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Why do some small Firms Grow in size?

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Introduction

Daniel Colton The Growth of Small Firms Why do some small Firms Grow in size? A firm, in its economic sense is an organisation / entity which produces goods, most likely to be for the benefit of consumers. Often, for a whole variety of reasons, most notably for the benefit of economic analysis, and government intervention, firms are placed into categories, according to size. A firm can be described as 'small' depending on its number of employees, turnover, size or value of output and perhaps market capitalisation. Most often the factors used will be turnover and number of employees. Both the Department of Trade and Industry, and the EU agree on the number of employees being under 50, and the turnover as defined by the EU should be under �7million. The Bolton Commission (1973) takes a slightly more specific approach, saying a small manufacturing firm has under 250 employees and a small building firms has under 25 employees, as well as having no 'large' market share and individual management. There are many benefits to staying small, as described in the second part of the question, but many firms if they have the willingness and ability, will grow in size. There are several reasons why this may occur. Firstly and often most importantly, this growth is to take advantage of some economies of scale. ...read more.

Middle

Being a smaller firm is limiting, as even the most efficient of small firms cannot compete in making the sort of profits that larger firms are capable of making. Normal profits are made with the intention of paying back those who have deposited money in the business, and represents the opportunity cost of putting money with the firm. Super-normal profit however is money that is left over after all costs are paid, and can be used by the firm for investment, or bonuses or any number of other uses. If a firm succeeds in its growth, it will move categories and become a 'medium' or a 'large' firm, that has more than 50 or more than 250 employees respectively. They also have turnovers of more than �7million under EU guidelines and also have a larger output and most likely a larger market capitalisation than a 'small' firm. There are far fewer government grants and allowances for larger firms, as the economic advantages of being larger speak for themselves. Firms may decide to become large for any number of different reasons, from simple economies of scale, to simply the need to stay in profit and in business. However, not all firms even if they have the ability, will choose to grow. ...read more.

Conclusion

This is because it is less of a risk for the government to invest in a more established business. In the last twenty years the government has guaranteed well over �20billion of loans. Venture Capital Trusts started in 1995, and they encourage investment is smaller business as well, by making dividends received immune from income tax. Finally there are tax allowances in the Enterprise Initiative where firms in a development area with less than 25 employees are entitled to a grant. This scheme existed 1992-1997. It is for the same reason that so many firms choose to grow that many firms equally choose not to grow. Firms may choose to remain small due to economies of scale. They may have already been exploited, and any further expansion could lead to diseconomies of scale as shown below in fig 2.1. This would mean that the unit cost of production in the long run will start to go up. The reasons why this might occur, could be due to a lack of skills to make the firm larger, meaning that expansion may be required for growth to occur, and so the more employees will have to be taken on. Thus, diseconomies of scale may begin to exist, as the average total cost curve goes past the point where it meets the marginal cost curve, as shown. ...read more.

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