The Foundations of Small Business Enterprise: An Entrepreneurial Analysis of Small Firm Inception and Growth

Citation

Tassabehji, R. (2010), "The Foundations of Small Business Enterprise: An Entrepreneurial Analysis of Small Firm Inception and Growth", International Journal of Entrepreneurial Behavior & Research, Vol. 16 No. 2, pp. 172-174. https://doi.org/10.1108/13552551011027039

This book is a consolidation of findings from a research project that took place over a period of three successive years from 1994‐1997 in Scotland, UK. The book is concerned mainly with an “entrepreneurial analysis of small business inception and growth” using an inter‐disciplinary approach. My initial worry on first reading the introductory chapter was the relevance of this study in 2009. Surely small firms have moved in over ten years? The analysis of the data and the concepts investigated addressed my concerns and the approach is an econometric analysis of 150 small firms (the majority (61.4 per cent) having less than five employees). The book examines a variety of issues: financial structure, flexibility, performance, contingency and information systems development, markets human capital, technological change and business strategy. Using a number of econometric techniques, such as regression analysis, logit modelling and cluster analysis, the data analysis is totally empirically founded and strongly based on a variety of rigorous theories in economic and firm theory.

The book is intentionally structured in a way that each chapter can stand alone as a “paper” in its own right and for this reason in every chapter there is a brief summarised section on data collected/methodology – which does tend to get tedious and sometime confusing when you are trying to relate the research findings to the original base sample of 150 companies in 1994. This is especially true in Chapter 18 when the chapter is based on a sample drawn from survivors of research conducted in 1985‐1988, 1991, and 1994‐1997 (the sample on which the book is based). In fact some of the chapters contain large sections of previously published articles, for instance Chapter 8 is largely based on Reid(2003). Reid's argument is that the results from such an extensive and long‐term project cannot be reported in “handy bite‐size units” and hence the need for the book, and this is a convincing argument.

The book is mainly aimed at academics, to demonstrate rigour in the testing of theories and there are many. However the non‐academic and non‐economist can benefit from the very interesting conclusions in this book.

The book is divided into 18 chapters and six parts, covering 244 pages with an additional 130 page appendix on instrumentation, which includes pre‐letters and a copy of the 4 questionnaires that were the basis of the face‐to‐face interviews with entrepreneurs, which highlights the rigour underpinning the research and analysis of the findings in the book. However with a price of £95 for hardback this does seem expensive for the average academic (staff or student) and especially a micro‐firm owner.

The first part is made up of two chapters providing background information to the study. The first chapter is very useful and summarises the findings of the study for each of the four years in which the data were collected broken down into market data, finance, costs, business and pricing strategy, human resources, organisation and technical change. Data about information systems were only collected in the last year and are not included here. In the next two chapters full details are provided about the research instrument developed and the data acquisition process which is central to understanding the subsequent analysis using econometrics and statistical inference.

The second part (chapters 4‐5) lays the theoretical ground for expounding theory about growth and profitability of micro‐firms using variants of Gibrat's Law. Gibrat's Law is tested and refuted concluding that smaller small firms tend to grow faster than larger small firms following a stable growth process and an alternative managerial hypothesis is presented implying a growth/profitability trade off. Chapter 5 refutes neo‐classical financial saturated hypothesis, rather suggesting that the flexibility of hiring part‐time employees is successfully exploited by mature micro‐firms to avert funding shortages. Other findings include funding shortages could be as a result of over‐trading.

Part 3 (chapters 6‐8) focuses on Finance, based on a literature review Reid identifies dynamic theory of the firm as the perspective which he will adopt to evaluate small firm financing and growth. Chapter 7 investigates whether financial structure at inception has an impact on early performance of the micro‐firm. Many financial features were found not to change across firms that continue to trade compared to those that cease, gearing and assets appear unimportant but trade credit arrangements and purchase commitments are more important as were more macro‐economic effects such as advertising, business planning, employment and innovation. Chapter 8 tests financial hypotheses using the dynamic financial theory of the firm which is lacking in the extant literature.

Part 4 deals with performance: the development of a classification for measuring performance (chapter 9); a statistical explanation of the ranking of performance by the business strategies deployed by owner managers (chapter 10) where long range planning and pursuit of pecuniary goals emerge as being particularly important; and finally (chapter 11) testing a model to estimate the effects of entrepreneurial action on new business survival. This had very interesting results, namely that product, and to a lesser extent process innovation, have a negative impact on survival where factors such as attitudinal variables (not often used in econometrics) and organisational structure have a positive impact on survivability. Part 5 looks specifically at information systems and information needs of organisations. A link between information and performance was found where the timing of events (based on contingency theory) was found to be associated with adaptations in IS. The final part explores flexibility, growth and survival and refutes Gibrat's Law (chapter 16) when considering scale flexibility and optimal size, niche flexibility (chapter 17) using Markov chain modelling and best market and organisational adaption to turbulence and flexibility of decision making (Chapter 18). The main factors that influenced the long‐lived small business positively are:

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  entrepreneurs being able to recognise change drivers;

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  adapt their organisation to it quickly;

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  make all the necessary adjustments for organisational change in particular investment decisions; and

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  delaying adjustments might have a positive consequence for performance.

Overall, this book achieved its major objective, which was to consolidate all the results of Professor Reid's research in one place and link the different strands of the studies with a strong theoretical underpinning drawn from a number of different disciplines – economics, entrepreneurship and IS. It is well written and although intended to stand alone chapter by chapter, it is better read as a whole, as many of the early chapters form the foundations on which the following parts are built. Although much of this information is in the public domain already, by placing it in one book, it provides an overarching view by the author himself which adds to the explanation and understanding of the issues he raises.