ROLE OF THE SMALL BUSINESS SECTOR

Role of the Small Business Sector

Role of the Small Business Sector

Introduction

The most commonly used definition of small businesses can be found in the Companies Act 1985. It states that small enterprises are companies with a turnover of below 2.8 million pound sterling per annum, a balance sheet total of below 1.4 million pound sterling per annum and the number of employees must not exceed 50. For a company to be regarded as a small enterprise it has to meet two or more of these conditions at the beginning of the financial year.

Reasons for government support

Governments intervene in companies for several reasons. Below I will outline some of the reasons why governments spend large amounts on money every year supporting small businesses.

Start-up support

This means governments supporting individuals to set up a company or newly created companies to survive in the market. Support takes place in different ways, such as financial support, managerial and entrepreneurial training.

Employment

One of the main reasons why governments support start-ups is that they are a major employment creator in every economy. When a new business is started, even with a one man company, at least one new job is created.

It is not only direct employment being created, but it is also indirect employment. Say a corner shop is opened up, the suppliers will experience a higher demand for their goods, and therefore they might want to employ more people.

Like the multiplier effect, (a small increase in government spending will increase the national income by a larger amount), the creation of a new company will trigger a considerable increase in employment - direct and indirect.

Competition

Another important reason why governments should support start-ups is that an increase in the number of businesses in the market means an increase in the competition.

As more and more suppliers (i.e. companies) enter a certain market, the supply will therefore rise. With the supply now being higher the prices will fall, due to the law of supply (an increase in supply will cause a decrease in price and vice versa) and the consumer will benefit.

It is not only the prices which are affected by an increase in competition. Firms in the market might want to raise the quality of the products to be able to sell more of their products.

Economic growth and increase in GDP

The third reason is that as more companies are in an economy, the economy's output will increase. With more people being employed the total gross domestic product (GDP - "the value of goods and services produced within a nation, representing only the sum of the incomes of the factors of production”) of the country is going to rise. As total GDP increases, GDP per capita will increase as well. A rise in GDP per capita means a rise in the level of welfare.

An increase in the level of GDP means economic growth which is one of the main overall aims of modern western economies.

Development support

This means governments supporting small companies which invest in product research and development ...