage of long-term investment finance, particularly at start-up and initial growth. Expansion of the institutional venture capital industry has done little to fill this equity gap on account of its preference for making large investments in established companies and management/leveraged buyouts. Moreover, the supply of venture capital exhibits a high level of spatial concentration. Initiatives by state/provincial and local governments, most notably in economically lagging regions, to increase the supply of risk capital for start-ups and early stage businesses have at best provided a very partial, and often costly, solution. A more appropriate approach to increasing the supply of start-up and early stage finance is to facilitate the more efficient operation of theinformal venture capital market. Informal investors, or business angels, are private investors who provide risk capital directly to new and growing businesses in which they have no family connection. Most business angels are unable to find sufficient investment opportunities and so have substantial uncommitted funds available. There is also considerable scope for expanding the population of business angels. The most cost-effective means of closing the equity gap is therefore for the public sector to underwrite the operating costs of business introduction services whose objective is to overcome the two main sources of inefficiency in the informal venture capital market, namely the invisibility of business angels and the high search costs of angels seeking investment opportunities and entrepreneurs seeking investors, by the provision of a channel of communication between informal investors and entrepreneurs seeking finance.     

Business ethics in Italy: The state of the art

Up until now, the work which has been done in Italy might be considered of a preparatory nature. In 1985 and in 1986, the association of Catholic businessmen produced two documents on the ethical implications of economic activity. But in those years, the world of big business, had not yet realised how central the argument was becoming.The first significant signs of interest for business ethics appeared in 1987. In June, 1988, the first Italian National Conference on Business Ethics took place in Milan. The main outcome of that conference has been the constitution of the Italian Chapter of the European Network. In 1988, I founded the first issue of the journal entitled Etica degli-Affari. Promotional efforts have developped along two lines. The first regards programs of executive training and, eventually, consulting. In the second place, efforts are being made to elaborate and introduce codes of ethics in Italian corporations. There are, however, some very fundamental difficulties involved in the promotion of Business Ethics in Italy. The first problem is the fact that Italy is a country with a low ethical temperature. We don't have a strong sense of national identity, nor do we have a strong sense of the state. The second difficulty has to do with the business environment — the Italian business community itself. As a self-conscious, self-aware nucleus of a sector of society, the Italian business community is a very recent, and rather minoritarian social phenomenon.I personally feel that a certain protagonism on the part of prominent business leaders who are quite sensitive to the theme of ethics would prove to be very influential and greatly accelerate the process.Mario Unnia is managing director of Prospecta, a research firm, Milan, Italy. He has lectured and published extensively in the fields of Business and Public Policy, Corporate Culture and Labour Relations. He has founded and is chairman of the Italian Business Ethics Network. He is editor of Etica degli Affari.     

Change in the size distribution of UK firms

This paper examines the extent of change and stability in the population of UK firms through time in terms of its size distribution, as defined by number of employees. It was empirically found that the distribution of employment by firm size remained surprisingly constant over the 1987–1989 period. A major implication of this finding is that in times of very high net job creation (involving high gross job creation and loss), factors are at work in the economy to keep the population distribution of firms (in terms of employment concentrations) more or less stable. It is hypothesised that a natural concentration exists for each different size band, and that as change takes place, the proportion of total employment based in the size band will tend towards this natural level.The rise in the proportion of employment in small firms, and the comparatively high job creation ability of small firms in recent times has come about in part because of negative rather than positive macro-economic influences. In recession, small firms in aggregate in spite of their individual volatility, are the most resilient. In prosperous times they do not increase their proportion of employment share, while in times of recession they do. Our results imply that large firms have a very significant, if not the most significant, bearing upon aggregate employment trends. On the other hand, small firms inherently have more potential to create jobs than large firms.The majority of public expenditure and legislative support for UK business is directed at large firms, as a result of culture and tradition. Even with the benefit of this support, large firms in recent decades have still performed badly, in job generation terms. In contrast, small firms have shown an inherent advantage in their ability to create jobs. A shift of government expenditure and legislative support from large to small firms would further enhance and realise the potential of small firms to benefit the economy and create jobs.     

The Impact of Innovativeness and Development Time on New Product Performance for Small Firms

Timing is becoming a new source of competitive advantage. The business press extols the benefits of faster product development. This paper examines whether competitive advantage can be gained by reducing development time across all types of new products or whether this advantage is restricted to certain types of new products. It proposes that product innovativeness moderates the relationship between development time and initial market performance. A survey of 110 small manufacturing firms in computer related industries supports the hypothesis. The survey findings indicate that a firm must guard against over- or under-development of the new product since product innovativeness was found to influence the impact of development time on market performance. The implications for managers are: beware of bringing a new product that is too much, too early or too little, too late.     

New business entrepreneurship in the Japanese economy

This article presents the results of a study focused on the role of new business entrepreneurship in the Japanese economy. Particular attention is paid to the activities of various government agencies in relation to new business entrepreneurship and to the barriers to this activity in Japan. New business entrepreneurship was defined as the formation and rapid growth of a business enterprise through unique approaches to the firm's activities.In contrast to the American stereotype of Japan as an economy of a few large, interconnected firms, it is, in fact, characterized by small- and medium-sized enterprises. Over 99% of all Japanese enterprises are categorized as small or medium and over 80% of all employed Japanese are employed by such firms. However, very few of these firms are entrepreneurial in nature. The vast majority are small firms that are either subcontractors to a single larger firm or small retail, wholesale, or restaurant establishments.The start-up rate for all types of businesses in Japan has been declining for the past 10 to 15 years. More importantly, the rate of start-up s for independent firms, as opposed to firms started by a larger firm to serve primarily as a subcontractor, declined even more sharply. This indicates a significant weakness in Japan's otherwise strong economy.The low and declining rate of new business entrepreneurship in Japan is a function of structural, governmental, and cultural barriers. Structural barriers include an acute, long-term labor shortage, high financial start-up costs due in large part to high land prices, and a shortage of venture capital funding. Government barriers include “red tape,” financial and other support for small firms that is withdrawn as they enter rapid growth, and the persistent protection of inefficient industry structures. Cultural barriers involve Japan's strong group/collective orientation, the traditional career path in Japan, bounds on creativity, and the fact that entrepreneurship is not assigned a high social value.While the government provides an extensive, well-developed network of services for small- and medium-sized firms, these programs are not designed to facilitate rapid growth into the large firm phase. The Japanese experiences and programs offer useful insights for policy and tactics by other governments.     

Employment change in independent owner-managed high-technology firms in Great Britain

There is a growing volume of literature that points to the potential for small technology-based firms to achieve substantial employment growth. As a direct consequence of such work this sector of any economy has attracted increasing attention from national and local Governments concerned with finding ways of revitalising economically deprived localities and creating employment opportunities. This paper provides up-to-date empirical evidence surrounding the ability of small high-technology firms to create additional jobs in Great Britain. In addition, key founder and business characteristics are isolated which are significantly associated with employment change in growing high-technology firms over the 1986 to 1992 period. With respect to factors influencing these high levels of employment growth, a high firm size (in 1986) was found to act positively on employment growth, as was a graduate level education for the key founder. On the finance side firms which had access to and used a multiplicity of sources of start-up finance tended to grow faster. Futher, on the basis of our results we would suggest (and recommend) a Government policy which at the firm level actively encourages high-technology firm start-ups (who record higher rates of survival than firms in more conventional sectors) as well as providing support for existing high-technology firms who have already demonstrated the inclination and ability to grow in employment size.     

Institutional Investors,Political Connections,and the Incidence of Regulatory Enforcement Against Corporate Fraud

We investigate two under-explored factors in mitigating the risk of corporate fraud and regulatory enforcement against fraud, namely institutional investors and political connections. The role of institutional investors in the effective monitoring of a firm’s management is well established in the literature. We further observe that firms that have a large proportion of their shares held by institutional investors have a lower incidence of enforcement actions against corporate fraud. The importance of political connections for enterprises, whether in a developed market such as the United States or an emerging market such as China, has been established by previous studies. However, we find evidence of another positive effect of political connections: they may reduce the incidence of enforcement action against corporate fraud. We also find that political connections play a more significant role in reducing regulatory enforcement incidents against non-state-owned enterprises and firms in weaker legal environments, whereas institutional ownership plays a more important role in reducing regulatory enforcement incidents against state-owned enterprises.     

Toward a Model of Understanding Strategic Decision‐Making in Micro‐Firms: Exploring the Australian Information Technology Sector

This study explores strategic decision‐making (SDM) in micro‐firms, an economically significant business subsector. As extant large‐ and small‐firm literature currently proffers an incomplete characterization of SDM in very small enterprises, a multiple‐case methodology was used to investigate how these firms make strategic decisions. Eleven Australian Information Technology service micro‐firms participated in the study. Using an information‐processing lens, the study uncovered patterns of SDM in micro‐firms and derived a theoretical micro‐firm SDM model. This research also identifies several implications for micro‐firm management and directions for future research, contributing to the understanding of micro‐firm SDM in both theory and practice.     

Transaction Costs and standardisation in professional services to small business

In the market of business services the easier segment of large business is being saturated. Therefore, suppliers of business services must seek to cater to the growing but more difficult segment of small business, if their growth is to be maintained. With appropriate extensions, Transaction Cost Economics can facilitate understanding of the nature of the difficulty involved. Due to effects of scale in transaction costs it is relatively more expensive to provide services tailored to the individual smaller firm. Standardisation of services may be required to make access to this market viable. The question arises whether such standardised methods should be stimulated by the government. To see how this issue is perceived by suppliers of various business services, a survey was conducted on a sample of 1,000 firms, with a response of 30%. The issue of economies of scale in transaction costs did emerge, but was not universally perceived as a problem. Many respondents confirmed the need for standardised modules. Opinions were sharply divided on the issue whether the government should step in to promote standardisation across suppliers.Cluster analysis shows that respondents fall neatly into a number of classes that conceptually and statistically are highly distinct. Just over half of the respondents were clearly against government intervention, and about one third of these (radical market proponents) were of that opinion even though they granted that the scale issue constituted a problem of access to the small business market. Just under half of the respondents clearly favoured government intervention, and about half of those (radical interventionists) were of that opinion even though they saw no great problem of access due to problems of scale, or were hesitant about that problem. Accountancy firms tended to be in favour of intervention, and business consultants tended to be against. The government might explore the matter further with accountants, while leaving the business consultants alone.     

Firm Growth,Size, Age and Behavior in Japanese Manufacturing

This paper investigates the relationship between firm growth and firm size, firm age and firm behavior, such as R&D activity and subcontracting, based on the data of nearly 14,000 Japanese manufacturing firms. The stylized facts that firm size and age have a negative effect on firm growth are confirmed in the case of Japanese manufacturing firms. Also, a firms survivability rises with its size and age. R&D expenditure per employee has a significant positive effect on firm growth, which justifies the argument made by Hall (1987). Although subcontracting to only one company has no significant effect on firm growth, it has a significant positive effect on a firms survivability. In addition, subcon-tracting firms depending on only one company as a customer are subject to no significant age effects. This possibly suggests that the age effect itself has some relation to the extent of the trade network.     

The Exploration of Technological Diversity and Geographic Localization in Innovation: Start-Up Firms in the Semiconductor Industry

This paper examines the innovative ability of small firms in the semiconductor industry regarding their exploration of technological diversity and their integration within local knowledge networks. Through the analysis of patent data, we compare the innovative activity of start-up firms and larger firms. We find that small firms explore new technological areas by innovating in less crowded areas. The analysis of patent citation data reveals that small firms are tied into regional knowledge networks to a greater extent than large firms. These findings point to the role of entrepreneurial firms in the exploration of new technological spaces and in the diffusion of their accumulated knowledge through local small firm networks.     

Adoption Dynamics in Buyer-Side Exchanges

The purpose of this paper is to understand buyer/seller adoption dynamics in independent, buyer-side B2B exchanges. In a stylized model, we assume that the main role of the exchange is to reduce search costs for buyers. Buyers and sellers enter or exit the exchange based on the relative economic surplus (loss) they receive inside vs. outside the exchange. We contrast two situations: one where participants' switching cost to join the institution is negligible and another, in which it is significant. In an extension, we also explore the impact of buyer/seller heterogeneity on adoption dynamics. We have three key findings with relevant implications for practice. First, we find that the general view that demand and supply (so-called liquidity) either grows or shrinks in the marketplace may not hold. In the presence of switching costs, the exchange can evolve to a stable state with only partial market participation. Second, our results suggest that the exchange is better off subsidizing buyers as opposed to sellers in order to achieve the so-called critical mass, beyond which there is full participation. Finally, we find that while in general, minor buyers of the industry have more incentive joining the exchange, when the fixed participation fee of the exchange is high, it is major buyers who are likely to join first. For sellers, this is not the case: minor sellers are always more keen in participating in a buyer-side exchange.