Small firms and local economic recovery: the case of Britain’s depleted communities

Abstract

This research aims to contribute to a better understanding of the small firm sector’s role in bringing about employment growth at the community level. The study begins by focusing on the new prominence of the small firm and the reasons for this. Part of this new prominence relates to the apparent ability of the small firm sector to generate a disproportionately large number of jobs when compared to the large firm sector. This ability has in turn led to speculation that small firms could play an important role in regional development. However, the literature reporting on small firms and the literature reporting on changes in the economy send mixed signals with respect to the potential of the small firm sector as an instrument of regional development. As a result, it is relevant to ask whether small firms can lead recovery in communities recently depleted by above average employment losses. In seeking an answer to this question the research focuses on Great Britain. There are several reasons for this choice. First, since the 1980s many researchers in Great Britain have studied the small firm sector; as a result, there is a substantial knowledge base including a sound understanding of the environmental factors that influence rates of new firm formation. Second, Great Britain has simultaneously experienced both growth and decline as its regional economies exhibit substantial variation; consequently, issues of regional development are important there. Third, during the 1980s the new prominence of the small firm received a considerable boost from promotion of the enterprise culture by successive Thatcher governments. Fourth, Great Britain’s small firm sector exhibited exceptional growth over the 1980s when the population of VAT registered firms increased substantially. Therefore the British experience should be an important indicator , of the potential of the small firm sector to lead recovery. Using the NOMIS data base and other sources, each community in Great Britain was classified as occupying an environment that was either most conducive, least conducive or indeterminate with respect to its influence on the rate of new firm formation. It was then shown that the majority of depleted communities in Great Britain occupied environments that were among the least conducive to new firm formation. Consequently, for the majority of Britain’s depleted communities, small firm led recovery would require a robust small firm sector that was capable of overcoming the limitations imposed by unfavorable environmental conditions. The research also showed that in recovering communities there was virtually no association between rates of firm formation and rates of net FTE employment change. This result strongly suggests that many recovering communities relied on other sources of employment change for their recoveries. An analysis of employment changes in recovering and non- recovering depleted communities revealed the very important role played by the manufacturing sector. In recovering communities the manufacturing sector acted as a "stabilizer" which made it possible for the contributions of new small firms to be observed. Together these findings suggest that in communities experiencing substantial losses m manufacturing employment, government policies which are intended to stimulate recovery by emphasizing entrepreneurship would be more effective if at least some resources were directed toward stabilizing employment in the manufacturing sector. In other words, even though new small firms created many new jobs, differences between depleted communities that recovered and depleted communities that did not recover are not well explained by variations in the number of jobs created by new small firms. Rather, the differences appear to be better accounted for by the abatement of manufacturing job losses in some communities (those that recovered) and the continuation of manufacturing job losses in others (those that did not recover)