All-Party Parliamentary

Group for Micro Businesses

Micro Businesses – The

Importance of a Definition
for Policy Making
First Report by the All-Party Parliamentary
Group for Micro Businesses

November 2011
Contents

1. Executive Summary ..................................................................................................................... 1

2. Background ................................................................................................................................. 3
3. The Reports ................................................................................................................................. 3
a. The London Business School – ‘Micro Business – Definitions Matter’ ................................... 3
b. Lancaster University – ‘Defining Micro Business in the UK’ ................................................... 4
c. Imperial College London – the Importance of Passion in Entrepreneurial Venturing ............ 5
d. Manchester Metropolitan University– Investigation into UK Micro Businesses .................... 6
4. Main Themes from the Research ................................................................................................ 7
a. Accepting the Need for a UK Definition .................................................................................. 7
b. Challenges Faced By Micro Businesses ................................................................................... 8
c. The Diversity of Micro Businesses .......................................................................................... 9
d. International Comparisons ................................................................................................... 10
5. Policy Implications .................................................................................................................... 10
a. Establishing a definition ........................................................................................................ 11
b. Establishing a growth agenda ............................................................................................... 11
c. Access to Finance .................................................................................................................. 11
d. Access to Skills....................................................................................................................... 12
e. Regulation ............................................................................................................................. 13
f. Internationalisation............................................................................................................... 13
6. Conclusion ................................................................................................................................. 13
Appendix A – The London Business School – Micro Business – Definitions Matter ......................... 15
Appendix B – Lancaster University – Defining Micro Businesses in the UK ...................................... 33
Appendix C – Imperial College London – The Importance of Passion in Entrepreneurial Venturing 59
Appendix D – Manchester Metropolitan University – Investigation into UK Micro Businesses ....... 66

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 1. Introduction and Executive Summary
Government policy both in the UK and elsewhere has traditionally been directed towards small and
medium sized businesses (SMEs), which account for 96.6% of all enterprises in the UK and
approximately 48% of employment and 41% of business turnover. However, it is commonly accepted
that the foundation of our economy and the lifeblood of our local communities are our very smallest
businesses. Both Adam Smith and Napoleon Bonaparte are famous for remarking that the UK is a
nation of shopkeepers. Although the range of business activities has grown considerably since then,
the UK retains a reliance on small enterprises that both Smith and Bonaparte would recognise.

Recent ONS statistics show that it is the very smallest businesses that are the job creators. At the
start of 2008, 3.85m businesses with fewer than five employees existed; at the start of 2011 this had
risen by 7% to 4.11m, while over the same period, the number of businesses with 100 employees or
more had fallen by 2.5%. These very small businesses have not, however, been singled out for
support. They have been lost in the noise of SMEs. They are a significant group; over 3.4 million
individuals are either self-employed or members of a partnership. Seven hundred thousand
businesses employ between one and four people. Micro businesses range from start-ups with both
high and low growth potential to family businesses that have been in operation for many years.
These businesses face very different problems to larger SMEs.

Typically, the owner-manager is responsible for carrying out the full range of managerial duties and
complying with many of the same government policies that large companies must comply with,
whilst simultaneously managing a small team of people and often undertaking part of the actual
work output of the business. Typically these micro businesses do not have the managerial capability
and skill base of larger SMEs and as a result face a unique set of challenges.

Notwithstanding the challenges these businesses face, they are an important source of new
employment and growth in the UK economy as a result of ambition, passion or, sometimes, quite
simply the necessity to create a businesses to earn a living when no employment opportunities exist
or as a social enterprise to meet the needs of the local community. However, too many are tempted
into the black economy simply to avoid the legislative burden, a loss to all concerned. Others simply
never get off the ground with inevitable consequences for government welfare expenditure. Micro
businesses can and often do play a vital role in maintaining the economic viability and social
cohesion of many regions in the UK, particularly rural and deprived urban communities. They need
support.

Despite both the historic and contemporary importance of small enterprises to the economic and
social well-being of our nation, we have failed to appropriately and unambiguously define precisely
what we mean by the term micro business. As such and by default, we refer to a definition devised
by the EU. This definition suggests that a micro business is any enterprise that employs fewer than
10 members of staff and has a turnover or balance sheet of less than €2m. The consequence of this
lack of definition has been an inability of government to create policy tailored toward this group.

This report will argue that the EU definition is not fit for purpose given the nature of the UK
economy. It is a definition that encompasses 95% of all UK businesses, which represent
approximately 19.5% of economic activity, and therefore prohibits effective policies targeted at our

1
very smallest enterprises from being devised. Such a group is too large in number and share of the
economy and too diverse in nature for cohesive policy making. An organisation with 4 employees
will generally have at least one member of staff appointed in a managerial role. A business with four
or fewer employees is still learning with an owner-manager trying to do everything. Instead,
therefore, this report will argue in favour of and recommend adopting a more restricted definition of
micro businesses that would encompass only enterprises that employ fewer than five members of
staff. The recommendation is not to include a turnover criterion but to leave that as a decision to be
taken on a policy-by-policy basis.

The report includes a review of definitions and recent changes in other countries. This shows that
the vast majority of countries are moving towards narrower definitions of a micro business as
employing between 0 and 4 employees. The EU is also currently reviewing its definition.

This report provides some thoughts on how such a definition may enable better policy making,
supporting the argument that a definition is need. They are not exhaustive but rather illustrative.
They include suggestions on:

 Ways to incentivise employment by this group, for example by treating them differently for
National Insurance purposes and reviewing how employment legislation applies to them.

 Making access to finance a reality by, for example, enabling banks to lend to them more
profitably by changing the capital adequacy requirements for micro business loans.

 Simplifying the tax burden by, for example, making Small Business Rate Relief both
automatic and permanent and, in time, looking at a tax regime designed for this group, as
they have in France.

 Developing a self-employment culture and skills-set through, for example, changes in the
school curriculum, building a mentor network and supporting the growth of incubator units.

 Simplifying regulation by including in the Red Tape Challenge a particular focus on micro
businesses

 Facilitating exports by ensuring UKTI and other government agencies extend their support to
micro businesses.

 Easing access to useful information, enabling material to be available not just on the web
but also in local libraries and post offices.

Clearly there is a major opportunity for the government to grasp the growth and employment
opportunities that micro businesses represent, better understand the issues that they face and
devise policy initiatives across the board to better foster the establishment, growth and survival of
this key part of our economy.

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 2. Background
The All-Party Parliamentary Group for Micro Businesses (hereafter known as the APPG) was
established in February 2011 at the initiative of Anne Marie Morris MP and Julian Smith MP and by
over 70 Members of Parliament and Peers from across the political spectrum (including the
Conservative Party, Labour Party, Liberal Democrats, Scottish National Party and Plaid Cymru) in
order to investigate the challenges faced by the very smallest enterprises in our society. The
objective of the group is twofold; to give a strong voice to micro businesses in Parliament and to
ensure their concerns are taken into account when government policy is being devised and
implemented.

Successive governments across the political divide have not enacted policies that address the
specific challenges faced by this important sector of our economy. Although much has been done to
try and help small businesses, the assistance that has been forthcoming has often not effectively
addressed the biggest issues our micro businesses need to overcome if they are to grow and be
successful. This becomes particularly relevant in times of greater economic and social uncertainty,
for it is our micro businesses that play a disproportionately large role in the economies of our rural
and deprived urban regions. They are the place where those leaving the public sector are most likely
to find employment. They constitute a large percentage of our social enterprises and make up a
significant part of the third sector. They are the home of start-ups and the drivers of innovation and
growth. They are the heartbeat of both our local communities and our local economies.

From the outset of the APPG, sector representatives and leading industry experts have played a
crucial role in identifying the issues that matter to our micro businesses and the group is supported
by the Forum of Private Business, the Federation of Small Businesses and the Small Business Bureau.
The earliest meetings looked at taxation issues, whilst recent focus has shifted to employment
matters. A number of working groups have been established with the aim of formulating policy
proposals to be submitted to government.

The APPG concluded early on that the current EU definition of what constitutes a micro business is
not fit for purpose given the nature of the UK economy. It remains our belief that a definition of
micro business that encompasses all enterprises that employ fewer than 10 members of staff and
have a turnover of less than €2m is simply too large for effective policy to be implemented. We
believe the government should look to devise an alternative definition that better fits prevailing
social and economic conditions.

As part of its efforts to stimulate debate on this subject, a research call was sent out by the APPG to
80 business schools in June 2011. Of those who responded, many felt they could best assist the
APPG by providing academic articles for us to review. Four universities (London Business School,
Imperial College London, Lancaster University and Manchester Metropolitan University) were invited
to undertake new, independent research looking at how the UK should define what a micro business
is and it is their findings that underpin the majority of conclusions reached in this report.

3. The Reports

a. The London Business School – Micro Business – Definitions Matter

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The report submitted by The London Business School (hereafter known as ‘the LBS’) to the APPG was
co-authored by Chris Coleridge, Professor Rajesh Chandy and Professor Michael Hay. A full copy of
the report can be viewed in Appendix A at the end of this report.

The central conclusion reached in the report suggests a micro business should be defined as an
enterprise that employs fewer than five members of staff. However, the report additionally
concludes that a distinction can be made between those businesses that employ 1-4 members of
staff and those that employ no one. This is suggested on the premise that, whilst micro businesses
with employees and those without employees share a sufficient number of characteristics in order
for a universal definition to be established, enough divergence is observable in key policy areas to
warrant the distinction to be made.

The report begins by outlining why micro businesses are so important to the UK with discussion
centred on explaining the vital role our smallest enterprises must play if we are to achieve a
successful and sustainable economic recovery. With reference to guidance issued by the OECD, the
report puts forward five different criteria it suggests the government should take into consideration
when developing policy for micro businesses. Firstly, any policy should be necessary. Secondly, any
policy must be cost effective. Thirdly, any policy must be consistent with existing legislation.
Fourthly, implementation of any policy must be unquestionably transparent. Finally, any policy
should be easily understood by those who will be required to adhere to it. The report argues that the
current EU definition of micro businesses covers such a substantial number of enterprises that it is
unclear whether the final criterion (and possibly others) has been successfully met.

Accepting the need for this definition to be replaced, the report then analyses alternatives used in
other countries. The report suggests that application of the EU definition in the UK may help explain
why, by comparison, we are good at encouraging people to establish a business, but less proficient
at producing significant numbers of high growth enterprises. The report references the fact that a
number of countries have recently moved from broad to more restrictive definitions of what
constitutes a micro business and the question is posed whether we should take a similar step in
order for competitiveness to be achieved.

LBS identify a number of different types of support in place for small businesses with respect to
finance, regulation, technology diffusion and management capabilities. It is suggested that this
assistance needs to be reviewed to ensure that it reaches micro businesses.

In conclusion, the report reiterates its belief that micro businesses should be defined as enterprises
that employ fewer than five members of staff. It is suggested that the adoption of such a definition
would be a cost-effective way for the government to stimulate growth in this most important sector
of our economy. LBS’s research has been sponsored by an organisation representing small and
micro businesses.

b. Lancaster University – Defining Micro Business in the UK

The report submitted by Lancaster University to the APPG was co-authored by Professor Magnus
George, Dr Danny Soetanto and Lizzie Hamilto. A full copy of the report can be viewed in Appendix B
at the end of this report.

4
The central conclusion reached in the report suggests a micro business should be defined as an
enterprise that employs up to five people and that has turnover of less than £1m over a specified
time. The report reaches no definitive conclusion of what this specified time should be, highlighting
that it could be done on an annual basis or as an aggregate of income over a predetermined number
of years.

The report begins by asserting that any definition of what constitutes a micro business should be
based on three important criteria. Firstly, any definition should be easily understandable to the
public at large. Secondly, any definition should be unambiguous and not open to misinterpretation.
Finally, any definition must result in a clear distinction between how we define micro businesses and
small businesses. The report suggests the current EU definition is not a useful one on the grounds it
fails to meet the last criteria in any non-arbitrary sense.

The report considers in depth a number of possible alternative definitions. It explores the possibility
of sector-specific definitions and concludes that it may be prudent for the government to adopt this
approach when formulating policy in certain areas. Ultimately, however, the report concludes that a
universal definition of what constitutes a micro business is preferable and any sector-specific
alternatives should be seen as additional and applicable only where such an approach is appropriate
given the policy detail under consideration. The report also notes that the hiring of a manager
represents a key moment in the development of a business. However, the feasibility of using this
definition is questioned on the grounds that such an understanding would perhaps be open to
misinterpretation with respect to how the term ‘manager’ would be defined.

The report also examines how micro businesses are defined in other countries. This provides further
empirical evidence in support of various definitions that the authors suggest warrant future
exploration. In addition, the report concludes that analysis into what growth-enhancing
interventions the government could make should be undertaken. The report acknowledges the
merits of many alternative definitions. Ultimately, however, it concludes that micro businesses
should be defined as enterprises that employ fewer than 5 people and have a turnover of less than
£1m over a specified time.

c. Imperial College London – the Importance of Passion in Entrepreneurial Venturing

The report submitted by Imperial College London to the APPG was co-authored by Professor Bart
Clarysse, Dr Sabrina Kiefer and Anneleen Van Boxstall. A full copy of the report can be viewed in
Appendix C at the end of this report.

The central conclusion reached in the report suggests it is important for the government to
understand the characteristics of micro businesses and formulate policy that will positively support
all types of enterprise observable within this varied sector. The report is more philosophical in
nature than the others received by the APPG and it makes no attempt to devise a universal
definition of what constitutes a micro business. Instead, the report seeks to characterise the micro
business sector as a diverse one in which each enterprise is owned by an individual with different
motivations for choosing to establish and run their own companies. Within this context, however, it
is suggested that micro businesses can be classified into those whose owners are motivated by

5
ambition, passion or necessity. From this classification, the report suggests a further subdivision can
be made that sees micro businesses fall into one of four categories.

Firstly, there are micro business owners who are keen to see their businesses grow and are also
passionate about what they do. Secondly, there are micro businesses whose owners are ambitious
about seeing their business grow as large (and often as fast) as it possibly can without necessary
holding a passion for the work their enterprise is involved in. The report suggests this ‘ambition’
category of micro businesses, which share a common thread of maximising turnover, has historically
found it more straightforward to attract the support of governments and financial institutions.
Conversely, there are micro businesses whose owners are passionate about what they do at the
expense of maximising profit. Furthermore, there are micro businesses whose owners have
established enterprises out of necessity rather than passion or a desire to generate vast amounts of
wealth. It is these micro businesses that have struggled most to secure financial assistance or
governmental support.

A central proposition put forward in the report suggests that we must begin to realise that micro
businesses enhance both the economic and social capital of our local communities. Quite often, it is
the micro businesses in which passion and necessity are the drivers that provide the social capital
that keeps our communities bound together. It is because successive governments and financial
institutions have failed to attribute enough importance to the role these businesses play in our
communities that so many fail to attract the financial support that they need to survive. It is
important to note that the report does not seek to say that all businesses driven by an owner with a
desire to enhance turnover do not add social value. However, it is equally important to highlight
that those businesses driven by passion or necessity may, with support, develop into profitable
enterprises that add to both the economic and social value of our communities. It is their plight the
report ultimately seeks to focus on.

The report subsequently concludes that our focus should be on better understanding the specific
needs of the different types of micro businesses rather than trying to classify the sector by devising
one universal definition.

d. Manchester Metropolitan University– Investigation into UK Micro Businesses

The report submitted by Manchester Metropolitan University to the APPG was co-authored by
Professor Lynn Martin and Professor Bob Jerrard. A full copy of the report can be viewed in Appendix
D at the end of this report.

The central focus of the report is to provide a critique of the strategy pursued by successive
governments in order to assist micro businesses. It is suggested that the ineffectiveness of policies
designed with good intentions can be explained on the basis that those charged with developing
these initiatives do not adequately comprehend the complex makeup of this particular sector of our
economy. As with the report submitted by Imperial College London, it does not seek to establish a
universal definition of what constitutes a micro business, although it is critical of the current EU
definition that is used in the UK.

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The report explores in detail some of the characteristics possessed by micro businesses that it
suggests have not been understood in detail by policymakers. Empirical evidence is provided that
breaks down the composition of micro businesses in terms of their size, type of enterprise, location
and gender and ethnicity of the owner. Various trends are identified that the authors suggest
should inform policymaking at a local level (for instance, the preponderance of manufacturing in
certain regions and high levels of female ownership of micro businesses in specific sectors).

The report argues that the current EU definition is unhelpful on the premise it is clear that those
enterprises without employees are vastly different from companies with 9 employees in terms of
both the support they require and the immediate objectives they need to meet to survive and
prosper. It is therefore suggested that a more appropriate and restrictive definition is formulated.
The report ultimately, however, offers no view on how micro businesses should be defined. Its focus
is instead on exploring the characteristics possessed by our smallest enterprises and arguing that the
government needs to develop an enhanced appreciation of this complex sector in order for its
policies to be more effective.

4. Main Themes from the Research

a. Accepting the Need for a UK Definition

Of the four reports received by the APPG, three (the LBS, Lancaster and Manchester Metropolitan
University) conclude that the current EU definition of what constitutes a micro business is not fit for
purpose given the nature of the UK economy. LBS and Lancaster are in agreement that the EU
definition covers too many businesses for any policies to be genuinely effective. The report
submitted by Manchester Metropolitan University acknowledges the inadequacies of the EU
definition and calls on the government to investigate the possibility of establishing an alternative.
LBS and Lancaster go further, suggesting that the need to establish a UK definition of micro
businesses is imperative so that our smallest enterprises can receive effective assistance from the
government. In addition, LBS and Lancaster agree that any UK definition of micro businesses should
be restricted to encompassing only those businesses that have fewer than 5 employees.

To varying degrees, both LBS and Lancaster also highlight a distinction between micro businesses
with and without employees. Although Lancaster suggests that this distinction could be useful when
formulating policy in certain areas, both fundamentally agree that a universal understanding of
micro businesses, based on a headcount of less than 5 employees, would be the most useful
definition for the government to adopt.

LBS and Lancaster do differ on whether the turnover of a business should be incorporated into any
new micro business definition. Lancaster is supportive of including this requirement, suggesting
turnover is a fundamental characteristic of any company and that it would therefore be appropriate
for any new definition to reflect this. Lancaster asserts that a UK definition of micro business should
include a requirement that the enterprise has a turnover of less than £1m. Lancaster suggests
further discussion would be required in order to determine whether the £1m turnover requirement
would be measured annually or on an aggregated basis over a predetermined number of years. LBS
considered the extent to which a turnover requirement should be incorporated into the definition
but ultimately conclude that, in the interests of effective policy making and simplicity, this would not

7
be helpful and that headcount alone would be sufficient. This would give government the freedom
to use turnover thresholds as it felt appropriate, policy by policy.

b. Challenges Faced By Micro Businesses

The four reports received by the APPG identify five different challenges faced by micro businesses.
These challenges are: access to finance; access to skills; access to information; regulation; and
internationalisation.

i. Access to Finance

The challenge posed to micro businesses of access to finance is considered in depth by all four
reports. The general consensus is that this is perhaps the biggest challenge that most micro
businesses face and that some elements must be considered when discussing this subject, including:

 The difficulties associated with securing finance from lenders, such as banks

 The difficulties faced by micro businesses in securing financial support from the government

 The difficulties faced by micro businesses in securing central or local government contracts

 The difficulties faced by micro businesses in securing appropriate financial advice

ii. Access to Skills

The challenge posed to micro businesses of access to skills is also considered in depth by all four
reports. Each one highlights the wide variety of roles that owners of micro businesses are required
to undertake in order to keep their enterprises afloat. Owners of micro businesses need to be
experts in marketing, accounting, sales and human resources (just to name four skills that they need
to possess to be successful). Whilst running the business and performing such a wide variety of roles
just to survive, it can be difficult for micro business owners to acquire the skills needed to ensure
their enterprise can grow. The reports suggest that, whilst the skills courses currently offered by the
government and others are useful, it is worth exploring the extent to which skill-specific bite-sized
courses might be more appropriate for micro business owners. The reports additionally consider
how the skill-sets of employees of micro businesses could be enhanced and it is recommended that
further work is undertaken to see what measures could be undertaken in this area.

iii. Access to Information

The challenge posed to micro businesses of access to information is raised in the reports submitted
by LBS and Manchester Metropolitan University. These reports both suggest that a lack of easy
access to relevant information ensures micro business owners have to spend valuable time
searching for what should be easily accessible instead of focusing on other matters that are essential
to sustaining or growing their enterprises. Information for small businesses has been provided by
the government with BusinessLink being perhaps the most recognisable and widely accessed service.
A range of information, advice and guidance services is also provided by consultancy firms in the
private sector. BusinessLink has been criticised for not providing enough information specifically
targeted towards start-ups and micro businesses and it could be argued that the wide ranging

8
reforms currently being implemented to the service should be used to rectify this. The reports
suggest the same could be said of assistance provided at a European level, where the focus of
information services and funding programmes is targeted towards businesses with more than 5
employees. The quality of information provided both by government and private sector services is
also questioned, with the reports highlighting the expense micro businesses have to incur when
seeking non-governmental advice.

iv. Regulation

The challenge posed to micro businesses by excessive regulation is also raised in the reports
submitted by LBS and Manchester Metropolitan University. The reports provide academic support
for widely held beliefs existing in the business community that the regulatory burden faced by micro
businesses is one of the most important barriers to growth in the sector. This is because micro
businesses do not have the resources or expertise at their disposal to cope with the amount of red
tape through which they have to navigate on a daily basis. The result is an imbalance between the
amounts of time owners have to spend on compliance as opposed to taking action that may grow
their businesses. Although both reports welcome recent government initiatives in this area, they do
suggest much more needs to be done to address the regulatory burden micro businesses are
required to meet.

v. Internationalisation

Finally, the challenge posed to micro businesses by internationalisation is raised by LBS. Their report
acknowledges the increasing importance of the globalised marketplace and the need to ensure the
world economy is accessible to micro businesses. This is particularly important for businesses that
are experts in highly specialist fields. The report suggests that the decision to trade internationally is
one for which many micro businesses need encouragement. Clearly the reverse is also true – we
need to encourage small businesses to produce goods that could be substitutes for currently
imported products to improve our balance of trade

c. The Diversity of Micro Businesses

All four reports suggest the micro business sector is an extremely diverse one and some attempt is
made in each submission to describe what are considered to be the most important characteristics
they possess.

Manchester Metropolitan University perhaps place most emphasis on the importance of

understanding the diversity of the micro business sector and their report provides comprehensive
empirical evidence looking at all aspects of our smallest enterprises. Their report suggests that
micro businesses are so diverse in nature that it is impossible for a universal definition to be
established. They provide empirical data for some of the characteristics of the micro business sector
including gender and ethnicity of owners, sector of activity, growth objectives and location. The
report does suggest that the impossibility of establishing a universal understanding of micro
businesses calls into question the usefulness of the current EU definition.

Lancaster and LBS focus more on the structure of micro businesses and suggest it is important to
recognise the difference between enterprises with employees and those that do not employ. In

9
addition, Lancaster asserts that there is a difference between micro businesses with no managerial
tier and those in which an employee has authority over other staff. Indeed, Lancaster conclude that
it is worthwhile considering whether enterprises with a managerial tier should be classified as micro
businesses, although they ultimately conclude that any definition must be based on headcount
rather than structure.

Imperial College London concentrates on highlighting differences between the motivations and
objectives of micro business owners.

d. International Comparisons

All four reports undertake analysis into how micro businesses are defined in other countries and the
extent to which governments elsewhere have been successful in developing effective policies
specifically targeting these enterprises. It is clear that a number of non-EU countries have chosen to
adopt definitions that agree with both LBS and Lancaster in that they regard a micro business as one
that has fewer than 5 employees. Countries adopting this definition of micro businesses include
Australia, Canada, India, Japan and Norway. Some of these countries seek to make a distinction as
part of their definition between enterprises with and without employees. Others include a turnover
requirement as part of their definition and some have adopted a sector-specific approach where
what constitutes a manufacturing micro business is not the same as what constitutes an agricultural
micro business.

There is also evidence to suggest that some non-EU countries have re-considered how micro
business should be defined in recent times. Where this has occurred, the trend is to almost always
adopt a more restrictive approach. Australia, Costa Rica, Japan, Jordan, Kyrgyzstan and South Korea
have all chosen to define a micro business in a narrower manner in the last decade. Only the Czech
Republic has adopted a broader definition in the last 10 years and this change was prompted
following accession to the EU.

The reports also identify policies implemented in other countries designed to provide support to
micro businesses. Perhaps the most interesting example highlighted is France, where separate
taxation mechanisms for micro businesses are now in existence. Other examples include micro
business loan guarantee systems in the USA and government sponsored micro finance initiatives in
various countries across the globe.

5. Policy Implications
The APPG acts as a forum for investigation, discussion and the formulation of policy proposals.
Topics of interest to the group are explored in open meetings with expert witnesses presenting on
the issues. Working groups are then established in key policy areas following meetings to delve
further and develop policy suggestions. Groups have been established for taxation and for
employment issues but neither are yet in a position to put forward concrete proposals. Based
simply on the reports submitted to us by the London Business School, Lancaster University, Imperial
College London and Manchester Metropolitan University, we put the following proposals forward for
consideration, which we believe are achievable with a new definition. We plan to expand on these
more fully in due course

10
 a. Establishing a definition

First and foremost, we believe the reports clearly establish that the EU definition of what constitutes
a micro business is fundamentally flawed and not helpful for the UK given the nature of our
economy. It encompasses far too many enterprises and therefore unhelpfully blurs the clear
distinction that exists between micro and small businesses. We believe adherence to the EU
definition is preventing many micro businesses receiving the targeted assistance that they need to
survive and flourish. As a consequence, the APPG feels the UK should adopt its own definition of
what constitutes a micro business.

It is our view that the UK should establish a definition that classifies a micro business as an
enterprise with fewer than 5 employees. Such a definition is simple to understand and could be
clearly defined with source data being obtained through the PAYE system. This would ensure the
government is better placed to devise and implement an effective policy programme targeted at our
smallest enterprises. Such a definition would encompass 90.6% of all businesses in the UK -
reflecting accurately that our country is a nation of micro businesses. Currently this represents
13.5% of the economy; with support this has clear potential for growth. This would then enable
government to specifically consider the needs and interests of this group when formulating policy
that will affect them. This would enable departments to consider particular schemes for micro
businesses or exemptions for them.

b. Establishing a growth agenda

Once this universal definition has been established, we believe it is important for the government to
proactively develop a policy agenda that will encourage growth and persuade micro business that do
not do so to employ staff. Of the 90.6% of enterprises encompassed by the definition we propose,
74.2% do not employ workers and 16.4% do. If micro businesses are to play the role they must for
our economy to be successfully rebalanced, we need to not only look at encouraging start-ups, but
also consider what measures we can take to encourage the owners of our smallest enterprises to
employ. If every non-employing enterprise employed just one member of staff, 3,366,188 extra
people would be employed (as of November 2011, 2.57 million people are unemployed). We need
to make it practical, rewarding and possible for those companies not employing to become micro
businesses with employees. This will mean looking at an appropriate and practicable balance of the
rights and obligations of both employers and employees in such tiny businesses and substantial
simplification of the employment rules and processes. Excessive complexity and uncertain risks
deter businesses from taking on employees as the very large number of non-employing enterprises
indicates. We welcome the government’s Employment Law Review but would suggest that while it
looks at reform it should specifically focus on the particular challenges of micro businesses.

c. Access to Finance

The APPG welcomes the recent announcement that the Regional Growth Fund will benefit from new
government investment of £95 million, which will be distributed through the banking network. The
government needs to ensure that this can be used to support our smallest enterprises and steps
need to be taken to make this a practical reality. Many funding pots and initiatives to make public
procurement easier for the smaller business do not extend to micro businesses. The government

11
might consider ring-fencing part of the new Regional Growth Fund for micro businesses with fewer
than five employees.

The risk profile of a micro business will very often be outside the business model for existing banks.
The capital adequacy requirements make this difficult. This could be addressed by reducing the
capital adequacy ratio for banks lending to micro businesses to make lending to this group more
profitable. The government could also establish a bank lending target to micro businesses within the
Merlin Agreement. New bank structures or divisions may need to be created to accommodate the
particular needs of micro businesses – this will need government support and incentives. New
lending schemes, perhaps a simpler loan guarantee scheme that is particularly designed for micro
businesses, need to be considered. Organisations and vehicles need to be created and further
research into the microfinance economy in developing countries may be instructive.

Government must also look into how the taxation system could be simplified to assist micro
businesses. The group has had discussions with the Office of Tax Simplification and believes that
body would find a definition of a micro business helpful in its work. Small changes that would help
include making small business rate relief an automatic and permanent feature for micro businesses,
which would provide both support and certainty. A review of the application of National Insurance
to micro businesses might be instructive, if the tax take is less than the administrative costs of
ensuring collection and compliance. Relatively few micro businesses employ one person, often due
to the high differential in the total cost of National Insurance between self-employed and employed.
One solution would be to give the first employee of a micro business self-employed status for
National Insurance purposes to encourage the move from a self-employed micro business to an
employing micro business. In time, a separate micro business taxation system should be seen as a
longer-term objective. The French example of Entreprise Individuelle à Responsabilité Limitée is
instructive.

d. Access to Skills

Improved training opportunities for owners and staff also need to be considered. Perhaps the
biggest improvement in this area would be derived if the basics of business finance and economics
were taught in schools and young people were given a real opportunity to make a choice between
employment and self employment when they leave. The work experience opportunities in schools as
a result of the Inspiring the Future website is welcome and needs promoting. Such initiatives would
incentivise new start-ups and equip future micro business owners with a base level of knowledge
that just might keep more borderline enterprises afloat - and as a result more people in work.
Training once a business is established needs to be easy to access and in small bite-sized pieces,
tailored to the needs of a micro business. The new services in BusinessLink – My New Business and
The Growth and Employment Service – are welcome.

The government has made significant progress in terms of establishing a network of mentors, but it
is important that this service is tailored towards the needs of micro businesses. The government
should look at ‘bottom up’ mentoring initiatives, which see established businesses in our local
communities offer to provide advice to newer micro businesses. Incubators for those aged between
eighteen and twenty five would also be supportive. The Premier League Enterprise Academy is very
welcome and good example of what is possible. The National Consortium of University

12
Entrepreneurs, which supports the creation of student enterprise societies, is an excellent start. The
government should consider similar support in secondary schools and further education colleges.

The APPG believes more needs to be done to encourage micro businesses to take on an apprentice.
This could be accomplished either by offering enhanced incentives for them to employ an apprentice
or by simply making the process easier for them to access. The newly formed National
Apprenticeships Service’s Small Business Unit does not include any support for micro businesses.

Currently, BusinessLink is the main source of government information for small businesses. Much of
the information is not designed for micro businesses and it is perhaps slightly larger and more
established enterprises that currently derive most benefit from the service. That said, the already
noted improvements are very welcome. The ongoing reform of BusinessLink provides an optimal
opportunity to address this. But other sources need to be found – for example information in post
offices and libraries.

e. Regulation

The government has begun the process of reducing the regulatory burden faced by micro businesses
through policies such as the Red Tape Challenge and the small business regulation moratorium. The
APPG welcomes these measures and encourages dialogue between the government and our micro
business owners in order to ensure future measures taken are appropriately targeted. It is,
however, not enough to remove legislation that is redundant. A full review on a department-by-
department basis of regulations affecting micro businesses is needed with a view to keeping only
those that are essential. A complex system like the one we have now, burdening our micro
businesses with the same mountain of red tape as their bigger brothers, stops businesses being
created and is very expensive to police and enforce. It is often not that they do not want to comply
– it is that they cannot because they do not have the skills, time and resources to do so.

Finally, an all-embracing exemption for micro businesses from EU regulation would be helpful in the
UK and, possibly, all member states.

f. Internationalisation

With the advent of the internet, many very small businesses are exporting. But many are put off by
the complexity of VAT and international trade rules. While the new National Export Challenge and
the ‘Open to Export’ web resource are welcome, UKTI and local embassies offer no support to this
very small size of business. They should be included as eligible for advice and support from both of
these government agencies and thought needs to be given to how micro businesses can more easily
access their services.

If we are to get our balance of trade back into balance, a full review of imports may help identify
industry sector areas in which to promote micro businesses, which might develop replacement local
products to meet the local demand. A cross-sector initiative to encourage consumers to buy British
products might also help. While ‘buy British’ campaigns exist, they tend to be focused on just a few
industry sectors.

6. Conclusion
13
The four reports submitted to the APPG lead us to believe the current EU definition of what
constitutes a micro business is not appropriate given the nature of the UK economy. Two of the
reports considered in detail what an alternative definition could be. They both believe a new
definition would be worthwhile, they both believe a new definition should be more restrictive than
the EU definition in place at the moment and they both believe that it should be based on the
number of employees that a business has. Both agreed that 4 employees should be the upper limit
and both agreed that a distinction could be made between businesses with and without employees.
Ultimately, however, both believe a universal definition of what constitutes a micro business should
be adopted and this distinction should not be encompassed. We believe that this assertion is
correct and suggest that the UK should adopt a new definition of what constitutes a micro business.
In our view, a micro business should be an enterprise with less than five employees. We do not
believe a turnover criterion should be included in the definition. The application of a turnover
criterion should be at the government’s discretion on a policy-by-policy basis.

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Appendix A – The London Business School – Micro Business –
Definitions Matter

Micro Business—Definitions Matter

Brief Table of Contents

Introduction
Section One: Why Micro business Matters
Section Two: Defining Micro businesses: A Proposal
Section Three: Barriers to Growth for Micro business
Section Four: International Approaches to Micro business and Small Business Regulation
Section Five: UK Government Approach to Small Business Support and Regulation
Conclusion
Appendix: Illustrative Case Studies of Departmental Approaches to SMEs

Introduction

The activities of micro businesses are critical to the UK economy. The financial crisis of 2008 triggered a rise in their
numbers of over 260,000, and it is well understood that at times of difficulty for employment, the entry into the economy
of micro businesses primes increases in future economic activity (Fritsch, 2008, Carree and Thurik, 2008). Some will drive
growth by taking advantage of market conditions allowing them to become small, or even large businesses (Baumol, 2002);
others, though remaining micro businesses in terms of the numbers they employ, will generate growth through efficiently
supplying others or by subcontracting (Audretsch and Thurik, 2010); while others will not exhibit startling growth, yet may
have a critical role to play, for example, in the country’s employment black spots, both economically and in promoting
social cohesion (Phillipson et al., 2002).

Micro businesses, with few or no employees, small resources and little reserves face substantially different challenges from
businesses generally. The current EU-derived definition of micro business makes little distinction between three essentially
different (Headd and Saade, 2008) categories: 1) businesses with no employees; 2) those which have taken the plunge
into employment but in which the owner performs all the managerial functions; and 3) those which have grown to the size
where there has begun to be a management team and a division of labour which allows for greater resilience and the
ability to engage with government initiatives or with collaborative partners. The challenges faced by the first two
categories mentioned can be exacerbated when regulations and government initiatives fail to distinguish between the
circumstances of the smallest businesses and those of their more well-established competitors (Servon et al., 2010, Sayers
2010, Gordon et al., 2010, Better Regulation Executive, 2010).

The UK has long been recognized within Europe as a leader in the innovative and effective way government supports SME
formation and development (UAEPME, 2011). The fundamental shift in the UK economy to increasing small business
ownership since 1980 is well-documented, and its structural character, as one of the most service-based economies in the
world, is also conducive to entrepreneurial activity (Acs et al., 1994). Government has both supported and reflected this
shift. Yet in the domain of effectively supporting the smallest businesses, the UK arguably lags many of its international
counterparts. Many countries including France, Norway, Australia, South Africa and Canada, as well as many US states,

15
define micro businesses in a way which fits the particular nature of their economies and take steps to target measures of
support and of exemption from regulations on the smallest businesses.

The UK, in fact, has no official definition of micro business; one may be called for in order to serve its growth agenda. At
present, government statistics and policy take as their default the EU’s definition of micro businesses: businesses with 0-9
employees and a balance sheet totalling less than €2m. This definition was introduced in 2003, and is used for two primary
purposes: as a cut-off point for certain programmes of state aid, administered for example through the Common
Agricultural Policy, and for subsidized access to the EU’s programmes of research such as FP7. The definition is rooted in
part in the ‘craft business’ tradition which still dominates the employment patterns of countries such as Italy, Portugal and
Spain. In these countries, 40% of the working population is employed in a micro business (largely in small manufacturing,
tourism or agriculture), whereas only 20% of the UK’s workers are employed in businesses of this size (EIM, 2010). The EU
has announced a consultation, scheduled to begin in 2012, to consider for the third time in fifteen years how small
businesses should be defined, in part responding to the initiatives of member states such as France who have since 2009
introduced considerable innovations in their approach to the very smallest businesses, exempting them from core
compliance responsibilities applying to other businesses. The consultation will take some time and in any event the main
thrust of EU small business policy is arguably to encourage members to adopt measures the UK has long had in place, for
example making incorporation easier and reforming bankruptcy law. The UK perhaps should therefore not look to the EU
for innovation in this arena. While EU consultation rumbles on and digests the compromises it will have to make between
the various economic traditions across the 27 member states, the UK’s micro business owners, many of them running new
entities and facing the difficult first steps to growth, will be called upon to make their contribution to their economy’s
recovery —it may be, therefore, that the UK might wish to consider its own definition more urgently.

This paper reviews the case for a specific UK definition of micro business as a business employing fewer than five people.
The question considered is how, in researching, formulating, implementing and communicating small business policy, UK
government might usefully make a distinction between the EU’s micro business definition, and the very different
circumstances and needs of UK micro business employers (with 1-4 employees) and UK micro business non-employers
(typically sole proprietorships or partnerships.) Such a distinction has the merit of simplicity of administration and
communication; a focus on “micro business employers” has the further merit, in terms of targeted policy-making and
engagement, of representing just 16.5% of business entities (and 6.9% of private sector turnover), while the quite distinct
group of “micro business non-employers” represents 74.1% of entities (and 6.6% of private sector turnover.) (ONS, 2011).

Section One. Why Micro business Matters

Throughout and despite the financial difficulties of the recent period, micro businesses have continued to form. At the
start of 2008, 3.85m businesses with fewer than five employees existed; at the start of 2011 this had risen by 7% to 4.11m,
while over the same period, the number of businesses with 100 employees or more had fallen by 2.5%. Studies have
shown (e.g., Thurik, et al., 2008, Carree and Thurik, 2008) that in OECD countries, while high unemployment induces more
people to become self-employed, this self-employment then over time drives entrepreneurial activity which in turn
(Fritsch, 2008) leads to reductions in unemployment rates.

While studies of the very smallest micro businesses are not often carried out, we know that across Europe and the US,
firms of fewer than ten employees grow faster than firms of larger size (Carree and Thurik, 2010). For example, during
2002-2005, UK firms with fewer than ten employees grew 60% faster than those with 10-49 employees (Bravo Biosca,
2010). Evidence from the US (Birch, 1987; Neumark, Wall and Zhang, 2011) indicates that if one examines both job
creation (through firm creation and existing firm hiring) and job destruction (by reductions in workforce among existing
firms and firms disbanding), firms of fewer than 20 employees account for more than 100% of net private sector job
creation in an economy: in other words, across the economy as a whole, larger firms shed jobs while smaller firms create
them.

By the nature of the entrepreneurial process, the very smallest firms include many young firms, in promising new
industries, which represent the wealth-creation opportunities of the future (Haltiwanger, Jarmin and Miranda, 2010;
Baumol, 2002). Even where small firms fail, the variety of their experiments makes it easier for larger firms to learn from
their efforts and incorporate their experiences into their own R&D (Nooteboom, 2000). In some industries, the efficiency
of large firms is based on their ability to outsource to small firms (Audretsch and Thurik, 2010). If the private sector is to
pick up the employment baton in the economic recovery, the smallest firms have an essential role to play.

16
Despite the important role they have in the economy’s growth prospects, one important reason to consider businesses
with 0-4 employees separately is that many of them do not grow, and do not even aim to grow (GEM, 2011). While some
micro business founders enter the competitive arena because they perceive opportunity, others are driven by necessity
and some, such as the founders of social enterprises, are even driven by a calling or a passion for a particular role in society
they see their businesses supporting. Yet the role of those without ambitions for rapid growth and of social enterprises in
supporting social cohesion and the resilience of the economy is nonetheless vital for the continued health of UK society.
Policies intended only to encourage the most dynamic businesses in the fastest-growing sectors are perhaps helpful but
they may be counterproductive in two ways:

--they may lead government departments to ignore what may be effective in supporting the mass of businesses,
which may not have aggressive growth goals, but are nevertheless important both economically and socially

--the prominence of such policies among the government’s communications about available support may lead
some managerially overstretched businesses to conclude that there is no effective support available to them and
thus to disengage from government policies

At the extreme end of this phenomenon of disengagement, we know (e.g., World Bank, 2007) that micro business
compliance with tax law is directly related to the ease of complying. Effectively designed rules that take into account the
circumstances of the smallest kinds of business are vital to ensure the ‘black’ economy is minimized.

The smallest businesses play a vital role in maintaining the economic viability and even the social cohesion of many regions
of the UK (Porter, 1995, Gavron and Cowling, 1998, ODPM, 2004, Lyon and Bertotti, 2007, Staber, 2011). For example,
while businesses with 0-4 employees provide just 21% of private sector employment in London, they provide 32% of
private sector employment in the South West and in Northern Ireland and 34% of private sector employment in Wales
(ONS, 2011). Two-thirds of businesses with fewer than five employees describe themselves as family-owned businesses
(IFB, 2010), with all that implies in terms of the dependence of a part of the community on their success.

Across the UK, there is less self-employment in areas that score poorly on the Indices of Deprivation (DCLG, 2010) than in
other areas, both in absolute terms and in terms of the prevalence of self-employment vs other types of employment
(ONS, 2011). Some level of social capital (Narayan, 2002) is necessary to successfully start a business and deprived areas
are noted for a lack of people who possess it (Levitte, 2004). However, small micro businesses with 1-4 employees are
somewhat over-represented (about 11% more common than their prevalence across the UK as a whole) in the regions (the
North West, Yorkshire & Humber and the West Midlands) which the Indices suggest are the most deprived in the UK. Both
of these perspectives—low entry rates for self-employment in deprived areas, despite low overall employment in such
areas; and, the critical importance of the smallest businesses for employment in deprived areas—show the priority which
may need to be placed on developing support systems for starting micro businesses and of ensuring that the pressures
placed on very small businesses are no greater than necessary, in order to help them survive.

Section Two. Defining micro businesses: a proposal

The dimensions of the proposed definition are:

A micro business is to be defined as a business employing four or fewer people. Within this definition, a
distinction is to be made between businesses with employees and businesses with no employees.

The proposed micro business category makes up about 90.6% of the UK’s 4.5m businesses. (The EU’s micro business
definition takes in 95.4% of all UK businesses.) Since one intention of the proposed change is to allow government better
to target small businesses when researching, developing, implementing and communicating policy, a further distinction is
proposed, between the 16.5% of UK businesses of this size which, because they employ others, are covered by
employment legislation, and the 74.1% who are not.

Number of Number of % of % of Change Average Average Turnover/

Employees Private Sector total Private Jan 08- Number of Turnover Employee
Enterprises Sector Jan 11 Employees (including
Turnover (excluding working

17
 owners) owners)

0 3,364,020 74.1% 6.6% +327,455 0 £60,200 £54,900

1-4 750,110 16.5% 6.9% -63,315 2.3 £281,500 £98,400

5-9 218,435 4.8% 6.3% +8,530 6.5 £884,000 £128,000

All Employers 1,178,745 25.9% 93.4% -53,160 16.2 £2,418,000 £144,600

All 4,542,765 100% 100% +274,300 4.3 £672,000 £130,500

The table (ONS Business Population, figures as of Jan 2011, released Oct 2011) supports the distinction we have drawn
regarding the disparity between the top of the current micro business band—a business with annual sales of nearly £1m
and seven employees—and the two lower categories—sole traders and partnerships with no employees, averaging
£60,000 in annual sales, and the smallest employers with an average of two employees and a turnover of under £300,000
supporting themselves and these employees. Many government policies regarding SMEs are aimed at the upper half of
this group and do not take into account the circumstances of the lower half.

There are at least five criteria to consider (UNIDO/OECD 2004) in developing effective policy towards small businesses,
whether related to an initiative or to an exemption from a procedure applying to larger businesses:

a. Is it necessary to solve a problem?

b. Is it effective in terms of cost-benefit?
c. Is it consistent in terms of linking with related aspects of law and policy?
d. Is it transparent in terms of how implementation can be monitored?
e. Is it simple in terms of how understanding can be developed among the targeted group?

The current definition-by-default of micro business in use in the UK covers such a broad range of firms that the answers to
most of these questions are not clear.

As outlined in Section Five, the approach taken by government departments to small business at present appears to vary
widely. Some departments do not apparently differentiate between types or sizes of businesses they deal with; others
make a distinction only between those smaller than the SME threshold (50 employees, according to the EU definition) and
those above this size; some have a patchwork of programmes aimed at different types of businesses in different ways. It
could be argued that given the broad range of the present definition, many departments may view a wide-ranging
promotion of their efforts to all SMEs to be ineffective, since for any given policy perhaps only a narrow band of businesses
will find it effective. Thus, the onus is on the SME to seek out the help they perceive they need or to become aware of it
through business advisers—advisers that the smaller businesses are least likely to have.

Good policy towards the smallest businesses will support them in at least the following ways:

1. Helping intended beneficiaries realize that the policy is targeted on them.

UAEPME (2011) reports that among the UK small business population, there is a takeup rate of 23% for business support
services. While the most common reason for not participating in support activities given was “don’t need support”, 31% of
those surveyed and asked about why they did not take part in business support services responded that they did not
believe the support was intended for their type of business.

The obvious benefit of tailoring services, initiatives and exemptions from regulation more closely to the recipients is that
the intended benefits of the programmes may be made more likely to be achieved. But the question of participation rates
may also be affected by more tightly targeted initiatives: firstly, the uncertainty an intended participant may feel about
whether the programme will deliver the advertised benefits to his or her business may be reduced; secondly, such services
are partly or even largely promoted through diffusion or word-of-mouth. A tighter definition of micro business will help
small business service providers better to project a message into the relevant channels of communication about for whom

18
a proposed programme of support is intended and therefore achieve superior penetration of awareness among a more
homogeneous group than previously would have been the case.

2. Matching programme ‘barriers to entry’/costs against intended benefits.

Many business support programmes require some form of application process—lengthy and stringent in the case of a grant
of public money, for example, or relatively unobtrusive when simply capturing personal details in the case of access to a
web-based source of information. The administrators of the programme face a tradeoff: capturing more information, for
the purposes of future communications and measuring effectiveness, or of validating a business’s eligibility or suitability for
the programme will almost always be potentially useful, but collecting it will always put off some of the potential
participants in the programme. This issue is particularly germane to the smallest businesses, whose managers are not
surrounded by a team who can carry on the business’s functioning while he or she investigates the possibilities on offer
from the government. A more targeted approach will help business support development by allowing a reduction of
uncertainty on both sides—the design can be based on a narrower ‘stripe’ of businesses.

There is an important special case of this effect that should be noted: the likelihood of the smallest businesses complying
with taxation law is directly affected by the ease of doing so (World Bank, 2007). This factor alone, with its possibility of
reducing the size of the black economy, is a strong argument in favour of introducing a new micro business definition to
the way in which government engages with small businesses: the work of the Office of Tax Simplification could well be
supported by a the potential for innovating in the relationship between the smallest businesses and HMRC that a new
definition might open up. See Section 4 for an account of the recent interesting French innovations in this arena and other
international comparisons.

3. Bringing together government initiatives across departments into a single stream of communication aimed at
the relevant group within the new micro business definition.

If policies are coordinated across departments, based on a common, narrower target audience among micro businesses,
perhaps using a clear common “brand” identity as part of the communications plan, then a number of benefits may accrue:

 The diffusion/word of mouth effect mentioned above may be more effective, with less chance for a relevant
programme not to be heard of by a business investigating programmes relevant to it simply because the
communications programme of a particular department in respect of its communications with business is lacking
in coverage.
 The costs of tracking and measuring the participation in such programmes will be reduced.
 The costs to business of gaining information and seeking to participate in programmes may also be reduced. As
previously noted, search and application costs are particularly onerous for the smallest businesses with least
spare management capacity.
 Finally and importantly, the clarity of the message about the forms of support available may engender a
synergetic effect of creating enthusiasm for the entire range of government engagement in this area.

While some countries also include maximum sales figures in their definition of a micro business (and the EU includes a
maximum balance sheet total), this is not proposed here. The definition, it is suggested, should be as simple as possible, so
that the communication between government and small business owners is as clear as possible. Where a policy involves a
disbursement of public funds or for example a loan guarantee, it would be possible to add an additional layer of
“qualification” to ensure the targeting of that policy was appropriate; however, as one of the merits of the redefinition
proposal is clear and energising messages from the government about the support and exemptions available to micro
business, this argues for the simplest possible definition.

Section Three: Barriers to Growth for Micro business

Academic observers (Chandy, 2011, OECD, 2010) and practitioners (Federation of Small Business, 2011, British Chambers of
Commerce, 2011) note the importance, in fulfilling the potential contribution the smallest businesses can make to the
economy, of considering the possible ways in which barriers to growth can be removed or mitigated. Large firms, if they
are working on a project which they judge to have market potential, are normally able to assemble the skills, information
and finance they need to make it a reality. The smallest firms are often seriously constrained in this regard (Chandy and
Narasimhan, 2011) and these constraints are often seen as the source of potential market failures and a target for

19
government support. Exacerbating these potential failures is the burden that regulatory compliance places on the small
business and this often worst affects the micro business (BRE, 2010) which lacks slack managerial resources to deal with
such requirements. Finally, we will consider the particular case of internationalization which also particularly limits the
opportunities of the micro business to grow. These five areas provide a number of examples of the practical respects in
which the proposed new UK definition for micro business could be used to improve, through targeted support, elimination
of obstacles and reduction of red tape, the prospects for the smallest businesses.

Skills

The correlate of being a ‘jack of all trades’ is being a ‘master of none’. Micro business employers are occupied with running
their business, mastering a full range of business disciplines, from marketing to bookkeeping, while looking after their staff
and of course operating the business. They may be in need of skills development, either to increase the efficiency with
which they run their business or to enable them to adapt the way their business addresses its market in response to
external pressures. Rather than comprehensive and rounded programmes of management development, they may require
“bite size” development opportunities that can be fitted in around their managerial responsibilities. The nature of the skills
needed to run a micromarketing campaign for a one-person business, or keep a cashbook, is also different from those
needed to develop a multi-media campaign for a budding brand, or to account for accruals in more complex management
accounts. Providers of skills development can do a better job if the structure and nature of their approach is targeted
precisely on the time-poor situation and practical requirements of the small-scale owner-manager.

Finance

Providers of equity finance tend to be highly reluctant to engage with the smallest businesses. Transaction costs would be
high relative to the overall size of investment; micro businesses are often operating in highly competitive markets with low
barriers to entry, making projecting high levels of growth (a fundamental requirement of many equity investors)
problematic; rarely will micro businesses own assets enabling an investor to foresee a breakup value in the enterprise
should it encounter difficulties; the business typically depends almost entirely on the continued health and enthusiasm of
its owner-manager rather than the business itself having any separate ability to exist. These reasons also figure in micro
businesses’ restricted access to bank finance. Most micro businesses will therefore not be able to grow using the same
sources of finance that slightly larger businesses may be able to access. Government-inspired programmes designed to
suggest that with the right business plan, these hurdles may be overcome, may waste a small-scale owner-manager’s time,
be confusing at best and misleading at worst. A realistic assessment of the situation of different types of micro businesses,
encouraged by a new definition of micro business, might help ‘access to finance’ programmes focus the attention of
owners on the importance and value to them of sound, sustainable working capital management, the possibilities of
accessing finance necessary to growth through partners, such as suppliers and clients, and effective ways of understanding
under what circumstances the smallest business does have the opportunity to sustainably grow.

Information

One recurring theme in studies (e.g., Servon et al 2010, BRE 2010) attempting to understand the position of the owner-
manager in a micro business is that the opportunity costs of information search are high. Where the growth imperatives of
a slightly larger business mean that exploring, for example, new markets or areas of new application for products is
essential and routine, the smallest scale business may only be able to make time to search for new opportunities by giving
up productive time that could otherwise be earning a living from those opportunities already discovered. Business
information services for small businesses exist in part in recognition of this problem: the intention is to filter information
that will be useful to the small business and take in some way the place of the professional adviser in making the business
owner aware of changes, threats and opportunities of which he or she may be able to make use. The recognition of the
smallest business’s different profile through an improved definition would enable the information being transmitted to
these businesses to reach higher levels of targeting and help ensure the most useful information is not lost among the less.
The BRE ‘Lightening the Load’ report suggests that a thriving industry ‘serving’ the self-employed and small employer is
made up of ‘health and safety advisors’ and ‘compliance consultants’ who charge moderate to large sums to small business
owners to repackage information on regulatory matters which is already available for free from government agencies.

Regulatory Compliance

Studies routinely show tax compliance and other government-related compliance costs per employer for the smallest
businesses at levels three to five times those for larger businesses. One recent estimate (BRE, 2010) suggests that micro

20
business owners spend eight hours per week on statutory compliance. While this time might serve good purposes for
society, if such an estimate is accurate then it suggests that some among the smallest micro businesses working at ‘full
capacity’ (in other words, those who could in the time given up in this way instead be increasing the potential of their
business to earn further revenues) are sacrificing 10-20% of their revenue potential to the necessity of record-keeping and
reporting. As we have noted, the effect of this, not least in matters of taxation, must be to encourage disengagement from
the system and resentment of government. Doubtless there is some irreducible minimum of monitoring and reporting
which must be allowed for—locating it and reaching it would be made easier under the proposed more granular
classification of business size class.

Internationalization

The effect of a new definition of micro business in respect of internationalization and export could be significant. Building
the capabilities to sell products or services at a distance (whether domestically or internationally) is a significant potential
route to growth for the smallest businesses. Yet the international dimension of this opportunity carries with it risks and
costs related to all four of the areas mentioned above: skills development to sell to unfamiliar customers, finance for
increasing working capital requirements, added barriers to effective information search and added regulatory burdens and
compliance costs. The decision to export is one which requires ‘handholding’ and expert guidance. Various analysts (Naidu
and Rao 1993, Leonidou 2004, Hauser and Werner 2010) have focused on the very low success rate of such schemes and
pointed out that the schemes require careful segmentation by the ‘skill and will’ of the firms they are targeted on to be
effective, particularly highlighting that the smallest firms need support even to engage with the specialist help on offer, let
alone to succeed in exporting.

It should be noted that most micro businesses will, whether trapped by these barriers or intentionally, remain small. As
has been argued, such businesses’ role in promoting social cohesion and acting as an underpinning of the economy
remains a vital one. Further, as the Harvard economist Josh Lerner argued in his 2009 book, Boulevard of Broken Dreams,
when government sets out to ‘pick winners’ and act as a catalyst to the growth of individual firms, the record of success is
mediocre to poor. As he and many other scholars recommend, the beginning of the design of a successful programme of
growth support is to understand the day-to-day reality of the entrepreneurial process and to provide firms support that
follows, and is ancillary to, rather than a replacement for, market signals that a particular firm has potential to grow.
Increased segmentation of the potential beneficiaries of growth-promotion programmes can aid in increasing
departments’ understanding of the support potential growth businesses will actually find useful, and avoiding attempting
to lead the market rather than to follow its signals.

Section Four: International Approaches to Micro business and Small Business Regulation

International comparisons reveal that:

 The UK is enviably good at founding businesses

 Compared to many other countries, the UK is not good at fostering high growth companies
 Many other countries use similar definitions to the ones proposed in this report for micro businesses
 Many other OECD countries outside the EU
o Do not apply a nationally uniform definition for what constitutes a small or micro business
and
o ‘tailor’ such definitions, varying them according to the aim of the policy and the structure of
their small business cohort

Business formation and growth rates outside the UK

The Global Entrepreneurship Monitor tracks early stage entrepreneurial activity around the world. The level of
entrepreneurial activity in an economy is partly driven by the GDP of that country—low GDP countries see high levels of
“necessity” entrepreneurship, driven by entrepreneur’s lack of alternative ways of supporting him or herself, while high
GDP countries see higher levels of “opportunity” entrepreneurship, driven by the perceived chance to improve one’s
situation:

21
Among the G7, the UK rates highly on the percentage of people engaging in entrepreneurial activity, especially
opportunity-driven activity:

% of population engaged in Opportunity Entrepreneurship Necessity

Entrepreneurship Entrepreneurship

G7 Average 3.6 1.2

UK 5.1 0.7

France 4.2 1.5

Germany 2.8 1.1

Italy 2.0 0.3

Japan 2.1 1.2

US 5.2 2.2

Source: GEM, 2010

In considering the role of micro businesses in the economy, one of the most striking international comparisons is that
despite relatively high levels of entrepreneurial activity, the expectations of UK entrepreneurs about growth potential are
significantly below those of other countries’ entrepreneurs. The table below refers to the percentage of entrepreneurs
who reported that they believed that within five years would be employing more than 10 people and experiencing greater
than 50% sales growth.

22
% expecting to employ >10 people and All entrepreneurs (including ‘nascent’ Entrepreneurs with established
see >50% growth over next 5 years entrepreneurs in the planning stages) businesses

G7 Average 16.8 2.8

UK 14.4 0.9

France 17.4 4.9

Germany 13.6 4.6

Italy 11.1 0.7

Japan 21.2 3.1

US 23.3 2.3

Source: GEM, 2010

More research would be necessary to unpack to what extent such low expectations, especially among current business
owners, relate to views of the business environment and to what extent they reflect a lack of aspiration. It is also open to
question to what extent the low expectations could be affected by better support to business owners. However, the
suggestion that low expectations and potentially low levels of aspiration may be a significant problem for UK business
growth is unavoidable.

Micro business definitions in use outside the UK

The EU’s definition of micro business is not shared around the world. According to World Bank research (2010), out of 78
non-EU countries with definitions of micro business, at least 29 define micro business as <5 employees rather than the <10
employees definition used by the EU. Notably, the World Bank research also shows that several countries changed their
definitions in recent times:

Australia—changed from 0-9 to 0-4 in 2003

Costa Rica—changed from 0-9 to 0-4 in 2004
Japan—changed from 0-9 to 0-4 in 2004
Jordan—changed from 0-19 to 0-4 in 2002
South Korea—change from 0-9 to a definition split by industrial sector (0-5 in some sectors, 0-9 in others) in 2007

There are few examples in the World Bank dataset, going back to 1997, of a country increasing the number of employees in
its definition of micro business, suggesting a growing sensitivity in national policies to the major differences in supporting
the very smallest employers compared to those slightly larger.

In the United States, different Federal government departments, different States and different government programmes
within States set different definitions of micro business, seemingly dependent on the emphasis of the programme: for
example, some programmes aimed at providing training and management advice use the <5 employees definition, while
others aimed at providing access to public procurement use a <20 employees definition. As we will discuss in the next
section, different types of SME programmes have higher levels of differentiation in ways in which they might affect the
smallest micro businesses than others.

Small- and micro business policy outside the UK

According to the OECD (2009):

“Most OECD countries have programmes which support SMEs. One-quarter of all public support [for business]
programmes reported to the OECD primarily target SMEs. Germany, Iceland, Japan and New Zealand dedicated

23
 more than 50 per cent of their entire public support programmes to SMEs. In 2008, a total of US$3.75 billion of
public money was paid to help start-ups, the acquisition of equipment, R&D, training and consultancy services, in
the form of direct grants, tax concessions, low interest rate loans or loan guarantees. More than 50 per cent of
SME programmes are administered locally, making co-ordination between authorities critical. Almost 70 per cent
of SME programmes last for more than five years. Stable and predictable programme management is in the
interest of users; however, a constant review process is vital to ensure quality and flexibility. Governments need
to intensify their efforts to disseminate information, eliminate unnecessary red tape, and make programmes
more responsive to the changing needs of SMEs.”

The OECD classifies existing programmes of SME support into five areas:

--Financing (mostly providing tax support to equity investment and R&D spending)
--Regulation (ensuring the needs of SMEs are considered in new legislation/ regulation)
--Management capabilities (training and advice)
--Technology diffusion (increasing SME receptiveness to technology)
--Market access (with two main foci—internationalisation and public procurement)

The US Small Business Administration undertakes a similar classification:

--Regulation
--providing compliance support
--providing exemptions from rules and compliance

--Business Development
--providing networking opportunities
--providing training
--providing support to start-ups in low employment areas

--Access to capital
--providing loan guarantees
--providing information regarding informal capital and VC investment

--Government procurement opportunities

In each of the policy areas highlighted by both the OECD and the SBA, the needs of micro businesses, especially the
smallest micro businesses, are substantially different from the needs of more well-established SMEs. The adoption of a
new definition of micro business would enable these policy areas to be reviewed and appropriate policy variations to be
formulated.

Type of SME Support How it may need to be differentiated for the smallest
micro businesses

Financing—loan guarantees Micro businesses need smaller amounts but will lack assets.
Likely to lack finance expertise so loans may need to be
linked to training on working capital management.
Administrative requirements may need to be tailored to
limited management time. Automatic screening to identify
businesses unsuitable for loans.

Financing—informal capital information Informal capital (e.g. business angels) a major source of
growth capital for those of the smallest businesses who are
suitable to grow. Some US states have a ‘classified ad’
system to link appropriate funders/ recipients.

Financing—VC investment Not relevant for the vast majority of micro businesses.

24
Regulation—considering small businesses in new legislation
Regulation—providing exemptions from compliance
Regulation—providing compliance support
Technology diffusion
Management capabilities--training
Management capabilities—advice
Management capabilities--networking
Management capabilities—support in deprived areas
A new definition would allow consideration of those
without management teams/less likely to have professional
advisers separately from those almost certain to have
management and advisors.
As seen in France (below), much standard paperwork and
compliance requirements might be adjusted for the
smallest micros.
The cost of compliance per employee is perhaps 3-8x higher
for the smallest micros compared to larger firms. At the
extreme this extra cost could be recognised in the tax
system, at the lesser cost end, tools to make compliance
less costly could be provided and compliance regimes
designed with the smallest firms in mind or with a
graduated set of requirements.
Only a limited subset of technology will be relevant to the
smallest firms and technology that is specialist, i.e. relevant
only to a particular industry vertical or segment, could be
best promoted through industry associations. In some
industries associations could be encouraged to consider
how to target their tech diffusion efforts in a way
appropriate to the smallest firms. Very small firms could
also be facilitated and encouraged to form appropriate
alliances for R&D.
The training needs of very small business owners may be
very different from those in larger companies—much
available management training is geared to taking
specialists and helping them become “general” managers;
very small business owners will often require a different
approach to the skills they need to develop. They may for
example require ‘bite size’ training opportunities targeted
precisely to help them handle a certain task, rather than a
course which covers a wide range of topics or skills around
a given subject.
As with training, advice needed by a smaller company with
little specialist help may need to be very bite size and
practically oriented. Help to achieve efficiency and to avoid
simple mistakes may be the principal need.
The opportunity cost of networking is effectively higher
where the owner has little time for exploring new
opportunities rather than searching for new ones. Although
some small business owners (BRE, 2010) say that
networking is vital for picking up information they need, it is
clear that the purpose of networking opportunities needs to
be examined carefully and the most effective purpose(s)
may well be stratified by size of firm.
This is an area where most initiatives are already in the
domain of supporting micro businesses.
25
Market access—international Such initiatives are unlikely to be useful to the vast majority
of micro businesses and should be carefully designed to
recognise the lack of ‘in house’ expertise such businesses
possess.

Market access—procurement Where such initiatives (as in the US) include micro
businesses, it is usually through encouraging them to form
partnerships with larger companies and vice versa.

Below are examples of how this is done in two other OECD countries.

France

The French tax system has long included a separate category for the micro-entreprise. Aimed at businesses with low start-
up costs and revenues below €81,500 (or €32,600 in the case of service providers), the calculation of tax is significantly
simplified for these businesses and substantial tax relief granted for those starting businesses having previously been in
receipt of unemployment benefits.

In 2009, this simplification regime was further extended when a new status of auto-entrepreneur was introduced, for
individuals intending to trade as sole proprietors and especially for those running businesses alongside a pension or a
salary. This allowed a radically simplified programme of registering the business, further simplifications in the calculation
and payment of tax and social charges and exemption from local business rates payments for the first three years.

In 2011, a further simplifying structure was introduced in the form of a new legal structure for sole trading businesses. A
new company status, EIRL (Entreprise individuelle à responsabilité limitée), similar to the Limited Liability Partnership in
the UK but not requiring more than one person be involved was introduced. This avoids the double taxation (on salary and
company profits) inherent in the prevalent limited company structure.

The thrust of these efforts is to lower the entry barriers and compliance costs for those engaged in the smallest scale of
business.

USA

Micro-lending
In several States, legislators have developed micro-lending programmes to encourage micro-enterprise development
within their states. One such programme, managed by the Montana Department of Commerce, offers loans and
operational and training grants to regional micro business development corporations within the state. These development
corporations then provide training, technical assistance in business planning, and loans of up to $35,000 to small
businesses that generate less than $500,000 in gross revenues. Montana’s “Micro business Finance Program” is self-
sustaining, and the services rendered by the state-administered intermediaries are available at low cost.

Incubator
The Southeastern Utah Business and Technical Center in Price, Utah is an example of a small business incubator sponsored
by city and county governments. It is located in a restored building and now accommodates up to 20 small businesses. It
provides shared services and equipment to new businesses at low rents. These services and equipment include telephone
service with voice mail, PCs, business libraries, copy machines and conference rooms. Clients are in an environment where
they can share experiences and conduct business with one another. They share costs and building maintenance
responsibilities. Sponsors also identify buyers for the clients’ products and services. Since its establishment, the Utah
incubator has assisted in the development of 16 new businesses that have gone on to provide more than 300 jobs in
Southeastern Utah.

Small Business Loan Guarantees

SBFDCs (non-profit small business financial development corporations) in California can collectively lend up to four times
the reserves held in a trust fund managed by the California Trade and Commerce Agency. The California Loan Guarantee
Program includes term loans, lines of credit, and farm loans. It complements SBA loan programs in making loans to some
types of businesses ineligible for SBA loan guarantees.

26
Section Five: UK Government Approach to Small Busine ss Support and Regulation

As is argued above, one of the principal benefits of the proposed new definition would be the possibility of better co-
ordinating government support and action in this arena. The extent to which this is necessary is shown in Figure 1 (Morris,
Dennison and Moorcraft 2011), which reviews, department by department, the sphere of policy and current issues which
relate to micro businesses.

Conclusion

27
The case for reviewing the definition is supported on the grounds of developing better policy, both in removing barriers to
growth and in providing better support to those who are not growing. Efforts to encourage business survival, with its
implications for social cohesion and a strong legitimate economy, and growth, with its implications for the wider economy,
can be better co-ordinated by government, their intended beneficiaries better made aware and better motivated to seek
the benefits of such efforts, under a new definition.

APPENDIX

Here we report briefly and not exhaustively, based directly on material supplied by Moorcraft and Townsend (2011) of
Anne Marie Morris MP’s office, some illustrative case studies regarding the principal issues that arise for micro businesses
and SMEs in dealing with government. If this account is accurate then the opportunity to improve departmental
engagement with the smallest businesses is evident.

Department of Work and Pensions

In its “Delivering information on pensions” report (2010) the DWP recognised that micro businesses with fewer employees
were qualitatively different from those with more employees—and specifically that the smallest businesses of 1-5
employees were much less likely to have professional advisers and so should be dealt with differently from what it called a
medium-sized firm of 6-249 employees. This distinction in the report was then carried into the legislation itself which
defines micro businesses as those with 1-4 employees and recognises in the cost/benefit analysis that the administrative
costs of implementing the reform are higher per employee in the smallest firms. The new definition proposed in this paper
is precisely to encourage this kind of sensible policy consideration. The DWP’s other work however uses the EU definition
of micro business. In 2005, the DWP carried out specific research on the role of micro businesses in employment.

In general the DWP appears to consider the concerns of SMEs carefully—perhaps simply its engagement with the real
issues facing the workforce have led to an awareness of the substantial qualitative divide in terms of the nature of
employment in the very smallest businesses compared to businesses of even a slightly larger size: this consideration is
evident in for example the delay in rollout of the new pensions reforms to the smaller business in order to give them
additional time to prepare.

Ministry of Justice
The MOJ provides Legal Ombudsman services which are available to the public, very small businesses, charities, clubs and
trusts. It consults with SMEs over certain legal matters such as reforms of employment tribunals or the Bribery Bill.
Employment tribunal policy is typical of a legal area which might well affect 1-4 employee micro businesses in different
ways than larger SMEs.

Department of Business, Innovation and Skills

A moratorium on new domestic regulation for micro businesses (using the EU definition) and start-ups was announced in
the Plan for Growth, published in March 2011. The moratorium policy applies to all new domestic regulation within the
scope of 'One-in, One-out' (OIOO), that affect micro businesses and which is intended to come into force before 31 March
2014 (the end of the moratorium period). It also applies to certain categories of domestic regulation that are outside the
scope of OIOO, particularly regulations addressing systemic financial risk.

The BIS also runs the Better Regulation Executive (BRE) which does research and designs initiatives intended to bring about
a steady change of culture across government, so that regulation is seen as the last resort and alternatives to regulation
are first considered, while reducing the regulatory burden on business and civil society organisations. Its excellent
qualitative research project, “Lightening the Load” (Nov 2010) has been an important source of understanding of the
granular reality of managerial life in a very small micro business. We quote from its summary here:

Summary of key views: what micro businesses think about regulation and Government

 They feel like they are not rewarded for the contribution they make and that ‘hurdles are put in their path at
every step’.
 They believe that no one is looking after their interests but they are expected to do things on behalf of
government (e.g. collect monies, control sales of certain goods) but get nothing back from the government.
 They recognise the value of some regulation but did not like the demand of regulation requiring them to keep
written records (for example records of replacing number plates, refused sales of alcohol or tobacco).
 They feel like they have no one ‘on their side’ and have no negotiating power with suppliers or government (e.g.
planning allowing large chains to open next door).
 They almost solely rely on accountants and associations for advice.

28
  They have the greatest interactions with inspectors and HMRC but have very little interaction with other parts of
government.
 Views were mixed on inspections but many agreed that they can be useful, although they do feel at the mercy of
an individual inspector’s opinion and did not believe that they had anyone they could turn to if they disagreed
with the inspector.
 They would like more local support and somewhere they could go to get clarification about all regulations. A
significant proportion of them do not use the internet as part of their business.
 They believe that they are seen less favourably in planning and by other enforcement agencies as the group most
likely to be in breach of regulations.
 Employment regulations- pendulum has swung too far in favour of the employee.
 They find it hard to make a profit.

BIS, unsurprisingly, engages with SMEs more than almost any other department, as evidenced by its 163 current
publications on ‘Enterprise and Small Business’. Apparently throughout however, it uses the EU definition of micro
business.

Cabinet Office

In February 2011, Francis Maude, the Minister for the Cabinet Office announced a broad package of reforms designed to
significantly open up the public sector procurement marketplace to SMEs. Such initiatives could be better targeted if they
considered the differing positions of the larger and smaller SME.

Department for Communities and Local Government

DCLG manages the European Regional Development Fund (ERDF) in England. This fund is focused on reducing economic
disparities within and between member states by supporting economic regeneration and safeguarding jobs. Funding is
targeted to meet three overarching objectives: Convergence, Regional Competitiveness and European Territorial Co-
operation. The ERDF Investment framework – ‘Exploiting the Science and R&D base of a region’ Stage 1 grants focused on
businesses with fewer than ten employees.

The English Property Development State Aid Scheme is a programme to provide aid to SME developers and where the end
user will be an SME. DCLG co-ordinates a cross-government ‘Innovation Hub’ targeted at SMEs, and provides substantial
quantities of advice to Local Authorities and Councils on how to best serve SMEs.

The ERDF, being an EU scheme, has its eligibility criteria for participation set outside the UK. However, even this
programme might be able to be best administered through an appreciation of the differing priorities and capacities of the
smallest businesses compared to the larger ones.

We may also note that while this paper does not review local government management of its relationship with micro
business, the national Government changing its definition of micro business would “free” or encourage local authorities to
also consider how their interactions with SMEs could be best tailored to the qualitative distinctions between micro
business non-employers, micro business employers, and small SMEs.

Department for Culture, Olympics, Media and Sport

The department shows awareness and some engagement with SMEs, especially through its responsibility for the creative
industries which include many micro businesses, both growth-oriented and not.

DEFRA
The department is committed to better advice for SMEs to reduce the burden the paperwork associated with regulation,
and provides guides for small businesses on relevant policy areas (eg waste). DEFRA research in 2009 indicated that 50% of
employment in rural settlements is in SMEs—given the significance this has in the context of battling rural poverty and
social exclusion, targeted support for micro businesses may well be relevant.

The Prime Minister’s Office

David Cameron has made a number of speeches about the concerns of SMEs and their barriers to growth, such as
participation in procurement and access to finance.

Wales Office
The Wales Office is engaged with SMEs and takes action to attract investment to Welsh businesses and to improve Welsh
exporting activity. 34% of Welsh private sector employment is in businesses of four staff or fewer.

29
Department for Transport
The DOT shows some engagement with small businesses – its impact assessments thoroughly examine impacts on SMEs
and, occasionally, micro businesses.

HM Treasury
The Treasury works closely with BIS on SME matters across a wide range of regulatory issues, including the Red Tape
Challenge, the small business tax review/Office of Tax Simplification and measures to deregulate access to equity finance
for smaller businesses. Both regulatory and tax issues are exemplary of the areas of policy which can usefully distinguish
between the very smallest, managerially limited businesses and those which operate on a larger scale.

Government Equalities Office

There is only a limited engagement with SMEs, such as consultations on exemptions from equalities rules. This area of
government’s work could arguably benefit from a new definition for micro businesses, as arguably there may be equalities
rules and regulations which would be appropriate in a firm of nine people but not in a firm of three.

Department of Health
Very limited engagement with SMEs. While SMEs do not play a large role in, for example, the pharmaceutical industry due
to the capital investment involved, the opportunity for engagement with micros and SMEs to seek out innovation in health
provision should be recognised by procurement departments.

Department of Education
Apparently limited engagement with SMEs, though through its responsibility for business and finance education at
secondary level it may find the distinction between the micro business and the small SME one which resonates with those
providing enterprise education as a practical precursor to entering the workforce through self-employment.

Ministry of Defence
Although the Ministry recognises the usefulness of SMEs for research and innovation and plans to encourage and continue
using of SMEs who win contracts through the CDE process, there is no real engagement with SMEs in terms of policy.

Foreign and Commonwealth Office

Although the FCO takes the lead in relationships with the EU over growth and regulations and in negotiating trade
agreements, there is little direct engagement with SMEs.

Department for International Development

Like the FCO, DFID has limited engagement with UK SMEs.

Home Office
The Home Office seldom engages with SMEs except to consult on the possibilities of exemptions from regulations on e.g.,
anti-terrorism crime and security issues.

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32
Appendix B – Lancaster University – Defining Micro Businesses in the
UK

Lancaster University Management School Institute for

Entrepreneurship and Enterprise Development

Defining Micro Businesses in the UK

Report to the All-Party Parliamentary Group for Micro Businesses

Magnus George, Danny Soetanto and Lizzie Hamiliton

October 2011

33
Defining Micro Business in the UK

Executive summary

This report combines a survey of global micro business definitions with an initial analysis of the UK business population and
proposes a new definition of micro businesses for the UK. In common with other countries around the world the UK has a
business population that is skewed towards a very large percentage of small and very small enterprises. These small and
medium sized enterprises (SMEs) or micro, small and medium sized enterprises (MSMEs) are extremely diverse in their
activities in every country. They employ a significant percentage of the total workforce and generate a substantial portion
of each nation’s GDP.

Definitions of micro businesses vary across countries and the UK currently adopts the EU definition of not more than ten
employees and either a turnover or a balance sheet value of €2 million. This definition has been in force since January
2005. Based upon employee numbers, 2011 data from BIS estimate that there are over 4.3 million micro businesses in the
UK. Fully 95 per cent of all private sector enterprise in the UK is micro enterprise under the EU definition.

UK micro businesses are dominated by enterprises with no employees. These are businesses comprising “sole
proprietorships and partnerships comprising only the self-employed owner-manager(s), and companies comprising only an
1
employee director” .

The current definition is viewed as lacking finesse in correctly segmenting the UK business population in two ways. Firstly
it combines businesses across a very large relative size range. Secondly it fails to distinguish between true micro
businesses, which have their own peculiar features and issues, and the lower end of small businesses. These failings may
lead to under-representation of legitimate micro business concerns and may hinder agile policy interventions that target
either micro or small businesses.

A single micro business definition is recommended as a preference to a range of sector-specific definitions. A combination
of employee number and turnover is recommended. An employee threshold of either four or five total employees is
recommended. Current government reporting gives employee bands clustered as 0-4, with lower bands, 5-9, 10-19 and
upwards. A threshold turnover of £1million is also recommended, on either a single year or rolling-average basis.

A final adopted definition would, therefore, be in the form that a UK micro business has up to a maximum of four (or five)
people in employment in the enterprise and a turnover of not more than £1million over the past year. It would apply to
approximately 4.1 million UK enterprises. Such a definition would distinguish micro businesses from the proportionately
rarer but highly-valued small business class, which has up to 50 employees).

1. Introduction

1.1 Aim and purpose of research

This paper is a response by the Institute for Entrepreneurship and Enterprise Development at Lancaster University
Management School to a request from the All-Party Parliamentary Group for Micro Businesses (APPG) for an opinion on
the best definition of micro businesses that can be applied in the UK. The purpose being to better enable government to
implement actions that will foster UK micro businesses and lead to enhanced economic growth. The Institute for
Entrepreneurship and Enterprise Development (IEED) is pleased to offer the following suggestions for how this
requirement may be met.

This paper addresses one research question. That is, how should micro business be defined in the UK? A number of
subsidiary questions are used in this report to identify alternatives, explore features that are relevant in setting a definition
and reveal practice in other territories.

1.2 Outline of the paper

This report draws on desk research using a range of available data. It examines how micro businesses are defined in other
countries around the world. It presents recent data on the size breakdown of UK businesses, in order to estimate the
number of micro businesses that would exist under a new definition. Options for a new definition are given. Sources are
given in footnotes or in the short reference list, and there are lengthy appendices with global comparison information. In

1
source: BIS (2011) Business Population Estimates for the UK and Regions

34
this paper the terms enterprise, business and firm are used interchangeably and no consideration is given to business
format (i.e. registered companies, partnerships or other structures).

2. Definition of micro-business firms

2.1 Fundamental requirements of a workable definition

A definition needs to meet a number of criteria, outlined below:

 A useful definition of micro business for the UK would need to be easily-understood and unambiguous. It should
‘feel right’ to business and the public at large.
 The current EU definition is set at a level that encompasses an extremely high percentage of all UK SMEs. If the
purpose of a new definition is to differentiate ‘true’ micro businesses from true small businesses then this
‘floodgates’ issue needs to be borne in mind. A new definition should allow for the clear differentiation of micro
businesses from small businesses.
 A new definition should minimise the risk of misinterpretation and of producing perverse incentives. Those risks
may fall more under the implementation of policy that uses the definition than in the definition itself. However,
establishing the definition will determine the future likelihood of those unwanted outcomes. The inclusion of
high levels of complexity may produce such situations, as well as inhibiting a warm response from the business
community. For example, financial metrics may be based upon rolling averages rather than single-year values. A
requirement to declare, say, turnover figures for the preceding three years would involve a trade-off between
accuracy or representativeness and attendant administrative burden, not to mention that it would introduce
scope for creative game playing. Again, the actual policy implementation would determine the extent to which
such undesired incentives existed, but the underlying definition would, itself, contribute to the frequency of such
problems.
 A collateral benefit of a new definition of micro business would be to distinguish the comparatively much smaller
group of ‘next size up’ enterprises (e.g. those employing up to 20 people). These more clearly-defined small
businesses may themselves become the target of dedicated support or policy initiatives. Separating out micro
businesses would allow for that to be done in a more transparent and measurable way.
 It may be helpful if a new definition allowed for easy comparison with existing data sets. It is therefore
important to be aware of extant reporting systems and size classes.

2.2 How are business size categories defined in the UK?

The Companies Act 2006 defines small and medium sized enterprises (SMEs) and stipulates accounting procedures with
which they must comply. The Act (sections 382 and 465) defines a small business as having not more than 50 employees, a
turnover under £6.5 million and a balance sheet value under £3.26 million. A medium-sized company has not more than
250 employees, a turnover under £25.9 million and a balance sheet value under £12.9 million. The CBI uses the acronym
MSB for medium-sized businesses, defined as having turnover between £10m and £100m, with between 50 and 499
employees (CBI, 2011). The CBI asserts that MSBs are caught in a ‘public policy gap’: too large for small business initiatives
but too small for the attention shown to FTSE firms. In some regards, UK micro businesses suffer similarly from being
aggregated with larger firms.

While the phrase SME is widely used it is evident that the majority of UK business enterprises are neither medium nor
small in size but are micro businesses. The existing dominant UK definition defaults to the EU definition. The European
Commission adopted Recommendation 2003/361/EC in May 2003 and, from January 1st 2005, this took effect. It
2
established the following definitions . For the first time these introduced financial elements to the micro business category
(EC, undated).

Enterprise category Headcount Turnover or Balance sheet total

medium-sized < 250 ≤ € 50 million ≤ € 43 million

small < 50 ≤ € 10 million ≤ € 10 million

micro < 10 ≤ € 2 million ≤ € 2 million

2
http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm

35
 2.3 What measures should be used to define micro businesses?

Globally, micro businesses are defined in terms of combinations of employee number, turnover and balance sheet value
(see appendices). Further additional or alternative metrics could be proposed, though these possibly relate best only in
specific situations. For example, in the specific context of a 1997 energy regulator ofgem consultation around consumer
redress schemes, the then Department for Business, Enterprise and Regulatory Reform (BERR) proposed the use of annual
3
business customer bill size to define micro businesses (in this case an annual threshold of £5,000 was used ). In January
4
2010 ofgem designated a full micro business definition which stipulated that a micro should meet one of these criteria :

 consumes less than 200,000 kWh of gas a year, or

 consumes less than 55,000 kWh of electricity a year, or

 has fewer than ten employees (or their full-time equivalent) and an annual turnover or annual balance sheet
total not exceeding €2m.

Additional potential criteria for definition are numerous, though unlikely to have general applicability. They would add
considerable complication to any resulting policy implementation. Suggested criteria might include number of trading
locations, number of vehicles (for transport businesses), number of vessels (for fishing operations) and a host of other
measurable or declarable features. These options are not considered in any more detail; however, sector-specific
indicators could be determined if required.

The World Bank publishes data on MSMEs (micro, small and medium enterprises) across the globe. The last update of this
5
was in January 2007 . This database, Micro, Small, and Medium Enterprises: A Collection of Published Data, is summarised
in appendix 1. With some exceptions, micro business definitions are in two clusters, and there is no obvious cultural or
economic development pattern to their usage. Micro businesses are almost universally defined as having either up to five
employees (i.e. 0-4 or 1-5) or up to ten (i.e. 0-9 or 1-9). MSME contributions to total business stock and total employment
vary widely in absolute and relative terms, though their contribution is always high. Micro businesses, however defined,
are always a large component of total MSME numbers. The accompanying financial metrics for micro businesses vary
widely, as do examples of specific governmental and legislative policies to support micro businesses. See appendix 1 for
further details of global MSME definitions.

A combination of employee number and either turnover or balance sheet value remains the obvious general standard that
any new definition will adopt.

2.4 Is there a lower limit to what a micro business is?

The UK business stock is dominated, in numerical terms, by enterprises with no employees. A definition of micro
businesses could, conceivably, relegate these to a different category, perhaps by formalising sole trader or independent
freelancer as a format. Micro businesses would then have both lower and upper limits, say between one and five
employees, with associated financial metrics. However, this splitting of non-employing from employing businesses would
be unwelcome for two main reasons. Firstly, the ensuing threshold between zero and one employee would probably abut
harshly against subsequent policy instruments, resulting in unforeseeable negative outcomes. Secondly, the very essence
of what micro businesses are is embodied in these ’smallest of small enterprises’ (Clinton et al., 2006), which provide
diverse formats for self-employment, portfolio working, start-up, refuge from redundancy and associated formats and
motivations. The option of a lower limit is ruled out in further analysis. However, once a micro business definition was set
it would, of course, be possible to segment within that, using terms such as ‘micro businesses employing three or more
people’ should that be desired for policy implementation. As an example, apprenticeship support might be targeted at
employers with existing staff looking to grow through such a route.

2.5 Should there be only one definition, or different definitions for different sectors?

The best way to consider this question is by way of two extreme examples. At one extreme, two highly-qualified
professionals, such as design engineers or barristers, could form an enterprise and bill several hundred thousand pounds-
worth of business in a year. In contrast, a ‘gangmaster’ may employ a large and fluid team of agricultural labourers who

3
http://www.ofgem.gov.uk/Sustainability/Cp/Cr/CJwg/Documents1/Ofgem%20-%20Defining%20Micro-businesses%20180308.pdf
4
http://www.ofgem.gov.uk/Consumers/Pages/Bc.aspx
5
http://rru.worldbank.org/Documents/other/MSMEdatabase/msme_database.htm

36
pick seasonal produce across the country. They could number over ten times the work force of the professional practice
for the equivalent turnover.

It is, of course, feasible to set different definition thresholds for different sectors. For example, the US Small Business
Administration (SBA) publishes a table of ‘size standards’. These standards specify the employee number or turnover value
that defines a small business (SBA, 2010) in each sector. Standards are listed for the North American industry classification
codes. They do not distinguish micro-businesses. The SBA web-site states that the “standards are critical in the
government-contracting process because they ensure a “level playing field” for competition among small businesses of
varying sizes”. The policy relates to small and not micro businesses. It is difficult to construct a plausible argument for a
range of sector-specific micro business definitions for the UK.

2.6 Aside from these measures of size, what makes a micro business a micro business?

The essence of what constitutes a micro is that in a micro the owner-manager can, and most often does, directly control all
of the team, who report directly to them. In contrast, small businesses require, though to different degrees, some change
to that state. With growth comes the need for, but also the crisis of, introducing systems. This requires the owner-
manager to begin to relinquish some aspects of day-to-day control over all operational issues. This is achieved by the
introduction of an intermediate layer of management. The managers are then tasked to manage other people. This
management layer ideally operates as a ‘top team’, the presence of which constitutes development beyond the micro
stage.

With growth comes an evolving requirement to adopt and adapt increasing degrees of internal control systems,
appropriate to the work undertaken. The owner-manager needs to, increasingly, adopt different mannerisms from those
they used when launching their business. These include effective delegation and handing over at least a degree of control
over day-to-day operational minutiae. Managing increasing numbers of staff brings new challenges, not least of which are
strict legislative requirements, i.e. ‘red tape’.

Operationally, there is a massive change in a firm when it first employees someone whose job is, specifically, to manage
others. This is probably the first time the owner/manager relinquishes total control. At this point the "logical synergy" of
everything being in the owner-manager’s head is pulled apart and decisions about how the company is going to carry out
its business becomes divided. From this point forward the company is a different entity, and the role of the owner-
manager undergoes a step change from completing everything (or supervising the completion of everything) to managing
people who undertake at least some of that work. This change is notoriously difficult for the great majority of companies
to achieve. Getting through it enables a company to progress from a micro to a small business state. It does not, however,
occur at a pre-set and fixed size in terms of employees or turnover. It may be interpreted that the achievement of
increased turnover or the growth in staff is a reflection of earlier changes in owner-manager behaviour and resulting
business success.

2.7 What limits should be used in the new UK definition?

An initial option could be to retain the EU definition. If however a new and more UK-specific definition is to be derived
then it should combine employee number and a financial metric. Micro businesses can, reasonably, be expected to
understand their turnover, whereas determination of balance sheet value can be more problematic, not to mention costly,
for them. Turnover could be determined either for ‘the past year’ or as a rolling average over a period of years. An annual
turnover figure of £1 million would be readily communicable. There should be no lower limit to the micro business
category. The upper limit should be set around five employees and two options are proposed. The first is that a micro
business is defined as having less than five employees, i.e. zero to four persons deriving employment from it. The second is
to allow five or less employees, i.e. zero to five persons deriving employment from it. Existing government reporting via
BIS presents data in the first category (BIS, 2011b), and these are used in the next section. The term employee should
require a simple head count. It should not require complicated formulae involving full time equivalents, hours worked,
distinctions between full and part-time workers, allowances and deductions related to parental or sickness absences or any
other laborious or interpretable metric.

37
3. Number of micro-business firms: the UK context

The October 2001 update to estimates of the UK population (BIS, 2011b) is summarised in the following graphs. These
show the total number of enterprises, employment number and turnover across business size classes. Sector breakdown
of enterprise numbers is included in appendix 4.

The predominance of enterprises without employees is marked. UK micro businesses are dominated by enterprises with
no employees, that is, businesses defined by BIS as comprising “sole proprietorships and partnerships comprising only the
self-employed owner-manager(s), and companies comprising only an employee director”.

3.1 Number of enterprises by size class

4,000.0
3,500.0
3,000.0
2,500.0
2,000.0
1,500.0
1,000.0
500.0
0.0
With
no 100- 200-
1 2-4 5-9 10-19 20-49 50-99
employ 199 249
ees
Enterprise (thousands) 3,364.0 169.6 580.5 218.4 109.7 63.7 20.3 8.5 1.7

3.2 Number of employees by enterprise size class

4,000
3,500
3,000
2,500
Thousand

2,000
1,500
1,000
500
0
With no
100- 200-
employ 1 2-4 5-9 10-19 20-49 50-99
199 249
ees
Employment 3,684 386 1,759 1,506 1,524 1,944 1,402 1,185 370

38
 3.3 Gross combined turnover by enterprise size class

300,000
250,000
200,000
£ millions

150,000
100,000
50,000
0
With no
100- 200-
employ 1 2-4 5-9 10-19 20-49 50-99
199 249
ees
Turnover 202,431 27,770 183,386 192,715 175,384 285,116 194,395 165,508 62,551

The October 2011 BIS statistical release estimated that there were 4,114,130 enterprises with up to four employees.
Introducing a lower as well as an upper threshold and removing enterprises with no employees would reduce that figure
significantly. BIS data estimate that there are in the region of 750,110 enterprises with between one and four employees.

4. Drivers and barriers to growth

SMEs are perceived as a vital seedbed for economic growth through sales and employment. By extension, micro
businesses are a key component of that potential. However, it is important to recognise that within the millions of MSMEs
only a portion generate significant growth. Recent reports by NESTA illustrate this well. As well as exploring the
phenomenon of so-called gazelle or ‘high-growth’ companies these also expose the ‘vital six per cent’ of enterprises which
generate between 50 per cent and 60 per cent of employment. Innovativeness has been identified as a vital determinant
of high-growth (Mason et al., 2009). These six per cent, the high growth firms, have been found (NESTA, 2011: p.5) to
“account for a disproportionate share of job creation, generating half of new jobs created by firms of ten or more
employees between 2007 and 2010. This suggests that this is a robust relationship that holds through good times and bad.
Companies continue to find routes to high growth, even during the recession.” NESTA also reports that, based on a cohort
study following approximately 250,000 UK start-ups, only very few firms report annual growth in employment of 20 per
cent in over two separate years in a ten–year period (Anyadike-Danes et al., 2009). However those few firms which began
with a single employee and grew to exceed 20 employees did yield rapid growth. By their third year such companies
averaged 50 employees. Subsequent growth was, on average slower (approximately 10 per cent per year). It can be
concluded that, although a large proportion of high-growth enterprises are comparatively young, such growth is only
achieved by a small fraction of all new enterprises (Mason et al., 2009). While such issues do not directly affect the issue of
defining UK micro businesses they are important in considering how to enact policy based upon such a definition.

Given such data it is evident that micro businesses must face significant barriers in achieving growth. The Small Business
Survey (SBS) (BIS, 2011a) provides business perception data on a range of issues linked to growth. The following graphs
summarise these for the period between 2006 and 2010. They show how micro businesses (by the EU definition) differ
from larger SMEs, specifically, how they lag behind larger enterprises in all areas.

4.1 Profit

The percentage of micro firms which had generated a profit in the previous financial years is relatively low compared to
other categories (small and medium classes).

39
 100
90
80
70
60
50
40
30
20
10
0
SBS2006/2007 SBS2007/2008 SBS2010

Micro (1-9) Small (10-49) Medium (50-249)

4.2 Plans for growth

Although the percentage of micro business that had developed plans for growth is relatively low compared to other
classes, there is a constant increase from 2006.

100
90
80
70
60
50
40
30
20
10
0
SBS2006/2007 SBS2007/2008 SBS2010

Micro (1-9) Small (10-49) Medium (50-249)

4.3 Plans for closure or transfer of business

The percentage of micro firms who had plans for closure or transfer of business is relatively high.

40
 25

20

15

10

0
Micro (1-9) Small (10-49) Medium (50-249)

4.4 Perception of whether the business has a strong capability at business activities

The micro firms constantly show a lack of confidence in most areas but the biggest gap is in accessing external finance.

80

70

60

50

40

30
Micro (1-9)
20
Small (10-49)
10 Medium (50-249)
0

41
 4.5 Business capability: training

The percentage of micro firms who had arranged or funded training for staff is lower than for other size categories.

100
90
80
70
60
50
40
30
20
10
0
SBS2006/2007 SBS2007/2008 SBS2010

Micro (1-9) Small (10-49) Medium (50-249)

5. Further work

The existing published statistics conceal an enormous diversity within the micro business stock, however it is defined.
Research into the high-growth components of the micro, small and medium sized business stock exposes both the
potential and the difficulty of enhancing the portion of companies that achieve high-growth status, as well as improving
performance in those that do not achieve it. Further work to better understand how these ideals could be realised is
clearly a priority if interventions are to be effective. Two schemes for this are proposed:

 Analysis of micro data in order to attempt to identify existing sectors, geographies or other features of parts of
the micro business stock that go on to grow significantly.

 Work with micro and small businesses by the Institute for Entrepreneurship and Enterprise Development focuses
on a range of issues that are involved in supporting growth-oriented owner-managers. Such work may provide
useful case material for members of the APPG for Micro Businesses.

42
6. References
Anyadike-Danes, M., Bonner, K., Hart, M. & Mason, C. (2009), Measuring Business Growth: high-growth firms and their
contribution to employment in the UK, NESTA, London.
BIS (2011a), BIS Small Business Survey 2010, BIS, London.
BIS (2011b), Business Population Estimates for the UK and Regions, Department for Business Innovation and Skills,
http://www.bis.gov.uk/analysis/statistics/business-population-estimates
CBI (2011), Future champions: unlocking growth in the UK's medium-sized businesses, CBI, London.
Clinton, M., Totterdell, P. & Wood, S. (2006), A grounded theory of portfolio working - Experiencing the smallest of small
businesses. International Small Business Journal, 24(2), 179-203.
EC (undated), The new SME definition: user guide and model declaration, EC, Brussels.
http://ec.europa.eu/enterprise/policies/sme/files/sme_definition/sme_user_guide_en.pdf
Mason, C., Bishop, K. & Robinson, C. (2009), Business growth and innovation: the wider impact of rapidly-growing firms in
UK city-regions. Research report October 2009, NESTA, London.
NESTA (2011), Vital growth: the importance of high-growth businesses to the recovery. Research summary March 2011,
executive summary, NESTA, London.
SBA (2010), Table of Small Business Size Standards Matched to North American Industry Classification System Codes, US
Small Business Administration, http://www.sba.gov/sites/default/files/Size_Standards_Table.pdf

Appendices

Appendix 1: MSME Data from The World Bank (Source: http://www.ifc.org/ifcext/globalfm.nsf/Content/MSME-

CountryIndicators)

Country Name MSME Definitions

Micro Small Medium

Australia 0-4 5-19 20-199

Austria 1-9 10-49 50-249

Azerbaijan <250
Belgium 0-9 10-49 50-199

Bangladesh <50 51-99

Belarus 0-9 10-49 50-249

Brazil 0-9 10-49 50-99
Canada 0-4 5-99 100-499
Switzerland 0-9 10-49 50-249
China n/a n/a n/a
Cyprus 0-9 10-49 50-249
Czech Republic 0-5 6-19 20-249
Germany 0-9 10-49 50-249
Spain 0-9 10-49 50-199
Estonia 0-9 10-49 50-249
Finland 0-9 10-49 50-249
France 0-9 10-49 50-249
United Kingdom 0-9 10-49 50-249

Greece 0-9 10-49 50-249

Croatia 0-9 10-49 50-249

Hungary 0-9 10-49 50-249

43
India 0-5 6-9

Ireland 0-9 10-49 50-249

Iceland 0-9 10-49 50-249

Israel 0-9 10-49 50-100

Italy 0-9 10-49 50-249

Japan 1-4 5-19 20-299

Korea <10 10-49 50-300
Lithuania 0-9 10-49 50-249
Luxembourg 0-9 10-49 50-99
Moldova 0-9 10-49 50-249
Macedonia 0-9 10-49 50-249
Malta 1-9 10-49 50-249
Netherlands 0-9 10-99

Norway 0-4 5-19 20-99

New Zealand 0-9 10-99 100-499

Poland 0-9 10-49 50-249

Portugal 0-9 10-49 50-249

Romania 0-9 10-49 50-249

Slovak Republic 0-9 10-49 50-249
Slovenia 0-9 10-49 50-249
Sweden 0-9 10-49 50-199
Turkey 1-9 10-49 50-249
United States 0-9 10-99 100-499

Structure of the MSME Sector

Country Name MSME Participation in the Economy
(% of all MSMEs)

MSME
MSMEs per
Micro Small Medium MSMEs employment
1,000 people
(% total)

Australia 89.1 10.9 n/a 1,269,000 63.1

Austria 86.4 11.8 1.8 252,399 31.1 65.3

Azerbaijan 100.0 49,527 6.0 5.0
Belgium 95.9 3.5 0.6 686,533 42.2 69.3

Bangladesh 84.7 15.3 177,000 1.3 80-85

Belarus 70.4 29.6 0.0 25,108 2.5 14.6

Brazil 93.9 5.6 0.5 4,903,268 27.4 67.0
Canada 79.8 19.2 1.0 2,245,245 69.6 64.2
Switzerland 89.0 9.3 1.7 344,000 46.7 75.3
China n/a n/a n/a 8,000,000 6.3 78.0
Cyprus 94.2 5.0 0.8 66,918 80.1 73.1
Czech Republic 96.3 2.4 1.3 2,405,290 n/a
Germany 91.1 7.3 1.5 3,162,111 38.3
Spain 94.1 5.2 0.7 3,168,735 73.0

44
Estonia 88.0 10.0 2.0 65,194 48.5
Finland 93.7 5.4 0.9 221,000 42.4 59.2
France 93.3 5.8 0.9 2,612,960 43.3
United Kingdom 95.4 3.9 0.7 4,415,260 73.8 39.6

Greece 97.5 2.1 0.3 771,000 72.2 74.0

Croatia 87.4 9.8 2.8 94,088

Hungary 97.0 2.7 0.4 1,215,789 n/a
India 94.0 3.3 295,098 0.3 66.9

Ireland 85.6 12.4 2.0 97,000 24.6 72.1

Iceland 92.3 6.6 1.1 25,449 87.8 76.6

Israel 94.0 5.3 0.7 468,338 67.8

Italy 95.6 4.0 0.4 4,486,000 77.8 73.0

Japan 61.7 29.9 8.4 5,712,191 44.7 88.0

Korea 89.4 7.7 2.8 2,998,223 62.4 86.5
Lithuania 75.0 20.2 4.8 56,428 16.5 71.2
Luxembourg 87.7 10.9 1.5 24,334 54.1
Moldova 70.8 18.5 10.7 25,667 6.1 21.6
Macedonia 80.0 3.8 1.7 55,742 27.5
Malta 95.8 3.6 0.6 30,974 77.2 86.9
Netherlands 92.1 7.9 735,160 45.0

Norway 85.5 11.8 2.7 316,243 57.7

New Zealand 91.9 7.6 0.5 334,031 82.3 70.9

Poland 99.2 0.8 1,654,822 43.3 67.1

Portugal 93.5 5.6 0.9 693,000 68.0 81.6

Romania 88.9 8.9 2.3 392,544 18.1

Slovak Republic 80.5 15.1 4.4 70,553 13.1
Slovenia 93.8 5.0 1.2 91,066 45.6 62.6
Sweden 96.2 3.2 0.5 898,454 99.6 39.6
Turkey 95.1 3.5 1.5 210,134 3.1 64.3
United States 78.8 19.7 1.5 5,868,737 20.0 50.9

Uzbekistan 85.7 11.2 3.1 212,424 10.5 57.0

45
 Membership Micro Definition Micro Definition Microfinance
Country by Employment by Turnover available

Europe (EU) Fewer than 10 Does not exceed 2 million Euros

United Kingdom EU, G12, OECD, The World Bank Fewer than 10 Does not exceed 2 million Euros Yes
France EU, G12, OECD, The World Bank " "
Spain EU, G12, OECD, The World Bank " " Yes
Italy EU, G12, OECD, The World Bank " " Yes
Germany EU, G12, OECD, The World Bank " " Yes
Austria EU, OECD, The World Bank " "
Belgium EU, G12, OECD, The World Bank " " Yes
Bulgaria EU, The World Bank " " Yes
Cyprus EU, The World Bank " " Yes
Czech Republic EU, OECD, The World Bank " "
Denmark EU, OECD, The World Bank " "
Estonia EU, OECD, The World Bank " "
Finland EU, OECD, The World Bank " " Yes
Greece EU, OECD, The World Bank " " Yes
Hungary EU, OECD, The World Bank " " Yes
Ireland EU, OECD, The World Bank " " Yes
Latvia EU, The World Bank " "
Lithuania EU, The World Bank " "
Luxembourg EU, The World Bank " "
Malta EU, The World Bank " "
Netherlands EU, G12, OECD, The World Bank " "
Poland EU, OECD, The World Bank " "
Portugal EU, OECD, The World Bank " "
Romania EU, The World Bank " "
Slovakia EU, The World Bank " "
Slovenia EU, The World Bank " "

46
 Sweden EU, G12, OECD, The World Bank " "
Switzerland G12, OECD, The World Bank

North America
USA G12, OECD, The World Bank Complex Categories by Sector Complex Categories by Sector Yes
Canada G12, OECD, The World Bank Fewer than 5 No turnover Specified
Central America
Mexico G12, OECD, The World Bank up to 15 No Turnover Specified
South America
Brazil G12, OECD, The World Bank, BRIC No Definition Found No Turnover Specified
Chile G12, OECD, The World Bank No Definition Found No Turnover Specified Yes
Asia
India BRIC, The World Bank Sector Dependent(See Link) Sector Dependent(See Link) Yes
Pakistan The World Bank No Definition Found No Turnover Specified Yes
Japan G12, OECD, The World Bank No Definition Found No Turnover Specified Yes
China BRIC, The World Bank New Definition Being Proposed New Definition Being Proposed Yes
S.Korea OECD, The World Bank Sector Dependent(See Link) Sector Dependent(See Link)
Australasia
Australia OECD, The World Bank Fewer than 5 No Turnover Specified Yes
New Zealand OECD, The World Bank Fewer than 5 Less than $60,000 Yes
Russia The World Bank No Definition Found No Turnover Specified Supporting Transitional Economy
South Africa The World Bank Based on Sector (See Link) Based on Sector (See Link) Focus is on Poverty Relief

47
 Appendix 2: Sources for micro business definitions

Europe-

http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm

USA –

http://www.sba.gov/content/am-i-small-business-concern

http://www.sba.gov/content/use-size-standards-government-procurement

Canada -

http://www.ic.gc.ca/eic/site/sbrp-rppe.nsf/vwapj/KSBS-PSRPE_July-Juillet2010_eng.pdf/$FILE/KSBS-PSRPE_July-
Juillet2010_eng.pdf

Mexico –

http://www-
wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2002/05/30/000094946_02052404020421/Rendered/P
DF/multi0page.pdf

(Under Objectives)

India –

http://smb-trends.com/2011/02/definition-for-indian-smes/

China –

http://cnbusinessnews.com/smaller-firms-to-benefit-from-new-definition-of-smes/

South Korea –

SME’s chart - http://www.sbc.or.kr/sbc/eng/smes/definition.jsp

Australia –

http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/1321.0Main+Features12001?OpenDocument

http://toolkit.smallbiz.nsw.gov.au/part/20/99/449

New Zealand –

Employees - http://sme-centre.massey.ac.nz/

Turnover for taxation purposes -

http://www.nzica.com/Technical%20and%20business/Tax/Tax%20submissions/~/media/NZICA/Docs/Tech%20and%20Bus
/Tax/other/6_Simplifying%20the%20Taxation%20of%20Small%20Business%20in%20New%20Zealand.ashx

South Africa –

Graph with employees and turnover - http://www.beesknees.co.za/startup/smallbusiness.htm

48
 Appendix 3: Information by Country

The Treatment of Micro Businesses in the UK

Business Arm of Government – BIS

Principle Tax Authority – Inland Revenue/HMRC

Membership - EU, G12, OECD, The World Bank

The treatment of micro businesses within the UK is derived from the EU legislation, indicated as those that employ less
than 10 people with turnover not exceeding two million euros. Within the UK small businesses account for 95 per cent of
all businesses and almost one third of private sector employment.

The ‘Voice of Small Business’ annual survey, conducted in 2009, was the most extensive research of the small business
sector during the recession with 10,000 responses. This survey showed one figure that should be taken into account: 31
per cent said if banks were to lend more, or more fairly, it would be key to improving their prospects. So why are the banks
not lending to small businesses to help them grow when, in fact, micro businesses accounted for £464 billion turnover
during 2001? http://www.fsb.org.uk/Annual-survey

The definition of a micro business is unclear - in the 2011 Budget the government announced a moratorium exempting
micro and genuine start up businesses from new domestic regulation for three years. This was good news for a large
number of micro entities given the planned legislative changes. However, there is an absence of detailed guidance and it is
not immediately clear what the scope of the exemption is in terms of specific regulations. On the other hand micro and
start–up businesses should be exempt from any other new regulation that is not derived by EU or international obligations,
including UK Acts, statutory instruments and codes of practice and self-regulation which are backed by statutory force.
http://accainpractice.newsweaver.co.uk/accainpractice/1x4uy6kgzsp1ozn4x0aa4p

A helpful piece of legislation was introduced from the beginning of parliamentary session 2008/2009 and within this new
sections were created to question why the legislation applies to small business and what considerations have been given to
minimise the impact of the requirements on small firms, for example, less frequent reporting and inspections to be
simplified. Specific treatments for micro businesses will help to minimise costs and resources.
http://www.bis.gov.uk/policies/better-regulation/policy/regulating-small-business

The definition of micro business, globally, is diverse. The UK’s definition is one of the most generous in terms of employees
and turnover and does not necessarily need changing. However the treatment of micro businesses needs more attention,
for example, creating easier access to finance and more government help, this should be based on research into the needs
of micro businesses.

49
 The European Union
Definition of Micro Business
‘The definition of micro, small and medium sized enterprises is updated to take account
of economic developments. The definition of enterprises according to staff headcount
and turnover or balance sheet total is essential for identifying businesses able to benefit
from European Union programmes or policies specifically designed for small and
medium sized enterprises (SMEs)’.
http://europa.eu/legislation_summaries/enterprise/business_environment/n26026_en.
htm
A micro business is defined as an enterprise which employs fewer than 10 people and
whose annual turnover and/or annual balance sheet total does not exceed two
million Euro.
By comparison a medium sized business is defined as employing fewer than 250 people
and turnover does not exceed 20 million euro, and a small enterprise is defined by
employing fewer than 50 people and turnover does not exceed 10 million euro.
Within the EU, in 2005, there were almost 20 million enterprises active, 99.8 per cent of
these were micro, small or medium. 29.6 per cent of non-financial employment was in
micro businesses.
Legislation
Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of
micro, small and medium-sized enterprises [Official Journal L 124 of 20.05.2003].
Special Treatment of Micro Businesses
2011 European Commission Review of the ‘small business act’ for Europe http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0078:FIN:EN:PDF
MicroFinance available?
Yes -
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/145&format=HTML&a
ged=1&language=EN&guiLanguage=en
Web Links
http://europa.eu/legislation_summaries/enterprise/business_environment/n26026_en.
htm
http://europa.eu/rapid/pressReleasesAction.do?reference=STAT/08/47&format=HTML
&aged=0&language=EN&guiLanguage=en
Canada
Membership
G12, OECD, The World Bank
Definition of Micro Business
Canada defines a micro business as a business employing fewer than five employees.
The term “SME” (for small and medium-sized enterprise) refers to all businesses with
fewer than 500 employees, whereas firms with 500 or more employees are classified as
“large” businesses.
Many institutions define small businesses according to their own needs — the Canadian
Bankers Association classifies a company as “small” if it qualifies for a loan authorisation
of less than $250 000, whereas the Export Development Corporation defines small or
“emerging” exporters as firms with export sales under $1 million.
http://www.ic.gc.ca/eic/site/sbrp-rppe.nsf/vwapj/KSBS-PSRPE_July-
Juillet2010_eng.pdf/$FILE/KSBS-PSRPE_July-Juillet2010_eng.pdf
Principle tax authority and Business Arm of Government
Tax- Canada Revenue Agency - http://www.cra-arc.gc.ca/menu-eng.html
Business Arm - Government Services for Entrepreneurs -
http://www.canadabusiness.ca/eng/
Special Treatment of Micro Businesses
Certified General Accountants Association of Canada, Tackling Compliance: Small
Business and Regulation in Canada. Draws on views of SME’s - http://www.cga-
canada.org/en-ca/ResearchReports/ca_rep_sme.pdf
Micro finance available?
Yes - http://www.microfinance.ca/index.php?title=Welcome
Web Links
http://www.ic.gc.ca/eic/site/sbrp-rppe.nsf/vwapj/KSBS-PSRPE_July-
Juillet2010_eng.pdf/$FILE/KSBS-PSRPE_July-Juillet2010_eng.pdf
http://www.statcan.gc.ca/cgi-
bin/imdb/p2SV.pl?Function=getSurvey&SDDS=5028&lang=en&db=imdb&adm=8&dis=2
http://www.enterprisetoronto.com/index.cfm?linkid=99&linktype=mainlink&content_i
d=222&fromurl=content&faq_id=162&action=viewItem&faqTopicId=49
USA
Membership
G12, OECD, The World Bank
Definition of Micro Business
Is your business ready to compete for government contracts? Before you can begin
government procurement activities, the size of your business must be evaluated through a
set of standards from a contracting officer.
A size standard is usually stated in number of employees or average annual receipts and
represents the largest size that a business (including its subsidiaries and affiliates) may be to
remain classified as a small business for SBA and federal contracting programs.
http://www.sba.gov/content/use-size-standards-government-procurement
Principle tax authority and Business Arm of Government
Tax- Internal Revenue Service - http://www.irs.gov/
Business Arm – Official Business Link to the US Government - http://www.business.gov/we-
have-moved.html
Legislation
USA Small Business Administration - http://www.sba.gov/category/navigation-
structure/starting-managing-business/starting-business/business-law-regulations/
Special Treatment of Micro Businesses
Signing of a Small Business Lending Bill - http://www.portfolio.com/business-
news/2010/09/27/president-obama-signs-small-business-lending-bill/
Microfinance Available?
Yes - http://www.sba.gov/content/microloan-program
Web Links
US Small Business Association - http://www.sba.gov/content/am-i-small-business-concern
India
Membership
BRIC, The World Bank
Definition of Micro Business
The definition of SME for the manufacturing sector is different from that of the service
sector.
Definition of SME in the Manufacturing Sector:
The manufacturing sector includes firms and businesses which involve production,
processing, or preservation of goods. The definition for SME in the manufacturing sector
according to the MSMED Act 2006 is described below. The cost of land, building and the
items specified by the Ministry of Small Scale Industries are excluded in this description.
When the investment in plant and machinery of the firm does not exceed Rs. 25 lakh, then it
is called a micro enterprise. A small enterprise is that having investment in plant and
machinery ranging between Rs. 25 lakh and Rs. 5 crore. If the investment in plant and
machinery is between Rs. 5 crore and Rs. 10 crore, then it is said to be a medium enterprise.
Definition of SME in Service Sector:
When the investment in equipment is not above Rs. 10 lakh, then it is called a micro
enterprise. A small enterprise is that which has the investment in requirement between Rs.
10 lakh and Rs. 2 crore. When the investment in equipment is in the range between Rs. 2
crore and Rs. 5 crore, then it is called a medium enterprise. Micro, small and medium
enterprises in India come under the name MSME, this sector contributes for 45 per cent of
the manufacturing output and 40 per cent of the exports of the country.
Principle tax authority and Business Arm of Government
Tax- Ministry of Finance - http://finmin.nic.in/
Business Arm – Business.Gov in India - http://business.gov.in/
Legislation
The Micro, Small and Medium Enterprises (MSMED) Act, 2006, was imposed by the Ministry
of Micro, Small and Medium Enterprises, Government of India in 2006.
Special Treatment of Micro Businesses
2006-14 Umbrella programme for the promotion of micro and SMEs, commissioned by:
German Federal Ministry for Economic Cooperation and Development (BMZ). Lead executing
agency: Small Industries Development Bank of India and Ministry of Micro, Small and
Medium Enterprises http://www.gtz.de/en/weltweit/asien-pazifik/indien/11163.htm
Micro finance Available?
Yes - http://www.sksindia.com/
Web Links http://smb-trends.com/2011/02/definition-for-indian-smes/
50
 Pakistan
Membership
The World Bank
Definition of Micro Business
No formal definition exists for what comprises a small business, however, statistics
generated on small business categorise enterprises with less than 100 employees as an
SME.
Number of employees
 Up to 250 employees ( Small and Medium Enterprise Development Authority, or
SMEDA http://www.smeda.org.pk/)
 Up to 250 persons in the manufacturing sector, and up to 50 persons in the
trade/service sector (State Bank of Pakistan)
 According to IFC data, small businesses in Pakistan employ between 11 and 50 people
(IFC MSME Database) http://www.ifc.org/ifcext/globalfm.nsf/Content/MSME-
CountryIndicators
Annual revenues
 Annual revenues up to 250 million PK Rupees or paid-up capital of fewer than 25
million PK Rupees (SMEDA).
 Net sales not exceeding Rs 300 million, or USD $2,916,812.54 USD (1 USD=87.71 PKR
as of January 9, 2011) as per latest financial statements (State Bank of Pakistan)
Total number of small businesses
90 per cent of enterprises in Pakistan are MSMEs (SMEDA).
 There are 26,205 small businesses in Pakistan (IFC MSME Database).
Principle tax authority and Business Arm of Government
Tax- Federal Board of Revenue - http://www.cbr.gov.pk/
Business Arm – Pakistan Business Council - http://www.pbc.org.pk/
Legislation and Special Treatment of Micro Businesses
Examination of the regulatory framework in Pakistan, focusing on poverty relief
http://www.microfinancegateway.org/gm/document-
1.1.9212/Evolution%20of%20Regulatory%20Framework.pdf
Micro finance Available?
Yes - http://www.microfinanceconnect.info/
Web Links
http://www.sbbnetwork.org/blogs/19?year=2011&month=6
South Korea
Membership
OECD, The World Bank
Definition of Micro Business
Within South Korea the definition of whether a business is small, medium or micro
is sector dependent, see chart: http://www.sbc.or.kr/sbc/eng/smes/definition.jsp
Within micro enterprises under manufacturing, mining, construction or
transportation they do not exceed more than 10 workers; however, for every
other sector the number of employees is under five.
SME’s in Korea account for 99 per cent of total businesses and 88 per cent of
Korea’s total employment.
Principle tax authority and Business Arm of Government
Tax- National Tax Service - http://www.nts.go.kr/eng/
Micro finance Available?
Yes - http://microfinanceafrica.net/tag/smile-microcredit-bank/
Web Links
http://www.kosbi.re.kr/eng/intro/intro01.html
http://www.sbc.or.kr/sbc/eng/smes/definition.jsp
China
Membership
BRIC, The World Bank
Definition of Micro Business
The definition of an SME in China is quite complex and can include relatively large firms. In
APEC (Asia-Pacific Economic Cooperation) economies, the definition of an SME also varies,
but is generally most commonly based on the number of employees. SMEs commonly
employ 100 to 500 people. But the vast bulk of SMEs, comprising around 70 per cent, employ
five people or less or are run by self-employed individuals. SME definition in China depends
on the industry category and is defined based on the number of employees, annual revenue,
and total assets comprising a company.
An industrial SME is defined as having up to 2,000 employees; while a medium-sized business
has between 301 and 2,000 employees; and a small business has less than 300.
Consequently, what is regarded as an SME in China may be quite large relative to an SME in
other countries. This paper mainly focuses on small enterprises (SEs), including the problems
of SE, the field survey of SEs, and the policy recommendations for SEs.
http://www.eria.org/research/images/pdf/PDF%20No.5/No,5-2-China.pdf
99 per cent of the country’s 10.3 million companies are SMEs.
http://cnbusinessnews.com/smaller-firms-to-benefit-from-new-definition-of-smes/
Principle tax authority and Business Arm of Government
Tax- China Tax.Gov - http://www.chinatax.gov.cn/n8136506/index.html
Business Arm – Ministry of Commerce People’s Republic of China -
http://english.mofcom.gov.cn/
Legislation
International Labour Organisation 2006 The Government adopted the Programme for
Support of Small and Medium Sized Enterprises in April 2005 in Mongolia
http://ilo.org/wcmsp5/groups/public/---asia/---ro-
bangkok/documents/publication/wcms_bk_pb_130_en.pdf
People’s Republic of China, main government website -
http://www.gov.cn/english/business.htm
Special Treatment of Micro Businesses
China is revising the definition of small and medium-sized enterprises (SMEs) to give smaller
companies wider access to policy and financial support worth tens of billions of yuan.
Song Xinli, Deputy Secretary-general of China International Cooperation Association of Small
and Medium Enterprises, has proposed narrowing the scope of medium sized companies and
expanding that of small sized companies, therefore proposing the creation of another
category – micro sized. This will aim to give more support to smaller companies which have
limited access to capital.
Microfinance Available? Yes - http://en.wokai.org/about
Web Links
http://www.eria.org/research/images/pdf/PDF%20No.5/No,5-2-China.pdf
http://cnbusinessnews.com/smaller-firms-to-benefit-from-new-definition-of-smes/
New Zealand
Membership
OECD, World Bank
Definition of Micro Business
Micro enterprise – fewer than five staff
Small enterprise – six to 49 members of staff
Medium – 50 to 100 members of staff
In New Zealand the SME sector make up for more than 99 per cent of all businesses
and account for approximately 60 per cent of employment. http://sme-
centre.massey.ac.nz/
For the purpose of taxation for micro businesses, they are classified as having a
turnover less than $60,000.
http://www.nzica.com/Technical%20and%20business/Tax/Tax%20submissions/~/med
ia/NZICA/Docs/Tech%20and%20Bus/Tax/other/6_Simplifying%20the%20Taxation%20
of%20Small%20Business%20in%20New%20Zealand.ashx
Principle tax authority and Business Arm of Government
Tax- Inland Revenue - http://www.ird.govt.nz/
Business Arm- Business.Gov - http://www.business.govt.nz/
Legislation
Regulatory Framework information - http://www.business.govt.nz/compliance
Simplifying tax proposals, Tax Management NZ - http://www.smetax.co.nz/
Special Treatment of Micro Businesses
Focus on microfinance for women - http://www.mwa.govt.nz/news-and-
pubs/publications/work-and-enterprise/microfinance-access
51
 Australia
Membership
G12, OECD, World Bank
Definition of Micro Business
The definition of a micro business in Australia is less than five employees and
includes self employed individuals. The main characteristic of a micro-business is
that it is independently owned and operated, that is, it is not owned by a large
business.
A small business employs between five and 19 employees.
‘Micro-businesses make up a large proportion of SMEs within Australia, and are a
very significant force in the Australian economy. They are important to the
economy as they provide employment to a large portion of the Australian
workforce, facilitate innovation and entrepreneurship, as well as provide an
avenue for offering specialised and niche products and services to the market.’
http://toolkit.smallbiz.nsw.gov.au/part/20/99/449
Principle tax authority and Business Arm of Government
Tax – Australian Government Taxation Office - http://www.ato.gov.au/
Business Arm - Department of Innovation, Industry, Science and Research -
http://www.innovation.gov.au/smallbusiness/Pages/default.aspx
Legislation
http://www.innovation.gov.au/Pages/ForSmallBusiness.aspx
http://australia.gov.au/topics/business-and-industry/abn-acn-business-
management/business-regulation
Special Treatment of Micro Businesses
‘The Micro and Home Business Association is a Canberra based not-for-profit
professional association supporting the micro and home business sector. It
provides support, representation, business services, training and networking.’
http://www.business.gov.au/GBDirectory/M/Pages/MicroandHomeBusinessAssoc
iation.aspx
Micro Finance Available?
Yes - http://www.australiangovernmentgrants.org/qa/qa.php?id=micro-business-
loans
Web Links
http://toolkit.smallbiz.nsw.gov.au/part/20/99/449
http://www.business.gov.au/GBDirectory/M/Pages/MicroandHomeBusinessAssoc
iation.aspx
http://www.australiangovernmentgrants.org/qa/qa.php?id=micro-business-loans
South Africa
Membership
World Bank
Definition of Micro Business
Number of employees and turnover is classified by the sector, for example, catering or
transport. However, under each sector the micro business definition stays the same,
under five people and an annual turnover of R 0.15 m.
For chart please see: http://www.beesknees.co.za/startup/smallbusiness.htm
Principle tax authority and Business Arm of Government
Tax – South African Revenue Service - http://www.sars.gov.za/
South African Business Council - http://www.sabco-uae.org/
Legislation
The definitions of small business according to industry sector, given in the table, are
based on the National Small Business Act No. 102. 27 November 1996. See also
National Small Business Amendment Bill published in the Government Gazette on 27
March 2003
Special Treatment of Micro Businesses
Tax incentives for micro and small businesses, recent government proposal -
http://www.southafrica.info/business/economy/policies/budget2011c.htm
Microfinance Available?
Yes - http://microfinanceafrica.net/
Web Links
Small Enterprise Development Agency - http://www.seda.org.za/Pages/Seda-
Welcome.aspx
MicroFinance Africa - http://microfinanceafrica.net/

MicroFinance
The EU
Micro-credit in the EU means loans under EUR 25,000. It is tailored to micro-enterprises, employing fewer than 10 people
(91 per cent of all European businesses), and unemployed or inactive people who want to go into self-employment but do
not have access to traditional banking services. 99 per cent of start-ups in Europe are micro or small enterprises and one
third of these are launched by people who are unemployed.
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/145&format=HTML&aged=1&language=EN&guiLanguag
e=en
European Investment Fund - EIF can help you only indirectly. EIF does not provide direct funding or grants to SMEs or
individuals. EIF indirectly supports SMEs by working with a wide range of financial intermediaries (banks, guarantee,
microfinance institutions, private equity and venture capital funds, etc) that provide equity finance, loans, micro-loans
and guarantees to SMEs.
http://www.eif.org/EIF_for/sme_finance/index.htm
MicroFinance Institutions Globally - http://www.mixmarket.org/networks
Within the UK
Small business owners in the UK are turning to microfinance, a system of credit more readily associated with helping
people in developing countries escape poverty, as a result of high street banks continuing to refuse loan applications.
Lending among British microfinance providers increased from £113m to more than £200m in the 12 months to March this
year, according to the Community Development Finance Association, the microfinance industry’s trade body in the UK.
http://www.ft.com/cms/s/0/804be24c-be97-11df-a755-00144feab49a.html#axzz1TlXho0Ea
Italy
The European Commission’s report on the benchmarking of business incubators in Italy notes that microcredit promotion
recently emerged as a significant governmental policy objective in Italy. By 2002, there were 17 business incubators within
the network overseen by Sviluppo Italia, and a further 13 additional incubators were in the process of being built or were
going through the planning stages. Most of the incubators in Italy are located on the premises of European-Union funded
BICs (Business and Innovation Centres).

52
http://www.google.co.uk/search?sourceid=navclient&ie=UTF-
8&rlz=1T4SUNC_enGB354GB354&q=does+italy+have+micro+finance+for+small+businesses (link called – International year
of micro credit 2005)
Cyprus
The EIF has signed two guarantee agreements with the Bank of Cyprus, allowing the bank to provide up to EUR 50 million
of new loans to Cypriot Micro and Small enterprises (“MSEs”), of which EUR 35 million will support enterprises in their
start-up or newly established phase, i.e. with up to 36 months business history.
The agreements signed by the EIF and Bank of Cyprus bring a new instrument, the First Loss Portfolio Guarantee (“FLPG”)
to the Cypriot market. The guarantees are implemented under the JEREMIE (Joint European Resources for Micro to
Medium Enterprises) initiative, co-financed from EU Structural Funds.
This instrument offers a new opportunity to a broad range of MSEs across Cyprus looking to invest or expand their
business. The bank will be in a position to finance enterprises with insufficient collateral, reduce loan interest rates and
also provide for extended repayment and grace periods. The product will be available to MSEs from June this year.
http://www.eif.org/what_we_do/jeremie/news/2011_news/2011_JEREMIE_Cyprus.htm
US
The Microloan Program provides small, short-term loans to small business concerns and certain types of not-for-profit
child-care centres. The SBA makes funds available to specially designated intermediary lenders, which are non-profit
community-based organisations with experience in lending as well as management and technical assistance. These
intermediaries make loans to eligible borrowers. The maximum loan amount is $50,000, but the average microloan is
about $13,000.
http://www.sba.gov/content/microloan-program
Canada
Microfinance.ca, is a community discussion wiki for practitioners of microfinance in Canada. We have much to learn from
microfinance around the world, and much to share with each other, as we build a community of promising practices right
here, in our own backyard.
http://www.microfinance.ca/index.php?title=Welcome
Africa
Microfinanceafrica.net is the primary online resource for news and information on microfinance in Africa, covering all
aspects of microfinance development in Africa.
It is aimed at anyone involved with the development of microfinance in Africa, including technology providers, information
providers, micro institutions, other service providers- as well as anyone seeking a general insight into the sector.
Microfinanceafrica.net includes a comprehensive news section, with industry updates and important developments added
daily, as well as a recruitment database for microfinance-related roles, a company directory of contact details for hundreds
of businesses in the industry, links to industry bodies and events.
http://microfinanceafrica.net/
Chile
Country profile of microfinance in Chile
http://www.mixmarket.org/mfi/country/Chile
India
Microfinance is an effective tool that can help reduce poverty and spread economic opportunity by giving poor people
access to financial services, such as credit and insurance. SKS distributes small loans that begin at Rs. 2,000 to Rs. 12,000
(about $44-$260) to poor women so they can start and expand simple businesses and increase their incomes. Their micro-
enterprises range from raising cows and goats in order to sell their milk, to opening a village tea stall.

http://www.sksindia.com/know_sks.php
Japan
The PlaNet Finance global network is a federation of more than 700 microfinance institutions in 60 countries administered
locally by a network of in offices more than 30 countries.
http://www.planetfinance.or.jp/en/microfinance/success-stories
China
“Starting with the idea that everyone deserves a chance, we built an online platform that allows you to have a direct
impact on the lives of people living in rural China, their families, and their communities. Utilising the principle of
microfinance, we connect you with people in rural China who want to start small businesses, but just need a little help
getting there. You make a tax deductible contribution to sponsor that person's loan, watch as they grow their businesses,
repay their loans, and lift themselves from poverty. At the end of the year, you re-invest your contribution and help
another borrower start a business.”
http://en.wokai.org/about
Korea
A Korean microfinance program, Smile Microcredit Bank, is paving the way for a successful model.
http://microfinanceafrica.net/tag/smile-microcredit-bank/
Russia

53
The Russia Small Business Fund (RSBF) was established in 1994 with the support of the G7 countries and Switzerland to
provide financing to micro- and small enterprises (MSEs) and to help strengthen the capacity of the Russian banking sector
in order that it may effectively lend to MSEs on a sustainable basis.
http://www.ebrd.com/pages/sector/financial/micro/russia.shtml
Australia
The government has micro loan programs as well as other loans for small business owners in Australia to use. Loans come
in a variety of denominations with differing interest rates. Some are interest free, others are no interest, and some loans
do not even need to be paid back.
http://www.australiangovernmentgrants.org/qa/qa.php?id=micro-business-loans

Appendix 4: Sector breakdown of current UK SME population (source: BIS, 2011b)

Agriculture, Forestry and Fishing
120,000
100,000
80,000
60,000
40,000
20,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 96,530 19,810 23,340 6,515 2,340 915 245 75 15
Mining
25,000

20,000

15,000

10,000

5,000

0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 19,530 310 1,975 1,150 720 585 205 80 30
Manufacturing
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 148,885 7,620 33,320 18,720 12,485 9,395 3,820 1,800 375
Construction

54
 800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 726,510 24,520 81,910 25,065 10,440 5,325 1,520 485 85
Wholesale and Retail Trade; Repair of Motor Vehicles and Motorcycles
300,000
250,000
200,000
150,000
100,000
50,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 251,175 35,755 110,135 48,770 21,565 10,815 3,105 1,270 240
Transportation and Storage
250,000

200,000

150,000

100,000

50,000

0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 215,135 5,525 15,230 6,910 4,060 2,515 915 325 65
Accommodation and Food Service Activities

55
 60,000
50,000
40,000
30,000
20,000
10,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 35,780 18,690 47,705 24,190 11,925 6,145 1,665 605 105
Information and Communication
250,000

200,000

150,000

100,000

50,000

0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 211,895 1,765 38,205 8,060 4,290 2,630 890 390 80
Financial and insurance activities
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 62,475 1,275 10,820 4,220 2,010 1,290 545 280 65
Real Estate Activities

56
 60,000
50,000
40,000
30,000
20,000
10,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 52,735 2,260 20,270 7,200 2,780 1,300 380 180 35
Professional, Scientific and Technical Activities
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 456,355 16,090 88,925 23,400 11,640 6,305 1,920 785 145
Administrative and Support Service Activities
300,000
250,000
200,000
150,000
100,000
50,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 252,750 12,515 43,295 14,605 7,495 4,775 2,120 1,135 230

Education

57
 250,000

200,000

150,000

100,000

50,000

0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 214,775 1,285 7,785 3,425 1,790 1,095 330 150 35

Human Health and Social Work Activities

300,000
250,000
200,000
150,000
100,000
50,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 254,655 6,295 15,150 11,490 10,445 8,120 1,955 665 95
Arts, Entertainment and Recreation
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
With no
100- 200-
employe 1 2-4 5-9 10-19 20-49 50-99
199 249
es
Enterprises 173,585 3,140 10,750 3,930 1,950 1,170 430 215 40

58
Appendix C – Imperial College London – The Importance of Passion in
Entrepreneurial Venturing

Summary of current research and anecdotal

examples of the role of passion in
entrepreneurial venturing

Prof. Bart Clarysse Sabrina Kiefer Anneleen Van Boxstael

24 October 2011

59
INTRODUCTION

The attention of government policy on enterprise is mostly directed at high-potential, high-risk, growth start-up companies
backed by formal venture capital. As an indication of a venture’s future growth, venture capitalists highly rate the ambition
of its founders. At the same time, the growth and profit aspirations of business founders vary considerably (Morris,
Schindehutte, & Allen, 2005). A large amount of practice and recent findings in academic research (e.g. Cardon, Wincent,
Singh, & Drnovsek, 2009) reveal that it is not only the degree of a founder’s ambition which is important, but that the
degree of passion is also highly valuable. Investing in passionate founders can also result in long-term success. For example,
Guy Laliberté founded Quebec's first internationally renowned circus. Driven by his passion for the performing arts, he
created a non-profit performing troupe that included fire-breathers, jugglers, and acrobats who hitch-hiked around the
country from show to show. However, it was not until receiving a government grant linked to Canada's 450th anniversary
celebrations in 1984 that his enterprise, named Cirque du Soleil, started to grow. Cirque du Soleil has now become a
sprawling international operation and has an estimated annual revenue exceeding US$810 million. Given the recent
findings about the role of passion for business success, business support and investment initiatives could benefit by
analyzing ventures from an ambition-passion perspective. Varying levels of ambition and passion in a venture may be
organised into four general categories (see matrix below).

6 1
High Passion (48%) Low Passion (52%)

Type 1 High Passion/ High Ambition Type 2 Low Passion/ High Ambition

• Lean StartUp movement • VC-backed, tech transfer model, e.g.

High Ambition
1 • Healthcity Belgium - ARM
(38%)
• Whole foods - Autonomy
• Dolby Laboratories Inc. - Ceres Power

Type 3 High Passion/ Low Ambition Type 4 High Passion/ Low ambition

Low Ambition • Chris King • Local convenience store

1
(62%) • Starbucks • Local plumber
• etc.

Venture typologies based on ambition versus passion, including examples discussed later in this text

6
The percentages are highly speculative and should be read with caution. There is no empirical research about
the frequency of ambition versus passion. The numbers are abstracted from a study by Westhead & Wright
(1998) but not defitive. See appendix for more explanation.

60
DESCRIPTION OF TYPOLOGIES

For the past 10 years, UK government policy on enterprise development has primarily favoured funding and support efforts
to bolster an ecosystem of companies backed by formal venture capital (VC) with high-growth ambition – examples include
the London Technology Fund and similar regional micro VC funds, NESTA, and university technology transfer activities
which benefit from the Higher Education Innovation (Fund HEIF), and other similar initiatives.

These efforts targeted opportunities and companies which were founded with a high degree of ambition for financial and
operational growth from day one – the so-called ‘gazelles’ and ‘born global’ companies. Business founders in this category
focus their attention and efforts mainly on establishing strong and profitable firms (Fauchart & Gruber, 2011). Their
primary motive in starting these firms is to make profits and accumulate personal wealth for themselves and their high-
return-focussed investors. They also value a professional and traditional ‘business-oriented’ school of thought in their
approach to creating and running a firm, paying close attention to managing their ventures according to widely accepted
business principles. Furthermore, they are highly competitive in their aim to achieve market dominance. These companies
have thus received a high amount of early public co-funding, in order to attract higher private funding, because of their
perceived high short-term profit potential. They could be categorised as High Ambition/Low Passion ventures. (The
scientists and inventors behind the technologies may be passionate, but they usually do not take business leadership
positions in the company.)

Up to this moment, UK government policy for business funding and support has paid little attention to the presence of
passion in a business. The role of passion in business venturing, however, has received increasing interest by academics in
entrepreneurship, who claim the importance of passionate entrepreneurs for business success (e.g. Baron, 2008; Baum &
Locke, 2004; Cardon et al., 2009; Chen, Yao, & Kotha, 2009; Grichnik, Smeja, & Welpe, 2010).

Passionate entrepreneurs often start small, founding so-called ‘micro-businesses’, which may nevertheless achieve growth
at a later stage. These ‘slow burners’ tend to achieve growth once the market has gotten to know them and their products,
and sometimes only when a second generation of management enters the business (see below). Since the success of these
passionate entrepreneurs is often the result of a long-term process, they have been neglected or have less visibility in the
early stage of business creation. Consequently, little has been made available to these micro-businesses in terms of public
policy stimulus.

However, micro-businesses are valuable because they are numerous and thus do create numerous though small nuclei of
employment as well as offering valuable products and services. Moreover, these passionate micro-businesses tend to have
a strong identification with the community of the market and sector in which the business operates (Fauchart & Gruber,
2011). This insider status or strong empathy with the community gives them unique, first-hand insights into the needs of
fellow community members and helps them design ‘authentic products’. By valuing authenticity and quality in their
products and services, these micro-businesses bring something truly useful to the community, based on their intimate
knowledge of the field. They care about their customers and are thus able to produce higher-quality products and services.
In addition, they identify business opportunities because they tend to meet informally with actual and potential customers,
driven by their shared interests and passions and their desire to contribute to the community. Their focus on the product
or service to their field and to the community of users limits their focus on high-growth business management. Their
business, however, is important for further market developments and for possible innovations because of their customer-
orientation and high-quality persistence.

For these micro-businesses which have high passion but low ambition, the initial period of slow growth (10-15 years) can
be seen as a period of market testing, where they experiment and find ways to reach customers, build relations (social and
external resources) and optimise procedures. Yet once they have found the right formula of product, market, industry and
operational fit, they may have a greater potential to grow than the VC-backed growth-oriented start-ups, which instead
often launch in an environment of market uncertainty.

61
Examples of such HighPassion/LowAmbition companies which eventually became global brands (either with the original
nd
founder or a 2 generation of management) include:

Starbucks – was founded in 1971 by three partners (two schoolteachers and a writer) as a small shop in Seattle
selling high-quality coffee beans and equipment for roasting, grinding and brewing coffee – aimed at coffee lovers
and connoisseurs. They had been inspired by another passionate small coffee seller, Alfred Peet (whose own small
shop was later sold and became the US cafe chain Peets). In 1982, Howard Shultz, a former Xerox salesman and
later general manager of a coffee machine manufacturer and supplier to Starbucks, joined the firm as Director of
Retail Operations and Marketing. Inspired by a trip to Italy, he advised the founders to extend the business into
serving drinks on site in a hospitable coffee bar atmosphere, as well as selling coffee beans and equipment to take
home. The founders did not take a fancy to this idea, thinking it would distract them from the finer side of their
connoisseur business, so Shultz eventually bought the company himself and expanded it into a global chain of
coffee houses. However, attention to the quality of coffee remained a hallmark of the Starbucks brand (along with
Schultz’s own passion for the social atmosphere of the European coffee house or bar).

Chris King Precision Components - In 1976, Chris King founded a small enterprise to support cyclists in their search
for sustainable bicycle parts. The company’s journey began with a passion for bicycling and admiration for the
adventurous spirit of the world’s cyclists, and the founder’s inspiration to join them. The company still embraces
the competitive nature of the sport of cycling across all disciplines and abilities. Because of this passion for
bicycling, the firm’s products are underpinned by quality craftsmanship and premium material selection.
Uncompromising fit and finish standards support their lasting brand appreciation. The company appreciates the
beauty of creative and elegant solutions. Chris King Precision Components are still conceived, designed, and
manufactured entirely in-house, allowing complete control over the core technologies, processes, and services that
make their components the very best for the customers. In spite of their world fame for qualitative material, they
still operate independently and remain a small specialist company. Furthermore, their passion encouraged
company investment in corporate social responsibility actions, for example using 100% degradable paint and
supporting breast cancer campaigns.

Unfortunately, the passionate micro-businesses have fallen off the grid for public funding and other forms of government
support. The importance of passion in viable enterprises can nonetheless be supported by recent academic research.
Passion has been mentioned as a cue for creativity (Goldberg, 1986) and drive (Marsh & Collet, 1987), especially in hard
times (Cardon et al., 2009). Passion has been further associated with freshness and originality (Elsbach & Kramer, 2003)
and has a direct effect on the motivation and competences of the entrepreneur (Baum & Locke, 2004). Passion also has a
positive effect on the entrepreneur’s persistence, tenacity, opportunity recognition and planning process when engaged in
new venturing (Chen et al., 2009).

Research interest in passion has sprung from increasing scepticism about rational decision-making in business venturing
(e.g. Grichnik et al., 2010; Seo & Barrett, 2007). Feelings such as passion are also found to influence the decision-making
process of entrepreneurs (Cardon et al., 2009). This influence is explained by the research finding that passion has an
affective, cognitive and behavioural component (e.g. Cardon et al., 2009; Chen et al., 2009; Ho, Wong, & Lee, 2011),
meaning that an entrepreneur has strong feelings towards the activity he pursues, spends a lot of time thinking about his
passion and behaves in manner that increases the passion. The latter is important, because it suggests that an
entrepreneur’s passion could influence not only personal but also business decisions, for example with respect to business
expansion. The examples of HighPassion/LowAmbition micro-businesses show how the founders value slow growth in
order to spend time and effort improving on basic quality standards.

Despite previous evidence to the contrary, the average view of the micro-business is of the ‘necessity-motivated’ or
‘subsistence’ type, meaning that the entrepreneur is self-employed out of necessity and for the pure sake or earning a
living (Low Passion, Low Ambition). This type currently constitutes the majority of micro-businesses. Examples include: the
local convenience store, the dry cleaner, the plumber, and certain freelance one-man businesses.

62
The presence of ambition versus passion in ventures is not a black and white case of one or the other. There is also a
category of micro-businesses that start with both passion and ambition. A large component of this category is the new
generation of ‘boot-strapping’ small digital or web businesses (low overheads, small software development team, fast
prototyping and product iteration, wide and cheap online distribution and customer feedback). This category may be
typified by the so-called Lean StartUp movement, which began in Silicon Valley and now has chapters around the world.
(Book just out Sept 2011: The Lean Startup, by Eric Ries). Antecedents may include Napster, Paypal, Facebook. These
businesses are not (at least, initially) venture-backed, but may benefit from R&D tax credits, R&D grants, the premises and
services of local co-working spaces (or college campuses), and private ‘start-up accelerators’ run by entrepreneur-angel
investors, such as YCombinator (US-California), The Foundry (US-Colorado), Seedcamp (UK and Europe – London HQ) and
SpringBoard (UK–Cambridge). They may access venture capital in a second stage of ramp-up expansion once they have a
proven business model.

In some cases, the ‘bootstrapping’ model may be more successful, for digital technology companies, than the VC-backed
model. A case in point is the example of Siruna vs Mobify, two companies competing in the same product category of
automated mobile website development, in chapter 10 of the book The Smart Entrepreneur (Clarysse and Kiefer, 2011).
Siruna, a technology transfer venture sourced from a Belgian research institute and backed by formal venture capital,
failed to obtain its second round of funding, due in part to the founders’ proposal to change the business plan in response
to shifting market developments, and consequently had to close. Its competitor Mobify, a Canadian start-up, bootstrapped
its development through revenue from client projects, allowing the founders to retain full control over business decisions.

Outside the digital sector, more specific examples of ambitious and passionate micro-businesses include:

Healthcity Belgium - 16 years ago, Dick Vande Vyvere founded his first fitness club, Passage Fitness. In an analysis
of Vande Vyvere’s entrepreneurial journey marks him out as an entrepreneur with both ambition and passion. His
choice to start a venture in the fitness business was driven by passion, specifically, for sport. He graduated with a
degree in physical education, and practiced sports several hours a week. After further studies in public
administration, he decided to found a business in the fitness industry. When asked about his motivation to start a
fitness centre, he says: ‘I wanted something new. I had the chance to acquire my father’s business in car-
electronics, but I wanted something innovative. I was a member of a fitness club and recognised the stepmotherly
management of fitness in Belgium. I visited the USA and realised that you have to see things big and professional. I
was always interested in sports and was in love with fitness.’ Vande Vyvere’s passion helped him to recognise a
business opportunity in the fitness industry and motivated him to improve on the Belgian fitness industry’s narrow
status-quo vision by building fitness centres on a large scale. This mission thus nourished not only his passion, but
also his ambition. Previous experience in his father’s business, along with his business education, also encouraged
his ambition and confidence. He opened his first fitness club in 1994. The second followed in 1997, the third in
1998. Since 1999, he has opened four or five new fitness clubs every year. In 1999, he also partnered with a
competitor, Fitness First, which possessed 32 clubs at the time. He helped to grow the joint venture, Passage
Fitness First by attracting more venture capital. Through his efforts, the company owned 31 clubs in Belgium and
Luxemburg, and 25 more in the Netherlands. In 2010, Passage Fitness First received an acquisition offer from
Healtchcity, an international fitness company. Vande Vyvere sold his first enterprise. The high investment return
from the acquisition satisfied his personal ambition. Passage Fitness First is now part of an international fitness
company of 540 clubs and has 1.7 million customers.

Whole Foods Company - In 1978, twenty-five-year-old college dropout John Mackey and twenty-one-year-old Rene
Lawson Hardy borrowed $45,000 from family and friends to open the doors of a small natural foods store called
SaferWay in Austin, Texas (the name being a spoof of Safeway, which operated stores under their own name in
Austin at that time). When the couple were evicted from their apartment for storing food products there, they
decided to simply live at the store. Passionate about healthy foods and organic farming, they continued in their
endeavour, even after suffering financial losses brought on by a water flood in their store. Two years later, John
and Rene partnered with Craig Weller and Mark Skiles to merge SaferWay with their Clarksville Natural Grocery,

63
 resulting in the opening of the original Whole Foods Market on September 20, 1980. At 10,500 square feet with a
staff of 19, this store was large in comparison to the standard health food store of the time. The young
entrepreneurs’ ambition grew and, in 1984, Whole Foods Market began its expansion beyond Austin. While
continuing to open new stores from the ground up, they fuelled rapid growth by acquiring other natural foods
chains throughout the 90s: Wellspring Grocery of North Carolina, Bread & Circus of Massachusetts and Rhode
Island, Mrs. Gooch's Natural Foods Markets of Los Angeles, Bread of Life of Northern California, Fresh Fields
Markets on the East Coast and in the Midwest, Florida Bread of Life stores, Detroit area Merchant of Vino stores,
and Nature's Heartland of Boston. Whole Foods Market started its third decade with the additional acquisitions of
Food for Thought in Northern California and Harry's Farmers Market stores in Atlanta. In 2001, Whole Foods moved
into Manhattan, generating a good deal of interest from the media and financial sector. The year 2002 saw an
expansion into Canada and, in 2004, Whole Foods Market entered the United Kingdom with the acquisition of
seven Fresh & Wild stores.

Dolby Laboratories Inc. - Ray Dolby is the founder with a passion for producing the world’s best audio signal
processing systems (Nesheim, 2005). Dolby has become a premier brand used around the world. His passion was
the engine of a new enterprise that became the largest business of audio signal processing systems. Ray Dolby was
bothered by the hiss on his audio tapes, which drowned out the subtleties of the musical instruments. He invented
electronic circuits which eliminate this hiss, and made his fortune on the product. A capable inventor, Dolby proved
to be a shrewd businessman as well (Nesheim, 2005). To penetrate the market, Ray Dolby enlisted professional
recording studios first, and then pursued manufacturers of high-end consumer electronics. Once these sectors
were on board, Dolby was able to convince mass market manufacturers that Dolby sound was a seemingly "high-
end" product that they could integrate at low cost. To ease the compatibility transition (allowing consumers to
continue playing non-Dolby tapes), the new tape recorders were issued with switches that turned the noise-
suppression circuit on and off. From that moment on, Dolby Laboratories Inc. continued to develop audio signal
processing systems and to manufacture professional equipment to further employ these technologies in the
motion picture, broadcasting, and music recording industries. Ray Dolby retained complete control of his invention
and his private company throughout the changing technological times to come. The company is headquartered in
San Francisco, with offices in New York, Los Angeles, Shanghai, Beijing, Tokyo and European Headquarters in
England. For 2011, Dolby is targeting revenues of $930 million to $955 million.

CONCLUSION AND RECOMMENDATIONS FOR FURTHER STUDY

The discussion above demonstrates the growth and profit potential of businesses with highly passionate founders.
However, while HighPassion/HighAmbition ventures seem able to attract the resources needed for their immediate short
term success, little is understood about the resource structuring process of HighPassion/LowAmbition micro-businesses.
Up to now, these micro-businesses neither attract venture capital nor are attractive for venture capitalists. Driven by their
passion, these founders apparently create manageable ventures in which they prefer to retain a high degree of operational
control, which would not be possible if backed by traditional venture capital investment. Nevertheless, a larger amount of
financial capital could support the survival and boost the growth of such micro-businesses when they are ready for
expansion, in the same manner as the HighPassion/HighAmbition ventures. A profound understanding of these growth
dynamics in HighPassion/HighAmbition ventures could provide guidelines for enhancing growth in
HighPassion/LowAmbition ventures. Furthermore, it could help finance providers to provide appropriate capital which
would guarantee the nurturing of passion in the micro-business.

In addition to a better understanding of the resource structuring process in the four types of business ventures, further
development and fine-tuning of an instrument to screen for the different types is highly recommended. The instrument,
which would identify a set of indicators, could be highly functional in order to increase the visibility of the micro-businesses
for access to capital and move away from the narrow perspective of venture capitalists and public policies from only the
LowPassion/HighAmbition ventures to a broader landscape including passionate ventures. In addition to increasing the

64
understanding and visibility of this typology of venture, such an instrument could also help to quantify its frequency by
identifying indicators which can be mined in larger business databases.

Reference list

Baron, R. A. 2008. The role of affect in the entrepreneurial process. Academy of Management Review, 33(2): 328-340.

Baum, J. R., & Locke, E. A. 2004. The relationship of entrepreneurial traits, skill, and motivation to subsequent venture
growth. Journal of Applied Psychology, 89(4): 587-598.

Cardon, M. S., Wincent, J., Singh, J., & Drnovsek, M. 2009. THE NATURE AND EXPERIENCE OF ENTREPRENEURIAL PASSION.
Academy of Management Review, 34(3): 511-532.

Chen, X. P., Yao, X., & Kotha, S. 2009. ENTREPRENEUR PASSION AND PREPAREDNESS IN BUSINESS PLAN PRESENTATIONS: A
PERSUASION ANALYSIS OF VENTURE CAPITALISTS' FUNDING DECISIONS. Academy of Management Journal,
52(1): 199-214.

Clarysse, B. & Kiefer, S. 2011. The Smart Entrepreneur. London, Elliot & Thompson.

Elsbach, K. D., & Kramer, R. M. 2003. Assessing creativity in Hollywood pitch meetings: Evidence for a dualprocess model of
creativity judgments. Academy of Management Journal, 46: 283–301.

Fauchart, E., & Gruber, M. 2011. Darwinians, Communitarians and Missionaries: the role of founder identity in
entrepreneurship. Academy of Management Journal, in press.

Goldberg, C. 1986. The interpersonal aim of creative endeavor. Journal of Creative Behavior, 20: 35–48.

Grichnik, D., Smeja, A., & Welpe, I. 2010. The importance of being emotional: How do emotions affect entrepreneurial
opportunity evaluation and exploitation? Journal of Economic Behavior & Organization, 76: 15-29.

Ho, V. T., Wong, S.-S., & Lee, C. H. 2011. A tale of passion: linking job passion and cognitive engagement to employee work
performance. Journal of Management Studies, 48(1): 26-47.

Marsh, P., & Collet, P. 1987. Driving passion. Psychology Today, 21: 16–24.

Morris, M., Schindehutte, M., & Allen, J. 2005. The entrepreneur's business model: toward a unified perspective. Journal of
Business Research, 58(6): 726-735.

Nesheim, J. L. 2005. The power of unfair advantage. How to create it, built it and use it to maximum effect New York Free
Press.

Ries, E. 2011. The Lean Startup. New York, Crown Publishing Group.

Seo, M. G., & Barrett, L. F. 2007. Being emotional during decision making-good or bad? An empirical investigation.
Academy of Management Journal, 50(4): 923-940.

Westhead, P., & Wright, M. 1998. Novice, portfolio, and serial founders: Are they different? Journal of Business Venturing,
13(3): 173-204.

Appendix

Based on a study by Westhead & Wright (1998), we could abstract some speculative statistics about the frequencies of the four types of
venture. In this study of 621 entrepreneurs in Great Britain, when asked why they started a venture, 49 % of the subjects (novice-portfolio-
serial) answered that they had developed an idea for a product and that they had a need for personal development. This figure might be
read as an indication of the quantity of entrepreneurs who start out of passion. Furthermore, the study shows that only 12% of the
entrepreneurs surveyed are portfolio-entrepreneurs. This type of entrepreneur shows a high resemblance with the
HighAmbition/LowPassion ventures. Therefore, we might estimate this type of venture at 12%. If we include the number of serial
entrepreneurs (25%), because being ambitious could prompt motivation to start up not just one but a series of enterprises, we might
estimate the proportion of ambitious entrepreneurs at 38%.

However, such extrapolations cannot be taken as general evidence and would need to be tested by more purposely designed and
targeted research.

65
Appendix D – Manchester Metropolitan University – Investigation into
UK Micro Businesses
A Draft Report prepared for the All Party Parliamentary Group for Micro Businesses by Lynn Martin and Bob Jerrard
from Manchester Metropolitan University Business School.

1. What are micro-firms/ micro enterprises in the UK in terms of size, sector, and turnover?

1.1 Size
In defining what a Micro Enterprise is, the measure that is used most often is the number of employees and the turnover.
In the UK we use the definition of a Micro Enterprise (ME) identified by the European Commission covering those firms
with up to 10 employees; in Canada a micro has been defined as a business with up to 4 employees, which may offer a
7
more useful picture when considering different needs and opportunities involved in employee numbers.

The European Commission defines micro, small and medium sized enterprises in Recommendation 2003/361/EC9. To be a
Micro Enterprise, a company must be independent, (which means less than 25% owned by one enterprise or jointly by
8 9
several enterprises) and have up to 10 employees. In terms of turnover, subsequent consultations with Member States
indicated that the thresholds in the Recommendation might be too high for accounting purposes. To reduce reporting
bureaucracy, the current proposal suggests that micro entities, the smallest enterprises to be introduced into the EU
legislative framework, will include companies with balance sheets showing up to €500,000 and a net turnover of
€1,000,000 and/or up to 10 employees.
This size range is necessarily a catchall that may misrepresent both the contribution and the issues involved in ME
ownership and operation. The needs of a start up or of a sole trader without employees are necessarily different from
those of an owner with 9 employees, given the regulatory responsibilities related to the employment of staff, their health
and safety and development needs and the need for the owner to have the capability to manage, motivate and lead staff.
In trying to gain a sense of how many UK MEs there are, however, difficulties arise due to the lack of disaggregated data.
In the UK at the start of 2009, there were an estimated 4.8 million private sector enterprises, employing an estimated 22.8
million people, with an estimated combined annual turnover of £3,200 billion. All SMEs accounted for 99.9% of all
enterprises, 59.8% of private sector employment and 49.0% of private sector turnover. Turnover in SMEs is estimated at
10 11
£1,589 billion, £88 billion (5.8 %) higher than 2008. A review of the main aspects of the Small Business Act in the UK
12
identified that 87.5% of such enterprises were MEs. Details about their nature or types of operations are less certain,
given that data about MEs are often included in the SME definition and in related data.
The same is true for Europe, where, although overall numbers have been estimated there are few details available about
employee numbers, size or sector. Hence, while 99% of all European businesses are Small and Medium Sized Enterprises
(SMEs), figures for the numbers of MEs vary. They are a major source of entrepreneurial skills, innovation and
13
employment in the enlarged European Union, 23 million SMEs provide around 75 million jobs but the majority (estimated
14
as 92.0 %) was described as MEs. It is not easy to identify how many of these are sole traders, or to indicate which may
run growth as opposed to lifestyle businesses, or those have significant profits as opposed to subsistence wages as a result
of their efforts.
Significantly too, given the current employment and growth agenda for the UK, it is difficult to identify which are important
in employment creation. So, although overall SMEs provide two out of three of the private sectors jobs and contribute to
more than half of the total value-added created by businesses in the EU, the data on which of these provide employment is
varied. Currently SMEs account for 99% of all UK businesses, half of all private sector output and employment. MEs as a
group, account for more than a third of private sector employment and over a fifth of private sector turnover. In the UK,
15
the Federation of Small Business (FSB) suggests that 75% of all small businesses are sole proprietors. The majority of

7
Micro-enterprises survey 2000, A Progress Report, Small Business Policy Branch, Industry Canada.
8
Commission of the European Communities (1996), Commission Recommendation concerning the definition of small and medium-sized
enterprises, C (96) 261 final, adopted (Official Journal L107 of 30.4.96, p4).
9
European Commission. Proposal for a Directive of the European Parliament and of the Council amending Council Directive 78/660/EEC
on the annual accounts of certain types of companies as regards micro-entities Brussels, 26.2.2009 COM(2009) 83 final 2009/0035 (COD)
10
Department for Business Innovation and Skills, URN 10/92
Small and Medium-sized Enterprise (SME) Statistics for the UK and Regions 2009 published, 13th October 2010
11
European Commission, SBS Fact Sheet, United Kingdom, 2009
12
http://www.fsb.org.uk/stats, 12 October 2010, updated (Accessed 25.10.11)
13
European Commission.The new SME definition User guide and model declaration, 2005
14
European Commission. Key figures on European business with a special feature on SMEs. Eurostat 2011 edition
15
http://www.fsb.org.uk/stats, 12 October 2010 updated (Accessed 25.10.11)

66
people working in MEs are sole traders and self-employed and in increasing numbers (now 4.03 million with approximately
16
300,000 people becoming self-employed during 2010).
Similarly, while it is estimated that nine out of ten European SMEs are actually MEs with less than 10 employees, on
17
average these firms provide work for two persons, suggesting again a mixed variety of ME sizes and employment status.
This compares with similar figures for Australia and for Canada, which estimate that around 77% of small firms have 2 or
18
less employees.
1.2 Sector

The focus on UK growth is often linked, in the popular imagination, with new technologies; but a range of reports show
19
that growth can occur in any sector, given entrepreneurial owner-managers and favourable trading conditions. Again,
20
data is patchy on sectoral presence by MEs. At the start of 2010, 25% of all businesses were in the Construction sector,
16% in the professional, scientific and technical activities sector and 11% in the wholesale and retail trade and repair
21
sector. These proportions are reflected in UK SMEs (including MEs) which are currently found in: Financial
Intermediation, 2%, Hotels and Restaurants 3%, Agriculture, Hunting and Forestry, Fishing 4%, Education 4%, Transport,
Storage and Communication 6%, Health and Social Work 6%, Manufacturing 7%, Other Community, Social and Personal
Service Activities 11%, Wholesale and Retail Trade, Repairs 12%, Construction 21%, Real Estate, Renting and Business
Activities 24%.

Whatever the sector, some MEs and SMEs are indicated as high growth firms. NESTA states that “High-growth firms are not
concentrated in’ high-tech sectors’ or ‘growth sectors’; all major UK sectors contained between 4 and 10% of high-growth
firms.” NESTA also suggests that the UK in recent years has consistently been ahead of the United States in the proportion
22
of growth firms in a variety of sectors, but particularly in financial intermediation and not in manufacturing.

Currently, the key factors influencing regional variation in ME/SME development will include: proximity to markets and
others in the same field (e.g., ICT in SSW Technology Corridor), proximity to other within the same cultural group (e.g.,
Clothing in urban areas), shared supply chains, city to city (e.g., Asian family groups) or proximity to knowledge investment
(e.g., around universities). The current policy of Enterprise Zones will take account of the last similar investment
announced in 1980 where the main value was, in the end, found to be “rethinking planning and the use of tax incentives to
23
address urban regeneration”.

As suggested above, it is difficult to differentiate MEs by sector given the lack of readily available disaggregated data;
24
however, previous studies have indicated the strong presence of trades and services among MEs. European MEs employ
more people than any other size class in a number of service sectors, particularly in real estate services and the repair of
25
computers, personal and household goods, where a clear majority of employees was found working in MEs. . Sector and
size are also inter-related. The UK construction industry is characterized by a small number of large contractors who
employ mainly managerial and professional staff, and a large number of small, micro- and self-employed firms that
26
provide, on a subcontracted basis, the majority of the industry's demand for a skilled manual workforce.

This may also be reflected in the characteristics of MEs, which include strong involvement of the owner in all operations
plus craft, technical and management competences, active contribution to production of products and services (in
27
particular tailor-made and single-size-products or in small quantities) and proximity to the client and local activities.

16
ONS, Labour Force Survey, 2008- March 2011
17
European Commission, Facts about SMEs http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/index_en.htm (Accessed
25.10.11)
18
Research on Small Businesses, Moya K. Mason http://www.moyak.com/papers/small-business-statistics.html
(Accessed 21.10.11)
19
Mihir A. Desai (2009) Securing Jobs or the New Protectionism?: Taxing the Overseas Activities of Multinational Firms Working Paper
09-107 Harvard University and NBER
20
BIS, Business Population Estimates for the UK and Regions 2010, Pub. 24 May 2011 FOONS 2010
21
BIS Economics Paper No 5, Internationalisation of Innovative and High Growth SMEs, March 2010.
22
Anyadike-Danes et al. above
23
Colin Jones (2006) Verdict on the British Enterprise Zone Experiment, International Planning Studies, 11, (2)
24
Martin, L. M., Warren-Smith, I., Scott. J and Roper, S., (2008), Boards of Directors and Gender Diversity in UK companies. Gender in
Management, 3, 211-223
25
European Commission. Council Directive 78/660/EEC on the annual accounts of certain types of companies as regards micro-entities,
February 2009
26
Morgan, A., Raidén, A. and Naylor, G. (2008), Unlocking the potential to influence government skills policy: a case study of the UK
construction industry. International Journal of Training and Development, 12: 238–252. doi: 10.1111/j.1468-2419.2008.00309
27
Anyadike-Danes, M., Bonner, K. Hart M. and Mason, C., Measuring Business Growth
High-growth firms and their contribution to employment in the UK, NESTA Research Report: October 2009

67
1.3. Social enterprise/ community organisations

A similar gap in aggregated data emerges when social enterprises are considered. This group has grown considerably over
the last decade according to many reports, and are among between 200,000-300,000 voluntary or third sector
organisations in the United Kingdom of various types and formats. There are an estimated 163,000 registered charities in
28 29
the United Kingdom. Given that many voluntary or third sector organisations do not register as charities, the overall
number of third sector organisations is likely to be higher; there were for instance around 62,000 social enterprises in the
30
UK or possibly four times as many as currently thought given the hidden nature of many small community organisations.
31

This is necessarily estimated overall since there is no central register for the broad range of types and sizes of organisations
that fall within the third sector – social enterprises, charities, cooperatives etc. and some organisations are ‘under the
32
radar’. This paper does not engage in the debate about the nature and types of these organisations which often forms
33
part of the academic and political debate about not-for-profit organisations.

Looking at available information, the majority of these community organisations are very small, with low turnovers, low
employee numbers and high vulnerability to funding cuts due to their reliance on one or two sources of income. For
instance, in the charity sector, of the 148,000 charities reporting income, only 2% have turnovers over £1million while 82%
34 35
have turnover of up to £100,000.

2) Are there types these firms can be classified into (familial/ non-familial? High growth/lifestyle…)

2.1 Family/nonfamily
36
Earlier research by the Institute for Family Business (IFB) indicates that family firms account for 65% of all UK private
sector enterprises, suggesting that the vast majority of these are SMEs/MEs, with more than half being sole traders with no
employees. These family firms have a longer time horizon than other firms and offer a unique alignment of managers and
owners. Women-led SME employers were less likely to be family businesses than SME employers overall (55 % compared
37
to 63 %) in the 2001 Small Business Survey.

Family firms may face specific issues as they grow, given that early stage growth in family firms relates to trust and
38 39
informality. Ethnicity also has impacts on this, related to social capital and strategy. Ethnic firms, whether family-

28
Charity Commission, The, (2011), Sector facts and figures,
http://www.charitycommission.gov.uk/About_us/About_charities/factfigures.aspx; (Accessed27.10.11)
28
Kane, D., (2009), How many charities are there?, 06/10/2009 - 13:23 , 6th October, http://www.ncvo-vol.org.uk/networking-
discussions/blogs/116/09/10/06/how-many-charities-are-there (Accessed 27.10.11)

30
Cabinet Office, (2010), The background to social enterprise, 26 February
http://webarchive.nationalarchives.gov.uk/+/http://www.cabinetoffice.gov.uk/third_sector/social_enterprise/background.aspx; (Accessed
27.10.11)
31
Delta, Economics (2009), Hidden Social Enterprises, Full report
http://www.deltaeconomics.com/COGS/Hidden%20Social%20Enterprises/Hidden%20Social%20Enterprise%20Report.aspx (Accessed
27.10.11)
McCabe, A., Phillimore, J. and Mayblin, L., (2010), ‘Below the radar’ activities and organisations in the third sector: a summary review of
the literature, Third Sector Research Centre Working Paper 29 January
http://www.tsrc.ac.uk/LinkClick.aspx?fileticket=80XsXl6tHkc%3D&tabid=500
(Accessed 27.10.11)
32
McCabe, above
33
Teasdale, Simon (2010) What’s in a name? The construction of social enterprise. Working Paper, Third Sector Research Centre,
University of Birmingham, Birmingham. http://epapers.bham.ac.uk/781; (Accessed 27.10.11)
34
Charity Commission, above
35
Cabinet Office, above
36
IFB, The UK Family Business Sector, February 2008
37
BIS, Small Business Survey 2010 Women-led businesses boost Report, prepared for the Department of Business, Innovation and Skills
(BIS), June 2011
38
Sundaramurthy, C., (2008) Sustaining Trust Within Family Businesses, Family Business Review, 21, (1), 89–102, March; Janjuha-Jivraj,
S. and Spence, L.J., (2009), The Nature of Reciprocity in Family Firm Succession. International Small Business Journal December, 27, (6)
702-719
39
Bhalla, A., Lampel, J., Henderson, S. and Watkins, D., (2009) Exploring alternative strategic management paradigms in high-growth
ethnic and non-ethnic family firms, Small Business Economics, 32, (1), pp77-94

68
based or not, show differences since ethnic minority firms must be seen as grounded in an external structural context as
40
well as in their own community networks.

2.2 Gender
There is evidence that gender may be a factor in ME ownership. Over 80% of women-led SMEs with employees in the SBS
41
2010 survey were MEs. These women-led SME employers were more likely to be sole proprietors and less likely to be
limited companies than SME employers as a whole. Despite 44 % of women-led SME employers perceiving their
businesses to be a social enterprise, only 9 % fell into the BIS definition of this (BIS, June 2011). Similarly, earlier research
42
found that women directors were most likely to be found in smaller enterprises. . There is also research showing that
women start firms with less capital and in low growth sectors and that perhaps as a result these firms grow more slowly
than male-owned firms but again data is variable.
2.3 Ethnicity
There are likely to be large numbers of ethnic minorities MEs, given that small family firms are the predominant
43
organisational form for ethnic minority businesses . This often means that supply chains and business networks are
culturally biased, e.g., Asian, black or white etc. The highest rate of self-employment is found in the Asian population and
particularly in the Pakistani and Bangladeshi ones (23%). Self-employment in the Black and African-Caribbean population is
below the national average (7%). Ethnic minority businesses may face particular problems in accessing finance and
44
resources due to perceptions of discrimination.

2.4 Growth/no growth

45
One way to differentiate companies is to plot them against measures of growth. Acs and Mueller differentiate between
small firms with less than 20 employees (termed ‘Mice’) and large firms with more than 500 employees (‘Elephants’) with
high growth potential firms seen as ‘Gazelles’, given their potential for rapid development. The focus is often on high-
growth firms or gazelles, because these firms consistently outperform other businesses in the economy in terms of growth
in sales and/or growth in employment. Gazelles are the subset of high-growth firms that are in their first five years of
46
operation.

Identifying high growth MEs is difficult given the data gap but there are indications that some MEs have great potential to
47
grow. Research by the Women’s Enterprise Policy Group suggests that, “if we assume one-third of all women-led
businesses have growth aspirations, and they grow by 10% per annum over the next two years, this will result in a
minimum additional £5bn contribution to Gross Value Added (GVA). If each of these growth businesses creates one job in
that period, an additional 240,000 jobs will be created. This represents a 9.6% decrease in current unemployment.” Given
the preponderance of MEs set up and managed by women owners, this economic contribution is likely to come from MEs.

In the UK each year, the majority of jobs are created by small firms. Their rate of job creation and destruction, particularly
within MEs, is much greater than larger firms. Out of a total of 2.61 million jobs created annually on average between
48
1998 and 2010, existing small firms contributed 34% (0.87 million jobs) and start-ups contributed 33% of these. Firms
with more than 50 employees showed little net annual employment change compared to MEs, where employment grew by
between two and 12%. MEs with less than 5 employees comprise 89% of the total of small firms, which includes start-ups
49
and excising firms. Of the startups about 60 % were one-employee firms. In terms of job losses, firms with than 50
employees shed 46% or 1.2 million jobs.

40
Jones, T. And Ram, M., (2010), Review article: Ethnic variations on the small firm labour process, International Small Business Journal
April, 28, (2), 163-173
41
BIS, above
42
Martin et al, above
43
Ram, M. and Jones, T. (2008), Ethnic-minority businesses in the UK: a review of research and
policy developments, Environment and Planning C: Government and Policy, Vol. 26 No. 2,
pp. 352-74.Fraser, S. (2007), Finance for Small and Medium-sized Enterprises: Comparisons of Ethnic Minority and White Owned
Businesses, a report on the 2005 UK survey of SME Finances Ethnic Minority Booster Survey, Warwick Business School, Coventry.
44
Fraser, S., (2009) Is there Ethnic Discrimination in the UK Market for Small Business Credit? International Small Business Journal, 27
(5): 583–607
45
Acs, Z. J. and Mueller, (2008), Employment effects of business dynamics: Mice, Gazelles and Elephants Small Business Economics, 30,
(1)
46
The State of Entrepreneurship in Canada, 2010, 4.3 Industry Canada,
47
Women’s Enterprise Policy Group. A Multi Billion £ Opportunity: The Untapped Potential of UK Women Entrepreneurs. Briefing Paper
September 2011
48
Anyadike-Danes, M. Bonner K. and M. Hart, (2011), Job Creation and Destruction in the UK – 1998-2010. Final Report for the
Department of Business Innovation and Skills, Aston Business School, August, section 4.1
49
Anyadike-Danes, M. Bonner K. and M. Hart, (2011), section 4.1

69
During the current economic downturn, the majority of jobs (71%) were created by start-ups and small firms; a total of
1.63 million jobs. However, MEs were responsible for 38% of all job losses on average in 2009 and 2010; almost 1 million
out of a total of 2.55 million job losses. Also, while firms employing more than 250 employees lost jobs at much the same
rate as pre-2008, they were significantly less likely to create jobs, i.e., 200,000 fewer jobs in each of the years 2009 and
50
2010.
While there is potentially good news on employment as seen in the Women’s Policy statements, between 2009 and 2010,
51
3.25 million European SME based jobs were lost. An analysis of policies for recovery for SMEs cites, amongst others
things, lower scale economies, lower labour productivity and lower profitability. However there is a higher propensity for
investment in SMEs, even higher in MEs, with high investment risk in new products and services.

Technology-based MEs may face particular problems; they lack tangible assets, which may otherwise be used as collateral.
Their high growth potential is usually derived from scientific and intellectual property as well as from novel, ongoing
market knowledge. Initially their products or services have little or no track record, are largely untested in the marketplace
52
and may suffer high rates of obsolescence. Also there are difficulties faced by potential investors looking for high growth
in the ME sector. High risks and uncertainties are involved surrounding novel R&D costs and in estimating the prospective
markets for a new product or service. To grow consistently MEs have to develop practical mechanisms for managing risk.
However, successful innovation is characterised as accompanying high growth and the potential for growth (financial,
structural, strategic and organizational) is a defining feature of high-growth SMEs. In order for policy to be effective these
high growth potential needs to be identified and supported.

3) Where are they?

There are significant regional disparities in the UK in terms of employment, productivity and innovation, as seen in a range
53 54 55
of recent literature. In particular, the meta-region of the Greater South East (GSE), which includes the regions of
London, Eastern and the South East of England, largely outperforms the rest of the country, and accounts for much of the
56
aggregate productivity growth of the UK.
57
This is reflected in the SME and ME communities. In 1999, a UK regional SME survey found significant regional variations
in the sector size and company age structure. The Industrial Heartland (West Midlands, North West, Yorkshire and
Humberside) sample was dominated by manufacturing firms, and its businesses tend to be older and larger than SMEs
elsewhere. The South East sample had the highest share of business and professional service enterprises, and was
characterized by high labour productivity. Peripheral (Scottish, Welsh and Northern England) SMEs tended to be younger
and smaller.

More recent research showed some of this pattern remained, as although MEs are spread throughout the UK, there is a
concentration in urban areas and generally in London and the South East. Since 2008, the greatest rises have been in the
South East and the South West, with the smallest rises in the North West and the North East. This same pattern is seen in
the proportion of home-based businesses. It is above the national average (36%) in just three regions – South East England
(41%), South West England (41%), and Scotland (37%), in terms of their proportion of all small businesses, home based
businesses are least significant, in Northern Ireland (18%), the North East (29%), Yorkshire and The Humber (29%), and the
58
Northwest (30%).
59
According to more recent research, London and the South East account for almost a third of all private sector enterprises

50
Anyadike-Danes, M. Bonner K. and M. Hart, (2011), section 5.2
51
EU DGENTR-Annual Report 2010 100511.indd 1, European SMEs under Pressure, Annual Report on EU Small and Medium-Sized
Enterprises 2009
52
United Nations Conference on Trade and Development. Improving the Competiveness of SMEs Through Enhancing Productive Capacity
Proceedings of Four Expert Meetings, New York and Geneva, 2005
53
Robson S., and Haigh, G., (2008), First findings from the UK Innovation Survey 2007, Department for Innovation, Universities and Skills,
Economic & Labour Market Review, Vol 2, 4, April, pp. 47-53.
54
NESTA (2006), The Innovation Gap: Why policy needs to reflect the reality of innovation in the UK, National Endowment for Science,
Technology and the Arts, October.
55
Kitson, M., Martin, R. and Tyler, P. (2004). Regional Competitiveness: an Elusive but Key Concept?, Regional Studies, Vol. 38.9, pp.991-
999
56
Eleonora Patacchini & Patricia Rice, 2007. Geography and Economic Performance: Exploratory Spatial Data Analysis for Great Britain,
Regional Studies, Taylor and Francis Journals, vol. 41(4), pp. 489-508.
57
David Keeble (1999) The Changing State of British Enterprise. North-South and Urban-Rural Differences in SME Performance and
Behaviour, Chapter 9 The Centre for Business Research (CBR) at Cambridge University
58
Colin Mason, Sara Carter and Stephen Tagg (2008). Invisible Businesses: the characteristics of home-based businesses in the United
Kingdom. Hunter Centre for Entrepreneurship, University of Strathclyde
59
BIS, Business Population Estimates for the UK and Regions 2010, Pub. 24 May 2011 FOONS 2010

70
in the UK. For some regions the number of businesses is relative to the size of the adult population but for some regions
the pattern changes when looking at enterprise density rates. For example, although Northern Ireland had the lowest
number of enterprises of all UK countries and regions (121,000), it was mid-ranking (fifth) in terms of its enterprise density
rate. And whilst the North West had the fourth highest number of enterprises (434,000) amongst the UK regions, it had the
third lowest enterprise density rate (775 enterprises per 10,000 adults). (BIS, 2011)

In London, 17.3% of businesses were in Professional, Scientific and Technical activities sector, the highest proportion of all
regions and countries Northern Ireland (7.9%) and Yorkshire and the Humber (10.0%) had the lowest proportion out of all
regions of enterprises in the Professional, scientific and technical sector). (BIS, 2011)

Increases in MEs in other countries, such as new and associated member states of the European Union, are often seen in
and around cities, where MEs arise as service providers for growing populations. The knowledge-based nature of their
services is based on human capital rather than global market immersion, although the growth of ‘internet dependency’ is
60
predicted to change this.
61
More recent research suggests that many MEs operate from home, using new information communication technologies
to communicate market and sell their services and products. This entails small business network capabilities, more
efficient web-based global shipping and money transfer together with what is seen as a flexible life style choice. Home
working is attractive to part-time business start-up for parents and to an often relatively affluent aging population who
62
would wish to invest savings in a business and remain active. For these reasons, it is suggested that the home will be the
most significant location for entrepreneurial activity in many advanced economies, particularly in non-urban environments.

4) Are there specific finance issues for micro firms and how does this map onto sector, size, turnover, and location?

“Any conversation with an SME very quickly gravitates towards issues of access to finance,” said Vince Cable (Chancellor of
the Exchequer). “Access to finance is absolutely critical for SMEs. Without access to finance, they can’t grow, and in some
63
cases can’t survive.” (Real business, 2011)

Finance affects growth and innovation through the supply of finance and credit to SMEs, without which growth (and
perhaps - given the way cash flows work in smaller firms- sometimes survival) cannot occur. The stock of lending to all UK
businesses overall contracted in the three months to February 2011, the same applied to small firms, with contraction in
the stock of lending to small and medium-sized enterprises (Bank of England, 2011). The stock of lending to UK businesses
overall contracted again in the three months to May and to August, as did the stock of lending to small and medium-sized
64
enterprises

Data published by the British Bankers’ Association (BBA) on the stock of lending to those businesses, with a turnover of up
to £1 million (i.e., MEs), showed negative lending growth rates for this sector, with the annual rate standing at -10% in June
65
2011. The Bank of England reports a mixed picture for SMEs and access to credit / finance, with some lenders reporting
reduced demand and debt reduction ahead of contractual requirements, particularly for smaller SMEs. The major UK
lenders also reported that cash balances of SMEs had increased, on account of reduced investment spending. Concerns
about credit availability have also been reported as tighter for SMEs compared to larger corporates, however, with both
small businesses and new business start-ups still finding it difficult to gain access to credit.

“The Bank’s Agents also reported that some small firms were holding sizable cash balances because of concerns about the
continuing availability of overdraft facilities. They reported that some small firms were reluctant to approach banks out of
concern for an increase in the cost of existing borrowings, or reductions in overdraft limits, and sometimes had resorted to
66
the use of personal loans instead”.

60
David Smallbone, Friederike Welter (2009) Entrepreneurship and small business development in post-socialist economies, Routledge
61
Colin Mason (2010) Home-Based Business: challenging their Cinderella status, Editorial: Small Enterprise Research (2009-2010), vol.
17, pp 104-11.
62
Mason above
63
Realbusiness, (2011), Government unveils SME growth plan Mark Prisk has announced a raft of measures to boost British SMEs.
http://realbusiness.co.uk/news/government_unveils_sme_growth_plan_ (Accessed 25.10.11)
64
Bank of England, (2011), Trends in Lending, October,
http://www.bankofengland.co.uk/publications/other/monetary/TrendsOctober11.pdf
65
British Bankers Association .bba.org.uk/statistics/article/small-business-support-may-june-201111/small-business/.
66
Bank of England (2011) above, p. 7

71
Also, the Bank of England reports that the annual rate of growth in lending to SMEs has been negative since late 2009 and
67
fell to -3% in February 2011 , despite total lending to SMEs representing approximately 25% of lending to all UK
businesses by banks and building societies.

The smallest firms, however, were in a worse position. The growth rate of lending was -6% in December 2010 to the
smallest businesses, (i.e., those with a turnover up to £1 million). This was more negative than that for the whole SME
segment, a trend that has continued since June 2010 (British Bankers’ Association, 2011). There is less credit available for
SMEs than there is for larger corporate organizations, and this is reportedly often accompanied by requirements to offer
personal guarantees and onerous credit application procedures. This has been seen in reports from some SMEs about the
68
replacement of overdraft facilities with alternative, more expensive, credit products.

Credit figures also show broadly flat or negative trends in applications for new credit and in the flows of new lending to
SMEs. Reports from the major UK lenders reported, that the value of applications by SMEs for new term loan and
69
overdraft facilities in the six months to February 2011 was 19% lower than in the same period a year earlier. This has
been attributed to risk aversion and perhaps understandable caution on the part of SME owner-managers to engage with
credit at a time of uncertain business prospects.

70
This is not, however, borne out by the recent Cisco survey or by the Confederation of British Industry Quarterly SME
71
Trends Survey , which showed little change over the previous half year in SME owner-managers’ optimism about their
72
businesses. This business optimism was broadly similar across the range of small and medium-sized SMEs and remained
positive. Thus we know that credit is a factor - but is it a significant one in understanding innovative SMEs? There were
companies where credit was cited as an issue. 6% of manufacturing SMEs did cite ‘credit or finance’ as a factor likely to
limit output in the next quarter. This did not represent an increase, however, as this was the same proportion cited in
preceding CBI Surveys over the previous 18 -24 months. It indicates that 94% of manufacturing SMEs did not see this as a
barrier to output.

Size is also related to sector. Manufacturing bucked the general trend in having its sharpest rise in 16 years over the 12
months to May 2011. The upturn in sales among small manufacturers rose from 9% to 14%. Manufacturers were also the
73
most optimistic sector for the coming quarter (23%) and report the highest positive expected investment balance (5%).
Optimism, regarding export prospects for the year ahead, rose at a slightly faster pace than in the previous two surveys. So
far there has also been growth for manufacturers in domestic markets; the strongest increase since January 1997, although
the growth in domestic orders is expected to decelerate slightly in last three months of 2011. Again optimism about the
74
general business situation remained positive and was broadly unchanged, for the third successive quarter.

Traditionally, wealthier people have become entrepreneurs. It was differences in levels of wealth, not age that explained
75
the low level of self-employment among people under 30 who sought finance at start-up to buy stock or materials (29%)
76
to purchase machinery or equipment (27 %) and to finance premises (8 %) most often among all other issues. This
finance is likely to come from family and friends and from banks rather than other sources of investment, where small
77
firms show consistency and loyalty despite the potential benefits of switching accounts. Others suggest that long term

67
Bank of England. Trends in Lending, April 2011 http://www.bankofengland.co.uk/publications/other/monetary/TrendsApril11.pdf
(Accessed 25.10.11)
68
Bank of England, (2011), Trends in Lending, April 2011,
http://www.bankofengland.co.uk/publications/other/monetary/TrendsApril11.pdf (Accessed 25.10.11)
69
Bank of England, above
70
Matthew Broersma UK’s SMEs Look On The Bright Side. http://www.eweekeurope.co.uk/news/uks-smes-look-on-the-bright-side-says-
cisco-24039 March 16, 2011 (Accessed 25.10.11)
71
Confederation of British Industry, (2011), SME Trends Surveys, April 2011,
66
Cisco, (2011), UK SMEs Believe They Hold the Key to Economic Recovery in 2011 Tuesday, 29 March 2011 14:25,
http://www.entrepreneurcountry.net/news-features/betterbusiness/item/988-uk-smes-believe-they-hold-the-key-to-economic-recovery-in-
2011 (Accessed 25.10.11)
73
Bank of England, above
74
CBI, above
75
Evans, D. S. & B. Jovanovic (1989). An Estimated Model of Entrepreneurial Choice Under Liquidity Constraints. Journal of Political
Economy, 97, 8-8-27.
76
Bevan J., Clark G., Banerji N. and Hakim C. (1989). Barriers to business start-up: a study of the flow into and out of self-employment.
Department of Employment.
77
Frankish, J. S., Roberts, R. G., Storey, D. J., (2008) Do entrepreneurs really learn? Working Paper No. 98 June; Fraser, S. (2007),
Finance for Small and Medium-sized Enterprises: Comparisons of Ethnic Minority and White Owned Businesses, a report on the 2005 UK
survey of SME Finances Ethnic Minority Booster Survey, Warwick Business School, Coventry.

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relationships between SME and a bank is beneficial due to greater availability of finance, lower interest rates and collateral
78 79 80
requirements.
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In an early study of finance for micro enterprises , around one in six self-employed people had needed to raise further
finance once they had established their businesses. Most of these had raised the money they needed from a bank (46% got
a loan; 37% an overdraft). Savings (6%) and help from family and friends (6%) were much less important than they had
been in setting up the business in the first place (Bevan et al, 1989). Within the current economic crisis, “increased
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insolvency rates appear to confirm SMEs’ increased inability to obtain short-term financing” (OECD).

Within the UK, potential borrowers often suggest the banking crisis has reduced confidence in the banks that in turn often
state that borrowers’ hesitation is restricting borrowing. In a bank loan study using a sample of 3366 SMEs from 19
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European countries, it was found that “SMEs in countries that protect its creditors and enforce existing laws are more
likely to obtain long-term bank debt”. Also, evidence was found that “banks seem to rely more on the institutional
environment when determining loan maturity for micro-firms than for medium-sized firms” Newer SMEs in Britain are
more likely to have their loan application rejected than those in other Western European nations according to EU research
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based on a survey of 2,500 businesses across the UK. The UK rejection rate was 35.6% in 2010 up from 6.8% in 2077; the
British information and communications technology sector was particularly high at 32%. Only the Netherlands and Ireland
recorded a higher score. (Eurostat, 2011)
85
NESTA has suggested that the specific issues for policy makers around finance for small firms include focusing on growth
without ruling out existing businesses for support and encouraging innovation. (NESTA 2009). Recent research from the UK
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Survey of SME Finances (ESRC) reports that “the credit crisis and ensuing recession have led to both a tightening of loan
approval thresholds (due to the crisis in financial markets) and an increase in default risk (due to the ensuing recession),
contributing to the poorer availability of credit in 2008”; based on representative samples of 2,500 UK businesses with less
than 250 employees.
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Key issues identified by NESTA around SME funding include specific trends: “the use of external sources of finance is
declining, as debt is being paid off, although the cost of loan finance for smaller businesses is increasing and there is a shift
towards (sometimes more costly) alternatives and although many companies are still keen to expand, many others are
investing merely to maintain a ‘steady state’”. NESTA also recommend an SME bond market, asset based invoice
discounting and lending and specific financial advice for small businesses.

5) Are there other issues for micro firms?

Apart from difficulty in accessing finance, there are other issues for SMEs, which are potentially exacerbated by other
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characteristics. These might be summarised as: Regulatory burdens, which are a recurrent feature of reviews of issues
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for small firms and owner-manager capabilities .

5.1 Regulatory burdens

78
Han, L., Storey, D. J. and Fraser, S. (2008) The Concentration of Creditors: Evidence from Small Businesses, Applied Financial
Economics 18(20): 1647–56.
79
Graham, T. (2004) Graham Review of the Small Firms Loan Guarantee: Recommendations. London: HM Treasury.
80
Berger, A. N. and Udell, G. F. (2002) Small Business Credit Availability and Relationship Lending: The Importance of Bank
Organizational Structure, The Economic Journal112 (February): F32–F53
81
Bevan J., Clark G., Banerji N. and Hakim C. (1989). Barriers to business start-up: a study of the flow into and out of self-employment.
Department of Employment.
82
OECD, The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses, 2009, Centre for
Entrepreneurship, SMEs and Local Development
83
Ginés Hernández-Cánovas and Johanna Koëte Kant (2011) SME Financing in Europe: Cross-country determinants of bank loan maturity.
published online, 2 September International Small Business Journal, http://isb.sagepub.com/content/early/2011/09/01/0266242611402569
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Survey on the Access to Finance of SMEs in the Euro Area, European Central Bank: September 2010 to February 2011, 27 April 2011
http://www.ecb.int/pub/pdf/other/accesstofinancesmallmediumsizedenterprises201104en.pdf (Accessed 18.10.11)
85
Geoff Mason, Kate Bishop and Catherine Robinson, (2009) Business Growth and Innovation The wider impact of rapidly-growing firms
in UK city-regions NESTA Research report, October
86
Fraser, S., (2010) The effect of the credit crisis on UK SME finance Centre for Small and Medium‐
Sized Enterprises, (ESRC grant no. RES-177-25-0007 and with support from Barclays Bank.) Warwick Business School, University of
Warwick.
87
Andy Davis (2011), Beyond the Banks Innovative ways to finance Britain’s small businesses, NESTA Research report: September
88
Fraser, S., (2009) Is there Ethnic Discrimination in the UK Market for Small Business Credit? International Small Business Journal, 27
(5): 583–607
89
OECD (2009), Top Barriers and Drivers to SME Internationalisation, Report by the OECD Working Party on SMEs and
Entrepreneurship, OECD; Arnold, J., G. Nicoletti and S. Scarpetta (2008), Regulation, Allocative Efficiency and Productivity in OECD
Countries: Industry and Firm-Level Evidence, OECD Economics Department Working Papers, No. 616, OECD Publishing.

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The issue of regulatory burden was recognised in the May 2011 UK budget, which included a three-year moratorium on
new domestic regulations for the smallest companies, i.e., those with fewer than 10 employees, or those just starting up as
a way to provide a stable base for businesses to grow, to take on employees and to invest. However, small businesses still
need to report on their finances and regulatory compliance. This may include: the need to file a Directors Report with the
published statutory accounts, audited balance sheets valued on total assets instead of net assets, to reduce the accounting
cost burden on small businesses, to simplify the tax regime and obligations around employee rights legislation on
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employers.

By 2012 the EU is planning to reduce the administrative burden on SMEs by up to 25% as part of the ‘Think Small First’
principle. “The proposed Directive would enable Member States to exclude micro-enterprises from the scope of the 4th
Company Law Directive and thus exempt them from certain burdensome accounting requirements. The overall cost
reduction amounts to estimated savings of €1,200 per micro-company per annum. EU wide, this would amount to annual
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savings of €6.3 billion”. MEs with limited resources are sensitive to unnecessary administrative obligations a considerable
part of these have fixed costs, the burden on MEs is therefore disproportionately large in comparison to larger companies.

In addition regulations come from many different sources across government, with the result that small firms and MEs are
hit by a range of requirements, some requiring major changes to custom and practice and others apparently contradicting
each other. This requires more joined-up approaches by government.

5.2 Owner-manager capabilities

Overseas, the case for the development of managerial capital development for small firms in developing countries is
currently under discussion which may have implications for the way in which we invest in local support services the UK
“Several development organizations provide business development services, including training and consulting, to SMEs. Yet
little data has been generated that rigorously demonstrates the impact of any of these approaches. With more consistent
data and experimentation, researchers should be able to learn more about not just whether such initiatives work, but how
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and why they work”.
Factors for the development of small firms in developing countries include individual entrepreneur characteristics, e.g.,
“formal education may provide entrepreneurs with a greater capacity to learn about new production processes and
product designs, offer specific technical knowledge conducive to firm expansion, and increase owners’ flexibility. While
most empirical evidence indeed suggests “firms with better educated owners and managers are more efficient”. The
characteristics of a firm- its age, its formality/informality etc., and relational factors, such as social networks or value
chains, all contribute. “Social networks can play in helping entrepreneurs overcome obstacles related to transaction costs,
contract enforcement, and regulation”, as well as contextual factors such as the business environment. “Growth
opportunities wax and wane as the business cycle evolves. It is hardly a surprise, then, that MEs tend to grow more quickly
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during periods of overall economic growth”.
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In a study of 120 Bangladeshi MEs it was found that “people without education who start the business have a greater
chance of failure than people with education” and that the order of importance for business start funding sources was:
Owner, Family/relatives finance, friends with NGOs forming the least important. This may be exacerbated by policies in
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non-economic areas. In a study of the environmental policy 123 Spanish food firms, it was found that …“proactive
environmental strategies of SMEs positively influenced their export intensity, but that firm size moderates this positive
influence. Specifically, there is an increased positive relationship between environmental pro-activity and export intensity”.

A policy maker has to ask whether tax process differences are desirable and necessary between small and large companies.
That is to enforce a differentiated tax system around whether a person is employed or self-employed. Plainly, an

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http://www.redtapechallenge.cabinetoffice.gov.uk/company-and-commercial-law/accounts-and-returns/comment-tag/tax-return/(Accessed
on Twitter, 8.9.11)
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Joint Position Paper: Exempting Micro-Entities from the Fourth Company Law Directive (Accounting and Auditing) European Small
Business Alliance et al January 2010 http://www.fsb.org.uk/policy/images/accounting%20directives%20-%20position%20paper.pdf
(Accessed 12.10.11)
92
Bruhn, Miriam, Dean Karlan, and Antoinette Schoar. 2010. "What Capital Is Missing in Developing Countries?" American Economic
Review, 100(2): 629–33.
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Simeon Nichter and Lara Goldmark (2009) Small Firm Growth in Developing Countries, World Development Vol. 37, No. 9, pp. 1453–
1464
94
Asif Ahmed (2010) A Practical Study on the Micro Enterprises Bangladesh Department of Accounting & Information Systems Faculty of
Business Studies University of Dhaka, Bangladesh, July
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Inmaculada Martı´n-Tapia , J. Alberto Arago´ n-Correa, Antonio Rueda-Manzanares (2010) Environmental strategy and exports in
medium, small and micro-enterprises, Journal of World Business 45 266–275

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assessment would be made against the potential of those (self-employed) businesses to grow. Judith Freeman states,
“There is a prevailing belief in the need for special measures to benefit SMEs but these measures need to be measured in
terms of cost effectiveness, targeting and the distortions they create.” One problem is how to institute a fair tax system to
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operate within informal trading practices. Research by the IFC and World Bank show the main tax system categories for
MEs throughout the world: Systems based on turnover or gross income; on indicators; on simple lump-sum patents and on
agreement between taxpayer and tax administration.

The recommendations from this research (above) include recognizing within the tax system (for example in Australia) the
particular issues involved in new business development. In particular to (1) “build community partnerships to reduce the
public tolerance of tax evasion behaviour; (2) build partnerships with tax professionals, industry associations, and
community groups: tax administration must understand the dynamics of different industries and work with industry to
develop well-targeted strategies; (3) tax administration must continue to investigate opportunities to reduce the
compliance burden for particular industries and taxpayers (e.g. through different requirements for recordkeeping,
reporting, and other tax obligations) based on the compliance history and the level of risk, to reward good compliance and
manage poor compliance; (4) develop a more flexible sanction regime (both in variety and in their application)”. (IFC, 2009)

Growth is a specific experience for MEs “time is the most frequent perceived challenge to grow in micro firms and is the
foundation of many other challenges to grow as well. Furthermore, there are factors that are hindering micro firms to grow
98
that were not present in the studies of SMEs, for example marketing and industrial acceptance”.

6) Is there a market failure for micro firms?

Market failure may be linked to access to finance, business support and management and workforce development. These
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may be exacerbated by the factors discussed in section 2, such as gender and ethnicity.

6.1 Finance

There appears to be a continued market failure for finance for small firms and for MEs. The section on finance above
suggests that lenders blame owner-managers for their risk aversion while owner-manages blame lenders for higher prices
and short timeframes attached to loans, with small firm investments and start up funding still constrained. “Credit
conditions continued to be tighter for SMEs compared to larger corporates. Small businesses and new business start-ups
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still found it difficult to gain access to credit. Finance for MEs has traditionally been from banks or from family sources
although there is now a potential range of institutional formats, ranging from individual moneylenders to more formal
arrangements, such as private individual investment, village banks, credit unions, financial cooperatives, state-owned
banks, and specialized SME funds.

Venture capital is unlikely in an ME context given the average size of VC loans except related to high technology start ups
or expansions which are likely to be small enterprises but requiring significant investment. Generally, the finance model
appears to generate a set of ‘initial conditions’ that, because of absolute dependency tends make each small business
venture a hostage to local fortune, prior to trading. Short term funding often fails to promote sustainable development by
for example omitting the consideration of plans beyond the (financial) scope of the loan. Many small enterprises centre on
combinations of autonomy, profit, community and social ambition. The solution may lie in working with MEs to develop
better long term strategies for growth but it is also likely to be improved if banks and lenders also developed better
understanding of ME situations.

6.2 Business Support

Business support has been provided in different formats over the last 15 years. There have been suggestions that there is
little evidence of market failure in provision or take-up of business support given the range of private providers but that
any systemic market failures that remain can influence only the start-up, very early stage growth, and/or the very smallest

96
Freedman, Judith. (2003). Small Business Taxation: Policy Issues and the UK. In, Taxing Small Business: Developing Good Tax Policies,
ed. Neil Warren (Australian Tax Research Foundation)
97
IFC, Designing a Tax System for Micro and Small Businesses: Guide for Practitioners, published in 2009
98
Sara Ekberg and Jesper Hedell. (2011) Perceived Challenges of Growth in Micro Enterprises. Jönköping International Business School
Jönköping University JIBS Working Papers No. 2011-6. May
99
Ram M, Jones T, (2008), Ethnic-minority businesses in the UK: a review of research and policy developments Environment and Planning
C: Government and Policy 26(2) pp. 352-374
100
Bank of England, October 2011, above

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single-person businesses. This may be due to the nature of public sector networks; business support has had varied
reviews in the past as to its success and the necessity for committed public sector engagement in this activity.

Business Link advice may be less likely to impact SMEs than that of accountants and solicitors simply because of the basis
of their relationship, with smaller firms less likely to benefit given the nature of advice given unless advice is differentiated
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to meet needs. Local Enterprise Partnerships (LEPs) have developed a local forum Enterprise for All Network (EfAN),
which suggests, “Enterprise and Business Support must be central to LEPs’ role, Engagement not just representation,
Localism not parochialism. Enterprise Inclusion is a competitive opportunity, Client-centred approach, Take micro-business
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seriously, Procurement and Local Business”. With the Business Coaching for growth scheme still under discussion, it is
difficult to assess how wand if this will impact on small firms in general or MEs in particular.

The focus for growth programmes targeting small firms is generally companies with 5-50 employees. This would
necessarily rule out two thirds of the SME population, as a conservative estimate, given the preponderance of sole traders
and of those with less than 5 employees (as suggested in the size section above). This same focus has also been seen in
European structural funded programmes over the past decade where the focus has been on ‘picking winners’ identifying
gazelles’ etc., given their impact on employment creation and wealth generation. This is understandable but means that
the range of support has been skewed to the minority group of small firms. There needs to be consideration of the impact
of business failure across this size group and the impacts on community (as well as those involved in the business) of higher
rates of churn in MEs. However, for business support policy, support options need to be flexible enough to provide
differentiated solutions.

There are issues for instance around business exit, with reduction in the business base of trade-based businesses as
discussed below. A more differentiated support structure which included examples of MEs of varying sizes would seem to
be indicated, to be more cost effective in the long term. Also, ways to tackle reports that new businesses have difficulty in
accessing finance might include examination of ‘bootstrapping’ activities as a way of compensating for the lack of finance
and other resources. Here social networks can help new ventures to acquire bootstrapped resources and improve
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business performance. There may also be impacts here on ethnic businesses and on start-up.

In terms of social enterprise, the data is very difficult to obtain, however reports show these as part of large group of
community organisations of various types, often very small both in turnover and employee numbers. While at the time of
writing there were at least 6 schemes to start up social enterprise, there were none reported on Google as supported
social enterprise which already existed, to support better business performance, higher profitability and better growth.
Those with more than 4 employees were able to join certain European funded programmes and some private sector
programmes in small numbers but there seems to no specific targeted business support for such organisations.

6.3 Management and employee capabilities

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According to Dun & Bradstreet statistics , 88.7% of all business failures are due to management mistakes. The following
list summarizes the 12 leading management mistakes that lead to business failures: 1) Going into business for the wrong
reasons, 2) Advice from family and friends, 3) Being in the wrong place that the wrong time, 4) Entrepreneur gets worn-out
and/or underestimated the time requirements, 5) Family pressure on time and money commitments, 6) Pride, 7) Lack of
market awareness, 8) The entrepreneur falls in love with the product/business, 9) Lack of financial responsibility and
awareness, 10) Lack of a clear focus, 11) Too much money, 12) Optimistic/Realistic/Pessimistic.

101
Bennett R, (2008), SME policy support in Britain since the 1990s: what have we learnt? Environment and Planning C: Government and
Policy 26(2) 375 – 397
102
Mole, K., (2002), Business Advisers' Impact on SMEs; An Agency Theory Approach, International Small Business Journal May 2002 vol.
20 no. 2 139-162; Mole K, Hart M, Roper S, Saal D, 2008, Differential gains from Business Link support and advice: a treatment effects
approach. Environment and Planning C: Government and Policy 26(2) 315 – 334; Mole, K. E., Hart M, Roper, S. and Saal, D. S., (2009)
Assessing the Effectiveness of Business Support Services in England Evidence from a Theory-Based Evaluation, International Small
Business Journal October 2009 vol. 27 no. 5 pp557-582
103
Rob Weaver and Erika Watson (2010). Enterprise for All and LEPs – A Briefing Note, August
http://www.linkedin.com/groups/Enterprise-All-Network-
3219452?searchQuestions=&gid=3219452&answerCategory=mra&trk=myg_ugrp_dis&mostPopular (Accessed 25.10.11)
104
Jones, O. And Jayawarna, D., (2010), Resourcing new businesses: social networks, bootstrapping and firm performance, Venture Capital
, 12, (10)
105
Rouse J, Jayawarna D, 2011, "Structures of exclusion from enterprise finance" Environment and Planning C: Government and Policy 29
Supplement, 659 – 676
106
Lee, R. and Jones, O., (2008), Networks, Communication and Learning during Business Start-up The Creation of Cognitive Social
Capital, International Small Business Journal October 2008 vol. 26 no. 5 559-594
107
Dunn & Bradstreet (2011) http://www.dnb.com (Accessed 7.9.11)

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As their owners typically personally run very small businesses it may be likely that failure results from personal direction. I
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Case study research by Kowalewski found that long term planning can make a significance contribution to success and
higher levels of planning can negate the probability of failure.

There has been exploration of types of training in small firms since the Bolton report however indications are still that SME
managers would benefit from seeking a formal training intervention that directly addresses their specific needs. Generic
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training solutions are not welcomed by SMEs, and are unlikely to provide significant performance benefits. Similarly,
development schemes for employees may benefit from being formal, as in the case of modern apprenticeships and later of
advanced apprenticeships, but there is still lack of clarity in what constitutes an apprenticeship, with, for instance, a wide
variation in net costs of modern apprenticeships across the various industries and frameworks and large differences
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between employers providing training under the same framework.

The preservation of the apprenticeship system in the Australian construction industry contrasts with its decline in Britain
over the last three decades due to changes in industrial structure, specifically a decline in the role of the public sector,
intensification of subcontracting and growth of self-employment. However the Australian construction industry has
undergone similar structural changes but has thrived, possibly due to institutional differences in the organization of the
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training system, employers and labour between the two countries . Informal evidence suggests that the costs of post 18
apprenticeships are off-putting for MEs in trade occupations, including traditional trades such as plumbing, carpentry etc
and technical trades including electricians, engineers, creative sector, TV and media

The need for differentiated approaches, which take account of size and sector are clear, as the following example
demonstrates. The construction industry in the UK comprises a small number of large contractors employing mainly
managerial and professional staff, and a very large number of small firms, MEs and self-employed contractors comprising
the majority of the industry's demand for a skilled manual workforce. The identification and delivery of vocational
education and training at an industry level rests firmly on addressing the skills needs of the small and micro-type
organizations and not those of the large construction firms, although it is the voice of the larger firms that appears to
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dominate the skills and training development agenda.

7) Are there any international examples from anywhere in the world where micro firms have had their needs addressed
/ have had their needs addressed successfully?

There are international examples of programmes to encourage financial support and to reduce regulatory burdens on small
firms, including MEs, however, there is less critical evaluation or data on what has actually worked as a result. Across the
world, location and culture seems to define entrepreneurs: Taiwan is seen as the most dynamic developing country of
recent years has built this success on the SME sector. Before this, Japan’s success relied heavily on SME’s. These successes
involve, among other things, many firms developing from or developing into the SME size range. However, the issues of
size and definition plus finance are recurrent themes in reports from around the world.

A recent Australian joint parliamentary committee reviewing small firms in Australia, and their access to finance, found
multiple definitions of SMEs which were used not only across the finance sector but also across other regulatory sectors
with no single universally accepted definition of a small or medium-sized enterprise. A 'small business employer' is defined
for the purposes of the Fair Work Act 2009 and the Small Business Fair Dismissal Code as an employer that employs
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fewer than 15 employees while micro businesses are defined as businesses employing less than five employees as well
114
as non-employing businesses.
A variety of definitions were identified based on the size of a business's annual turnover, the number of its employees, the
115
size of its borrowings, or a combination of these characteristics. This also impacted on MEs. Here “micro business
customers” as defined by the National Bank of Australia included as businesses with turnover under $1 million, while

108
Kowalewski, R.A (2010) Perceptions of Planning Analysis within Micro Enterprises in Birmingham, UK, Silent Solutions UK
109
Jayawarna, J., McPherson, A. and Wilson, A., Training commitment and performance in manufacturing SMEs: Incidence, intensity and
approaches, Journal of Small Business and Enterprise Development
110
Terence Hogarth and Chris Hasluck, Net Costs Of Modern Apprenticeship Training To Employers, Research Report RR418, Department
for Education and Skills; Institute for Employment Research
111
Toner, P. (2008), Survival and Decline of the Apprenticeship System in the Australian and UK Construction Industries. British Journal of
Industrial Relations, 46: 431–438. doi: 10.1111/j.1467-8543.2008.00680.x
112
Morgan, A., Raidén, A. and Naylor, G. (2008), Unlocking the potential to influence government skills policy: a case study of the UK
construction industry. International Journal of Training and Development, 12: 238–252. doi: 10.1111/j.1468-2419.2008.00309
113
Fair Work Act 2009, 23; Fair Work Australia, Small Business Fair Dismissal Code ,
http://www.fwa.gov.au/index.cfm?pagename=legislationfwdismissalcode (Accessed 30.3.11).
114
Australian Bureau of Statistics http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/1321.0Glossary12001?OpenDocument (Accessed
21.10.11)
115
Parliamentary Joint Committee on Corporations and Financial Services, section 1; Australian Treasury, Submission 16, p. 2.

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“small business customers” were businesses with turnover between $1 million – $5 million , as compared to the
117
Commonwealth Bank of Australia’s definition of small businesses as having client loan balances less than $2 million'.
118
The definition of SMEs can also vary between members of a banking group.
The Australian Finance Conference (AFC) raised concerns with the absence of a uniform definition of SMEs causing
119
difficulty and confusion in the discussion and development of SME finance policy. However a common definition may
not be ideal for support. In the United States, the Small Business Administration (SBA) delivers small business support
programs, including guidelines for government contracting, using different small business size standards for each industry
120
sector, to tailor program eligibility to the structure of each business sector. These also feed into the procurement
121 122
opportunities for small firms on public sector contacts and differentiated loan services.

Although finding mixed evidence that the absence of a uniform definition of SMEs directly restricts SMEs access to finance,
the AFC suggested that the SME sector would benefit from consistent, sector-wide definitions of 'micro', 'small' and
'medium' business to assist analysis of the health of the SME sector and encourage greater use of the analysis by SME
stakeholders. They also felt that “a shared understanding of micro, small and medium business would also promote more
informed policy and practice and solutions tailored to the challenges faced by each kind of SME”. SMEs have limited
funding options and place considerable reliance on debt funding, although using a variety of sources, including internal
funding, owner equity, venture capital, secured and unsecured intermediated credit, and bank bills. While larger
businesses can issue corporate bonds and equity as alternative sources of finance, small businesses’ funding requirements
tend to be too small to make such issuance cost-effective. As such, bank credit remains an important funding source for
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SMEs.”
For the Australian businesses surveyed as part of the Asia Pacific Small Business Survey 2010 (the Asia Pacific Survey), the
124
most important source of finance was from a bank, which is used as working capital and for new capital expenditure
and expansion. Unsurprisingly perhaps, difficulties accessing finance were cited as contributing to poor SME performance
and to lower employment as SMEs facing tough credit conditions and severe cash flow problems, are almost three times as
125
likely to lay off staff as those SMEs not so affected. This has led to 62.6% of Australian small businesses using credit
cards as a source of finance, potentially increasing business costs through high interest rate charges for credit card finance.
126

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It is often suggested that in the UK we need to make things easier for business. Recently Mark Prisk said, “We stand
17th in the world for ease of starting a business. The country that comes first is New Zealand. Whereas we undergo six
procedures and on average take thirteen days, for them it is: one procedure, one day” This means that in the UK there are
17 more procedures towards company registration in the UK than in New Zealand. However there are many examples in
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the UK of fast start up MEs. Other very fast start-ups are in Canada and Singapore. Overall the EUs ‘Think Small First’
principle is committed to: reducing start-up time to no more than 1 week and reducing the time it takes to obtain business
licences should not surpass 4 weeks and ‘one stop shops’ should assist to facilitate start-ups and recruitment procedures.

The three ‘best’ countries to set up a small business are Denmark, Canada and the US; however Denmark is amongst the
129
most expensive in the world to start a business in the world. Historically business performance in the UK is often
compared to that of the US where businesses tend to be larger and younger, on average. The proportions of female and

116
National Australia Bank, Submission 19, p. 5.
117
Commonwealth Bank of Australia, Submission 17, p. 1.
118
The Westpac Group, Submission 9, p. 2.
119
AFC, Submission 15, p. 3.
120
US Small Business Administration, Size standards, http://www.sba.gov/content/size-standards (Accessed 21.9.11).
http://www.aph.gov.au/senate/committee/corporations_ctte/sme_finance/report/c01.htm; Ch.1 Terms of reference1.11 (Accessed 25.10.11)
121
http://www.sba.gov/content/use-size-standards-government-procurement
122
US Small Business Administration see for instance http://www.sba.gov/about-sba-services/2834
123
Australian Government: The Treasury. Inquiry into Access for Small and Medium
Business to Finance, Submission to Joint Committee on Corporations and Financial Services 16th February 2011
124
CPA Australia, The CPA Australia Asia-Pacific small business survey 2010: Australia, Hong Kong, Malaysia and
Singapore, 'Figure 4: Reasons for seeking additional funds', p. 12, as cited in CPA Australia, Submission 10, p. 4.
125
Section 1.30 Access for Small and Medium Business to Finance 28 April 2011 Commonwealth of Australia; ACCI, Submission 6, p.
9; NSW Business Chamber, Submission 8, p. 4; CPA Australia, Submission 10, pp 3–4, p.6; Lismore and District Financial Counselling
Service Inc., Submission 2, p. 1.
126
JPC, 2011; section 1; Australian Chamber of Commerce and Industry, Submission 6, p. 10.
127
Mark Prisk, Minister of State for Business and Enterprise, Creating the most entrepreneurial decade, 18 Mar 2011, Federation of Small
Business conference, Liverpool
128
"Think Small First": A Small Business Act for Europe, Brussels, 25th June 2008
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1003 (Accessed 25.10.11)
129
Wall Street Journal (Europe), The Best County to Start a Business. 10.11.10
http://online.wsj.com/article/SB10001424052748703859204575525883366862428.html based on Doing Business 2010, World Bank.
(Accessed 8.9.11)

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ethnic minority businesses, in their respective populations, are similar between the UK and US but owner-managers in the
130
US are more likely to have a university degree than their UK counterparts.

In developing countries, most start up companies are business to consumer focused, as for example in Algeria where nearly
70% are such. Business entry regulations have significant effects as “only informal investments have statistically significant
131
influence on entrepreneurial propensity”.

Current UK government policies are increasingly aiming to stop putting British businesses at a disadvantage to their
European competitors by over interpreting EU directives. This is planned by: early transposition of new EU regulations,
avoidance of harmful (to UK Business) EU regulations and establishing regular ministerial review of EU regulations. There is
also a need for more joined up thinking across ministries as different sets of regulations may affect companies at the same
time, with conflicting priorities and a need for rapid action and investment. This may be exacerbated by location, size and
sector, with waste directives hitting manufacturing and metal companies more significantly than service firms for instance.

As part of the “Think Small First” the EU have identified across Europe a range of optimisations to simplify the business
processes of SMEs. These include: the “one stop shop” system in the Czech republic; the application of “only once”
principle in Hungary; the ELENA – (Elektronischer Entgeltnachweis) in Germany; the Inter-Institutional Taxation Data
Storage (TDS) in Lithuania; the “Osmotherly Guarantee” (data survey standard) in the UK; the ‘Rescrit and the chèque
emploi’ in France and the Contribution Payment Centres (CPCs) in Bulgaria.

Despite the fact that most entrepreneurs ‘plough their own furrow’ the EU has more recently provided useful networking
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at a business level for MEs/SMEs. which reflects the suggestions earlier in the report by Jones and Jayawarna that social
capital is a key component in company development.

Lynn Martin PhD, Professor of Entrepreneurship,

Director of the Centre for Enterprise
Manchester Metropolitan University Business School
Minshull Building, 47-49 Chorlton Street
Manchester, M1 3FY, United Kingdom
www.mmucfe.co.uk <http://www.mmucfe.co.uk/>
Tel +44 (0)161 247 3733: Fax: +44 (0)161 247 6911

Professor Bob Jerrard PhD FDRS

Visiting Professor
Centre for Enterprise
Manchester Metropolitan University

In preparing this report, the writers have tried to focus on practical rather than academic language. Any inaccuracies are
our own and in no way reflect on the support given by a range of contributors from the UK and overseas. We would like to
acknowledge the contributions of Professor Mark Hart at Aston, Professor Ossie Jones at the University of Liverpool and
Professor Colin Mason from Strathclyde University and, in addition, contributions were received from colleagues at:

130
Stuart Fraser (2004) Finance for Small and Medium-Sized Enterprises
A Report on the 2004 UK Survey of SME Finances Centre for Small and Medium-Sized Enterprises, Warwick Business School, University
of Warwick
131
Yuen-Ping Ho and Poh-Kam Wong Financing, Regulatory Costs and Entrepreneurial Propensity, Small Business Economics 28(2-3):
187–204, 2007
132
European Commission (2008) D-G Enterprise and Industry, Supporting the internationalization of SMEs Good practice selection,
Luxembourg: Office for Official Publications of the European Communities

79
UK
Aston University
University of Birmingham
Birmingham City University
Cambridge University
Cardiff University
Coventry University
De Montfort University
Federation of Small Business
University of Glamorgan
University of Huddersfield
University of Leeds
University of Liverpool
University of Newcastle
Nottingham Trent University
Oxford SAID
University of Plymouth
Queens University Belfast
Strathclyde University
University of Teeside
University of Ulster

Non UK
Australian National University
Babson University, USA
European Commission, DG Enterprise
European Commission, DG Regional Policy
Free University of Brussels
Indian Institute of Foreign Trade
Ministry for SSIs, India

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