The UK governments defines SME’s (Small and Medium Sized Enterprises) as an entity engaged in economic activity that: employs fewer than 250 people and has annual turnover less than or equal to £39 million (Morse, 2016). The government often works in three ways to help SME’s, as a regulator, an economic agent and as a strategic planner and promoter. The government primarily works in three ways to help SME’s; as a regulator, an economic agent and a strategic planner and promoter. In 2015, there were 5.4 million businesses in the UK with of which over 99% of these were SMEs, and of these, most were micro-businesses (Morse, 2016).
The UK Government works as a regulator when promoting start-ups and supporting SME growth, and its approach includes reforming the regulations that govern public sector contracts (Morse, 2016). This enables small businesses to compete effectively against their larger counterparts. Given the high numbers of SMEs in the UK and their importance to the economy, Government policy also seeks to minimise the bureaucracy involved in the regulation. It is important for policymakers to consider how to enable more firms to achieve and sustain high growth (Lee, 2013). The UK governments 2015 regulations on SMEs highlighted that there was an average annual turnover of less than £25m (FCA, 2016). Having regulations specific to SME’s will help the promotion and growth of the firm, for example the UK government reduces the risk and cost of private equity finance for SMEs. This make it easier for the SME’s to fund and grow their business (OECD, 1997).
The Regulations require the government to maintain arrangements to monitor and enforce relevant requirements, whilst using resources in the most efficient and economical way (FCA, 2016). To ensure regulations in the UK are fair and effective, the UK government controls the number of new regulations by operating a ‘one in, two out’ rule for business regulation, assess the impact of each regulation, reviews the effectiveness of government regulations and reduces regulation for small businesses (GOV, 2018). Yet governments can encourage entrepreneurialism by lowering taxes, particularly capital gains taxes which have a particularly high impact on entrepreneurialism while raising relatively insignificant revenues by reducing regulations and vigorously enforcing property rights (Sanandaji, 2014). An approach to understanding and explaining growth lies in examining the impact of factors and constraints external to entrepreneur or the business. These include Marco-economic variables such as aggregate demand, taxation, regulations, labour market skills (Bridge, 2008).
An issue with the Government’s microeconomic regulation policies is pointed out by Cough (2018). He states that 84% of SMEs do not anticipate that the introduction of the small business commissioner will have any positive impact on their business. The poor performance of SMEs in the UK has been attributed to a wide range of barriers, both internal and external to the firm (Revell and Rutherfoord, 2003). Another issue identified by Cough (2017) is that the Government is not doing enough to help the promotion and growth of SME’s. He highlights that fewer than three in ten UK SME’s have heard about the government’s new industrial strategy. There are a number of issues with the UK government’s current policies which have been pointed out by academics such as Alonso Mendo and Fitzgerald (2005). The pair argue that despite the efforts of governments and the various support programs, the attainment of the advanced stages of ecommerce by SMEs is very low, suggesting that the Government aren’t doing enough. Government policy in this area has significant microeconomic effects as its implementation alters the inputs and incentives for individual business decisions as they allocate their resources.
In addition, the UK Government often works as an economic agent. Stevenson and Lundström (2001) stated that Governments policy around SME growth are largely due to the country seeking to increase entrepreneurial vitality to increase economic growth and development. A Government’s approach to economic policy will depend on the assumptions it makes about what drives economic growth processes (Stevenson and Lundström, 2001). Burns (2010) argues that at the macro level, entrepreneurship and innovation are seen to encourage economic growth. The use of macro-economic policies such as taxation, interest rates and other instruments are used to stabilise the economy and reduce oscillations and un- certainties. Government’s regulatory environment itself is a key contribution to the level of risk small businesses experience (Carter, 2012).
The Office for National Statistics estimates that SMEs create around £35 of gross value added to the UK economy for every £100 of turnover, while larger companies create only £24 (Morse, 2016). Furthermore, the Government has laid out a decisive plan to restore confidence in the UK economy (BIS, 2010). The Federation of Small Businesses argues that the success of the UK economy rests on helping more small businesses to export more (Werffeli, 2017). Morse’s (2016) report states that for every £1 spent with an SME there was an additional 63p benefit for the local economy compared with 40p in every £1 spent with a larger business. The dominant approach to development in the latter part of the 20th century was based on the assumption that a small number of large, established firms were the major source of economic growth and the belief that this would produce a ‘trickle- down’ effect on the economy, creating economic opportunity for SMEs (Stevenson and Lundström, 2011). An aim of the UK government is to help SMEs benefit from 33% of central government procurement spend, either directly or indirectly via the supply chain, by 2022 (Gov,2017). The Small Business, Enterprise and Employment Act 2015 contains measures aimed at improving access to credit information about SMEs and helping to match SMEs rejected for finance with alternative lenders through finance platforms (FCA, 2016). At the start of 2002, the percentage of the work- force employed by SMEs was 55.6%, the percentage of firms that were classified as SMEs was 99.8%, and these firms accounted for 52% of the business turnover (Alonso Mendo and Fitzgerald, 2005). According to Kachlami and Yazdanfar (2016) country-specific factors significantly influence the financial structure decisions of a firm, as these factors, in fact, create the macro-economic environment, in which a firm operates (Michaelas, 1999).
Brown (2014) identifies a disadvantage to the UK Government working as economic agent, he argues that although SMEs are 9% more likely to apply for finance than larger businesses, they are no more or less likely to be successful. Werffeli (2017) states that a key issue facing SME’s is a limited access to suitable finance.
On the other hand, the Government and particularly its micro economic policies are often used as a strategic planner and promoter when helping the growth and promotion of SME’s. The FCA (2015) argue that promoting investment for SMEs and ensuring a greater range of financing options were available as the Government’s priorities in the 2015 Budget. Each region has its own subsidised delivery structure for the support of start-up and growth of SME’s. Storey (1994) states that the use of strategic planning is defined in terms of the plans of an organisation being written down, relatively long panning horizons being chosen, and objectives and goals being specified. Providing wider macroeconomic and financial stability is necessary for the private sector to have the confidence to invest and expand, but it is not by itself sufficient, according to BIS (2010). The Government is committed to building on these plans for stability to create the conditions for strong and sustainable growth. Additionally, the recently enacted Small Business, Enterprise and Employment Act aims to help on a micro level by ‘reducing the barriers that can hamper the ability of small businesses to innovate, grow and compete’. At a macro level, ‘to ensure that the UK continues to be recognised globally as a trusted and fair place to do business’ (FCA, 2015).
Stevenson and Lundström (2001) argue that in many countries, very little has been done to examine what Governments are actually doing to promote entrepreneurship. The Government has been critiqued for a lack of information and awareness on Governmental benefits and schemes designed to facilitate their induction into and continuance in the MSME sector (Chandra and Pareek, 2014).
Overall, the UK Government’s current policies around the promotion of Start-ups and the growth and development of SME’s are driven by the principal of increasing economic benefit at both a micro and macro level. The sources support the notion that there is a complex relationship between micro and macroeconomics in how the UK Government supports Start-ups and SMEs in that the decisions individual firms make are directly influenced by a combination of both levels. Although the macro factors such as inflation, interest rates and taxation have an impact across all businesses, regardless of size, specific micro factors around regulation, subsidy and procurement support can be targeted at the SME to address specific restrictive issues. Many policies are recognised by the business community and academics as successful, but awareness and access are still a significant barrier to growth and the issue must be addressed to promote the start up an d growth of SMEs.