The Small Business Sector:
Rapid Growth And Major Job Creation

Small companies in the UK, those employing eight or fewer people, have been growing faster and generating proportionately more jobs than larger ones. And despite the high ‘death rate’ of firms in this sector, it is balanced by an equally high ‘birth rate’. Small companies that survived over the period 1989-93 increased their employment level by 50% while their larger brethren were reducing their staff by 6%. These are the findings of Peter Hart and Nicholas Oulton in an analysis of growth and firm size published in the September 1996 issue of the Economic Journal.

Hart and Oulton examine the relationship between growth and size for three measures of size: employment, sales and net assets, finding similar results for each measure. For companies employing more than eight people, growth and (initial) size are largely independent. There is tremendous variation in the growth rates of individual companies but it is not related to their initial size.

However, for companies employing eight or fewer people, growth is significantly and negatively related to initial size. In other words, these firms have been growing more rapidly than their larger counterparts, whether size is measured by employment, sales or net assets.

Hart and Oulton’s study is based on a large electronic database of company accounts, comprising around 87,000 independent companies and covering all sectors of the UK economy for the period 1989-93. Unlike in most other studies, the sample covered the whole range of company size. For example, 26% of the companies had eight or fewer employees.

The study covers only companies that survived throughout this four year period. A sceptic might argue that the results are biased since it is well known that small companies have a very high death rate: even if surviving small companies generated proportionately more jobs than larger ones, the job losses due to company deaths may have outweighed these gains.

But small companies also have a high birth rate, thus generating jobs, and in subsequent research, Hart and Oulton find that the effects of birth and death rates roughly balanced out over this period. Over the period 1991-3, surviving companies employing eight or fewer increased their employment level by 50%, while those survivors employing more than eight reduced theirs by 6%.

But despite this excellent performance by small firms, there is a limit to what can be expected from them in the way of job creation. Companies employing eight or fewer people only account for about 4% of total employment in the corporate sector.

ENDS

Note for Editors: ‘Growth and Size of Firms’ by Peter E. Hart and Nicholas Oulton is published in the September 1996 issue of the Economic Journal. Hart is at the University of Reading and Oulton at the National Institute of Economic and Social Research.

For Further Information: contact Nicholas Oulton on 0171-222-7665 (email: 101547.3154@compuserve.com); or RES/ESRC Media Consultant for Economics Romesh Vaitilingam on 0171-878-2919 or mobile 0468-661095.