1 Essay Question 2: There has been a rapid growth in the small business sector in many economies in recent years.

Describe and explain (giving examples/evidence where relevant) the factors that have contributed to this growth. INTRODUCTION General Issues Regarding Rapid Growth in the Small Business Sector The small business sector is widely recognized as having considerable impact on economic development (Jackson et al., 1999). It is specifically evident that the small business sector has significantly contributed to the economic growth of many world economies, and an insight into the factors that contribute to the businesses prosperity is worthy of investigation. The factors participating in the growth of small businesses are erratic and complex. It is crucial to determine the support and appropriateness of these determinants on the growth of a small business. It is also important to know the impact of these growth determinants on the success of the small business sector. The small business sector has provided much impetus for economic growth in many economies especially in Asian, European and Asian economies (Odagiri, 1997), especially for long-term growth. It is therefore critical to determine the factors that promote business growth and performance, with special focus on the business, the business proprietors, a businesss internal determinants on business performance, including the broader external environment. Main Question to be tackled It is important to understand the internal management practices as well as the external economic factors associated with the success of small business firms. In order to identify the factors associated with growth potential and success, one must address how and to what degree the characteristics of the proprietor, the fundamental qualities of the business and business strategy, combined with economic factors; affect the growth of the small business sector. Thus the central question that arises is:

2 What are the fundamental factors in terms of proprietor characteristics, nature of business, business strategies and management practices, external economic conditions and government support that influence and shape the growth of the small business sector? How the Question will be tackled In solving the question to be tackled, various existing literature and relevant reports will be utilized. Various economics literature and research studies cover many aspects and theories involved in the determination of growth in the small business sector. Previous and recent research has not only focused on managerial, entrepreneurial and other personal attributes of proprietors, but also examined the total variance of factors promoting growth of the small business sector. Methodology There are several empirical studies on determinants of growth in the small business sector. These relevant economic studies (Storey, 2002) and other related studies (Keeble et al., 1992; Glancey, 1998) on entrepreneurship suggest various hypotheses in the relationship between growth of small businesses and different variables. Birds (1989) study concluded that small businesses are characterized by risk-taking and innovative behaviour and owners are basically well trained and educated. Narayana and Hill (1990) outlined that a successful growth business is characterized by excellent reputation, job devotion, efficient customer response and above all high quality goods and services. Proper management and employee relations are also fundamental indicators of improved business performance. Storey (2002) incorporated many explanations presented by researchers on factors promoting the success of small businesses. Storeys model extends a broad view of key factors that comprise of three major components in analyzing growth of the small business sector. These are; the entrepreneur characteristics, business characteristics and growth business strategies. 2. FACTORS PROMOTING GROWTH IN SMALL BUSINESS SECTOR With reference to small business sector growth literature, business growth is distinctly influenced by several factors. These factors may be internal while others are external to the business and they are beyond the control of the owners. Storey (2002) concluded that a

3 businesss growth is driven by three key components which are the characteristics of the entrepreneur, characteristics of the business and business development strategies fostering growth. i) Characteristics of Business Owner Previous research in the study of traits of business owners in affecting business performance has been scrutinized thoroughly. Various background factors relating to personality and individual traits, such as gender (Orser and Hogarth-Scott, 2002), age, education, entrepreneurial behaviour and past experience have been extensively discussed (Storey, 2002). These studies are crucial in my analysis since they focus on the association between personal factors relating to small business growth within a theoretical framework. They investigate how various types of factors are inter-related with the performance of a small business. Accordingly, these studies will contribute immensely in this analysis. ii) Nature of the Business The growth of a business can be affected by its size, age, and legal structure. In general, young businesses tend to grow more rapidly compared to older businesses. It is also crucial to look at the firm size. Small businesses tend to grow at a much faster rate than larger firms. It is also likely that limited companies experience more rapid growth than partnerships or sole proprietorship Tibbits (1999).

4 iii) Business Strategies Different strategy literatures suggest that rapid growth businesses are symbolized by successful strategies (Stokes & Wilson, 2010). This implies that the effectiveness of a businesss strategy relies on how activities in all functional areas are unified to form a pattern. This pattern illustrates a businesss strategy in gaining competitive advantage in the industry. Porter (1980) outlined three comprehensive business strategies which enhance competitive advantage in the market. These universal strategies include product differentiation, cost leadership and marketing strategies.

iv) External Factors Businesses are compelled by the external environment in which they exist and operate in and therefore, organizational growth can be expounded in terms of these environmental factors. The two main external factors include economic factors and governmental support. Bhaird

5 (2010) illustrates that the nature of the market in which a business operates is highly associated with potential growth and the economy has a direct tremendous effect on a small businesss growth. Governmental support and policy also plays a crucial role in growth of the small business sector (Bhaird, 2010).

2.1 DISCUSSION i) Characteristics of Business Owner In explaining the relationship between the age of an entrepreneur and business growth, two converse arguments can be presented (Storey, 2002). One of the arguments is an older entrepreneur is more likely to foster better firm growth. The alternative argument dictates that a middle-aged entrepreneur is more likely to provide better firm growth. Storey (2002) examined fourteen studies in explaining whether the gender of an entrepreneur is a factor in promoting business growth. Twelve of the fourteen studies suggested that there was no relationship between gender and business growth. This indicates that gender is not likely to influence business growth. One can draw two contrasting hypothesis with regards to the educational background of an entrepreneur. These are positive or negative influence on business growth. Mahmood (1992) analysed seventeen studies with more than half the studies indicating a positive relationship

6 between business growth and education. This gives fairly consistent evidence for the view that rapid growth of the small business sector is linked to educated entrepreneurs. A survey conducted by Tan and Tay (1994) examined relationship relating to an entrepreneurs prior management experience to small business sector growth in Singapore. The survey demonstrated a positive relationship. This indicates that prior management experience is positively associated with rapid growth of small business sector. ii) Nature of the Business The nature of a business influences its growth. Almus and Nerlinger (1999) conducted a research examining Storeys inverse theory relating to a businesss age and its growth. In their multiple regression analysis, they established a negative correlation between a businesss age and it growth rate. Other studies indicate that older businesses are more stable hence benefit from dynamic economies of scale leading to a higher growth rate. Thus the coefficient of a businesss firm age variable can either be negative of positive. Limited companies can be hypothesized to grow rapidly than sole proprietorship or other forms of small businesses. This is because the company is a separate business entity from the owners hence they do not incur any losses resulting from the business (Charantimath, 2006). iii) Business Strategies The performance of the small business sector is dependent on the business strategies it adopts (Stokes & Wilson, 2010). Planning contributes positively to business growth since business plans lay down the objectives to be achieved within a specific period. Conscious decisions made in adopting relevant marketing strategies which include market adjustments, market positioning, product introduction, focusing on customers among others are crucial in business success. It is also common knowledge that technologically sophisticated firms with significant employee training are more likely to experience rapid growth (Levy & Powell, 2005). iv) External Factors External factors play an exceedingly critical role in the growth of the small business sector. These external factors include availability of financial support and government support (Bhaird, 2010). External economic factors play a key role in affecting small business growth.

7 The small business sector is likely to fail in a downturn economy whereas it is more likely to experience rapid growth in stable economies.

CONCLUSION Entrepreneurship and business growth are dynamic phenomena as outlined in this theoretical elaboration. The small business sector plays an integral role in different economies in the world. In recognition of the need to find out the success of the small business sector, there must be unique factors fostering success of these small businesses in these economies. Business owners may adopt different strategies and managerial style depending on the risk they are ready to assume, and the amount of growth they desire. However, it is imperative to combine the four main factors which influence the growth of the small business sector - the characteristics of the business owner, the nature of the business, business strategies adopted, and

8 relevant external factors should be merged appropriately for growth to be realized (Charantimath, 2006). The level of government assistance or subsidy is crucial in the development of the small business sector in all economies. Existence of an enabling business environment free of unnecessary restrictions is also crucial for the success of the small business sector (Bhaird, 2010). Favourable external factors contribute immensely to the rapid growth of the small business sector. Business owners who run their own businesses should be encouraged to learn better management qualifications and skills in order to gain better managerial capabilities and experience. Acquiring core management practices enables a business owner to adapt with the increase in business size and the increase in management task complexity. Small businesses with advanced technology, appropriate strategic planning mechanisms, relevant education and training of employees and strong governmental support exhibit improved and rapid growth performance (Bhaird, 2010). Due to small business sector growth, there results a changing role of factors that illustrate the need of the businesss owner flexibility. This is because as a business moves from one stage to another, importance of variables changes. These variables often alternate in three levels of importance. One of the variables is key factors exceedingly critical for success which must be highly prioritized. The second includes factors that are necessary for a businesss success which must receive some little attention and the third incorporates factors of little concern to the management. From these three levels of importance arising from small business growth, a vivid picture of changing management demands can be drawn. As the small business sector grows and develops, so does the factors influencing its growth especially the core management factors which determine the sectors ultimate success (Singh, 2010). The small business should embrace the changes in order to achieve rapid growth. Some of the factors discussed in this study might also change; therefore, the sector should also adapt in order to attain positive growth. The factors discussed are imperative to the success of the small business sector and they play an exceedingly crucial role in promoting their success in different economies of the world.

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