Business Death and Firm Size in the UK

Abstract

Professor C. C. Gallagher and H. Stewart are with the Department of Industrial Management at the University of Newcastle-upon-Tyne, England.

Although the number of firms forced out of business in the UK by financial problems has increased dramatically in the current recession, less firms have ceased to trade. In parallel, surprisingly, firm creation rates have risen almost continuously over the same period. The different statistics used to examine trends in the number of firms ceasing to trade give conflicting results. Liquidations and bankruptcies show a sharp increase over the period 1979-83, while figures for 'business deaths', based on VAT data, show a slight decline from the peak figures of 1976-78.

An explanation is that in more prosperous times many options exist for profitable business, and many entrepreneurs will choose to switch to what they perceive as more profitable opportunities. However, in the recessionary years of 1981-83, contrary to popular perception, less firms ceased to trade. While insolvencies increased there was less voluntary switching to other activities. There was actually less 'churning' in the economy due to 'deaths'. Thus the recession, while having a major effect on increasing flexibility in the labour process, may have actually reduced the flexibility of capital and had the effect of freezing some inefficiencies present in the market.