[16
NOV 98] UNIVERSITY OF WARWICK PRESS RELEASE
Why Do Most Firms Die YoungNew research
from Warwick Business School exploring why so many small businesses die young could
provide the first detailed "early warning system" for failure that is
particularly tailored to the operations of small businesses.
It is an established fact that most new small firms die in
the first two years of trading. Researchers are also now able to produce the bell-shaped
graph to plot those failures no matter what part of the world such failure data is taken
from.
In this new report Dr Robert Cressy from the Centre for
Small and Medium Sized Enterprises at Warwick Business School has researched this graph
and found that it applies to small business failure data from many very different parts of
the globe.
He has also established some of the hard facts underpinning
that graph that cause so many new SMEs to die young. His conclusions are:
- Fast growth small firms will be more failure-prone
- Businesses run by more cautious entrepreneurs will live
longer
- Better capitalised start-ups will live longer
- Niche marketing (a popular SME business choice) produces
greater profit growth but with higher failure rates - and in the case of niche marketing,
failure rates will be raised because growth is ‘purchased’ at the expense of
higher risk
- The costs of growth to the entrepreneur will be smaller for
entrepreneurs with greater human capital (experience, management skills etc), and also for
those in markets with less variable profit rates or greater growth rates
- Chance factors play large role, eg the closure of a large
firm the small firm supplies, or the closure of a supplier where the event in question
could not be foreseen
These results have important implications for policy
towards small firms.
- The graph and the understanding of its underpinning factors
is the basis of a model which would generate an early warning system for small firm
failure for used by governments and banks
- A more understanding approach to bankruptcy and insolvency
among small firms should be initiated - in line with US practice. If chance plays a
significant role in small business failure then one can argue that such closures are
without blame. The laws on personal bankruptcy currently attach great social stigma should
be made more ‘open-minded’.
- If human capital plays such a large role in firms dying at
an early age, then money without human resources can be seen to be useless Throwing money
at the problem is an approach which must be permanently discarded.
MORE INFORMATION:
Dr Robert Cressy, CSME, Warwick Business School 01203-522899
email: smerc@wbs.warwick.ac.uk
Peter Dunn, University Press Officer 01203 523708
email: puapjd@admin.warwick.ac.uk
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