Small Firms Investment: A Search For The Motivations 1999-2002.

Abstract

Some twenty years ago, research was conducted by the author into the investment motivations of a sample of small firms in the south of England. The results were published in the International Small Business Journal 1984. This research has been updated between 1999 and 2002. The results were surprising in the sense that little had changed over the period. The aim of the original 1979-1982 South Wessex Survey was to make a contribution to what was considered at the time to be an under-researched field by examining the motivations and weaknesses behind investment decision making. This involved investigating 52 small firms with up to 200 employees in the South Wessex region of the United Kingdom. The results showed that, in the main, small firms actually chose to ignore, and even avoid, certain opportunities to reach the highest attainable return on investment, indicating endemic investment weaknesses within the small engineering firm. For example, the sample firms had concentrated on their main products over the years for various reasons, but tradition as opposed to strategy was a principal explanation. Hardly any firms had considered movement into new fields, and related diversification was not popular being regarded as risky rather than risk spreading. The impression was that diversification could have been at least as beneficial as the activity currently engaged in which was producing sub-optimum results. Some firms argued that diversification, and even related diversification, was impracticable. In output determination, flexibility is essential. Yet 46% of the firms fixed output by allocating quotas which would be retained for some time until events dictated otherwise. Only 27% were scheduling output in response to market forces suggesting reasonable degrees of flexibility. But perhaps most striking was another 27% actually employing constant output policies. Current and expected demand, as measured by length of order books were fundamental determinants of output levels, whilst labour availability and excess capacity acted as major influences. As far as output constraints were concerned, inadequate plant capacity predominated with rising costs of production second. The results indicated that very rarely did firms raise or lower output in the shorter term in a conscious attempt to optimise sales, profits or costs. It emerged that the principal goal of 21% of the firms was satisfactory profit. Subsidiary policies tended to be rather more individual, e.g. safety, but two clear aims repeated themselves: satisfactory profits and survival. Key personnel gave specific reasons for adopting their policies. Several claimed that satisfactory profits and survival were the only real goals for small firms especially during recessionary economic conditions. But policies did seem to be the result of historical or traditional decision making, and once a firm had adopted a goal this would be retained and only amended when events dictated.Flexibility of strategy was not apparent. From this finding it seemed clear that a flexible policy could well have increased profits, because if profits had not improved then the policy could easily have been changed. Since firms considered survival either second to satisfactory profits in the hierarchy of objectives, or as one of the foundations for profitability, the signs were that firms were simply aiming to survive. It was possible that survival could have been the critical fundamental objective since many firms regarded this as a barometer of success. There were other factors that were equally worrying, and these are now considered in parallel with the 1999-2002 follow up study.