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Sarah McKinley

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SARAH MCKINLEY 101185309 DEGREE PROGRAMME: R9N2 MODERN LANGUAGES WITH MANAGEMENT STUDIES

MODULE: BUS 3000 ENTERPRISE & ENTREPRENEURSHIP MODULE LEADER: CHRISTINE CHIFAMBA 2014 ESSAY ASSIGNMENT

QUESTION 1: DISCUSS AND CRITICALLY EVALUATE THE RELEVANCE OF GOVERNMENT REGULATION ON THE SME SECTOR. WORD COUNT: 2,180

Sarah McKinley

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Q1: Discuss and critically evaluate the relevance of government regulation on the SME sector? For several years the relevance of government regulation on businesses, especially SMEs, has been subject to debate. Conventionally, there is an assumed negative connotation associated with regulation, with smaller businesses suffering disproportionally (SBS:2004a). This is reflected in the literature and studies available; although there are now more studies emerging which portray varying attitudes to regulation with alternative views that it is inherent and relevant to the business landscape. Despite the extensive repertoire of studies available, the contradictions in findings due to methodological differences, contingency upon market contexts and the unique individuality of each enterprise hinder a complete consensus on the relevance of regulation in the SME sector. This essay discusses the relevance of government regulation on the SME sector firstly by defining regulation, then by analysing the range of studies available followed by critically evaluating what they have ascertained, looking specifically at employment legislation, health and safety regulation and environmental regulation. It will also examine current regulation trends to come to the conclusion that despite its negative conceptualisation of being a burden, regulation is to an extent just as relevant for SMEs as for larger businesses, generating a number of direct and indirect outcomes; however there is a need to reduce its excessiveness, especially in the U.K., where SMEs make up 99.9% of the U.K.s private sector (FSB:2013).

Regulation is defined by the Better Regulation Task Force (BRTF) as any government measure or intervention that seeks to change the behaviour of individuals or groups. It can both give people rights and restrict their behaviour (BRTF:2003. p1). It is important for the government to maintain an environment to enable the market to function and to protect entrepreneurs, businesses and consumers. As Kitching states, government regulation profoundly shapes all economic activity (Kitching:2006.p4). If we envisaged an economy left to self-regulate several problems could arise, for example less efficiency and business malpractice (Down:2010). This would be an extremely utopian approach: the reality is some form of government regulation is needed. Nevertheless, critics

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of regulation perceive it as a burden on entrepreneurs and smaller businesses, imposing costs that impede start-up, investment, growth and employment (Nicoletti and Scarpetta:2003.p11).

One of the major issues in critically evaluating the relevance of government regulation is the range of methodology used to measure its impact (Down:2010). Kitching and Smallbone (2010) cite four different types of surveys which attempt to assess the impact of regulation, in particular business-burden surveys and compliance cost studies, which tend to reinforce the idea that regulation is a restraint on business. Failure to investigate the exact nature of causal mechanisms through which regulation contributes to business performance (Vickers: 2008.p221), alongside the tendency to word questions negatively - for example using business burden language - surely presupposes that respondents are going to react negatively (SBRC Kingston University:2005.p6). Moreover, the attempt to quantify all costs incurred from complying with regulation further stresses the notion of burden. On the other hand, qualitative studies (e.g. Arrowsmith et al. 2003 and Vickers et al. 2005) have paid more attention to the complexities of assessing regulation, and show that it can generate a number of dynamic direct and indirect outcomes with little impact on SMEs (Edwards et al:2004). Furthermore, it is also important to note that regulation does not have uniform consequences for SMEs and that everything is contingent on the wider market environment (Kitching: 2006). Therefore, it is important to rely on different empirical sources to explore the relevance of different types of regulation, three of which will be discussed henceforth.

Firstly, an area where SMEs appear to struggle and need support is that of employment legislation, also apparent in Human Resource Management. Finding and retaining skilled workers has been identified as the third most important issue behind achieving sales and planning for the future of the business (Berry:2006). Compliance with employment legislation is viewed as an ever-increasing burden, with recent developments such as the National Minimum Wage, maternity rights and contracted working hours (Blackburn:2006). Perhaps regulation is relevant as a benefit for the protection of employee rights; but a burden to owner-managers, evident in the rise of the number of SMEs looking for external support in this area (Jarvis & Rigby:2011). Do SMEs suffer disproportionally compared to larger businesses? Arguably, to a certain extent this is true as they are probably more likely to lose at a tribunal, or struggle with issues such as employee claims against them (Jarvis &
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Rigby:2011), because they tend to be poorly equipped to deal with problems (OECD:1997.p3). Blackburn and Harts quantitative study (2002) comes to the conclusion that it is the medium enterprises (20-49 workers) who suffer the most (p.5). This may be because they are a size where employment issues become more obvious and relevant. Edwards et al. (2004) builds upon this in their qualitative study, verifying and supporting what Blackburn and Hart found, however highlighting that owner-manager perceptions tended to be general and overstated, not reflections of concrete experience (Lynch-Wood et al:2006.p325).

Around 88% of SME respondents in a 2010 study undertaken by Illuma Research for Right Management believe the complexity of UK employment legislation to be a problem (Right Management:2010). However, it can be reasoned that it is more of an irritant rather than a major impediment to performance as Kitching et al. (2003) point out in their study of a document storage services company, in which the owner agreed that employment regulation had enabled the company to achieve higher levels of performance by creating new market opportunities (Kitching et al:2013.p12). Perhaps it could be argued that the government should allow SMEs to focus on developing business in order to be successful, rather than focusing on complex legislation and creating possible barriers to entry for new businesses David Camerons current proposed reform on employment red tape promises more flexibility on regulation (Ahmed:2012) but it cannot be ignored that employment regulation is relevant in the fact it can lead to exponential levels of performance and innovation directly and indirectly (Kitching et al:2013).

Secondly, the relevance of health and safety legislation on the SME sector is also widely discussed. Regulatory barriers to entry, success and growth of SMEs were considered in a 2001 study commissioned by the Health and Safety Executive (HSE), performed by Lancaster et al., and found that compared with larger corporations, SMEs are often at a competitive disadvantage (Lancaster et al.:2001). It can be assumed this type of regulation is a burden especially for new organisations as they would be likely to have a lack of knowledge, information, time and resources, therefore suffering as a result (Lancaster et al.:2001). Larger corporations, on the other hand, would be expected to have the expertise and time to dedicate to compliance. It is important to note that internal and external factors
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greatly influence the impact and relevance of this regulation (Blackburn:2006). Compliance and attitudes towards health and safety regulation in any enterprise highly depend on the nature of the processes, technology, machinery and premises used and their associated hazards (study by Vickers et al.:2005, discussed by Blackburn:2006). For example, it could be claimed the more dangerous the activity in an enterprise, the more relevant health and safety regulation is. But in the case of SMEs, they are less likely to have formal health and safety systems in place with larger organisations more likely to involve external support (Lancaster et al.:2001). Also, the wider market environment, competitive pressures, supply chain influences and requirements of the supplier and customer all play an influencing role in compliance and attitudes to health and safety regulation within the SME sector (Blackburn:2006). In the 2005 mixed-method study undertaken by Vickers et al., the majority of firms were found to avoid compliance and/or viewed it as an unnecessary burden (Vickers et al.:2005.p8). A minority of firms more knowledgeable about health and safety regulation were positive, with some viewing it as an opportunity to be one step ahead of the competition (Vickers et al.:2005). On the contrary, the qualitative HSE study found that 72% of small enterprises thought that the advantages outweigh the costs of implementing this type of regulation (Lancaster et al.:2001). To a certain degree, health and safety regulation may be problematic in its expense and time-consuming nature of implementation; nevertheless it is relevant in that it can be advantageous for SMEs as it creates a safer working environment, decreasing the time and working days lost through accidents; it may increase productivity and staff-morale; it protects the SME against potential legal action in the case of accidents; and keeps the SMEs reputation intact (Lancaster et al.:2001). In 2011/12, 148 workers were killed at work and 78,000 other injuries to employees were reported in the U.K. (HSE:2013), with 27 million days lost in 2011/12 due to work-related health or injury (HSE:2013). With that being so, health and safety regulation is highly relevant to any business, whether it be an SME or not.

Finally, the relevance of environmental law on SMEs is debated, with findings that ownermanagers often have very positive outlooks on the environment but that this concern is typically not reflected in their behaviour (Vickers:2008.p223 from McKiever and Gadenne:2005). This could be explained by the fact that SME owners have questioned their
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role and how they are to acquire the resources in environmental management without compromising their core business activities (McKiever and Gadenne:2005.p2). Various studies suggest that SMEs face larger costs in complying with environment regulation (Dean et al.:2000), however this is attested in other studies claiming that when it comes to compliance and enforcement, SMEs are more likely to escape compliance as agencies are more likely to inspect larger more established firms, allowing SMEs to avoid adherence to the regulation (SBRC Kingston University:2005.p12). Furthermore, these larger industries, faced with such inspections, could divest themselves of the departments that pose the biggest liability for environmental regulation, thus creating new start-up opportunities for other SMEs (Dean et al.:2000). However, with government standards such as the ISO14000 series, it is necessary that all firms have some level of compliance to these laws (Chapple et al:2001).

There are many industries which are heavily regulated in relation to environmental issues. For example, in a study conducted by Revell and Blackburn (2004; 2006) the construction industry is found to be subject to heavy regulation, for which the relevance is often undermined. Environmental regulation, especially in this sector, is fundamentally relevant especially in todays society, with ever-increasing levels of pollution and industrial waste. Everyone, including SMEs, has a responsibility in sustaining the environment and adopting maintainable measures. In several interviews with builders, the study found that many believed more stringent environmental legislation was the only way to ensure that the industry reduced its environmental impact (Blackburn:2006.p12). However, it was noted that the cost pressures of constantly implementing such regulation led to worries raised by owner-managers that not everybody within the industry would comply, therefore leading to a not-so-level playing field (Blackburn:2006). Regardless, environmental regulation is just as relevant to SMEs as to larger corporations, but there appears to be a necessity of regular regulatory contact between government and SMEs to improve compliance effectiveness.

In conclusion, despite its negative conceptualisation of being a burden, regulation is to an extent just as relevant to SMEs as to larger businesses, generating a number of direct and indirect outcomes; however there is a need to reduce its excessiveness, especially in the U.K. Supposedly, regulation in the U.K. has cost business more than 50bn since 1998 (BCC:2006.), however The World Bank (2007) puts the U.K. in 6th place of the world
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rankings based on ease of doing business. Despite its business-friendly appearance, the current UK coalition government has recognised and has made the commitment to cut the red tape burden (Fallon:2012, cited by Hurley:2012 in The Telegraph Online) on SMEs. Business minister Michael Fallon claims the one-in, one-out policy has saved companies 850m since 2010 (Hurley:2012). As discussed, what is important is that alongside the costs and problems of regulation, the benefits must also be considered as they are just as relevant. This essay specifically looked at these in terms of employment legislation, health and safety regulation and environmental regulation. Additionally, researchers must go further than asking entrepreneurs whether regulation is a burden as there are a wide range of impacts both positive and negative on businesses, none of which are uniform as it is highly dependent on the market context (SBRC Kingston University:2005). Generally, where competition in the market is intense, regulation can provoke a poor position; but where competition is less extreme, SMEs may be able to cope better (SRBC Kingston University:2005). The government aim to get the balance right in order to create a fair and prosperous market, and the creation of government responses attempt to simplify regulation by, for example, extending access to reliable, robust advice and removing obsolete laws (Enterprise and Regulatory Reform Act 2013, Department for Business Innovation & Skills). Consequently, despite the contradictions in methodological findings, it can be concluded that government regulation is to an extent just as relevant to the SME sector as to larger corporations, but there is a need to reduce its excessiveness, especially in the U.K.

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Reference List:
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Federation of Small Businesses (FSB). (2013). Small Business Statistics. Available: http://www.fsb.org.uk/stats. Last accessed 13th January 2014. Health and Safety Executive, The. (HSE). (2013). Statistics 2012/13. Available: www.hse.gov.uk/statistics/overall/hssh1213.pdf. Last accessed: 04th Feb 2014. Hurley, J. (2012). Michael Fallon: We will cut red tape for SMEs. Available: http://www.telegraph.co.uk/finance/festival-of-business/9620284/Michael-Fallon-We-will-cutred-tape-for-SMEs.html. Last accessed 05th Feb 2014. Right Management through Illuma Research (2010) Available: http://www.rightmanagement.co.uk/news-and-events/press-releases/item20601.aspx. Last accessed 01st Feb 2014. Jarvis, R., and Rigby, M. (2011). Business Advice to SMEs: Human Resources and Employment. ACCA research report no. 123. Certified Accountants Educational Trust: London. Kitching, J. (2006). A burden on business? Reviewing the evidence base on regulation and smallbusiness performance [online]. Kingston University: London. Kitching, J., Hart, M., and Wilson, N. (2013). Burden or benefit? Regulation as a dynamic influence on small business performance. International Small Business Journal. Available: http://isb.sagepub.com/content/early/2013/07/03/0266242613493454. Last accessed 27th January 2014. Kitching, J. and Smallbone, D. (2010). Literature review for the SME capability to manage regulation projects, report for Inland Revenue. Government of New Zealand: Auckland. Lancaster, R., Ward, R., Talbot, P., and Brazier, A. (2003) Cost of compliance with health and safety regulation in SMEs. Entec UK Ltd on behalf of the HSE: Penicuik Midlothian. McKiever, C., and Gadenne, D. (2005) Environmental management systems in small and medium businesses. International Small Business Journal, 23(5), pp. 513-537. Nicoletti, G. and Scarpetta, N. (2003). Regulation, Productivity and Growth: OECD Evidence. World Bank Policy Research Working Paper 2944 OECD: Paris. Office of Fair Trading (OFT). (2010) Consumer Law and Business Practice: Drivers of compliance and non-compliance. OFT1225. Organisation for Economic Co-operation and Development (OECD). (1997) Small businesses, job creation and growth: Facts, obstacles and best practices. OECD.

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Revell, A. and Blackburn, R (2004) SMEs and their response to Environmental Issues in the UK, Occasional Paper. No.57. Kingston Business School. Small Business Research Centre (SBRC). (2005). Regulation and Small Firm Performance and Growth: A Review of the Literature. Kingston University: London. Small Business Service (SBS). (2004a). A Government Action Plan for Small Business: Evidence Base, Small Business Service: London. Vickers, I. (2008). Better regulation and enterprise: the case of environmental health risk regulation in Britain, Policy Studies: London.29:2, pp. 215-232. Vickers, I., James, P., Smallbone, D., et al. (2005) Understanding small firm responses to regulation: The case of workplace health and safety. Policy Studies 26(2): pp.149-169. World Bank, The. (2007) Doing Business 2008. The International Bank for Reconstruction and Development / The World Bank: Washington D.C.

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