Ebook Small Firms’ Actions and their Survival Probabilities
When Alfred Lord Tennyson wrote “It surely was my profit had I known”, he was describing in poetry what the market achieves quite naturally. Whether or not entrepreneurs are conscious of it, by their actions within competitive firms they participate in a selection process which favours the survival of those firms which achieve superior performance.
Conventionally, economists have tended to think of such entrepreneurs as having few actions at their disposal to achieve good competitive performance. In fact, the competitive firm faces many action possibilities, extending well beyond output, location, advertising etc. For example, it has many possible actions it can take as regards both financial structure, and the composition of its work force.
This paper examines a random sample of one hundred and fifty new business start-ups for evidence on the complex set of actions which entrepreneurs may undertake. These complex actions are classified under the headings of markets, costs, strategy, finance, organisation, human capital and innovation. The outcome of these complex actions is simple; the new start-up either folds or remains in business.
An econometric analysis of the probability of staying in business over a three year period, depending on the actions of entrepreneurs, was undertaken. This produced three results of particular note. First, using a bank loan or overdraft was detrimental to staying in business. This accords with theoretical views of small firm financial structure which emphasise the importance of rapid debt retiral, Hilten et al (1993), and low gearing, Reid (1991), for staying in business. Second, the attitudes adopted towards running the business are important. If the entrepreneur treats the business as simply an alternative to unemployment, or uses it to fulfil personal dreams, like getting rich quick, being one’s own boss etc, survival prospects are diminished.
However, if the entrepreneur is willing to sacrifice profit initially in order to ‘grow on’ the firm, it is much more likely to stay in business. Third, the structure of employment within the new small firm is important. On a headcount basis, larger small firms have better survival prospects than smaller small firms, which is associated with a reduction in full-time employees and tighter control of the wage bill. There is also a hint that early innovation is generally not important in the inception stage of the life-cycle of the new small firm. Perhaps starting the firm is itself ‘the innovative event’; and precipitate further innovation reduces prospects for staying in business.
Download
PDF Ebook Small Firms’ Actions and their Survival Probabilities
Posted in :
