Chapter 2 Literature review of the debate surrounding the need for intervention
2.2 The debate regarding the need for intervention in SMEs in general
After the Second World War, the rise of large businesses, conglomerates and multi-national corporations led many people to believe that there was no future for the small enterprise.
In the United Kingdom, it took the Bolton report published in 1971 in the United Kingdom, to highlight how badly the small business sector had been handled in the United Kingdom. The report was successful, not only in quantifying the small business sector’s contribution to the socio-economic structure of contemporary Britain, but also in identifying the main problems associated with it, as well as the fact that Britain was now lagging behind efforts in the small business sector in the United States of America, Germany, France and Japan.
The conspicuous lack of vocational education and training among small business owner/managers and their workforce featured prominently in the findings summarised in the report (Matlay, 1999:6).
A number of researchers indicated that not only are the numbers of small and medium businesses increasing internationally, but that small and medium businesses are significant creators of new employment opportunities, underlining their importance in the world economy (Warren and Murphy, 2000:1; Watson, Hogarth-Scott and Wilson, 1998:218; Small Business Profile 2002 – A profile of Small Business in British Columbia, 2002:4). Governments are recognising this increased importance too, and this is reflected in new and changed legislation favouring small and medium businesses, clearly
the economy (Warren and Murphy, 2000:2; State of Small Business in South Africa, 1999:11).
An alternative viewpoint comes from Hallberg (2000:4) of the World Bank’s International Finance Corporation. Hallberg firstly distinguished micro enterprises as those businesses that trade in the informal sector, and small and medium enterprises as those businesses that trade in the formal sector. Hallberg (2000:5) suggested that more and more SMEs grow into large businesses as the developing economy matures towards a developed economy, rather than as a result of interventions. Hallberg suggested that the evidence points to the fact that within industries, SMEs are in fact less labour intensive than large businesses within a sector, and that the labour intensiveness is related to the industry rather than the size of the business. Hallberg further stated that developing countries by default will have a greater percentage of SMEs as their economies are young and weak, and that as a country moves towards becoming a developed country, so too does the mix of SMEs to large businesses change in favour of large businesses. Hallberg (2000:6) postulated that SMEs create more jobs because there are more of them. However, she says that if the job destruction rate is factored in, then SMEs do not create more jobs. Therefore, the only way to increase job creation, using SMEs, was to increase the job creation rate by increasing the rate at which SMEs are created, rather than the rate at which micro enterprises are created. Hallberg (2000:10) nonetheless believed that interventions are required, with a bias towards functional interventions in order to grow the rate at which SMEs are established.
This realisation of the importance of SMEs, leads to the question as to whether or not government should intervene in any way in order to
accelerate the establishment and growth of SMEs. Bridge (1998:205) suggests that because job creation is important to governments, especially during periods of high unemployment, governments will be prepared to intervene. However, Bridge (1998:216) further suggests that the proponents of a free market system argue that the laws of supply and demand must be allowed to rule, and that interventions in the SME market are of no value. Bridge suggests that the benefits of free enterprise should be sufficient inducement to get individuals to start enterprises. However, interventionist proponents argue that this is only applicable in perfectly competitive markets, and is therefore only applicable in theory (Bridge, 1998:217).
Bridge (1998:218) suggests that all legislation related to business that already exists in any country, is in itself an intervention, and that a precedent for intervention has thereby been set. Bridge (1998:218) further suggests that a laissez-faire economic approach suggested by some governments is seldom, if ever, seen in practice.
Matlay (2001:396) describes the interventions in Eastern Europe after the collapse of communism in terms that indicate that the local governments used functional intervention, and, according to Matlay, these efforts were successful despite setbacks caused by unsuccessful selective interventions.
Wint (1998:282) also quotes the World Bank as arguing that their research indicated that economic success with a high growth rate in eight (8) countries studied appeared to be directly related to functional interventions. Wint (1998:294) further suggests that the role of government should be to manage the macroeconomic environment as it is the least obtrusive, yet is the intervention that creates the best environment for growth by creating a stable
economic environment which does not suffer from widely fluctuating macroeconomic factors such as exchange rate and inflation.
Lohmann (Online, 9 November 2003:2) found that in Hawaii, which was perceived to be one of the worst places in the United States for entrepreneurial activity to be able to occur, there was a remarkable number of entrepreneurs. He was astounded that despite anti-growth, anti-business government policies, combined with an economy in recession which should doom many of the local companies to failure, they succeeded with remarkable results.