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Cosgrove: Engaging with SMEs

Hon Clayton Cosgrove
Minister for Small Business

27 August 2008

Engaging with SMEs: Key challenges for policymakers – speech to open the Annual Research Symposium at the NZ Centre for SME Research at Massey University

Massey University, The Museum Building, Buckle St, Wellington

12.00pm, Wednesday 27 August 2008

Professor Claire Massey, Director at the New Zealand Centre for Small and Medium Enterprises (SME) Research; Professor Larry Rose, Pro Vice-Chancellor of the College of Business at Massey University; Professor David Smallbone from the Small Business Research Centre at Kingston University in the United Kingdom; academic staff and researchers from Massey University; special guests; ladies and gentlemen.

Good afternoon. It is a pleasure to be here today. Thank you for the invitation to open this annual research symposium at the NZ Centre for SME Research here at Massey University, and to speak with you on the topic of "Engaging with SMEs – Key challenges for policy makers."

From a “policy maker” perspective, I acknowledge that “engaging with SMEs” is one of our “key challenges”. It is equally one of our key opportunities, as this sector is the most flexible with the most growth potential.

As you will all know, SMEs make up 97% of our businesses. The other obvious fact is the sheer diversity in what they do, the way they operate, their capabilities, and their aspirations. To engage with such a diverse sector requires a good understanding of the sector - and this can be a challenge, as research into SMEs is still quite young.

That is why researchers, such as those in this room, are so important. Your work helps ensure that policy decisions are evidence-based and relevant to the sector. The importance of having reliable data and analysis is recognised in the establishment of Massey’s SME Research Centre and equivalent bodies overseas, such as the UK's Small Business Research Centre.

Today I am pleased to announce the release of this year’s edition of the annual report SMEs in New Zealand: Structure and Dynamics from the Ministry of Economic Development.

The report shows, amongst other things, that the number of SMEs increased by 2% between February 2006 and February 2007 and that the total number of people employed by SMEs increased by 18% between 2001 and 2007 to 594,410. It is great to see many small business owners are experiencing enough growth to need to take more people on. This is all further evidence of the important role SMEs play in the New Zealand economy.

This year’s report is notable because it uses a new business demography dataset, based on the recently developed prototype Longitudinal Business Frame or LBF. The LBF contains data from two main sources: the Statistics New Zealand Business Frame, which was previously used in Structure and Dynamics, and the Linked Employer-Employee Database (LEED).

The main difference between the LBF and its predecessor is that the old Business Frame shows only the most recent data on businesses, while the LBF records their attributes over time, hence the “Longitudinal” title.

The ability of the LBF to assess businesses over time has enabled a more accurate measure of the New Zealand business environment. The old Business Frame tended to include dormant enterprises, reactivations and administrative churn such as ownership change and restructuring because it only recorded the number of entries and exits into the Statistics New Zealand dataset. In contrast the LBF is better able to identify the number of businesses starting up, closing and continuing to operate. This gives us a more accurate picture of enterprise performance over time.
Another new feature of this year’s report is the inclusion of data on High Growth Enterprises. Acquiring this data has been something of a coup, as the OECD hasn’t even been able to get similar information from all its members yet. Two indicators have been used to assess whether or not an enterprise is high growth – employment and GST sales. Interestingly the results do differ, with the employment measure showing that 3.8% of enterprises are high growth and the sales measure showing that 6.5% of enterprises are high growth. These numbers indicate that this is potentially an area where further work could be done.

These are just a couple of examples of the extremely valuable material contained in this year’s Structure and Dynamics report. In order to make the most of a statistical snapshot like Structure and Dynamics, complementary research and analysis that digs into these numbers, and identifies the drivers behind them, needs to be undertaken as well. This is where you come in.

In SME research you hear a lot about categorising and typecasting SMEs into life-cycles and other such models. I want to say - and I speak as a former small business owner as well - that SMEs should not be seen just as young businesses looking to grow-up into mature businesses. Go and talk to any business person and they will not see themselves in terms of “mature” or any other such titles. SMEs are businesses in their own right, operating successful business models, without necessarily having to get bigger or smaller, or more “mature”.

We need to understand the perceptions of business owners and the impacts those perceptions have on business decisions. For example the 2007 KPMG/BusinessNZ Compliance Cost Survey respondents perceived that compliance costs were increasing in all compliance cost areas over the previous 12 months. However in most cases, on the basis of their own responses, compliance costs are remaining the same or falling. For example the Survey shows that compliance costs have fallen by a third since 2005 for firms employing five or fewer staff.

We need to know why business owners have these perceptions about compliance costs, as it can impact on their business decisions whether to, for example, invest or employ more staff. It is about understanding their motivations and perspectives, and improving interaction and communication between the government and the business sector to try and minimise the impact that these perceptions have on business decisions.

That is why organisations such as the Small Business Advisory Group (SBAG) are so important, because they provide direct communication between policy-makers and the SME sector. Since the government established SBAG in 2003, it has produced three reports. I will soon be reporting back on the latest report, and the government has already delivered on 75 percent of SBAG's recommendations in its previous reports.

Other measures introduced by the government to ensure the SME “voice” is being heard include the establishment of my portfolio, the Minister for Small Business, in 2002; the establishment of the Small and Medium Enterprises Policy Team within the Ministry of Economic Development; and the setting up of specialised small business units or groups within a range of government ministries and departments (including the Department of Labour, Inland Revenue Department, Ministry for the Environment, Statistics New Zealand and Te Puni Kokiri).

Cleary these direct links to the small business community allow the government to learn first-hand about the concerns and challenges facing this vital sector. However this needs to be backed by research to gain a full picture of how to maximise the potential that can be unlocked.

Importance of research for policy making

Research is hugely important for policy making. Research that enables policy makers to understand the key drivers behind the behaviour of New Zealand’s SMEs, would also enable those same policy makers to work out how best to communicate with SMEs. This would allow us to improve in the areas of practice that are holding back economic growth.

Obviously the potential areas for research are almost innumerable. One such possible area that has been brought to my attention is in analysing the capability of firms. Often the number of full time employees a firm has or its turnover are used as proxies for determining capability, which implies that the bigger a firm is the more capable it is. But this assumption doesn’t always apply - I can tell you that I have met some very capable small firms, and not every business strives to be bigger.

Research could be conducted into these capability differences. Is there a “capability threshold” at which an SME ceases to be an SME? From a policy perspective, research of this kind would potentially give us the opportunity to investigate designing different approaches for policies and programmes depending on where a firm sat in relation to a particular threshold. This has already been done in some other countries.

As well as assessing the capability of SMEs, research could also potentially address the aspirations of business owners. There is a common perception that NZ business owners are more interested in the “3 Bs” - the Bach, Boat, and BMW, rather than business growth. But as I said earlier, small businesses are not necessarily big businesses waiting to grow-up, they are often businesses well adapted to their local environment and market. We need to have a better understanding of what is ‘driving’ business owners, and what will help, or hinder them, going to the next level.

Ultimately we need more internationally competitive businesses operating from New Zealand, be they small, medium, or large, and we need to know what it is that will encourage business owners to take on the challenge of ‘internationalising,’ so that the government can play an appropriate role in helping them achieve that.

There are many challenges for policy makers in engaging with SMEs, and there are also great opportunities for this sector. Today provides us with a platform to identify and address some of these challenges. I wish you all the best for a successful conference.


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