Chapter 9: Formation and Function of New (and Small) Firms

Martin Fejerskov

Agenda

• Why study new and small firms• Characteristics of new and small firms• Factors determining location of new and small

firms• New firm formation• The Lifecycle Curve for Successful New Firms• Take Away/ Conclusion

Why study new (and small) firms?

• Majority of manufacturing firms are small• New (small) firms differ from multinationals– They take an entrepreneurial approach in contrast

to the bureaucracies of large companies– Locate differently– Different life-cycle – Different challenges in surviving

Characteristics of small firms

• Entrepreneurial form• Too small to change market forces– Small market share

• Small in absolute measures– Few employees

• Failure has no measurable social impact

Characteristics of small firms cont.

• Ownership and management is often combined and personalized

• Decision making is direct• Decision making involves high personal risk

but also incentives to improve efficiency and performance– Innovation

Location of new (and small) firms

• New firms tend to locate in their home region• Rationale:– Entrepreneurs know possible local workers– Or understand the characteristics of local labour– Possible contacts with local financial institutions– Knowledge of local market and demands– Knowledge of available local suppliers

New firm formation

• Number of new firms is correlated with six main indicators(Storey, 1982):– The percentage of small firms– The percentage of the population that are managers– The percentage of the population with degrees– Savings per head of population– The percentage of the workforce in low-entry

barrier industries– The regional income distribution

New firm formation cont

• Local government incentives and policies• Framework for industry structure

• The single most important influence on new firm formation in all industries is local economic diversity (Reynolds et al 1993)

The Life Cycle Curve for Successful New Firms

Time

SalesIntroduction Take-off Slow Down Maturity Decline

Life Cycle Model of Small Successful Firms (Marschall, 1922)

• Notion: New firms experience the highest death rate among firms of all ages and many firms never reach the “Take-off” level

Take Away/ Conclusion

• New and small firms differ considerably from large multinationals in regards to – Characteristics– Decision making/ incentive for innovation – Location factors– Formation factors

• Majority of manufacturing firms are small and the small firm sector thus make up a significant segment within capitalist economies