Abstract
This is the book on SMEs I have been waiting for. Written in a concise and reader-friendly fashion, Watson has produced a compelling, evidence-driven review of the literature on SME performance structured around what he asserts to be common myths – that is, that failure rates are excessive, business growth is restricted by a lack of external funding and that female-owned businesses generally underperform compared to their male-owned counterparts partly as a result of the difficulties they face in accessing funding and in networking. In the former case, he provides details of his journey towards the discovery that SME failure rates (the topic of his doctoral research carried out in Australia) are often over-egged and the evidence inconsistent. Nonetheless, Watson stresses that industry speakers, professional bodies and academics alike have often used high failure rates to direct policy-makers to the significance of failure, given the contributions made by SMEs, and to serve as a warning to businesses.
The book is organized into six parts. Part 1 describes how the author became interested in SMEs and his rationale for exposing some of the myths around SME performance. Also, before providing a review of the failure literature, he is careful to note, consistent with Schumpeter, that not all failure is bad, as the exit of less efficient businesses makes way for more efficient ones. Part 2 examines more closely measures of SME performance. Here, Watson draws attention to the attributes that, when brought together, create a more robust measure of performance (e.g. objectivity/verifiability, reliability/freedom bias); following this, four definitions of failure (discontinuance, bankruptcy, termination to prevent further losses and failure in the sense of not being able to ‘make a go of it’) are examined against these attributes. It is suggested that variance in failure rates may be attributed to the age, size, and industry in which the business operates, and to the economy. Part 3 argues that failure rates are no higher in female-owned than male-owned businesses when these factors are controlled for. Part 4 examines the issue of financing business growth and questions the tendency in prior research to focus on supply-related financial constraints (e.g. bank discrimination), rather than demand-related constraints (e.g. concerns over loss of control, perceived risk). The so-called ‘finance gap’, it is argued, may be exaggerated. Further, taken alone, supply-related constraints do not adequately explain differences in levels of external funding attained by female-owned SMEs as compared to their male-owned counterparts. Part 5 explores the relationship between networking (specifically the personal relationships of the owner) and SME performance. Among other things, it seeks to dispel the myth that female-owned businesses have a smaller number of networks and benefit less from such. Further, a key finding is that too much networking might be counterproductive and that access to an external accountant is the only formal network which significantly affects firm survival and growth for both female- and male-owned businesses. Part 6 summarizes findings from each of the chapters and discusses the need for greater understanding of the links between SME owner motivations and performance.
There are many good things to say about this book. First, each chapter is very well structured and aptly begins with guiding research questions and the significance of these in the context of the broader literature. Second, in examining each of the ‘myths’ central to the book, Watson avoids simply describing the numerous studies he has compiled over a 20-year period, but critiques the collective claims, summarizing as he goes along, pointing out inconsistencies where needed. Third, the book makes good use of the author’s own recent empirical work to question the prevailing wisdom around SME failure and performance; like the three case studies cited in Chapter 2 (in Part 2) on business success/failure, or the focus group research and survey described in Chapter 7 Part 4), where he examines how demand-side issues may be used to explain financial constraints (demand-side issues being largely neglected in research in favour of supply-side issues that can be addressed by policy-makers). Fourth, in relation to the previous point, I applaud the use of mixed methods. Too often studies on the subject tend to rely on cross-sectional surveys alone, which distinguish successful/growing firms from their less successful/non-growing counterparts. In agreement with the author, these studies seek to describe variables associated with performance rather than explain performance.
I have but one cautionary note to apply to the conclusions drawn – particularly to the revelation that female-owned businesses are not being routinely discriminated against by banks – which may be misleading if taken to be generalizable. There are two reasons for this: first, much of the research cited that pointed to discrimination was carried out nearly 20 years ago, since when advances have been made to increase access to bank financing (e.g. to educate loan officers and to support aspiring female entrepreneurs) and attitudes towards women have become more progressive; a second, related point, is that while it is one thing to claim that female-owned businesses in developed countries (e.g. Australia, United Kingdom and United States where most studies were conducted) are not discriminated against, a similar finding might be less confidently reached in developing or emerging/transition economies, where financial institutions remain underdeveloped and/or attitudes towards women are less progressive. Therefore, it is also useful to consider the ways in which context and culture shape SME performance and the extent to which the myths Watson identifies are universal.
Finally, I agree with all of Watson’s suggestions for future research, particularly the need to understand more about the motivations of SME owners and how they impact on performance. It seems absurd to focus all our efforts on, for instance, simply identifying those factors internal/external to firms that may facilitate growth, and then measuring the impact of these factors, without also determining whether growth is both desirable and feasible for SME owners; if the motivation to grow is simply absent, then growth behaviour seems – well – rather unlikely also. A more complete picture of SME performance would be achieved by examining the cognitive factors at play, but also the emotional and social processes as well, as they too are likely to impact on behaviour. In short, this book is a must-read for all scholars, students, practitioners and policy-makers with an interest in entrepreneurship and SMEs.