Is big back?
Densil Williams, Guest Columnist
In December 2011 and March 2012, The Economist, a highly respected magazine which covers a wide range of subjects from politics to business, ran two interesting articles looking at the debate over the size of firms.
In one of the articles, the author tried to show why large firms are more superior to small firms in relation to the critical variable of innovation. The views expressed in that article would be considered by many as unorthodox in today's environment, where the conventional wisdom says that small firms are more nimble and better able to be more innovative than large, bureaucratic enterprises.
The other article in the March 2012 edition was titled 'Small is not beautiful: why small firms are less wonderful than you think'. There, the author tried to show that economies with too many small firms are often stagnant and may find themselves in serious economic conundrum to eke out growth in the long run.
To buttress this argument, the writer cited empirical evidence in the Eurozone, where Greece, Portugal and Italy, all economies with a large mass of small firms, find it hard to grow. On the other hand, Germany, the Eurozone's strongest economy, has a larger proportion of large firms and is not struggling with its growth problem.
What these articles have done, in my view, is to put squarely on the development agenda the role of public policy in supporting small firms.
The role of public policy
In a small country like Jamaica, it is very fashionable to talk about the need for government to provide support for small and medium-size enterprises (SMEs). These days, the jargon has moved from SMEs to MSMEs (micro, small and medium- size enterprises).
Amid the cacophony, what is never clear to me is the real rationale for the call for government support for MSMEs. While the protagonists do not always state clearly their agenda, it is important that policymakers know the objective of their support.
The policy and programmes that are put forward by the government to support the MSME sector should not be aimed at containment but must be geared towards helping firms in the sector to go for growth. In other words, the role of public policy aimed at supporting small firms must be towards getting these firms to grow. Public policy should aim to encourage firms to graduate from the MSME sector and encourage the start-up of more new, smaller firms, which are great for job creation.
Small firms should not be encouraged to stay small indefinitely. For robust economic transformation, size matters, especially in this highly integrated global economy. Policymakers, therefore, should start thinking about putting in place policies that remove the barriers to growth in the small-firm sector. Discriminatory policies like differential tax rates for small versus large firms should be eliminated so that small firms do not have the incentive to remain small indefinitely.
With the current structure of the global economy, economies of scale in production and distribution and economies of scope are going to be the most critical variables that determine which firms remain open and which ones are closed.
Size is one of the most important drivers for economies of scale in production. Large firms purchase bigger volumes of inputs and, thus, can negotiate better discounts versus the small firms that generally purchase small quantities and at higher prices. With large discounts on the input price for the materials that are fed into the production process, large firms are able to sell the same products that small firms are selling, but at a much lower price.
Even if small firms try to differentiate their products, the cost of the differentiation may be so exorbitant that the firm may not be able to sell enough to consumers in order to cover the cost of production. Most consumers are price-sensitive and will choose the cheapest product once the quality is at a reasonable standard.
Another important benefit that large size offers is specialisation. As firms grow larger, workers can specialise in critical areas without having to be a jack of all trades and master of none, thus improving their productivity. In a micro firm, the engineer is sometimes working as the receptionist and bearer, and is also fixing everybody's email problems. This does not give him/her sufficient time to concentrate on the task that an engineer should be doing, i.e., be innovative and coming up with new products that can sustain the firm.
Further, the larger the firm the more attractive it is for talented employees. Talent is an important source of competitive advantage for an enterprise. The outcomes and performance of the firm are directly linked to the talent that it employs. Indeed, academic work has shown this connection from as early as Penrose (1959) up to Porter (1990), among others.
The firm is not merely an economic unit that responds to market forces. Any conceptualisation of the firm has to take into account the human element, which is critical in shaping strategies and policies that will determine long-term performance. Therefore, talent recruitment and training will be critical for firms to compete effectively in the marketplace. Larger firms generally have an edge over smaller ones in this regard.
As Jamaica continues its deliberations on tax reform, economic competitiveness, economic transformation and, economic growth, different special-interest groups will articulate their various viewpoints in order to get their agenda on the table.
The technocrat who will eventually aggregate all the various positions, need to be clear in their minds about the role public policy should play in achieving the end result of economic growth and transformation of the Jamaican economy.
What is clear is that the current global economic structure is more biased towards larger firms. The rise of globally integrated enterprises which are managing large production systems, e.g. Apple, Google, among others, are cases in point.
Government support for small firms, therefore, should be framed along the line of providing incentive to propel growth, and not to encourage them to remain small indefinitely. There is definitely a place for small firms in all economies. Most great ideas start small, but in order for them to have the desired effects and solve the problems of economic growth and development which Jamaica so badly needs, these ideas have to spread widely, by growing the company.
China, India and Brazil are all doing well today not because of scattered small enterprises. Most of the firms that are driving the growth in these economies started small, but the vision was never to remain there. Public policy was geared towards helping these firms to grow. Today, we see the likes of Haire, Acer, Daewoo, in addition to numerous others, which started out as very small companies and are now competing on the world stage as large multinationals.They are driving the growth in the emerging economies of India, South Korea, Taiwan, among others.
Indeed, small firms are necessary but not sufficient to drive economic growth in a country like Jamaica. We will need more of our small firms to start growing in order to compete more effectively in the global economy.