Small business responses to a major economic downturn: Empirical perspectives from New Zealand and the United Kingdom

Abstract

This article analyses small firm responses to a major economic downturn, based on empirical investigation in the UK and New Zealand. Despite differences in the timing and depth of the downturn, there is remarkable similarity in the sectoral composition of small enterprises and methods of financing in reported recession-related effects and business performance during 2008-2009. While recognising that the study focused on surviving businesses, in neither country did the downturn have a consistently negative impact on small businesses and in both countries a significant minority of firms surveyed performed well. The study provides much needed evidence on small businesse responses to major economic crisis. Conceptually it demonstrates that although many small firms are vulnerable to changes in circumstances over which they have no control, they show underlying resilience and a high level of adaptability and flexibility. Longitudinal follow-up is necessary to show how the types of adaptive behaviour observed impact on business performance.

Are the HR responses of small firms different from large firms in times of recession?

“…Consequently, Ryans (1989) suggested that the management of a small firm involves a different set of experiences, risks and needs to the management of a large firm. For example, discretion over firm strategies and management policy are severely constrained by the availability of financial and human capital resources, as well as other entrepreneurial circumstances (Smallbone et al, 2012;Cassell et al, 2002) compared with the resources generally available to, and exploited by, larger firms (Kroon et al, 2012). A superior resource base and greater market power suggests that large business enterprises possess greater discretion and more options than SMEs over strategic choices and responses during recession (Singh and Vohra, 2009;Smallbone et al, 2012).…”

“…More specifically, in times of recession, Smallbone et al (2012) identify two broad views with respect to how firms of different size are affected: the "vulnerability" and "resilience" views. In the vulnerability view, smaller firms are perceived to be more vulnerable and susceptible to external shocks whereas their larger counterparts are believed to be more resilient.…”

“…The existing literature suggests that external uncertainty and economic shocks can impact small and large firms differently (Smallbone et al, 2012;Latham, 2009). In fact small organisations differ in nature from large organisations (Liff and Turner, 1999), given the distinctive factors that characterise enterprises of different size.…”

“…In fact small organisations differ in nature from large organisations (Liff and Turner, 1999), given the distinctive factors that characterise enterprises of different size. Specifically, as a result of their relative resource poverty, weak external environment control, limited options of financing (Smallbone et al, 2012;Westhead and Storey, 1996) and access to financial resources derived from imperfections in capital market allocation (Revest and Sapio, 2010;Cressy, 2002;Auerswald and Branscomb, 2003), a priori, smaller firms are expected to be less resilient to a recessionary environment than larger firms (Field and Franklin, 2013;Sheehan, 2013). McCann (2008) reports that 62% of UK small firms experienced negative effects of the 'credit crunch'; half of these have been affected directly by more expensive finance and the rest indirectly by poor sales performance.…”

“…Wickramasinghe and Perera, 2012;Latham, 2009;Shama, 1993) suggest that a firm-size effect may be extended to a firm's employment related responses when facing such external environmental uncertainty. Latham (2009), for example, reports that cost and headcount reductions occurred mainly in large firms during the 2001/3 economic recession, a finding that is reflected in a study of small firms that found evidence of their resilience rather than weakness (Smallbone et al, 2012). Hence, although there has been a growing body of knowledge examining the relationship between firm size and strategic responses during adverse macro-economic conditions, this issue remains relatively unexplored.…”