Future Economists Essay Competition: Commended A

About the author: Casey Espiritu was commended in the Future Economists Essay Competition.

Casey answered: Question 3: “Small businesses are a driver of innovation and economic growth. What does economic theory and evidence tell us about the role of small businesses in driving innovation and economic growth, and, the factors, relevant to Jersey, that would enable small businesses to grow and flourish?” 

Future Economists Essay Competition 2024: Commended

“Ideas shape the course of history.” – John Maynard Keynes. Small businesses execute key functions in a country’s economy. They are the foundation of diversity, innovation, and creativity in an economy. As UK (United Kingdom) markets remain unstable, along with changing policies, the growth of small businesses is stagnating, with the stigma behind establishing a business preventing their development. This essay will outline the role of small businesses, and the factors that would enable small businesses to grow and flourish, that are relevant to Jersey.

According to the UK government, a small business is a business that has less than 50 employees and an annual turnover of under €10M. Small businesses are great providers of employment. They expand job opportunities and make them more available, resulting in higher employment and leading to skill enhancement. Based on the Federation of Small Businesses in the UK, total employment in small businesses was 13.1M (48% of total) in 2023 – providing income for approximately half of the population that is in employment and being a major source of income in the nation. With this, they contribute to local productivity and economic growth, taking part in a nation’s output and Gross Domestic Product.

Small businesses are drivers of innovation. A study made by the U.S. Senate on Small Business & Entrepreneurship showed that small businesses produce more than 14 times more patents than large businesses and universities. With this, they bring innovative ideas, products, and services to the market – as Adam Smith’s theory of the Invisible Hand suggests, self-interest, in a free market economy, fills in gaps in the market – bringing transformative ideas to fill such gaps, leading to greater social benefits and development.

Diversity and cultural development can be rooted in small businesses. As small businesses provide goods and services big businesses may not, small businesses commonly focus on niche markets, tailoring their products and services to certain types of demand – stimulating diversity of demand in an economy and developing a culture to be more dynamic, also decreasing the possibility of diminishing marginal utility by giving consumers a wider range of options.

Based on the labour market report in Jersey in June 2019, the number of small businesses was 7,570 (97.7% of total private sector businesses) with education, health, and others, having the most number of small businesses with 1,630 businesses, (21.5% of total small businesses). This shows that small businesses in Jersey during the year 2019 were thriving in terms of population. However, figures may have changed especially during the global pandemic that caused instability and uncertainty.

Market instability and finances are two of the main reasons why small businesses and individuals planning on establishing are struggling. The Consumer Price Index for 2023 increased by 4% likely leading to further causes of market instability, making it difficult for individuals to plan and predict likely outcomes as risks increase. Furthermore, 41% of businesses are reported to be worried about interest rates, potentially resulting in firms and possible owners not having the necessary finances for managing or establishing a business.

One key factor why some small businesses are not established is a lack of confidence. Research by Elizabeth Rosling, a business finance specialist, identified that 64% of the UK workforce want to form a business, yet almost half (43%) of aspiring entrepreneurs don’t believe they will set up a business and ¼ are discouraged by fear of stress – women significantly less confident than men. Due to this, potential businesses are not established and are not given the chance to grow, likely leading to some potentially successful businesses effectively not existing and not contributing to the local economy – being a large opportunity cost for society.

Small businesses are also struggling with their productivity due to a lack of technology. A study that surveyed 500 SME professionals across the UK by Lanna Deamer, Deputy Editor of Emergency Service Times, stated that 84% of small businesses said they are left behind due to restrictive budgets to spend on technology, with 49% stating that it impacts growth, in which 34% stated that they are still relying on spreadsheets to carry out invoices. With this, small businesses would likely not be as productive, possibly leading to an increase in unit costs, putting them at a competitive disadvantage, and making it difficult for small businesses to survive or thrive.

Making technology more available to small businesses could be a factor that would positively impact their performance and growth. By doing this, the performance deficit of small businesses to large businesses that can afford technology could be reduced. Thus, small businesses are likely to achieve productivity, especially in parts of the business where simple, repetitive tasks take a lot of time.

A powerful factor that could help small businesses grow and flourish is education, which is one of Jersey’s main contributors to the small business population during 2019. With education, individuals can acquire the knowledge and skills necessary to potentially start and grow a business; improving one’s confidence and ability to plan, make good decisions and handle business processes, likely eliminating the fear of stress. Therefore, an improved quality of education, especially for possible entrepreneurs, can lead to a rise in the number of small businesses and improve its quality, being beneficial to the entrepreneur and the society.

Lastly, an encouraging environment for entrepreneurs could be an evolutionary factor. By changing the stigma and developing a positive culture towards entrepreneurship, individuals who have the potential to grow a business have the courage to start and try building a business, reducing the cases of individuals wanting to grow a business, but not having to start at all. We could make an impact through programs such as essay competitions on the importance of small businesses – making individuals realize its worth, as well as empowering young minds and women to undauntedly chase their goals and recognize that they too are part of a society where they can contribute and start a small business – building pillars of tomorrow.

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