ABSTRACT
 
Small firms have been playing an important role in
the economic and industrial development of a
country, be it a developing or a developed nation.
There are various definitions of small firms, but
generally they can be defined on economic,
qualitative and quantitative terms. The factors
affecting the growth, stagnation or decline of small
firms are examined . Analysis of performance of
small firms reveals that the growth of small firms
is affected by internal factors, strategic
management and the entrepreneurs themselves. On the
contribution of small firms towards the economy, it
is generally recognised that small firms have played
a significant role in the fields of income
distribution, social mobility, capital investment
and the development of entrepreneurs.
 
 
INTRODUCTION
 
Small firms have been found to be an important
factor in the economic development of a nation. In
South Korea and Taiwan, small firms flourished by
playing the dual role of providing supportive
services to large firms and exporting
labour-intensive products. According to Al Youngson
(1982), Hong Kong is an economy of small firms.
About 96% of manufacturing firms in Hong Kong
employed less than 100 workers in 1980. The
adaptability of small firms has contributed
significantly to Hong Kong's economic success. In
Singapore, according to Lau (1983/4), there were a
total of 215 new small firms which came into
operation, while several large firms closed down
during the recession period of the mid-seventies.
 
In their in-depth study of the small firms'
contribution towards employment in six countries,
Staley and Morse (1965) found that in the initial
period of industrialization, small firms dominated
the industrial scene in terms of the percentage
share of employment in the United States. The
percentage share of employment in small firms
remained stable even as the economy matured. They
also found the percentage share of employment in
small firms in Japan, Canada, Sweden, Brazil and
Argentina to be relatively constant. In Britain, a
report from the Committee of Inquiry on small firms
headed by Mr John Bolton reported that in 1963,
small firms accounted for 20% of the total
employment.
 
Several reports of the Organization for Economic
Cooperation and Development countries indicated that
the resilience of small firms during the current
world economic crisis has been remarkable (Rothwell
and Zegueld. 1981). it has also been reported that
small American firms laid off fewer workers and
weathered the 1981/2 recession better than big firms
. Some claimed that small firms led the way
out of the recession in the U.S. (The Straits Times,
1983).
 
The above findings clearly demonstrate that small
firms have contributed significantly towards the
industrial and economic development of a country be
it a developing or developed nation. This paper
discusses the characteristics, the growth factors,
and the role of small firms in the context of
economics development.  This is very relevant in the
case of, developing country like Malaysia. As
Malaysia face unemployment and a shortage of capital
an/ technology, small firms being more labour
intensive create substantial employment
opportunities.
 
DEFINITION OF SMALL FIRMS
 
Traditionally, many microeconomists have spoken of
"the firm" as if every action is directed by an
owner-entrepreneur-a risk-taking individual who/
supplies financial capital and supervises the
economic resources needed for production, and who i
supposedly gifted in the task of running a business
The firm is also seen to engage in a single-line
business. Such a concept of a firm as proposed by
Thompson (1973) is of course a suitable definition
of the small firm.
 
Economic Definition
 
Economic theorists have differing definitions of the
small firm. While the issue of the relation between
ownership and management rights arise only in
capitalist economies (because in capitalism private
ownership is the essence of all businesses and in
particular that of small businesses), such is no the
case for the socialist economies. For a socialist
economist, the chief distinction between big and
small business is its size (Hertz,1982). Professor
E.F Schumacher (1974) defined the small business as
possessing the four elements of: ownership of
property needed for creative work, small scale,
local and personal. The requirement that the
management be personal is not dissimilar to the one
required by the U.K. Bolton Committee as mentioned
before.
 
An economic definition of small business ought to,
by its self-imposed restrictions, rely on economic
criteria. Yet Professors Schumacher and Knight
referred to the entrepreneur himself and not merely
to his business activities in their definitions.
Such definitions indicate that there is a close
identification between the interests of the
owner-manager and those of the business. This view
ignores the fact that many small businesses operate
as corporations, which are legal entities from those
of their owner-manager. In Kaplan's ( 1948)
definition, a small business means typically an
identity of management and ownership.  Oscar (1961)
saw the welfare of the firm and that of its
owner-manager as intertwined. The definition of
Hollander (1967) revolves around the centralisation
and concentration of managerial tasks by the owner
manager.  Kets de Vires (1977) did not contain
himself to mentioning the personal management, which
typifies the small business, but detailed its
meaning and manner of application.
 
 
Qualitative Definition
 
In Professor Frank H . Knight ' s (1971) qualitative
definition of small business, the term "small
business" does not appear in his major theoretical
economic study, 'Risk, Uncertainty and Profit'. He
defined the small firm as an enterprise headed by an
owner manager trading with unlimited liability. His
theories offer explanations of the two most crucial
issues arising out a small business definition,
which are:
 
a. The need to link management of property (capital,
land, movable, goodwill, etc.) to its ownership in
order to achieve effective control, and
 
b. The size limitation of an economic form where
ownership and control are concentrated in one person
or a family unit.
 
 
Quantitative Definition
 
Quantitative definitions of the small business
varies. The same quantitative criteria can be used
to define varied industries in diverse locations,
merely by changing their numerical thresholds.
Different industries might require different levels
of work force, capitalisation and sales volume. By
adopting a variety of quantitative ceilings, each
correct within its sector, a quantitative definition
of the small business can equate a business
employing 1,000 persons, with one employing 250
people so that both can be considered as small
businesses for the purpose of government loans. It
can also equate small business from different sized
economies, by taking into account the overall size
of a country's economy. Criticism of the
quantitative definition have come from the small
businesses and the administrative applicators. The
dissatisfaction arises on account of the ambiguity
and inflexibility of the quantitative definition.
 
 
GROWTH OF SMALL FIRMS
 
A literature search on the growth of a small firm
reveals a dominant theme-that of a stage model of
growth. Stanworth and Curran (1976) summarised the
stage models into the following phases:
 
i. The initial stage stresses the individual
entrepreneur with a single product and service
 
ii. Division of managerial tasks as small firms plan
for growth and the owner-manager loses total control
 
of the firm
 
iii. The firm becomes more bureaucratic as it grows
larger
 
iv. In stages four and five, the firm matures and
stabilises
 
Although researchers do agree that a firm does pass
through a series of phases as it grows, the problem
arises as to where should be the cut-off points
between the stages, and what characteristics the
firm displays at each particular stage. Muellar
(1972) theorised the growth of the small firm on the
s-curve hypothesis which suggests that the small
firm will go through a formative period which is
usually followed by a period of rapid growth,
sometimes reaching an exponential rate.
 
In a small firm, growth is by no means the natural
or inevitable strategy. It is the manifestation of
social phenomena, and the entrepreneur ' s
aspirations, dynamism and limitations that will
determine the nature and extent a small firm's
growth. Stanworth and Curran (1976) noted that
decisions in small firms were frequently the
responsibility of one or a few persons who might be
ill-equipped to do so. For most firms, the
management decisions are made for survival instead
of growth. Penrose (1959) pointed out that the
quality of the entrepreneurial services available to
a firm is of strategic importance in determining its
growth, if at all the small firm wants to grow
(Norris, 1984).
 
Stanworth and Curran (1976) argued that although
living in a society where rapid growth and expansion
of the small firm is a social mythology, many
entrepreneurs chose to adopt a no-growth stance .
Such a social action view of the small firm explains
why growth is, on the whole, much less common than
the prevalent growth ideology would indicate. In
their growth model, they view the firms as passing
through three phases. The artisan stage, the
classical entrepreneur stage and the manager stage.
During the artisan stage, the entrepreneur's values
and goals influence a largely autocratic firm and as
the firm grows, financial goals dominate the
classical entrepreneur behaviour. As the firm grows
even further, the entrepreneur needs to be more
managerial .
 
The various theories on growth cycles highlights the
changing roles an owner-manager must perform as the
firm grows. The manager must change his behaviour to
match the situation of the firm or else the growth
of the firm will be curtailed to match the behaviour
patterns which the owner-manager is able or willing
to display, or both.
 
Measures of Growth
 
As put forward by many researchers, growth can be
expressed in the conventional terms of turnover,
profits, value of assets-total, fixed or net, number
of employees, market share and equity of the firm.
Though useful, each measure has its weakness.
Penrose indicates that growth of a firm when
measured in terms of fixed assets has its
limitations in that a firm may be large simply
because the firm is unable to expand its operations
fast enough to make use of its cash resources. She
recommends taking long-term profits as the optimum
measure as it is the ultimate determinant of a
firm's ability to reinvest. Few, if any, firms would
want to invest for the sake of growth if the return
is negative. Therefore Penrose argues that to
increase the long-term profits of the firm is
equivalent to increasing the rate of growth.
 
Singh and Whittington (1968), concluded that growth
should be measured in terms of net assets due to the
correlation between profitability and growth. Also
growth is found to be a systematic function of past
growth and cannot be regarded as a random process.
 
Internal Factors
 
The internal environment is determined by forces
operating within the firm and there are basically
two factors: the managers and the workers (Hodgetts,
R.M., 1985). As Drucker (1973) puts it, a firm
depends on managers, it is built by managers,
directed and held together by managers, and is made
to perform by managers. Dun and Bradsheet records
show that more than 90% of business failures are
caused by the owner' s incompetence. Thomas (1983)
gives support that incompetent managers can impose a
limit to a firm's activities whereas Penrose
differentiates between entrepreneurial and
managerial competence and postulated that managers
will limit the growth of a firm, due to lack of
resources. However, Thomas proposed that if
entrepreneur behaviour is built into the process of
management development, then the firm will grow.
 
A firm is a collection of people who acquire
resources and use them in an efficient manner, to
produce output of goods and services (Dearden et.
al., 1965). Mayo in his Hawthorn studies sees that
people are motivated by various variables, the
actual mix being the people themselves and the
systems they belong to, which contradicts Taylor
(1911) who propounded in his Theory of Scientific
Management that people are motivated by material
benefits alone. The following theories have been
proposed to support the theory that people can be
motivated to produce efficient work by a range of
factors:
 
i. Maslow (1956) : A Hierarchy of Needs
 
ii. Herzberg (1966): Hygien-Motivation Theory
 
iii. Argyris (1962) : Immaturity-Maturity Theory
 
iv. McClelland (1953): Achievement
 
v. Vroom (1964) : The Expectancy Theory of
Motivation
 
vi. Handy (1975) : Path-goal Theory
 
vii. McGreger (1960): Theory X and Theory Y
 
 
Woodward (1976) sees that bad management i!  almost
always the culprit of a small firm's failure
identifying three principal weaknesses as growth of
sales, seen as a solution; inadequate product-cost
analysis, and gearing operations . Argenti (1976)
and Bibeault (1982) are among others who agree that
the prime cause of a firm 's failure is internally
generated and the problem of financial control
stands out as one of the many factors resulting in a
firm's failure. If financial control is deemed an
important variable for a firm to fail, likewise
growth would also produce financial stress for the
small firm.
 
 
Weston and Brigham (1978) identified differing
potential financial stress factors w which could
arise as a small firm experiences growth. Hutchinson
and Ray (1983) asserted that 'supergrowth' small
firms have a financial profile of low liquidity, low
retained earnings to total assets, and low equity to
debt. From their Bath studies, they have summarised
the key features of financial control systems of the
' supergrowth ' entrepreneurial firms and the
matched 'passive' firms.  Their final conclusion is
that in order to be successful, an entrepreneur
needs to be flexible and proactive in his stance
towards control, and adapt to the situation as his
firm grows.
 
External Factors
 
A literature search on the environmental factors
affecting a firm has revealed that much work has
been done and many theories have been formulated. In
the following discussion only the more prominent and
recent developments on the external factors are
discussed.
 
It is a truism that a small firm should respond to
the environment. Gorb (1978) sees the small firm
manager as operating in a world which is pervaded by
events he can neither see nor control. According to
Bibeault (1982), environmental changes can take
place slowly and predictably or with such shocking
suddenness and severity that no one can predict.
Johnson and Scholes (1988) further stress the
importance of the environment on a firm in that
environment changes throw up opportunities and
threats, as perceived changes in the environment
will signal possible changes in a firm's strategy.
Dr. Noburn (1973) gave evidence that firms which are
better at diagnosing the environment would perform
better than those which are weak at it.
 
 
Many theories have been put forward as to the
constituents of the environmental influences, and
Figure 1 illustrates a modification of the Johnson
and Scholes model, chosen because of its
comprehensiveness.  Included in the model are two
other factors in the environment: the buyers and
stakeholders. Hatten and Hatten, (1987) point out
that stakeholders constitute the most relevant
social and political environment of the firm and can
seriously affect the firm's ability to implement
certain strategies. Moreover, for a firm to be
effective as well as efficient, it needs to assess
the macroeconomy to adopt proactive strategies.
 
In his studies backed by practical experience,
Bibeault (1982) concluded that external factors are
responsible for 21% of the total decline of firms
Economic problems facing a firm include slackening
overall market demand, currency problems, interest
rate hikes, credit squeeze and inflation. Altman 
examined reasons for corporate bankruptcy America
and from his studies believed that squeeze is one
the potential causes of a firm ' s firm's
 
Porter (1980) says that a key aspect environment
influence is the industry in which firm competes. In
Figure 2 he illustrate competitive forces driving
industry competition] he concedes that the
collective forces will determine the profitability
of the industry as measured long-term return on
invested capital. He He describes that the forces of
competition are the are of suppliers and customers,
and the threat of entrants and substitutes, together
with the rivalry between competitors within the
industry.
 
A market cannot be stagnant. It changes a time. A
firm, then, needs to be adept at monitoring their
customers and proreact to social trends like changes
in life-styles, composition of a given population,
attitudes, and behaviour and consumer trends
(Bibeault). The social climate calls for new
strategies in product and market development.
Demographic changes reveal new threats and
opportunities for a firm.
 
In today's fast changing technological progress,
which creates many choices for the consumer, an
entrepreneur needs to be on the alert for products
and services which will satisfy his customers.
Comerford and Callaghan (19&5) stress that firms
with access to new technology have a distinctly
competitive edge; technological innovation is a key
factor of success in a given industry; and that
sensitivity to the technological environment is a
primary component of strategic planning.
 
Government policies, in one way or another,
contribute to external problems. Economic and
government problems are one and the same. The
government either directly or indirectly, represents
a major factor in the private sector through the
fiscal policy.
 
The Entrepreneur
 
Given the importance of the owner-manager's role and
the strong influence he exerts over the small firm,
the entrepreneur needs to be examined in detail.
Understanding the entrepreneur will lend
understanding to his attitudes to later growth in
the firm's life.
 
A study conducted by Smith ( 1967) distinguished
between the two types of owner-manager-the craftsman
entrepreneur and the opportunistic entrepreneur. The
craftsman entrepreneur has limited and narrow
educational and training background, and has low
social awareness and involvement. He lacks
flexibility and confidence, is reluctant to delegate
responsibility or authority, and is adversed to
employing external sources of finance, adopting
aggressive marketing strategy or engaging in any
long-term planning of the firm's future. These
characteristics are similar to the ones Kets de
Vries (1977) found in his entrepreneur, where he
generalised and condemned the whole breed
conclusively. Smith, on the other hand, attributed
such unfavourable symptoms to only one class of
entrepreneur-the craftsman entrepreneur.
 
The opportunistic entrepreneur, according to Smith
has a broad education and training, and has high
social awareness and involvement. He is flexible and
confident, and has an acute awareness and
orientation for the future. He is ready to delegate
and hire on an universalistic basis. He utilises a
variety of financing sources, employs an aggressive
marketing approach and undertakes long-term
planning. Consequently, his firm is more
growth-oriented than the craftsman's firm.
 
A conclusion of Smith's observation is that:
 
i. Different types of entrepreneurs account for the
different characteristics observed in small firms
 
ii. The degree of centralisation and concentration
of management depends on the entrepreneurial type of
the owner-manager
 
iii. Personal management is not an automatic
byproduct of an owner-manager firm
 
Professor Knight's studies on firms expounded that a
firm headed by an owner-manager is bound to be
limited in size on account of the capacity of the
leadership; the greater the magnitude of operation
which any single individual attempts to direct, the
less effective in general will he be; and the larger
the contract, the greater the difficulty for any
single individual to give adequate security and
therefore, a limited opportunity to grow. The
essence of these truisms is that a firm headed by an
owner-manager is self-restricting in size as it
relies on the supply of the three resources which
are vested in the owner-manager himself: capability,
control and finance.
 
In the psychodynamic model of the entrepreneur, Kets
de Vries reduced the entrepreneur to the stereotype
image of deviant, who is an unable to fit
comfortably into organizational life. He provided an
account of the entrepreneur's formative years and
their implications in terms of learnt or adopted
behavioural coping patterns.
 
The social development model stresses that the
entrepreneurs change through life and the
differential importance of various social influences
at significant periods will have its effects on the
individuals (Gibb and Ritchie,1981). They proposed
four stereotypes of the would-be entrepreneurs-the
improvisers, the revisionists, the superseders and
the reverters. Their model is supported by Levinson
(1980) who said that throughout one's life social
pressures and circumstances will influence one's
behaviour. In 1976, Sheeby, a psychologist, argued
that in a person ' s lifetime, transitions are
needed to satisfy and reconcile changing needs,
goals and ambitions with the evolving environment
presenting opportunities and threats.
 
The trait model attempts to discover similar traits
which could distinguish the entrepreneur from the
others but it has resulted in equivocal findings
with no firm evidence of any single trait which
could be applied to the entrepreneurs in general
(Chell, 1986).
 
A survey carried out by Butterworth (1989) to
distinguish between the entrepreneur and the
successful manager, reveals that there is little
consensus on the characteristics of entrepreneurs.
On the high side of the score, an entrepreneur
possesses the characteristics of a moderate
risk-taker, abundant energy and drive, creative,
goal-oriented, a strong need for achievement,
decision-maker, foresight, persistence,
problem-solving ability and self confidence.
 
In trying to reconceptualise entrepreneurship,
Harre's situation-act model, Figure 3 (Harre, 1979)
shows that the individual ' s perception of the
situation is of key significance. Harre believed
that external and internal business environments
will create situations which will cause the
entrepreneur to mobilise his own particular set of
personal variables, i.e. his skills and abilities,
his beliefs and expectancies, his plans and goals
and his strategies. He may or may not cope with the
situation. The model suggests that growth of a firm
is limited by the capabilities of the entrepreneur.
Does he have the necessary skills to cope as the
small firm increases in size, or does the
entrepreneur limit its growth due to reluctance to
relinquish control of the firm?
 
Stanworth and Curran, (1976) argued that the key to
growth lies in the entrepreneur's involvement in the
small firm.
 
 
Strategic Management
 
Hatten and Hatten defined strategic management as
the process by which managers through an artful
blending of insightful analysis and learning,
formulate objectives and create value from the
skills and resources which they control to achieve
the firm's objectives. They further stressed that
strategy is a means to a firm's objectives.  Gilmore
(1971) in his studies of small firms argued that
because small firms lacked the sophisticated
facilities of large corporations, their managers
need to strategise and plan for profit maximisation.
He recognises the changing nature of the growing
small firm. Golde ( 1964) also advocated that small
firms adopt informal planning. In his studies on the
applications of different types of strategy in
different firms, he pointed out that relative
success in strategy formulation and implementation
depended upon matching the method to key
decision-makers. Covin and Slevin (1987) in their
studies of small firms in hostile and benign
environments concluded that amongst others,
successful small firms have the attributes of
strategic management, an organic structure, and a
long-term goal-oriented approach. He also showed
that there, is a relationship between strategic
management practices and small firms with high
performance.
 
 
THE ROLE OF SMALL FIRMS IN A NATION'S ECONOMIC
DEVELOPMENT
 
The role of small firms in the economic development
of a nation can be generally identified in the areas
of income distribution, social mobility, capital
investment and the entrepreneurs themselves.
 
Small firms produce a large number of relatively low
wage payments and make relatively low capital
incomes, and so its impact consists of relatively
small increases in income for a relatively large
number of people. The income distribution
characteristics of different firm sizes can be
deduced by observing the wage rates, the wage share
and to a certain extent the distribution of labour
and capital income.
 
Small firms have a favourable impact on income
distribution in that new entrepreneurs with limited
financial resources and technical skills can gain
entry into the industrial sector through small
industry operations.  Thus the small firms have the
effect of creating a new class of small capitalists,
leading to the expansion of the middle class and a
wider distribution of income. Small firms can
survive in less developed parts of the country
because of their locational flexbility, their lower
requirement of infrastructure, their nature to serve
small geographic markets, and their firm commitment
to local development.
 
With a large number of small firms operating in
different markets, there is a greater probability
that competition will prevail leading to lower
prices; new improved products will be more
frequently introduced; and there will be better
services for the customers.
 
The establishment of small firms and in particular,
successful entrepreneurs, provoke numerous attempts
at imitation by those craftsmen, traders and skilled
workers who are full of ideas and are prepared to
take a gamble.  Admittedly, a great number of these
new entrepreneurs will fail in the first few years,
but their behaviors is very significant to the
developing society, in that it becomes apparent that
those who are talented and are prepared to take a
risk can become active irrespective of their social
background. Moreover, it also shows that social
recognition can be achieved, apart from careers in
politics, government and the military. For the
Malaysian society which has been developing over a
period of several decades, this is of paramount
importance in helping to free itself from the
dependence on those who traditionally held a
monopoly of economic and political power.
 
A clear indication of the level of social mobility
would be the background of entrepreneurs according
to their previous occupation, school education,
ethnic origins and so on.
 
Experience has shown that though the setting up of
small firms (measured in terms of the number of
their work-force) is relatively easy, but the rate
of failure is correspondingly high; large
enterprises usually grow from small ones and have
therefore, been in existence for sometime.
Therefore, small and medium size firms must be
relatively new, while larger firms are relatively
old.
 
New owner-entrepreneurs and manager entrepreneurs
form a group of people who have learnt to develop
initiative, organise and find solutions to problems.
These new aptitudes are not only confined to the
economic and technical arenas but will later extend
to the political and social scenes. As members of
professional associations, guilds, entrepreneurial
organisations and chambers of commerce and industry,
they lay the foundations for the existence of
private institutions and the influence these may
have. Small firms thus, create part of the structure
of a free market economy and a democratic society.
 
Small firms serve as a training ground for
developing the skills of industrialised workers and
entrepreneurs. The low cost of setting up a firm
enables an enterprising worker not only to provide
himself a livelihood but also offer employment to
others. Small firms employ relatively more unskilled
and semi-skilled workers. Training is mainly given
on-the job in the premises itself. Proprietors of
small firms do not have the time nor the personnel
to engage in formal training. For the
newly-initiated entrepreneur, the setting up of a
small establishment enables him to put his skill and
knowledge into practice. In addition, the small film
enables him to acquire further experience and to
improve his ability gradually with the growth of the
firm. Furthermore, such training can be carried out
on an extensive basis. A hundred small
establishments can offer at least a hundred
individuals opportunities to develop many of the
skills required to operate a successful firm. It
should be stressed that the need to accelerate the
development of entrepreneurs is an urgent one in
Malaysia, where there is a serious shortage of local
entrepreneurs. The Malaysian government is very
concerned with this problem, in view of its desire
to ensure greater Malay participation in the economy
of the country. In this context, small firms can
play a vital role by providing an ideal training
ground for Malay entrepreneurs.
 
Small firms help to increase total savings in the
economy. The principal source of funds for small
firms are the owners' family, friends and relatives
as well as traders who extend them credit.
Similarly, in the case of medium- and long-term
capital, small establishments provide a large
proportion of their own capital as compared to large
firms.  It is likely that a large proportion of the
capital if not devoted to investment in the small
firms, would have been utilised for consumption
expenditure. This propensity to save and invest in
small firms can increase the overall saving ratio of
the population. Another form of savings is related
to the resources used in small firms. Machines and
equipment are often purchased second-hand and are
usually used to the fullest extent of their economic
lives. Though this may reduce output, there is net
saving to the society as used machines and equipment
would have been condemned and not put to use by
large firms.
 
Fixed capital per man-hour and per worker generally
increases with employment size . The total capital
per worker for small firms on the average is about
14% lower than that for the larger establishments .
 
Besides the contributions discussed above, small
firms supply a substantial part of the demand for
simple and inexpensive consumer goods at prices
within the reach of the lower income group. Also,
specialities that would be uneconomical for large
firms to produce are supplied and products for which
the market is too small to justify mass production
are made available. Besides, small firms supply many
large firms with parts and components. The absence
of these complementary relationship, will mean less
choice for the consumers and higher cost of
production for the large-scale producers. Compared
to large firms, efficient small firms can provide
better selling services such as extra quality,
speed, or provision of technical knowledge to
customers who require special attention.
 
CONCLUSIONS
 
The analysis carried out on the performance of small
firms reveals that small firms have a very
significant role in the economic and industrial
development of a country, be it a developing or a
developed nation. A small firm can be generally
defined as an entity engaged in a single-line of
business with an owner-entrepreneur who supplies
financial capital and supervises the economic
resources needed for production.
 
The growth of small firms is dependent on the
internal environment, that is, the managers and
workers, and financial control; and on the external
environment, which is determined by the capital and
labour markets, socio-cultural and technological
changes, and so on. In fact, external factors have
been found to be the cause for 21% of the total
decline of small firms.
 
The role of small firms in the economic development
of a nation can be identified in the areas of income
distribution, social mobility, capital investment
and the entrepreneurs themselves.  Small firms have
afavourable impact on income distribution due to the
ability of new entrepreneurs (though with limited
financial resources and technical skills) to gain
entry into the industrial sector through small scale
industry operations. Thus, the small firms have the
effect of creating a new class of capitalists,
leading to the expansion of the middle class and a
wider distribution of income. In terms of social
mobility, the establishment of small firms and in
particular, successful entrepreneurs invoke numerous
attempts at imitation by those who are craftsmen,
traders and skilled workers. This behaviour is very
significant for the developing society, in that the
risk takers who are talented can become active
irrespective of their social background.
 
Small firms serve as a training ground for
developing the skills of potential entrepreneurs.
The low cost of setting up a firm enables an
enterprising worker not only to provide himself a
livelihood but also offer employment to others. In
addition, the small firm will enable him to acquire
further experience and improve his ability gradually
as the firm grows.
 
On the wider perspective, small firms help increase
total savings in the economy. It is likely that a
large proportion of the capital if not devoted to
investment in the small firms, would have been used
for consumption expenditure. Small firms, besides
producing specialised goods that would be
uneconomical for large firms to produce, also
contribute by supplying large firms with parts and
components. This complementary relationship is
perhaps most fundamental in giving a wider choice to
consumers due to lower production cost. As a result,
the market price of goods produced by large-scale
manufacturers is lower.
 
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