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Why Do Most Firms Die Young

New 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.

Dr Robert Cressy, CSME, Warwick Business School  01203-522899     email:
Peter Dunn, University Press Officer  01203 523708


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CWN / Education / University of Warwick / Press Release / 16 Nov 98

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