The importance of the SME to the modern UK economy

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Last updated: April 14, 2019

In this assignment I am going to discuss the importance of the SME to the modern UK economy. I will examine innovative and non-innovative SMEs to illustrate my points.The importance of SMEs is clear in the modern UK economy.

They provide ideas, products/service, jobs and also contribute to the wealth of our economy. SMEs account for approximately £1 trillion of the UK turnover [Small Business Service]. The Small Business Service collated statistics about enterprises based on the number of firms registered to pay VAT. In 2002, 25.2million people were employed in firms with less that 250 employees.[Based on number of employees, SME Statistics 2002] and those firms’ combined turnover was £988,985 million [Based on turnover, SME Statistics 2002].

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For firms that generally employ less than 250 people each that is an astonishing statistic. That turnover figure alone shows just how important a role SMEs have in our economy. However, when you look at the other side of the coin and see that, when combined, SMEs account for nearly 99% of the total number of businesses trading in the UK, it would seem obvious that they contribute so much.It is predicted that by 2010, there will be 4.5million small and medium sized businesses in the UK(most of which do not exist today) and those businesses will have contributed over 2million new jobs to the economy. [extracted from a briefing paper by the Performance ; Innovation Unit(PIU)]There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things [Machiavelli, Entrepreneurship ; Small Firms; Deakins ; Freel].

The words spoken by Machiavelli back in the 15th century are still prevalent today and express the fear some organisations have of innovation because there is a degree of risk associated with it. A larger firm may be able to reduce the risk posed by having several innovation projects on the go at once. On the other hand, smaller firms may have to put all of their efforts and time into only one product which in turn substantially increases the risk associated with it.”Sometimes you need to do outrageous things to get noticed: this is where SMEs excel.” [Bruce Epsley, president of CIMA, taken from article by Adrian Zea, www.accountancyage.com] I take this to mean that an SME is more likely to have take risks to get noticed whereas a larger firm would be more cautious as not to destabilise its base.

Many studies show a high level of innovative intend however, the actual level of innovative output is generally lower [adapted from Entrepreneurship ; Small Firms, Deakins ; Freel]. An example an innovatition based business would be the Dyson Company . When you hear the name Dyson, you automatically think of vacuum cleaners. In many respects this is true but before the vacuum cleaner, James Dyson was also responsible for designing the Sea Truck(where world-wide sales now exceed £500million) and the Ball Barrow which became a market leader within three years of launch. He has recently launched a dual drum washing machine which spins clothes in opposite directions[Dyson.co.uk] The Dyson example shows how one idea can make a company “famous” even though it has been responsible for many more.

The Dyson company has grown over the years due to the popularity of its products.In the current economy, innovation is very important to enterprise and the development of goods/services. Enterprises be them large or small become innovative to try and improve and to attempt to increase profits.

66 percent of enterprises in the UK were classed as being innovation active between 1998 and 2000.The assumption that many of those enterprises would be SMEs, is disproved by the fact that 78 percent of large enterprises are innovation active compared to only 66 percent of small and medium enterprises. [adapted from UK Innovation Survey 2001] The sizeable percentages of SMEs who are innovate shows how important, in an overall context, innovation is to our economy.However we should not discount the importance of non-innovative SMEs. The best way to describe a non-innovative SME would be a business which is based on an existing product or service but the person starting the business see potential in the area they are in. To show this, I will detail a situation which arose where I live. Up until approximately 12years ago, there was only one male hairdressers and it was generally felt that this barber was for the older gentleman.

A new barber opened and has been very successful due to the number of clients which has been able to attract.Of course it would be stupid to assume that a SME is always going to be a hairdresser. The point is, a non-innovative SME is likely to be a business which has been created due to an available market or because the person starting the enterprise believes that they can provide a better product or service than their competitors. Other examples would be a flower shop, coffee shop etc. Many enterprises which claim to be innovative may, at the end of the day be a basic non-innovative SME. Studies have shown that 40 percent of such firms fail to produce new products. [CBR (2000) British Enterprise in Transition, Department of Applied Economics, University of Cambridge]Even though it appears that SMEs have an important role to play in the modern UK economy, the importance of the larger firms cannot be discounted. Large companies such as WH Smith employ large numbers of staff and have high turnovers.

In 2002, WH Smith Plc had turnover amounting to£2.9bn and employed 30,747 people. [taken from WH Smith Plc Annual Report 2002]. Although nowhere near the £1 trillion turnover amassed by the SMEs, the fact that one company in itself generated nearly £3bn illustrates that large firms still have a vital role to play in the UK economy. The figures given earlier showed that all but 1percent of businesses trading in the UK today were SMEs. That 1 percent accounts for 60 percent of the GDP for the UK.

Approximately £1.5bn. [Small Business Service].In conclusion, it appears that the SME is going to continue to be important to the modern UK economy. The volatility of the business world means that many SMEs will fail to succeed but many of these will be replaced by new business.

The government is trying to encourage start-ups by putting initiatives in place to try and help new businesses get finance and support if they need it to get them through the difficult early days. The sizeable contribution they make to the total GDP of the UK exhibits how important it is for the government to support these businesses. On a national level, 25 percent of SMEs sell outside the UK [SME Omnibus Survey 2001(wave 1)].

This makes them valuable to the economy in terms of encouraging trade with other countries. With regard to innovative and non-innovative SMEs, both are equally important. It goes without saying that the market place needs innovators or it will go stale but we cannot discount the importance of the coffee shops, the hairdressers as they perform or produce goods that the customer wants and needs.

At the end of the day the SME has become a large cog in the machine that is the UK economy. Without these businesses, that machine would run a lot slower.This is a brief statement to clarify that this assignment is entirely my own work and that I am aware of the University’s policy/regulations on copying, plagiarism and collusion.

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