The modern day economies have been faced with an increasing pressure to satisfy the demands of the progressively rising populations. Financial resources become insufficient to meet the needs of every citizen. The education sector has been producing more than enough graduates with diverse skills. However, employment opportunities have reduced significantly due to the high recruitment in the job market that does not match the rate of expansion in industries that would create job opportunities. Economies end up having a high number of skilled man-power, lacking enough capital to engage in highly productive and profitable ventures where skills can be utilized to earn a livelihood. Under these circumstances, entrepreneurship comes in handy. Investing in small businesses that do not require large amounts of capital is fits the entrepreneurs whose capital acquisition is limited. With more and more people getting engaged in the small business sector, their ability to meet the basic needs is strengthened as they wait for better opportunities to emerge.
The small business sector
The small business sector is composed of many small independent firms that own a little market share. The small firms lack the capability of influencing prices within the market segment that they occupy. The firms in a small business sector lack formalities in their management structures. They are normally dominated by centralized management and individual decision making in the production process. Firms in a small business sector mainly operate on low capital and produce a limited number of products, targeting a narrow array of customers in the market (Nathaniel, 2008: 47). The small business sector is a derivative of entrepreneurship and innovation. Entrepreneurship is the process of undertaking the risk of obtaining goods and services at a particular cost and selling them at predicted prices. It is the process of combining many factors of production in the creation of new enterprises. Innovation is a change in product, service or the method of production and marketing, with the aim of improving competitiveness of a business in the market.
The small business sector comes up to satisfy a particular demand existing in a particular locality. Innovative entrepreneurs identify the need for availing nonexistent products and services in the market. They may not be needed in large quantities, but they are essential in the market. A good example is where small scale dealers in spare parts complement the automobile industry in a particular area. Motor vehicle dealers may not necessarily be selling spare parts, but they are essential since repair and maintenance must be done continuously on the depreciating vehicles. In the same market there will be entrepreneurs who will be offering tire repair, car wash and mechanical repair services. An amalgamation of all these business activities leads to the development of a small business sector with many small scale entrepreneurs.
Since the management and running of these enterprises tends to be informal, skilled labor is not a necessity. Price determination is mainly through haggling, with customers tending to pay better prices depending on the quality of goods and services. Customer satisfaction in the small business sector is the main factor that raises turnover since customers will tend to choose the commodities or services from the providers who offer the best utility. In the long run, the small business sector tends to exhibit perfect competition.
Small enterprises in the sector are characterized by low numbers of personnel, with the owners participating fully in the daily activities of the business. The financial system of enterprises in the small business sector is normally unpredictable. This is because their turn over is dependent on the availability of customers as well as environmental conditions, e. g during a cold day, cold soft drinks such as ice-cream do not sell as much as during hot weather. On the other hand, they are normally hard hit by difficulties when a country’s economy becomes unstable. They are hardly eligible for sufficient loans from financial institutions due to their varied production as well as documentation that are required by banks for loan eligibility assessment (Bridge, S, O’Neill, K, and Cromie, S, 2003: 23-27).
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Impact of the small business sector on an economy
As world economies develop, there has been a rising demand for employment due to the high population growth rate and improved education systems globally. School leavers from all levels graduate with the hope of acquiring employment for self sustenance and personal development. Many economies have been unable to provide white collar jobs for all citizens in the limited job market. The small business sector comes in handy to assist economies in poverty alleviation through provision of self employment to thousands of citizens who would otherwise depend on the government for their existence. The small business sector employs a considerable number of people either as entrepreneurs or as casual workers. This enables them to afford basic commodities which in turn add to the Gross Domestic Products of many economies. In the United Kingdom, the small business sector carries 99.1% of all enterprises with 40% of total turnover. The small business sector provides employment to 19% of graduates from universities in the United Kingdom (Feldman, 2008: 22-27).
In South Africa, the small businesses provide employment to more than 15 million people. These are employed in more than 800,000 small enterprises in the whole country. This is a significant number of people who earn their livelihood from the small business sector. It has great value to the South African government. In the United States, reports show that between 1980 and 1986, 63.5% of all the jobs created were in the small business sector. They amounted to 10.5 million jobs that cropped up in the private sector (Feldman, 2008: 22). The United States’ government recognizes the role that the small businesses play within the economy. According to Susan Ward (2008, Fox pars. 2-3), “More than 1.7 million employees, or 16 percent, worked for medium-sized enterprises in 2007, totaling to over 6.8 million, or 64 percent, of private sector employees.”
The small business sector produces a variety of goods and services needed in the development of an economy. Importation of goods and services has a cost attached to it meaning that the importing country has to forego some amount of money that could otherwise have been avoided if the goods could have been produced locally. Small enterprises are therefore necessary to avail these commodities and services. Small firms play an important role in providing raw materials for large firms in an economy. This ensures efficient production of goods and services in the large industries, resulting in low costs of production and an eventual reduction in the cost of the finished products. Small businesses are significant in providing the required competition in the market as well as providing a variety of products for customers to choose from. Due to this competition, innovation is encouraged in the market as businesses strive to differentiate their products from the rest in order to attract more customers. This improves the quality of products within an economy, which culminates in the products’ acceptance in the international market. The interactions amongst these small businesses give rise to new businesses that are beneficial to the economy in the sense that more and more potential investment opportunities become exploited improving per capita income.
Emigration has also been hurting many world economies. This occurs when educated citizens depart their country to search for employment in foreign countries. Under such circumstances, funds are spent in educating citizens, but eventually do not help in achieving the desired objectives. Entrepreneurship in the small business sector absorbs graduates who would otherwise have left the country to produce for another economy. It therefore plays a significant role in ensuring that funds injected into the education system of an economy are not lost. With a large proportion of people getting engaged in the small scale business sector, it is most unlikely that unlawful activities will be a problem in an economy.
Small firms in the small business sector mainly crop up to satisfy a rising demand of a particular commodity in the market. Large manufacturing companies can hardly satisfy all the customers’ demands however much they try. Consumers tend to avoid purchasing products from in accessible industries especially if the seller does not provide transport. The transporters in the small business sector ensure that place utility for goods is realized, hence promoting sales, that eventually improve the economy in general (Burns, 2005: 16-21).
Intervention in the market to promote small business
Due to the numerous benefits attached to small businesses, it is of utmost importance to engage in promotion activities in order to derive maximum utility from them. Interventions are not restricted to the entrepreneurs alone. Information from consumers can be acquired through research. Small businesses normally lack enough funds to engage in intensive research for product improvement and development. However, the research does not necessarily have to be designed to consume a lot of money. Simple and focused research can be very beneficial to the entrepreneurs (John, 2001: 36-41).
Intervention in the market to promote small businesses is important due to several significant issues; failure attributed to incompetence of small businesses is an issue that may necessitate intervention in the market. Intervention may be aimed at professionalizing small businesses through skills addition in order to boost production. It may also be important in enlightening the entrepreneurs on important information such as government policies in order for businesses to be operating in line with the law. In the cultural context, it is necessary for the government to intervene; in order to harmonize different cultures to embrace the policy where by anyone can invest in any part of the country regardless of culture or ethnic background. Intervention helps in eradicating cultural barriers. With emergence of new technologies progressively, it is important to ensure that entrepreneurs in small business are enlightened accordingly to increase production. Entrepreneurs are trained time and again as new ways of production emerge. The government may be of assistance in ensuring that the small business enterprises are decentralized through subsidies for entrepreneurs who locate their industries in certain areas within the country, in a bid to balance national development (Burns, 2005: 26-32).
Product promotion in small businesses can be approached in numerous ways. The most important part is to ensure that the information is perfectly received by the consumers. Government intervention is important in order to facilitate the creation of an enabling environment. Government policies are important in promoting small businesses. The government is in charge of security and protection of property. It comes in handy to provide security, and in certain cases, it builds structures to shelter the merchandise especially in cases of a common market. The government can intervene through provision of grants to dedicated entrepreneurs to boost their capital as well as expand their enterprises. This can help in solving the problem of lack of capital, which hampers development in the small business sector. Entrepreneurs can also be assisted to venture in to small businesses through the governments initiative of reducing the procedures involved.
In order to evade failure, start-up entrepreneurs should take sufficient time to acquire sufficient information concerning the market. They should assess the feasibility of their investment through interactive surveys amongst the already established entrepreneurs. It is important for them to attend public shows for product promotion organized by other players in the market, paying attention to any useful information that may help them in establishing a strong market base for their new products. It is also necessary to identify the vacuum existing in the market. This is because it is no use venturing in to a competitive field, producing the same goods that have flooded the market.
However, intervention in the small businesses does not always culminate in constructive results. It may contribute to the down fall of the small business sector. Government intervention fabricates new laws and regulations that may disorganize the working of the market system. Price determination is the worst affected by any external intervention in the market. This is because the laws of demand and supply are not allowed to operate the way they should. Diversity of individual business policies is not taken in to consideration when the government intervenes. This is because government policies apply across the board (Susan Ward, 2008, Fox pars. 6-8). This may hamper progress in particular industries whose production process may not be conventional as the government may presume. In this case, the government may end up using a lot funds that do not produce the desired result, which translates to a loss in the economy.
Government intervention is more often than not meant to be a long term endeavor. However, regimes change time and again, with a resultant review of policies over and over again. This usually impacts negatively on the small businesses since they keep on reorganizing their systems frequently resulting in an overall loss. More over, the long term objectives of the government that act as the driving force are never realized because of lack of continuity in most cases. This phenomenon stirs up the small business sector, compelling some entrepreneurs to quit. Connecting enterprises with the government through policies may be detrimental to their existence especially if the government is to be faced by financial crisis. Government intervention results in an improvement of poor performers and low producers. However much the intervention is beneficial to the small businesses, the impact to the best performers and large producers may be negative. In some cases, one might argue that resources and such positive measures should be sacrificed to boost the performance of large producers and expand the best performers, instead of spending a lot of money on small businesses that might never satisfy the market demand. In encouraging so many entrepreneurs to venture in to small businesses, the government may be creating the problem of overproduction of a certain product.
Through the law of demand and supply, prices may fall resulting in an overall loss which might cause dire consequences to the economy (John, 2001: 36-41). An example of this kind of investment is that which occurred in the United States in 2007, where so many people had borrowed loans to acquire mortgage. There happened to be an excess of houses in the United States, causing the prices of houses to fall to unexpected levels. The people who had borrowed the loans were unable to repay, causing the current banking crisis in the United States. Intervention that involves the cooperation of a number of small businesses may end up leading to the formation of oligopolies which in turn have a tendency of restricting entry of other industries in to the market. This causes a negative impact on the growth of the small business sector, with a subsequent failure in the economy.
The small business sector has been significant in strengthening world economies through provision of employment as well as providing essential commodities in the market. It is important for entrepreneurs wishing to venture in to a small business to do the necessary market survey in order to avoid unnecessary decisions that may impede success in the process of production and marketing. Government intervention is necessary for the promotion of the small business sector. However, there are various disadvantages associated with this intervention. There occur some situations where the market system in the small business sector should be left to regulate itself, for example allowing the law of demand and supply to regulate prices without intervention.
- Burns P. (2005) Entrepreneurship and Small Business, Palgrave- Macmillan.
- Bridge, S, O’Neill, K, and Cromie, S (2003) Understanding Enterprise, Entrepreneurship and Small Business, 2nd edition, Palgrave Macmillan.
- Feldman K. (2001) Innovation in Business: Building Blocks of World Economies, Rockhampton: CQU Press.
- John B. (2001) Innovation, Entrepreneurship and the Firm: a Post-Schumpeterian Approach,
- University of Birmingham, Edgbaston, Birmingham B15 2TT, England, UK
- Nathaniel B. (2008) “Modern Trade: Difficulties Encountered,” International Business Journal, 3, no. 2, August, p. 47
- Susan W. 2008, Key Small Business Statistics: How many people work for small businesses? Viewed 29 November 2008, <http://www.ic.gc.ca/epic/site/sbrp-rppe.nsf/en/rd02303e.html.>