Small businesses play a vital role in the economic contributions of any country. A small business is a sole proprietorship, a business, or a partnership that earns less yearly revenue and fewer employees than a regular-sized business and is privately owned (Ferran & Ho, 2019). In many nations, especially the Organization for Economic Co-operation and Development (OECD) countries, governments encounter challenges regarding weak investment and trade, low growth, and persistently increasingly high inequality. Considering the essential role that small businesses play in the attainment of Sustainable Development Goals (SDGs), these countries need to promote small businesses to enable them to boost their economic growth (OECD, 2017). New Zealand is a member of OECD countries and is considered to have a higher concentration of small businesses, yet ranked first for doing business worldwide. Such top rank results from the country’s promotion of small businesses. For a country with few large businesses and more than half a million small businesses, continuous improvements are vital. In this perspective, it is inevitably crucial for New Zealand to define what small business entails and identify the sector’s issues or challenges (Ferran & Ho, 2019). This paper aims to discuss the definition of small business in New Zealand compared to other countries and describe issues facing small businesses and their impacts on the local economy.
New Zealand bases firm size definition on employment headcount or full-time equivalent (FTE) employees’ numbers, total assets, and annual turnover. The Ministry of Economic Development (MED) considers a business with 19 or fewer employees as a small business or SME (McCann, Oxley & Shangqin, 2009). These businesses make up the majority of businesses in the country, depicting 97 % of all businesses, which are roughly 546,000. As such, they contribute about 29.3% of employment and more than a quarter of the country’s gross domestic product (GDP). Whatever measures they use, the definition generally tries to classify or separate business populations at trigger points where business management practices change(Ferran & Ho, 2019). Segmentation is essential as the government needs to prescribe or determine what businesses to include or exclude when implementing an intervention or a policy. For instance, the policy framework of Emergency Business Support recommends that businesses with less than 19 employees be eligible for financial support in case they suffer a substantial revenue drop following natural disasters (Ferran & Ho, 2019). Such a policy supports firms important to the national and local economy but is too small to cash reserves to enable them to survive through downturns.
However, since New Zealand’s market scale is among the smallest in OECD countries, the definitions used differ from those of other nations (Ferran & Ho, 2019). It is especially true for countries with a larger market, where definition criteria vary across countries, with the majority using profit levels and staff numbers to classify firm sizes. While New Zealand considers firms with 19 and fewer workers as SMEs, that definition by European Commission seems much simpler. According to European Commission, firms have annual work units (AWU) of below 250, a maximum of €50 million turnover, or whose total annual balance sheet goes below €43 million (Berisha & Pula, 2015).
In the USA, however, a standard for small business size exists for every private sector. With this standard, the Small Business Administration (SBA) aims to correctly or perfectly reflect firm size distribution differences in the industry. Usually, the administration states small or medium standards based on either average annual receipts or employee numbers (McCann, Oxley & Shangqin, 2009). For instance, in the manufacturing sector, about 75% of industries have a size standard of 500 employees, while the rest have a higher threshold of 1500, 1000, and 750 employees. Compared to such a threshold, most SMEs in New Zealand are micro firms. Following these definitions would classify very few businesses as medium-sized businesses in New Zealand.
In the case of the United Kingdom, the definition of small business is slightly different from the above cases, as the UK and New Zealand have similarities and few differences (Smallboneet al., 2012). The two countries have similar (GDPs). Another similarity is that both countries’ business stocks are greatly aligned toward small businesses. For instance, SMEs in the UK are firm with less than 250 employees and accounts for about 99% of business stock. Likewise, SMEs in New Zealand account for 99%, with less than 100 employed people. However, despite the similarity, the two significantly differ in their economic sizes, as reflected in their populations, with New Zealand having 4.3 million in 2010 as compared to the UK’s population of approximately 60.9 million in the same period (OECD, 2010). Another significant difference lies in the structure of their small business sector. New Zealand sustained a strong primary sector of 9.2% compared to the 2% OECD average. As a result, it impacts on manufacturing sector that has an essential element for food manufacturing. According to Statistics New Zealand (2009), agriculture, forestry, mining or fishing had about 9% of firms, with manufacturing having about 15% in 2008. On the other hand, the UK had 7% in the manufacturing sector, while agriculture received about 4%, even though the UK included small firms’ data (Smallboneet al., 2012). All these countries help to understand variations in the definition of small business in various countries compared to New Zealand. The following section discusses the main issues small businesses face and their impacts on the local economy.
Small businesses experience limited access to national markets, which diminishes the country’s innovation and export capacity. Among the OECD countries, New Zealand is the third lowest national market, with its national market equaling to medium size market in the United States of America (McCann, Oxley & Shangqin, 2009). Yet, it is also one of the two most physically remote countries worldwide regarding its accessibility to other national markets. Most other small countries belong to a much bigger market, especially those in European Union (EU), enabling them to intensify returns resulting from exports. On the contrary, New Zealand’s nearest adjacent market is over 2500km away in Australia. Additionally, it only accounts for 20 million people. Such a huge geographical distance between the country and other markets restricts knowledge transfer, making it difficult for small businesses to innovate or export physical goods.
The economic implications of this are significant, provided that the net exporting benefit decreases with an increase in distance costs. Thus, it implies a smaller positive exporting effect for New Zealand than other small nations. According to metrics by Hamilton and Dana (2003), among the ECD countries, New Zealand is the least high-technology goods exporter country. They assert that the country exported five times lower high-technology production than it imported. Additionally, the exporting firms in New Zealand are only 8,500 out of 259,000 firms. Finally, they pinpointed that merely half of the foreign exchange in New Zealand is earned by merely 30 firms (Hamilton & Dana, 2003). Since small businesses account for most of New Zealand’s businesses, the country’s limited accessibility leads to lower innovation propensity and success.
Another issue small businesses encounter relates to higher interest rates associated with the New Zealand economy’s isolation and small scale. Regarding the New Zealand dollar, there is always a higher risk premium involved than most other currencies (McCann, Oxley & Shangqin, 2009). Its real interest rates have constantly been among the highest worldwide. Resultantly, fewer investments are made in the other productivity-enhancing assets and technology. In addition, the optimal business investment portfolio is different in New Zealand compared to other nations with a higher preference for labour over the investment of capital (Ferran & Ho, 2019). The economic impact associated with higher interest rates is low new technology embrace, as small businesses invest little or less in the new technology. Additionally, low investment in technology can complicate problems that small firms encounter as they reach international markets.
In New Zealand, small businesses struggle to employ and retain staff and depend greatly on migrant workers. Small businesses compete for top talents against bigger firms with attractive employee benefits packages. Resultantly, it affects their capacity to gain and retain market share as well as attractive, skilled employees (Stevens, 2012). With large companies having the capital to invest in long-term development and training programs, small firms with limited cash flow and capital have fewer chances. Even if they hire employees, their retention turns difficult as “push” and “pull” factors that fuel turnover come into effect. Push factors include employees searching for more development and training, more money, appreciative managers, and more interesting work. Strong demand for labour and skill shortage represents the pull factors. According to Hunt and Rasmussen (2007), without enough skill, with no training implies outdated production methods, which translates to low-quality production, less competitiveness and lowered economy.
In conclusion, small businesses in the context of New Zealand refer to firms that employ 19 employees or less. The government has segmented firm size to identify small firms eligible for financial support in the case of natural disaster events. Such definitions differ from other countries with a larger economy and market scales as follows; the USA uses a standard for small business size applicable in each of the private sectors. The standard stipulates the number of employees an industry should contain to be classified under small or micro-enterprise. In the EU, the firm size classification depends on turnover rates, annual work units (AWU) and balance sheet amount. For the UK, the difference occurs in the structure of the small business sector. Unlike New Zealand, which retained a strong primary sector with agriculture having 9% and manufacturing 7%, the UK had less in the primary sector where agriculture accounts for 4%, while manufacturing has 7%. Among issues that small businesses face include limitations in accessibility to national markets lowering innovation and export capacity. Higher interest rates resulting from small scale and isolation discourage technological investment by small businesses. Finally, small firms are disadvantaged when hiring and retaining skilled workers, as they have limited capital compared to bigger firms.
References
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