Exploring the linkages between entrepreneurship and SMEs

While preparing my PhD dissertation in 1976, I conducted a field survey on 52 Irish plastics manufacturing industries. I found that five owners/managers in these companies introduced minor 'Follow-through' inventions, i.e., revisions in their strategy as opposed to 'break-through or radical inventions. But these minor revisions resulted in significant improvements in products and processes. 

Of the five inventors, one developed a 'Perpetual Calendar', another developed 'a process of cutting plastic window blinds', another a 'cutting Tool', and two others a Tele Table for cutting and decorating plastic sheets and an "Advertising Sign". All these helped them cut their processing costs by at least 50% and improve the quality of their products. None of these inventors patent their inventions and decided to use them as commercial secrets. 

Typically, we would categorise these five managers as entrepreneurs, but apparently, there is much debate regarding the definition of entrepreneurship and an SME. 

Even though entrepreneurship growth and SMEs are closely intertwined, protagonists from both sides seem to have contrasting views from their respective positions claiming predominance over one another.

In this article, I would like to find out whether such a theory of predominance bears any truth.

Most SME enthusiasts regard SMEs and entrepreneurship as synonymous. No doubt, SMEs are important vehicles especially for the Schumpeterian innovative entrepreneurs, but the two terms are conceptually different. 

Entrepreneurial ventures may begin at any level of firm size (large or small) and may consist of various combinations of entrepreneurial categories. As explained by Schumpeter during the initial decades of the 19th century, entrepreneurship and small-scale "start-ups" tended to overlap, serving as important sources of employment and income generation. 

While the "new start-ups" are important for entrepreneurial development, all of them are not necessarily important sources of growth nor succeed as promising sources of future growth. On the contrary, many of them buy or start small businesses for themselves and their families. Many of them do not intend to be particularly innovative either.

However, there is ample evidence of economic activities moving away from large corporates to SMEs during the 1970s and 1980s, particularly in the European continent.

Policy emphasis towards SME promotion and growth identified four important consequences of SME growth.

Illustration: TBS

SMEs are routes of innovation

They are sources of industrial progress and dynamism, and most importantly SMEs are engines of employment generation and output and exports.

Evidence in support of these merits of SME is also available from many developed countries and many emerging economies. For example, Small-scale entrepreneurs in Vietnam and microenterprises in the Ethiopian urban informal sector are doing well as innovators. Voeten and others as well as Gebreyes noted that the SMEs possess significant innovation capacities which contribute to enterprise efficiency and economic growth.

Through their innate characteristics, SMEs come to the forefront in any discussion of entrepreneurship development, especially in the developing countries as they act as the engines of new business creation (new "startups") given the resource scarcity, intense need for low-cost employment creation and poverty alleviation. 

The upturn in the SME activities (noted earlier) was accompanied by the development of new inventions (taking advantage of cutting-edge technologies), the emergence of new business models, and niche markets. A new generation of SMEs in the various flexible technology-oriented (i.e., electronics, plastics, small compute production etc.), and niche markets.

Hallberg agrees that SME competitiveness and growth is intimately connected with good business environments. Hence the primary role of government should be to ensure an enabling business environment that opens access to markets and reduces policy bias against SMEs.

Small businesses figure out distinctively as both new start-ups and innovative entities qualify as an entrepreneurial venture, though there are contrary views. The contrary argument is that not all small business owners are entrepreneurs nor are they always innovative, these are categories who are identified as owners of "lifestyle business".

Nevertheless, empirical evidence available from the US Small Business Administration (SBA) for the period 2000-2015 confirms that small businesses generated an impressive 25.5 patents per hundred employees as against only 1.7 patents per hundred employees by the large companies. The list of important innovations included Airplane, Air conditioning, and new ways of doing things, such as selling books over the Internet, New company Amazon.com etc. These are good enough examples to support the view that SMEs provide solid foundations for starting innovative entrepreneurial ventures. 

Following Schumper it can be concluded that entrepreneurship and small-scale start-ups tend to overlap. It is well known, starting a business involves taking the risk, determination, hard work, planning, and persistence. These are all entrepreneurial characteristics that need to be nurtured carefully through providing essential support services and institutional back-up for effective implementation of the pro-SME business environment through designing a holistic policy framework. 

Dr Momtaz Uddin Ahmed is a former chairman of Department of Economics, University of Dhaka. 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.