Separating Myth from Reality
Chapter 3: The Effects of Age, Size, Industry and the Economy on SME Failure Rates
INTRODUCTION The previous chapter reviewed some of the more commonly used measures of SME success and failure and showed how reported failure rates can vary substantially depending on the definition of failure used. The broader the definition, the higher the likely failure rate; the narrower the definition, the lower the likely failure rate. While each of the definitions has certain strengths, none is clearly superior. Further, the results of prior studies suggest that reported failure rates (even where the same definition is used) can vary substantially. For example, the annual bankruptcy rates reported in Chapter 2 range from 0.7% to 1.8%, with business closure rates ranging from 3.9% to 16%. This large variance in reported failure rates must surely confuse policy makers and others interested in the SME sector. This chapter will consider some of the potential reasons for these differences, in particular, age, size, industry and the state of the economy. 3.1 THE EFFECT OF AGE Most studies of SME failure have found that a business is at greatest risk in its first few years. Jovanovic (1982) argued that younger firms are more likely to fail because they face greater variability in their cost functions while they learn about their industry and management capabilities. The efficient grow and survive; the inefficient decline and fail. For this reason, younger firms are less likely to survive than older ones. There have been numerous studies confirming this proposition: Stewart and Gallagher (1986); Evans (1987); Bates and Nucci (1989); and Dunne, Roberts and...
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