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With the current turmoil in the global economy, Small and medium-sized enterprises (SMEs) have become a pertinent sector of a nation's economy. They have a particular importance in terms of job creation for millions of citizens; their work is strongly customer-driven; they encouraged innovation and entrepreneurial spirit; increased competition and are the seed for enterprises of the future (Hillary, 2000).
Over the last two decades, various governments in the UK being labour, conservative or liberal have discussed and initiated strategies in order to support and enhance entrepreneurial spirit within the UK SMEs. However, the role of the banking sector, the firm of insolvency practitioners, the taxation authorities and other related organisations are still debatable as to whether they have contributed to such strategies.
The purpose of this research is to explore the patterns of growth, acquisition and failure amongst a sample of UK small and medium sized enterprises (SMEs) over the last decades. It will also address the challenges and barriers to the development of the sector, and highlight the role the governments, internal and external support institutions have played in promoting sustainable entrepreneurial spirit within the UK SME's.
According to the Department for Business, Enterprise & Regulatory Reform (BERR)'s Enterprise Directorate Analytical Unit, in 2007 there are 4.5 million businesses in the UK. Latest figures have revealed that Small and Medium Enterprises (SMEs) constitute 99.9 per cent of businesses in the UK, employing 59 per cent of the non-government workforce and making up 52 per cent of business turnover. The remaining 0.1% is large corporations with over 250 employees. In developing countries, the importance of SMEs in the economy is similarly higher. In 2003, figures revealed that they represent 99 % of an estimated 19.3 million enterprises in the EU and provide around 65 million job opportunities representing two-thirds of all employment (Europe Commission 2003).
During the last decade there has been substantial evidence that the SMEs are dominating the UK Economy and will continue to do so into the foreseeable future. The Department for Business, Enterprise and Regulatory Reform's (BERR) SME Statistics show that the sectors where SMEs are most prevalent are 'Real Estate, Renting and Business Activities', 'Wholesale, Retail Trade, Repairs' and 'Construction' hence account for a higher proportion of employment in those sectors (Crown, 2008).
Small and Medium Enterprises are recognised as the backbone of the UK economy, which accounts over half of the UK's turnover. Businesses employing fewer than 50 people account for 37 per cent of UK turnover and 44 per cent of private sector employment (Crown, 2008). However, failures are more frequent in SMEs due to lack of management and leadership and other barriers and challenges from the banks, the taxation authorities, the firm of insolvency practitioners and other donor organisations.
Why some businesses fail or succeed remains a controversial issue. Research conducted by Small Business Administration has shown that over 45,000 businesses within the SMEs fail every month. It was also reported that declining consumer confidence, massive layoffs, credit constraints and foreclosures are the main catalysts likely to lead to the number of business failures, closures and bankruptcy in the years ahead. And the question is asked, is there any light at the end of this tunnel? (Janklow, 2009)
Hence, new research is dispensing with the myth: "SME failure - is it fact or fiction" (Prsteny, 2003)
Over the years, the governments and many other donor agencies attested that the SMEs sector is a key contributor to the economic and social development of the UK economy. It is believed that they play a crucial role in enhancing entrepreneurship, and creating job opportunities hence catering for the basic needs of the population.
However, despite this recognition and the various pronouncements on the pages of media by the government and the banks to enhancing and supporting the rise and growth of SMEs in the UK, there are still records of business failures on a monthly basis. The study of the failures of SMEs in the UK is an area that has not received the attention it deserves, and consequently little is known about these enterprises and their causes of such failures. This research will therefore provide an original focus on the behaviour associated with SMEs failure drawn from real life lesson of entrepreneurs and hence presenting new insights of how to prevent failures.
RESEARCH AIM AND OBJECTIVES
This research aims at contributing to the existing literature about SMEs failures in the UK and the extent to which entrepreneurial spirit has been promoted hence filling a gap that exists in the knowledge about them. Accordingly, this research has the following specific goals:
An empirical investigation of causes of SMEs failures in the UK
To address the underlying issue that a lot can be done to encourage and foster business growth of SMEs within the UK.
Highlight the roles and failure of various stakeholders such as the Government, Banks, Insolvency practitioners and other organisations supporting business failures, not sustaining its growth and development.
To examine the extent to which financial and regulatory constraints are affecting SMEs operations
To enable the current structure of governance, through the legislative framework to create reform that will undoubtedly support the rise and growth of SMEs in the UK, thereby providing a forum for economic development and growth for the UK's working population of over thirty million.(Department of Employment statistics, 2008)
To address the potential that exists to enhance the chances for SMEs to achieve sustainable development in the UK.
To recommend suggested strategies to be implemented in order to reduce level of failures within the SMEs.
There is no single definition of SMEs as it varies between communities, countries and can be further extended between sectors. The main features used to categorise an organisation either micro, small or medium are the number of people employed and size of capital, turnover, assets, etc.
In the UK, sections 382 and 465 of the Companies Act 2006 define a SME by virtue of its accounting requirements. A small company is one that has a turnover of not more than £6.5 million and which does not employ more than 50 employees, where as a medium-sized company has a turnover of not more than £25.9 million employing not more than 250 employees. It is worth noting that even within the UK this definition is not universally applied. On the other hand, the British Bank Association defines small businesses as sole traders, partnerships, limited liability partnerships and limited companies with an annual turnover of under £1 million.
The importance of small and medium-sized enterprises (SMEs) has long been recognised for economic development among the major world economies and in recent times of economic crisis, their economic role cannot be over emphasised (Marchisio et al 2009). Despite its immense contribution to sustainable economic development, SMEs in any country face the same common problems, which hinder both their performance and survival, hence lead to business failure.
Several scholars and theories have given different definitions of business failures. Fredland and Morris (1976) define business failure as "discontinuance of business", on the other hand, other researchers such as Dun and Bradstreet (1969) define it as "businesses that go into bankruptcy or cease operations with resulting losses to creditors". Between these two extremes, further two views of business failures include, "termination to prevent further losses" and failure to 'make a go of it' (Watson and Everett 1996)
Traditionally, SMEs have been relatively skilled in exploiting early technology and identifying entrepreneurial opportunities, but less effective in developing and sustaining the competitive edge needed to exploit those opportunities overtime (Ireland et al, 2003). Research has also shown that with all good strategic plans properly executed by the owner managers, challenges loom prevailing in the business environment and with the meagre support from the various stakeholders such as government and banks in particular, the SMEs sector performance still falls below its expectations (Ahonsi, 2009)
The UK SMEs face great challenges: UK and global economic crisis, intense competition, lack of government support, banking sector unending demand for collateral, exploitative taxation system both at local and centre government level, the quest for insolvency practitioners to kill a business for financial gain and rapid technological change (Ahonsi, 2009; Ireland et al, 2009). Along the way, many organisations have been bedevilled by the aforementioned factors militating the performance and hence fail to meet the objective of long term survival.
According to Meyer et al (2002) while there is a great deal of work surfacing in the field of strategic entrepreneurship, a lot of the early work and research works in this area focused on the inter-relationship between entrepreneurship, large organisations and strategic management. He also asserted there is an overall lack of research at the interface between SMEs and strategic management and emphasis the need for such research to take place.
A major difficulty in studying the trends and patterns of SMEs is the lack of accessible and reliable data. Bannock and Doran (1980) noted that "Perhaps the most important gap in British Statistics, and indeed in virtually all other countries, is in statistics on new enterprise formation (births) and failures (deaths)." Once a small business has ceased its operations, it is difficult and sometimes impossible to retrieve any information about such businesses. This can largely attributable to the fact that there are no formal reporting requirements for SMEs as compared to listed companies, hence the information resides solely with the owner.
However, few studies were conducted to examine the perceived causes of SMEs failures. Abdelsamad and Kindling (1978) stated that the motivation behind most of these studies was the belief that although failures cannot be completely mitigated in a free economy, the failure rate could possibly be reduced if preventive action is taken to address the barriers and causes of such failures. A similar view was expressed by Larson and Clute (1979) who stated that one realistic approach would be to identify and diagnosed failure symptoms early enough so that failure may be averted.
Yet research studies conducted have shown that the UK government and other stakeholders have handled this issue with levity. This conclusion is confirmed in recent times for the unprecedented business failures largely attributable to poor strategic focus and decision making processes of governments and other stakeholders. Other contributing factors can also be traced to owner managers of such SMEs lacking strategic resource management and appropriate management skills (Jennings & Beaver, 1997; Webster & Lechus, 2007; Mazzarol, 2004).
According to Lall (2000), SMEs usually face three sets of competitive challenges. These challenges are attributed mainly because of their small size, distortions in markets and government policy interventions. The challenges in turn pose constraints to SME's, firstly because they are at high risks as they rely extensively on latest technology and enormous investment to carry out their operations. Secondly, SMEs lack access to inputs which are favoured to larger companies, such as credit, labour, infrastructure, and technology and market information to expand their business beyond the national boundaries. Thirdly, policies tend to be against SMEs since larger firms with wider resources and acquaintances can manipulate bureaucrats 'to exploit the system'.
To overcome the downward spiral and in enhancing entrepreneurial spirit within the UK SME's, there is greater necessity and urgency for UK SMEs to develop strategic capacity enabling them to receive support from all the stakeholders hence achieving the desired economic objectives. Thus, a sustainable entrepreneurial engagement required conscientious efforts, well articulated and long term and continuous programme of actions from all stakeholders. Marchisio et al (2009) stated that any tools, techniques, framework or methods that encourage effective decisions within an entrepreneurial strategy will be of value to SMEs.
Thus, this literature review attempted to address the work which has been done in the field of enhancing entrepreneurial spirit in the UK. It aims to commence debates and discussions with the current strategy of supporting and sustaining UK's SMEs, for both thriving and not-so-thriving businesses of UK SMEs. It will also provide a set of concrete strategic recommendations to address the constraints and challenges faced by the SMEs in order to achieve competitive economic growth in the UK economic system.
PROPOSED RESEARCH METHODS
The study will take an exploratory approach to research by incorporating both the qualitative and quantitative methods. Extensive literature survey as well as a pilot study through interviews of selected businessman, bankers, government officials and other related organisation officials will be conducted. The interviews will be based on open ended questions about the key constraints faced by SMEs sector in the UK including lack of access to credit, excessive government regulations, arbitrary and exploitive tax administration system, a weak technological base and lack of business support system. From the response received from the interviews, a detailed questionnaire will then be developed and distributed to the SMEs owners.
Using qualitative survey instrument, it is anticipated that 100 firms will be sampled to ascertain what they viewed as major obstacles to their investment and growth. Given the limitation of time and resources, interviews will be conducted in five sub sectors: Retail Sector, Financial Institution, Manufacturing Sector, Education Sector and Pharmaceuticals in particular to failed or financially strap business owners, in order to understand what they experience and what support is available to financially infirm organisations from the government and other donor organisations. Fifty bank managers/personnel across all the major high street bank will be interviewed to understand how they have supported SMEs and another twenty personnel from the taxation authorities in order to investigate the extent to which the relevant stakeholders have impeded entrepreneurial spirit within the SMEs in the last decade. The gathered data from these interviews will be used in quantitative analysis.
METHOD OF ANALYSIS
The main purpose of this research is to address the underlying issue that a lot can be done to support and sustain business growth of SMEs within the UK, hence the concept of qualitative data analysis will be preferred as it will assemble or reconstruct the data in a meaningful or comprehensible fashion (Jorgensen, 1989: 107).
Qualitative data analysis follows three steps once the data is gathered. Firstly, there is data reduction (selecting, focusing, simplifying, abstracting, transforming), secondly data display (organized, compressed), and thirdly drawing conclusions /verification (noting irregularities, patterns, explanations, possible configurations, propositions) (Miles & Huberman, 1994).
The data collected from observation and interviews will be coded (data reduction) and with the help of Microsoft Excel, the data will be presented by means of diagrams (data display), drawing out themes and concepts (drawing conclusions/verifications).
As this proposed study is an intriguing phenomenon with different trends and patterns, content analysis shall be used in analysing qualitative data (Stemler 2001). The aim of the content analysis in the study will be to investigate the extent to which entrepreneurial spirit has been enhanced in the UK SMEs within the last 10 years
The overall time scale from start to finish will take approximately five months refer in the table below and as Gant Chart in the appendix.
PROGRESS TO DATE
The journey towards this MBA programme started in the mid of August 2010 at Edge Hill University, Ormskirk Campus. The structure of the programme is currently designed in three phases. The first phase requires the completion of a 1500 word assignment called CW1 also referred to as "Literature Review". The second phase similarly requires the completion of 3000 word assignment known as CW2 "Research Proposal". Progression to the third phase is only possible upon successful completion of the first two stages. The third stage is the conduct of the actual research project.
To ensure the smooth running of this process, it was necessary to attend a five days extensive workshop on the Ormskirk campus of Edge Hill University from Monday the 16th August 2010 to the 20th August 2010. This provided the opportunity to get acquainted with the University Life, the tutors and/or supervisors and also with all the facilities available during the course of the programme.
The first stage of the programme started from Monday 23rd August 2010. For a complete understanding of the assignment, I structured it in 3 different stages and assigned a time frame for the completion of each of them. The first stage dealt mainly with the collection of data through Library and Internet Research was completed between Monday 23rd August to Friday 27th August 2010. The second stage was the analysis of the data collected to assimilate the appropriate information for the write up of my CW1. Finally, I completed my first piece of assignment and submitted it to my tutor for review and feedback on Sunday the 5th September 2010, before the final submission on Monday 6th September 2010, the advertised deadline. However, the feedback was really disappointing as the coursework did not address the issues in the assignment given. This was mainly due to confusion with the title of the assignment. A second opportunity was provided to submit another piece of work which was due to be submitted on the 13th September 2010.
After submission of the first piece of assignment namely CW1 "Literature Review", I embarked immediately on my second assignment, given the time frame for submission was quite short. This piece of assignment is still in progress.
My main dissertation is made up of the following stages:
Phase 1- Introduction
(Start Date: 21st Sept 2010; Completion Date: 10th Oct 2010)
Phase 2- Literature Review
(Start Date: 11th Oct 2010; Completion Date: 05th Nov 2010)
Phase 3- Research Scope and Methodology
(Start Date: 06th Nov 2010; Completion Date: 15th Dec 2010)
Phase 4- Analysis, Discussion and Findings
(Start Date: 16th Dec 2010; Completion Date: 07th Jan 2011)
Phase 5- Amendments and Revisions
(Start Date: 08th Jan 2011; Completion Date: 14th Jan 2011)
Phase 6- Conclusions and Recommendations
(Start Date: 15th Jan 2011; Completion Date: 19th Jan 2011)
Phase 7- Final Report
(Start Date: 20th Jan 2011; Completion Date: 27th Jan 2011)
Submission of Dissertation 28th January 2011
With my value added-network of contacts from various backgrounds and disciplines, I have made few consultations with some small businesses. I have been invited by their board of management to come for a meeting to discuss the purpose of my research as the subject is very much of interest to them.
Although the Internet and Library research conducted during my CW1 and CW2 will be significantly appropriate towards my final dissertation, I plan to visit few universities libraries to quench my thirst for further scholars on my subject area.
Reflective diary will be used to closely monitor progress and in ensuring that the timescale as per the Gant Chart is adhered to and met.
LIMITATIONS OF THE STUDY
Although the research tries to fulfil its research objectives, however, there are a number of limitations which must be acknowledged. As the research will involve a broad range of interviews with different businesses and given the amount of time available, only SMEs in London might be used as a sample. Given more availability of time, the research can be extended across the whole of UK. Another possible limitation of this study might be the choice of the organisation. If the organisations chosen are not representatives of other organisations, it will limit the findings of the research.
While conducting this research there will also be adherence to the ethical standards and issues with regard to: voluntary participation and the right to withdraw by individual employees from the process. In accordance with the Data Protection Act, the research will maintain the confidentiality of data provided by individuals or identifiable participants and their anonymity. Data gathered and information will be exclusively used for the purpose of this research project and will not be divulged to a third party.