The Impact of Regulation on Small Business Performance

Report for the Enterprise Directorate of BERR by
Small Business Research Centre Kingston University Kingston Hill Kingston upon Thames Surrey KT2 7LB Tel: 020 8547 7247 Fax: 020 8547 7140 Email: m.hart@kingston.ac.uk

April 2008 URN 08/806

Acknowledgements
The project owes an enormous debt to Ian Drummond and his colleagues Andy Harrison and Paul Hadley in the Enterprise Directorate (formerly the SBS) who provided the research team with the opportunity to develop a research project on regulation and small business performance using an innovative and powerful methodology. This is an important area of policy reaching across Government and it was important to have had the time to develop the research methodology and to undertake and analyse the detailed face-to-face interviews that were required. We are grateful to them for affording that time since July 2005. An important part of the research process was a series of 5 workshops which involved the Kingston research team, the Enterprise Directorate and our two external academic advisors – Professor Steve Fleetwood (University of the West of England) and Dr Andy Pratt (London School of Economics). These workshops allowed the research team to present emergent findings as well as to receive critical comments and advice on the conceptual and analytical framework of the project. We would like to thank Steve and Andy for their encouragement and constant attention to detail. The Steering Group for this project, comprising representatives from HMRC, Cabinet Office, HM Treasury, BERR, Enterprise Directorate, CBI, and ICAEW made a number of important contributions to the discussions about the research methodology and earlier drafts of this report. The usual disclaimer applies. In the SBRC, Richard Hyde, Kristy Bannon, David Conner, Lisa Graham and Anna Faulkner arranged the 124 face-to-face interviews. Maria Bradley, Sam Stevens and Wendy Smythe transcribed the interview recordings. We are grateful to the efforts of this ‘back office’ team. OMB Research were contracted to undertake the telephone survey of 1,205 small and medium-sized businesses and we are indebted to Rachel Olding, James Murray and Gemma Bird for their inputs into the development of the questionnaire, the successful completion of the survey and the delivery of the survey dataset. We owe a special debt to José Luis Iparraguirre D’Elia at the Economic Research Institute of Northern Ireland (ERINI) who provided invaluable technical assistance for the Structural Equation Modelling component of the project. Without his direction and support the outcome would have been less insightful. Finally, and by no means least, we would like to thank the owner-managers of all the small and medium-sized business in England who freely gave up their time, either in face-to-face interviews or by telephone, to allow us to explore with them many aspects of their business including performance. Our understanding of the effects of the regulatory environment upon their actions, strategies and business outcomes stem from these discussions. Small Business Research Centre (Kingston University) Research Team: Dr Michael Anyadike-Danes (ERINI) Rosemary Athayde Professor Robert Blackburn Professor Mark Hart (Project Manager) Dr John Kitching Professor David Smallbone Dr Nick Wilson January 2008

CONTENTS
Page i 1 2 2 3 5 5 6 7 8 8 8 9 12 12 13

Executive Summary PART ONE: INTRODUCTION Chapter 1: Introduction and Research Objectives 1.1. Background and Aims 1.2. Defining ‘Regulation’ 1.3. Defining ‘Business Performance’ and ‘Growth’ 1.4. Research and Policy Context 1.5. A New Approach to Studying the Impact of Regulation on Small Business Performance 1.6. Structure of the Report Chapter 2: Explaining the Impact of Regulation on Business Performance 2.1. Introduction 2.2. Regulation Generates Enabling, Motivating and Constraining Influences 2.3. Direct and Indirect Regulatory Influences 2.4. The Necessary Role of Agency in Mediating the Influence of Regulation on Business Performance 2.5. Internal and External Conditions Mediate the Impact of Regulation on Business Performance 2.6. Summary PART TWO: BUSINESS OWNER REGULATION RESPONSES TO

Chapter 3: An Explanatory Account of Regulation and Business Performance: Face-to-face Interviews 3.1. Introduction 3.2. Methods, Data and Sampling 3.3. Regulation and the Market Mechanism 3.4. Enabling and Motivating Regulatory Influences 3.5. Constraining Regulatory Influences 3.6. Regulation Generates Multiple Influences 3.7. Adapting to Regulatory Change 3.8 Summary Chapter Attitudes to Regulation and Business Characteristics and Performance: Evidence from the Telephone Survey 4.1. Introduction 4.2. The Telephone Survey: Sampling Approach and Sample Characteristics 4:

15 15 17 18 22 26 27 33

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4.3. Owner-managers’ Perceptions of Regulation 4.4. Managing Regulation 4.5. Regulation-Handling Capacity is Crucial 4.6. Sources of Advice on Regulation 4.7. Regulation and Innovation 4.8. Regulation and Business Growth: Does Constrain or Enable Business Growth? 4.9. Regulation and Management Characteristics 4.10. Summary

Regulation

39 41 43 45 50 53 59 65

PART THREE: THE IMPACT OF REGULATION ON BUSINESS PERFORMANCE: A MULTIVARIATE APPROACH Chapter 5: Unravelling the Relationship between Regulation and Business Performance 5.1. Introduction 5.2. Multiple Voices on Regulation: a Clarification 5.3. Revisiting the ‘Bundle’ of Regulation Questions 5.4. Developing Measurement Models of Regulation, Management and Performance 5.5. A SEM Model of Regulation, Management and Performance 5.6. Summary PART FOUR: PROJECT OVERVIEW Chapter 6: Conclusions and Policy Implications 6.1. Summary of Argument and Key Findings 6.2. Policy Implications - Informing the Better Regulation Agenda References Appendix 1: Business Performance Pro Forma (Face-to-Face) Appendix 2: Telephone Survey Questionnaire Appendix 3: Regulation Question Descriptives

67 67 70 73 76 81

83 85 90 94 99 123

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Executive Summary
Research and Policy Context The purpose of the study is to investigate the impact of government regulation on small business performance outcomes. The received wisdom arising from previous studies often assumes a rather narrow view of regulation focussing on the burdens, costs and constraints that regulation imposes on small business. This report presents an alternative but fundamentally complementary view, constructed from a broader understanding of the diverse ways regulation contributes to business performance outcomes. Our approach was specifically designed to capture the complexity and interrelated nature of the factors that underpin differences in small business performance. And within this to explain why and how small businesses tend to experience different performance outcomes despite a common regulatory environment. Our findings suggest that although regulation clearly does impose costs and affect businesses performance, the performance outcomes experienced in practice are not simply a function of the regulation involved. Rather they also reflect both the capacities and motivations of particular businesses and the wider contexts they operate. The research findings can add to the established better regulation agenda. In particular, they provide a basis for the development of new forms of business support that will enable the better regulation programme to more completely achieve its core aims of improving business performance. The research can also be used to further develop the ‘Small Firm Impact Test’ on the effects of new regulation. How we Approached the Task The first stage of the research was to develop our understanding of the regulation-performance relationship on the basis of detailed studies of 124 small businesses in England. The second stage used the findings from the first to design a series of questions on regulation which we then used in a telephone survey of 1,205 small businesses in England. This quantitative component of the project was designed to provide a larger dataset that could be used to develop a multivariate model of the relationship between regulation and small business performance. Key Findings • Our analysis of the interviews with the 124 small business owners lead us to conclude that regulation generates multiple influences which can be enabling and motivating as well as constraining.

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These influences, operating simultaneously, shape the activities of small business owners and other stakeholders whose actions underpin small business performance. These influences operate whether or not owner-managers (and other actors) are explicitly aware of them. The impact of regulation on business performance is not simply a reflection of the properties of regulation (for example, the scope of obligations or their complexity), important though these are. The performance outcomes experienced in practice also depend on how business owners, and other stakeholders respond to specific regulations. Agents’ adaptations to regulation, and thus the business performance outcomes that result, depend on firms’ internal resources and capabilities, and on the external context in which they operate: particularly product, labour and capital market conditions. Business owners vary in their capacity to discover, interpret and adapt to regulation. Those with greater resources – finance, equipment, management capability, workforce knowledge and skills – are better placed to deal positively with regulation. Where businesses lack the resources to develop new practices and products, their capacity to adapt to regulation is constrained. Businesses also vary in the business objectives they seek to achieve and these also shape how they adapt to regulation. Whether regulation motivates changes in practices and products beyond minimum compliance, and the consequences for business performance, also depend on the wider context within which particular businesses operate. For instance, where businesses perceive product or process innovation as essential to maintaining competitiveness, regulatory change will likely motivate, whether acknowledged explicitly or not, the search for new products and processes. Moreover, external conditions shape how successful adaptations to regulation are in terms of business performance. If competitors adapt better or more quickly to regulatory change, adaptation by the focal business might not suffice to improve performance. The findings from this survey of 1,205 small businesses can be summarised as follows: o The results confirm that regulation is enabling and motivating for small business owners as well as constraining. Although the costs and constraints associated with regulation were at the forefront of business owners’ minds, the data also suggest that many business owners were aware that regulation offers opportunities to develop more efficient ways of working and/or of increasing income. o Almost a half of the sample claimed their businesses were able to deal with new regulations and sizeable minorities reported impacts on their firms that provide benefits.
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o A key correlate of many of the core regulation variables is owner-manager knowledge. Those owners reporting being wellinformed about the range of regulations affecting their businesses tended to adapt more dynamically and to experience the best business performances. This suggests that knowledge of regulation, coupled with the internal capacity to respond positively can and does enable business owners to adapt business practices and products to overcome some of the constraining influences of regulation. o Owners of fast growth enterprises were significantly more likely to report that the introduction of new regulations had encouraged them to take action to ensure their businesses remain competitive and to claim that that they were able to adapt more quickly than competitors. Fast turnover growth firms (but not fast employment growth firms) were more likely to report regulation as being beneficial for their business. This is further evidence that it is not simply the regulations themselves that cause business performance outcomes but rather, it is how businesses adapt to new regulations that is the major influence on performance. As with other aspects of the business environment – such as increased input prices, changing technologies and patterns of consumer demand – it is those goods and service providers best able to adapt quickly and effectively to the changing landscape that are most likely to prosper. o A key finding from our multivariate analysis is that the response to the question on costs – “to what extent would you agree that there are costs to your business of meeting the minimum regulation requirements” – is clearly unrelated statistically to owner-manager responses to the other regulation questions. The implication here is that owner-managers hold strong views on the way regulations imposes costs upon their business but that they simultaneously hold strong views about other aspects of regulation which do not impact on business outcomes in quite the same way. We believe that this dis-association is important in a number of respects. Not least is how it might inform the conduct of future research which seeks to capture some measure of the costs of regulation or administrative burden. o The survey also collected data on business attributes and growth performance and we developed a model of the relationships between the three latent constructs of regulation, performance and management. The outcome is a statistically significant multi-layered model of this complex relationship, with many significant direct and indirect connections. o What this means is that there is a mutually interlocking relationship between regulation and performance which in
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simple terms does not allow us to draw the conclusion that one construct (regulation) causes another (performance). The two constructs move together, yet as we noted above this does not include the dimension which relates to the costs of regulation. o In summary, we are confident that this way of viewing regulation has both conceptual meaning and statistical robustness. We now have significant conceptual and empirical depth to the construct of regulation as viewed in the context of small businesses.

Policy Implications • Our research has provided an in-depth analysis of the nature of the relationship between regulation and small business performance and this understanding allows us to set out some policy implications. At the outset we must be clear that the analysis does not allow us to say anything about ‘how many regulations’ nor what they should be. Neither do these findings detract in any way from the established better regulation agenda. Rather, our findings suggest the possibility of complementary policy measures which have the potential to enhance the performance of at least some businesses over and above that stemming directly from the establishment of better regulation. In particular, we develop two inter-related policy areas which are set out in more detail in Chapter 6. The first concerns the realm of business support and builds on our findings that knowledge and capacity are important dimensions of how regulation impacts upon business performance. We argue that there needs to be a greater emphasis upon familiarising small business owners with the regulatory environment and a need to build internal capacity to deal with regulations. An extension of this argument would be that as the regulatory environment is simplified the outcome for small business may well be less than optimum without support to enable them to adapt effectively. The second policy area relates to Impact Assessments and, more specifically, the Small Firms Impact Test (SFIT). Policymakers must recognise there will not be a single ‘small business effect’ but many different ones and that part of the reason why the effects of regulation may vary relates to the internal capacity to cope with them. The obvious implication here is that regulatory exemptions need to be based on aspects of this capacity rather than on the more easily accessible areas such as size. Size on its own is not always a good indicator of the capacity of a business to cope effectively with the introduction of new regulations.

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If there is to be a greater emphasis on familiarisation and capacity within the business support framework to help small businesses cope better with the regulatory environment then the associated range of costs need to be built into the ex ante impact assessment of the evolving regulatory environment. In brief, there is a need to acknowledge the costs of building capacity within small businesses. Indirect regulatory influences are a major source of dynamism amongst small businesses, though perhaps largely unacknowledged, in the competitive market system. In developing Impact Assessments, more emphasis should be placed on indirect influences on small business performance. Recognising that regulations that constrain small business owners by placing obligations upon them might also enable and motivate them and other small businesses to adapt products and processes in order to reduce costs and/or increase trading revenues is important.

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PART ONE INTRODUCTION

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1.
1.1

Introduction and Research Objectives
Background and Aims

Regulation and its impact upon businesses are major topics of public debate. Small businesses are argued to suffer disproportionately from regulation because of higher fixed compliance costs and their lower resilience to external shocks due to limited resources (e.g. Chittenden et al., 2002). One recent estimate, derived from the Government’s own regulatory impact assessments (RIAs)1, suggests that implementing new legislation has cost UK businesses more than £55bn since 1998 (BCC, 2007). Other sources, in contrast, note the ‘business friendliness’ of the UK regulatory regime; the World Bank (2007) ranks the UK sixth out of 178 countries in terms of the ease of doing business. Critics of regulation ignore the fact that in spite of the regulatory framework – or is it because of – 4.5 million businesses operate in the UK, a number that has continued to rise in recent years despite claims of increasing regulation. Creating ‘better regulation’ is a key policy objective of the UK Government (Cabinet Office, 1999) and has been one of the seven key strategic themes running through small business policy (SBS, 2004). In 2005, the Government launched the Better Regulation Action Plan to reform the regulatory framework (HM Treasury, 2005) and created the Better Regulation Executive to drive forward the agenda. The Action Plan was strongly influenced by the Hampton report (2005) aimed at improving inspection and enforcement procedures and the Better Regulation Task Force (2005) report, Regulation Less is More: Reducing Burdens, Improving Outcomes, which proposed measurement of ‘administrative burdens’ imposed by regulation and setting targets for their reduction. Reducing and simplifying regulation is not, however, an end in itself but a means to enhancing national economic performance and living standards for the UK population. The acid test of regulation, therefore, is whether it contributes to these broader policy objectives by producing the relevant outputs and outcomes at the firm level. Our analysis is designed to capture the various factors that interact with regulation to shape the business performance outcomes actually experienced in practice. Because it moves beyond seeing business outcomes as a direct and simple consequence of regulation, it has the potential to offer new points for intervention; interventions that will allow businesses to cope more positively with whatever regulatory environment they operate in and thereby achieve enhanced performance. Such an approach is fundamentally complementary to one which seeks to reduce and simplify regulation; indeed it has the potential to significantly enhance the effectiveness the better regulation programme. Research in this area, necessarily, rests on the approach taken to explaining how regulation influences business performance. Rather than starting with a set
1

These have been renamed Impact Assessments since May 2007. Small Business Research Centre, Kingston University

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of quantitative research techniques for collecting data on regulation and performance and making statistical inferences, and simply presuming their appropriateness, we do something different. We begin by inquiring into the nature of the object under investigation and then design a methodological tool box that is appropriate for dealing with it. The research, guided by a realist methodology, started by probing a little deeper into the nature of the relationship between regulation and small business performance2. We did this in two distinct stages. First, we developed a causal analysis of the regulation/performance relationship on the basis of qualitative data derived from detailed studies of 124 small businesses in England3. Building on this analysis, we undertook a second stage, designing a series of questions on regulation to use in a telephone survey of 1,205 small businesses in England4. This quantitative study was used to estimate a multivariate model of the relationship between regulation and performance using a larger dataset. The analytical toolkit chosen - Structural Equation Modelling (SEM) - assumes many aspects of ‘regulation’ are unobservable and, therefore, difficult to quantify. ‘Regulation’ is treated, therefore, as a latent construct. To begin, we define key concepts, review the evidence base on the causes of small business performance and growth, including regulation, and provide details of our research approach. 1.2 Defining ‘Regulation’

The research and policy literature tends to define ‘regulation’ narrowly in terms of the particular obligations placed on business owners to act (or not act) in particular ways, for example, to provide information to Government; alternatively, studies do not define regulation, allowing business owners to draw on their own meanings (SBS, 2006). These approaches are limited because they do not cover the full range of regulatory influences on small business performance. In the context of this study, therefore, we define ‘regulation’ as: …..the legal and administrative rules created, applied and enforced by Government regulatory authorities – at local, national and transnational level – that both mandate and prohibit actions by individuals and organisations, with infringements subject to criminal, civil and administrative penalties. Government regulatory authorities are bodies with responsibility for creating, implementing and enforcing regulation, including those with tax-raising and tax-collecting powers. The activities of all sub-national, national and transnational bodies possessing such powers fall within the remit of the study. This includes the 63 national regulators, 203 trading standards offices and 408 environmental health offices in 486 UK local authorities covered by the
2

We are grateful to Professor Steve Fleetwood for helping us clarify our thinking about the conceptual and methodological design of the research project. 3 Undertaken by the Kingston research team between September 2005 and March 2006. 4 Carried out by OMB Research between January and March 2007. Small Business Research Centre, Kingston University

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Hampton Report (2005) as well as the European Union and World Trade Organisation which regulate trade between member states. As the recent NAO report (2007) indicates, regulation takes many forms, including: Acts of Parliament; statutory instruments; rules, orders and schemes made under statutory powers by Ministers or agencies; licenses and permits issued under the central Government authority; codes of practice with statutory force; guidance with statutory force, codes of practice/guidance/self-regulation/ industry agreements with government backing; bye-laws made by central Government; and EU regulations and Directives. By mandating and prohibiting action on the part of small business owners and others whose actions causally affect them – actual and prospective competitors, customers, employees, suppliers, infrastructure providers and regulatory authorities (henceforth ‘stakeholders’) - regulation shapes small business performance outcomes. Regulation only influences business performance outcomes through small business owners’ and stakeholders’ adaptations to intervention. This is the case whether or not business owners recognise regulation as a causal influence on theirs’ or others’ behaviour. An important part of our approach has been to explain why regulation may tend to inhibit small business performance; it clearly does not always do so in practice. Small businesses operating in the same regulatory context can and do experience very different performance outcomes; some perform well and grow, others struggle. Understanding this differentiation and how it is produced is vital to the development and application of better regulation. For Government, one central purpose of regulation is to enable a complex economy to function better. Regulation provides criminal and civil law protection for property and contract, a framework governing business activities and relations, and supports Government action to create a civil society infrastructure and other public goods that enable trading. 5 These include: a financial system that enables the supply of credit to business investors; a welfare system that enables the supply of healthy, educated and motivated individuals to form businesses and to work in them; a science base to provide knowledge; a defence and national security system that enables trading free from external threats; and energy, transport and communications infrastructures that enable businesses to operate. Even where the private sector supplies infrastructure and public goods, the Government’s role in enabling them to do so is necessary and could be provided by no other institution. Moreover, by creating expectations of behaviour, regulation stabilises trading conditions which, in turn, facilitate market exchange and long-term investment. Regulation, defined in this way, is a necessary condition of sustaining an advanced market economy like that of the UK, though it does not determine the precise form regulation will take nor guarantee that policy objectives will be achieved. An advanced market economy without comprehensive Government regulation is an impossibility. 1.3
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Defining ‘Business Performance’ and ‘Growth’

To describe certain Government activities as public goods does not mean all are able to benefit equally from them. Small Business Research Centre, Kingston University

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Business performance can be defined both in terms of processes (start-up, resource acquisition, development and deployment (i.e., the strategic direction of the business) and outcomes (sales, profit, asset value, intrinsic work satisfactions).6 Regulation impinges upon all of these activities. ‘Growth’ is a narrower concept, denoting a particular type of change in performance. In this study we address growth by using a number of dependent variables. For example, we have continuous data on employment and output growth from the face-to-face interviews and the telephone survey. Alongside this we construct additional variables which re-classify small businesses into those which have grown rapidly and those which have not in order to provide an assessment of how regulation is perceived by the owner-managers of these firms. 1.4 Research and Policy Context

For almost three decades small business performance and growth has been an important research topic (Storey, 1994; Barkham et al., 1996; Delmar, 1997; Davidsson et al., 2002; Davidsson, 2004). Studies typically identify a number of potential influences on growth: • • • • firm characteristics (e.g. size, age, sector and ownership); owner-manager characteristics (e.g. experience, education, ethnicity, gender, size of management team); and strategic priorities (e.g. innovation, R&D and technical capability, internationalisation; staff development and formal training) external environment (e.g. market conditions, regulation, public policy support)..

Although there is no consensus on the precise, and indeed consistent, influence of particular factors on the performance of small businesses, these form an important foundation to our research framework. Much of the evidence regarding the impact of regulation on small business performance adopts a somewhat one-sided view of regulation and is constrained by various methodological limitations (Kitching, 2006). Most studies adopt a static approach, identifying regulation solely or primarily as a cost to, or constraint upon, business owners. Surveys typically ask business owners whether they perceive regulation as a ‘burden’ (or other synonym) on business performance (or similar indicator) (e.g. Cosh and Wood, 1998; SBS, 2006). Such surveys tell us what business owners think about regulation but not what they do about it. Other surveys focus on the impact of regulation, for example, on business start-up, with mixed results as to whether it is a deterrent (Djankov et al., 2002; Ho and Wong 2007) or not (van Stel et al., 2007). Nor do such studies allow for respondents to misperceive the impact of regulation. Prospective and actual business owners often over-estimate
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No assumption need be made regarding the priority owner-managers attach to various objectives, though repeated failure to achieve a profit is likely to set in train a sequence of events that will bring about the dissolution of the enterprise. Small Business Research Centre, Kingston University

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the extent to which regulation constitutes a real burden (Allinson et al. 2005, 2006); a finding at least partly explicable in terms of the pervasiveness of ‘anti-regulation’ discourses in the wider society. Such discourses exert a genuine constraining influence on business start-up and performance in the UK. Compliance cost studies adopt more sophisticated methods but, on the whole, reinforce the view of regulation as a cost or constraint (e.g. Chittenden, 2002). The benefits of regulation and its dynamic influence on small business owners’ activities and performance are often neglected. Qualitative studies highlight small business owners’ variable awareness of regulation (e.g. Yapp and Fairman, 2005), distinct attitudes to compliance (e.g. Petts et al., 1999; Vickers et al., 2005), the benefits of regulation (e.g. IpsosMORI, 2007) and provide deeper insights into the dynamic effects of regulation on business decision-making and competitiveness (e.g. Arrowsmith et al., 2003; Grimshaw and Carroll, 2006). Current policy initiatives have necessarily been constructed around this established, and in some respects partial, body of evidence (e.g. HM Government 2006; BERR 2007a). We believe that this has limited the scope of initiatives available to policy makers and may well have limited the overall impact of the better regulation agenda.

1.5

A New Approach to Studying the Impact of Regulation on Small Business Performance

We applied a new approach to exploring the influence of regulation on small business performance explicitly drawing on a realist perspective (Figure 1.1). We address two main questions: 1. 2. How does regulation causally influence business performance outcomes, and why do they vary between businesses? What conditions support/hinder the exercise of these causal mechanisms, thereby shaping the outcome realised in practice?

Regulatory Mechanism

Business Performance Outcomes

Conditions
(Other mechanisms)

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Figure 1.1: Realist View of Causation (adapted from Sayer 2000: 15) Our approach goes beyond studies focusing on small firm owners’ perceptions of regulation as a ‘burden on business’ and compliance cost studies that present a static picture of regulation as a cost or constraint. Instead, we propose a model explaining the dynamic impact of regulation on small business performance. The model specifically allows for variation in business owners’ adaptations to regulation due to differences in their capacities and motivations, and to differences in performance outcomes due to the influence of the wider contexts within which businesses operate. This opens up space for policy to intervene to enhance business owners’ capacities to discover and interpret regulation and to adapt to it in a manner likely to improve business performance. Start-up and business development programmes could incorporate learning about regulation and how to adapt to it. This might also help overcome the undoubted hostility of some business owners who perceive regulation as totally unrelated to conducting business activities. 1.6 Structure of the Report

Chapter 2 sets out the analytical approach adopted, Chapter 3 presents the qualitative findings and provides the basis for the construction of a set of regulation statements investigated further through the large-scale telephone survey of small business owner managers. Chapter 4 reports on this survey and develops a profile of the range of attitudes to regulation and how they relate to particular types of small businesses. Chapter 5 provides a multivariate analysis of the relationship between attitudes towards regulation and performance variables using primarily Structural Equation Model (SEM) techniques. Chapter 6 concludes with a summary and identifies the implications of the study for policy.

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2.
2.1

Explaining the Impact of Regulation on Business Performance
Introduction

This chapter presents a model to explain how regulation causally influences small business performance. Our focus is on the micro level, on the performance of individual enterprises, rather than on the macro level of the UK economy. First, we make two distinctions regarding how regulation exerts its causal influence derived from our broader definition of regulation. Second, we examine the necessary role of agency in producing regulatory effects; regulation only influences business performance through the actions of business owners and other stakeholders. Third, we consider the wider conditions of agents’ adaptations to regulation that shape their impact on business performance. Understanding the properties of regulation, agents’ adaptations to it, and the wider contexts of action are all essential to providing a causal explanation of the impact of regulation on business performance. 2.2 Regulation Generates Enabling, Motivating and Constraining Influences

Regulations vary in the number of agents to whom they apply, the ease with which they can be interpreted, the demands they make of those subject to them, and in the sanctions available with respect to non-compliance. These characteristics shape business owners’ perceptions of, and adaptations to, regulation, including whether they choose to comply at all. Individual agents, including small business owners, might, of course, misperceive these characteristics, all of which influence agents’ capacities and motivations to adapt, and, ultimately, business performance outcomes. Regulation causally influences business performance by enabling, motivating and/or constraining the projects of business owners and other stakeholders whose actions causally affect them. Regulation enables agents to achieve their aims by making certain actions possible; it motivates by incentivising agents to act in particular ways rather than others; and it constrains agents by limiting their scope for action. Regulation is not enabling, motivating and/or constraining in general but only in relation to agents’ specific goals, for example, growing a business by 10% during some specified period. Regulations trigger multiple influences (enabling, motivating and constraining) simultaneously for the same business owner. For instance, the National Minimum Wage (NMW) constrains employers by requiring them to pay at least the minimum rate to employees. But by restricting their capacity to control labour costs, it also motivates them to implement product and process innovations, or to raise prices, in order to cut costs and/or increase trading revenue. The NMW might also be enabling in so far as it increases labour supply and/or forces competitors to increase prices to adapt to their higher labour costs and thereby make their products less attractive to consumers.

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There is no necessary correlation between regulation and performance. Identifying an enabling regulatory influence does not mean businesses achieved a high level of performance; similarly, to identify a constraining regulatory influence does not mean firms performed poorly. Regulation generates multiple influences, simultaneously, in combination with other causal influences. It is not possible a priori to predict which of these influences on performance will be the most powerful for any particular business. We can say that regulation tends to inhibit performance, but we must recognise that this is a tendency; not all businesses will be constrained to the same extent; some may well struggle but equally others may well achieve high levels of performance. 2.3 Direct and Indirect Regulatory Influences

From the point of view of a focal business owner, direct and indirect regulatory influences can be distinguished, although in practice, they operate together. Direct influences relate to small business owners’ adaptations to regulation that mandates or prohibits action by them – for example, the NMW - either by constraining them to comply, or by enabling and motivating them to adapt business practices and products in order to maintain or improve business performance. Most small business research focuses on these direct influences, particularly the constraining ones. Indirect influences refer to changes in small business owner behaviour arising from adaptations to regulation by other stakeholders whose behaviour causally affects the focal business owner, either through market relations (with competitors, customers, employees, suppliers and some infrastructure providers), or non-market relations (with infrastructure providers and regulatory authorities). For example, where suppliers increase pay rates and product prices as a result of the NMW and this causes the focal small firm to adapt their business practices and products, then regulation is a causal influence on that focal business. Indirect influences will be experienced most commonly by business owners as changes in the cost or availability of wanted resources, or in product sales. Given the inter-dependent nature of firms’ relations with other stakeholders, indirect regulatory influences on business performance are potentially very complex and far-reaching, whether business owners are aware of them or not.

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Small business owners, like other people, are more likely to report direct, rather than indirect, regulatory influences because they are more knowledgeable about their own behaviour and motivations than they are of others. This does not, however, mean that indirect influences are less important. Indeed, regulation might exert a greater indirect influence on business performance than directly. Direct and indirect enabling regulatory influences operate simultaneously, causally contributing to business performance outcomes. The black arrows in Figure 2.1 indicate direct regulatory influences on small business owners and other stakeholders; the white arrows indicate indirect influences on a focal business owner operating via market and non-market relations with other stakeholders.

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MARKET SYSTEM – including regulatory framework

Competitors Suppliers Customers FOCAL SMALL BUSINESS

Employees ‘Infrastructure providers’
d i r e c t e f f e c t s I n d i r e c t e f f e c t s

Figure 2.1: Direct and Indirect Regulatory Influences on Business Performance

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2.4 The Necessary Role of Agency in Mediating the Influence of Regulation on Business Performance Regulation only influences business performance through the exercise of human agency, that is, through business owners and other stakeholders adapting their behaviour to the regulatory framework; agency mediates the impact of regulation on business performance. If business owners and other stakeholders do not change their behaviour as a consequence of regulatory change, its effect is nil. Business owners and other stakeholders vary in their capacities to discover, interpret and adapt to regulation and pursue different strategic priorities. Regulation does not, therefore, have uniform effects on small business performance. The capacity of small business owners to discover and interpret regulation depends not only on how well it is communicated to business owners - both the message and the media used – but also on firms’ capacities to comprehend the meaning of regulation. Intermediaries such as business advisers, consultants, insurers, trade bodies and friends and family as well as regulatory inspectors play a crucial role in shaping business owners’ understandings of regulation and their responses to it (e.g. IpsosMORI, 2007; BERR, 2007b). Business owners always have some discretion regarding how to adapt to regulation – from non-compliance, through minimum compliance and incremental change to far-reaching reform of business practices and products. Adaptation need not entail detailed knowledge of regulation; indeed, regulation can exert an indirect influence on a focal business without any knowledge of regulation at all. Non-compliance due to ignorance or wilful evasion risks legal penalties (e.g. fines, business closure, and imprisonment) and economic sanctions (e.g. threat to commercial reputation) but some business owners may feel more constrained to avoid compliance than others, for example, those operating in highly competitive markets. Adaptation depends, therefore, in part, on the wider context. 2.5 Internal and External Conditions Mediate the Impact of Regulation on Business Performance

For simplicity, internal and external conditions of action can be distinguished. Internal conditions refer to the resources, capabilities and motivations of agents internal to the enterprise – owners, managers and employees – to discover, interpret and adapt to regulatory intervention. Business owners might, for instance, be unaware of particular regulations or interpret regulatory obligations incorrectly. Some might choose to create a dedicated regulationhandling post in order to improve their ability to deal with regulation. Business owners might decide to implement major innovations as a response to regulatory change; others will adapt minimally, while others will choose not to comply at all. Discovering, interpreting and adapting to regulation all require resources to develop the required capabilities; because firms possess different resources, such capacities are, therefore, necessarily variable.

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The Impact of Regulation on Small Business Performance

External conditions refer to the actions of stakeholders beyond the enterprise, including product, labour and capital market agents. Markets distribute resources and rationales for action – for instance, to acquire inputs cheap, to sell products dear, and to adapt business practices and products in order to cut costs and/or increase trading revenue. Whether particular regulations produce specific performance outcomes for particular firms depends, in part, therefore on the actions of other stakeholders as well as their own efforts. What is a constraint for one business owner is another’s enablement because they are in competition for resources and markets. If other stakeholders adapt better or more quickly to regulation, then the focal business may experience a decline in performance. 2.6 Summary

The analytical framework presented in Figure 2.1 enables us to identify and stylise the different types of regulatory influence (enabling, motivating, constraining) that causally contribute to business performance outcomes. Regulation only produces its effects through the agency of business owners and other actors with whom they causally interact (actual and prospective competitors, customers, employees, suppliers, infrastructure providers, regulatory authorities). We stress the variety of business owner responses to regulation founded on their variable resources, capabilities and motivations to adapt. Chapter 3 presents a detailed analysis of our 124 cases to examine these regulatory influences and the conditions that support or hinder their causal impact on particular small business performance outcomes.

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The Impact of Regulation on Small Business Performance

PART TWO BUSINESS OWNER RESPONSES TO REGULATION

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The Impact of Regulation on Small Business Performance

3.
3.1

An Explanatory Account of Regulation and Business Performance: Face-to-face Interviews
Introduction

This chapter provides a more comprehensive causal explanation of the impact of regulation on small business performance than previous studies have offered hitherto. It takes account of the dynamic, multi-faceted influence of regulation on performance. Data from the sample of 124 face-to-face business interviews is drawn upon selectively to illustrate the enabling, motivating and constraining regulatory influences that contribute to, but do not determine, small business performance. 3.2 Methods, Data and Sampling

Data were obtained from face-to-face interviews using a semi-structured interview topic guide with 124 small and medium-sized business owners (or managers) in a range of business settings (see Appendix 1). Sample businesses were identified using a commercial database and satisfied the following criteria: • • • • Independence – not part of, or owned by, large companies; Employment – employed 1-249 people; Sector – businesses operated in a range of sectors; Location – mainly located in London, the South East, South West, Leicester and Leeds.

A sample was constructed to incorporate businesses with a range of size and sector characteristics (Table 3.1). The purpose of the qualitative study was not to achieve a ‘representative sample’ in order to generalise statistical relationships to the broader UK small business population. Rather, our aim was to explain how regulation contributes to particular performance outcomes in particular contexts. By selecting businesses with a range of features, we hoped to uncover a wide range of regulatory influences on business performance. Sample size is not of central importance in this type of research methodology. The regulatory influences we identify shape, though do not determine, the performance of all businesses, their precise impact in particular business cases varying with the conditions within which these influences operate.

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The Impact of Regulation on Small Business Performance

Table 3.1 Interview Sample Businesses Number of Firms Micro (< 10 employees) Small (10-49 employees) Medium (50+ employees) Manufacturing Construction Retail/wholesale Hospitality Transport/communications Finance/business services Health and social care Other ALL 53 55 16 23 12 13 20 11 36 5 4 124

% of Sample 42.7 44.3 13.0 18.5 9.7 10.5 16.1 8.9 29.0 4.0 3.3 100.0

Several features of our methodological approach are worthy of mention. First, business owners were approached on the premise of investigating the determinants of performance - not to assess the impact of regulation. We did not assume regulation was a principal influence on performance. Second, the topic guide was constructed to identify the influences on, and barriers to, business performance before raising the thorny issue of regulation. Third, the topic guide was used flexibly, with interviewers exercising discretion in question sequencing where respondents raised regulatory issues prior to their position in the guide. Fourth, the method of data collection permitted deeper probing into business owners’ actions and motives beyond that usually possible using more structured research instruments such as postal or telephone survey formats. Fifth, owner-managers’ accounts provide the starting point for understanding how regulation influences business performance but they do not, and cannot, constitute the whole regulation/performance story. Many studies treat respondent reports as causal explanations in their own right rather than as data that contribute to an explanation. Regulation shapes business owners’ activities without necessarily explicitly entering their motivations or reasoning; indeed, over time, particular regulations are likely to become absorbed into business routines such that they become a taken-for-granted, barely visible, condition of conducting business. Few, if any, business owners report property or contract rights as important regulatory influences on their behaviour, yet these are necessary for trading.7 Business owners’ lack of awareness of particular regulations does not mean they have no effect.
7

Property and contract rights also constrain business owners, of course, by restricting the unauthorised use of others’ property and by binding contractors to the agreements they make.

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The Impact of Regulation on Small Business Performance

Owner-manager hostility to regulation is not synonymous with constraining regulatory influences being paramount for business owners’ activity or with poor levels of business performance. Similarly, favourable respondent views of regulation do not necessarily correspond to the importance of the enabling and motivating influences of regulation or high levels of business performance. Owner-managers’ perceptions of regulation, particularly their initial responses, need not reflect regulatory influences or business performance outcomes in any obvious way (see Case 1). Case 1: Fund manager investing in early-stage technology enterprises. Founded in 1981.
Employment: 22 employees. Extremely profitable business (£6m profit out of £12m turnover). Regulation was NOT reported until prompted but very strong critical views were expressed once the issue was raised. The owner reported regulation to be unnecessary for the vast majority of businesses as most operated honestly. Hostile to UK and EU increase in ‘burden of regulation’, despite their claims to be deregulating. Reported impacts included employing one person full-time to deal with Financial Services Authority (FSA) matters. The owner suggested it might influence the business to relocate offshore if regulation becomes much worse! Having said this, the owner recognised that some regulation to clarify what people can and cannot do was essential to do business. The owner felt that Governments were overregulating to prevent another Enron but this was having detrimental effects for the honest majority.

We begin by outlining the fundamental and necessary role of regulation in enabling a complex market economy to function. This is crucial because without regulation, market activity and relations of the scale and complexity prevalent today would simply be inconceivable. We then present arguments and evidence to illustrate the enabling and motivating influences of regulation, before considering cases highlighting the conventional constraining view of regulation. Next we consider cases that illustrate the multiple, and often contradictory, influences generated by regulation. Because regulation is so all-encompassing of business activity, managing multiple and contradictory regulatory influences is the normal condition of doing business. 3.3 Regulation and the Market Mechanism

The regulatory framework is a key component of the ‘market mechanism’, shaping buyers’ and sellers’ actions and relations. Although regulation is often perceived as a Government response to market failure, for example asymmetric information, arguments counterposing the market or the state ignore the fact that market exchange in advanced economies necessarily presupposes the existence of a state regulatory framework. The market is not independent of the regulatory framework. Regulation does not interfere with a prior, independent market mechanism or distort market signals; rather, regulation is a necessary institutional precondition of the adequate functioning of an advanced market economy.

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The Impact of Regulation on Small Business Performance

Private property, contract and money are essential preconditions for an advanced market economy, enabling transactions between agents over large distances and across time; all presuppose an active Government role as regulator (Sayer, 1995). Without these institutional supports, the economy simply would not function in the way it does involving chains of buyers and suppliers separated across time and distance who will never meet. Without regulation, buyers and sellers would have neither the will nor the means to engage in market exchange. Clear and enforceable property rights are fundamental to market exchange and business investment. The World Bank (2006) identified investor protection as a key indicator of the ease of doing business; the higher the level of regulatory protection the easier it is to do business. Excessive or ill-considered deregulation would not lead to a ‘pure’ market uncontaminated by regulation, but instead would lead to a crisis of the market system because buyers and sellers lacked the confidence and the capacity to engage in trade. 3.4 Enabling and Motivating Regulatory Influences

Government regulation enables and motivates business performance in various ways, for instance, by making it easier for actual and prospective goods and service providers to access and deploy resources, and by creating market opportunities. Two points are worth repetition. First, the creation of these opportunities is enabling and motivating for business owners but this does not guarantee the opportunities enabled are commercially exploited. Human agents must act on the basis of these enablements if these influences are to be realised. Second, business owners themselves might not perceive regulation as enabling or motivating in the manner described; the examples given have often been reconstructed from owner-manager accounts, without them necessarily making the same connections between regulation and business performance as the research team. • Regulation enables and motivates business performance through licensing, registration, prior approval Regulatory authorities sanction agents as ‘business owners’ through the allocation of tax statuses (as self-employed traders or incorporated bodies), company registration and, where relevant, licensing or registration to undertake particular trading activities. These prior approval practices regulate market entry and the supply of particular goods and services – for instance, professional services such as medicine, law and architecture as well as food production and distribution, entertainment and leisure, health and care services, and transport all require licensing. These regulatory influences operate directly on focal small business owners – by permitting or not permitting them to trade lawfully – and indirectly, by permitting or not permitting others to do the same. Everything business owners do subsequently – and the business performance outcomes achieved - is shaped, though not determined, by these fundamental regulatory enablements. This is true whether or not business owners actually recognise this. The extent of such impacts depends upon the number of approved

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The Impact of Regulation on Small Business Performance

operators, the nature and extent of competition between them and the level of aggregate demand for their goods and services. • Regulation enables and motivates business performance through attribution of preferred supplier status Public and private sector organisations are often mandated to purchase inputs from a preferred, approved or certified supplier. The use of preferred supplier lists is enabling for those businesses on the list and constraining for those excluded, with implications for subsequent business performance. Preferred supplier status motivates R&D and innovation to take advantage of the market opportunities enabled (Case 2). Case 2: Aerospace Engineering – design/manufacture of helicopter composites turbine
cowlings, operating since the mid-1970s, Employment: 45 employees. Currently £3m turnover, an increase on £2.2m the previous financial year. The industry is heavily regulated by both the International Air Transport Association (IATA) and the Civil Aviation Authority (CAA). Due to the origins of the company in the 1970s the company got, and has continually renewed, maintenance, manufacturing and design approvals for its products. This gives it a significant advantage over competitors who usually hold only one of these three approval certificates. CAA certification enables the business to exploit a profitable market niche by adopting the quality standards set down by the regulators. These quality standards drive the R&D and innovation activity of the business & enable sales.

• Regulation enables and motivates business performance through deterring market entry/motivating competitor exit Regulation, by raising the perceived or actual costs of operating, may deter market entry and/or encourage exit by existing providers. For those businesses that choose to operate, such regulatory influences are indirectly enabling by reducing the number of competitors. One company, a travel insurance provider subject to FSA regulation, provides a good example (Case 3). One of the objectives that lay behind the creation of the Financial Services Authority in 2001 was to allay public fears following the endowment misselling and other scandals that have beset the financial services industry in recent years. Ironically, falling within the orbit of the FSA was one of the reasons why the respondent had been recruited to his position of company director a few months prior to interview. FSA regulation and scrutiny had not, however, prevented the business from achieving a high sales and profit performance.

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The Impact of Regulation on Small Business Performance

Case 3: Financial services, primarily retail travel insurance. Founded in 1998
(respondent joined 2005, partly to take on responsibility for regulation). Employment: 25 employees. The business is growing rapidly. In 2004, the company turned over £3.5m (profit of £900k) and projects an estimated £4.5m for 2005. Business has been regulated by the Financial Services Authority (FSA) since January 2005, a major irritant for the respondent as travel insurance products are perceived as not sufficiently complex or risky to justify regulation. Regulation also enabled certain activities. The owner acknowledged that the FSA had led to the creation of new market opportunities in the cargo insurance market and had encouraged some competitors, mainly those for whom insurance was only a part of their business, to exit the travel insurance market to avoid regulation. ABTA, the travel agents’ association, had negotiated a 2-year exemption for their members but when this expires, this might lead to further withdrawals from the market-place. He also anticipated potential benefits from having the required documentation of business practices in place should a trade sale ever be sought.

That Government regulation creates or protects a market does not mean that businesses necessarily achieve high product sales. Competitive pressures operate to influence performance outcomes with some businesses outperforming others. The point is to recognise this obvious role of regulation in market creation and the stimulus to trading activity, which is enabling for businesses willing and able to exploit the opportunity. • Regulation enables and motivates business performance by mandating customer purchases Regulation often requires consumers to purchase particular goods and services if they wish to undertake a particular activity, either in the context of commercial or leisure activity (Case 4). Such regulation by creating, or raising, demand for particular goods and services creates market opportunities for actual and would-be providers of those goods and services; these are indirectly enabling for such businesses. Regulation enables policymakers to achieve social policy objectives – e.g. public safety, environmental protection, education – while at the same time stimulating economic development. Examples from the sample include: requiring buildings to meet environmental and safety standards; requiring boat-users to purchase safety equipment; requiring property developers to meet environmental waste management standards, requiring schools to purchase IT equipment to meet their educational obligations. Case 4:
Geological Survey company, founded in 1967, employing 68 staff. The business has grown rapidly to £3.4m sales, up 14% p.a. in the 2000-05 period. Work for commercial and residential housing developers to ensure their sites are developed in accordance with EU and UK environmental legislation – especially in the area of waste management licences. They have developed a specialism in working with contaminated sites (testing/assessing the risk and advising on actions for specialist contractors before development work can begin). They are in fact the interface between the developer and the regulator (e.g. County Council Environmental Health Officers and Ofwat).

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The Impact of Regulation on Small Business Performance

These examples could be multiplied many times. For example, regulation requiring business owners to submit annual accounts provides market opportunities for accountants and financial advisers and, in this sense, is enabling for those businesses. By requiring those engaging in a particular activity, commercial or leisure, to purchase particular goods and services, regulation can further both economic and social policy objectives. Many businesses thrive on the back of Government regulation by providing regulatory advice and support to small business owners; many of these businesses, of course, are themselves small enterprises (see ACCA, 2006 for further evidence). • Regulation enables and motivates business performance by motivating customer purchases Regulation can be indirectly enabling for small business owners, for example, where it encourages, but does not compel, consumers to purchase certain goods and services. A good example of this would be food regulations that assure customers of the quality of food products; frequent food scares might reduce consumer confidence in foodstuffs. An interesting example from the sample relates to the indirect impact of the US Sarbanes-Oxley Act, which aims to protect investors in US companies, on the activities of recruitment agencies. The Act encourages companies to hire staff in order to ensure compliance with the Act and thereby creates market opportunities for recruitment businesses (Case 5). Case 5: Recruitment agency, founded in 2003, placing IT staff into the financial
services sector. Employs 13 in UK and Bahrain offices. Makes a small profit on £1.1m turnover but looking for 50% growth next year, and aiming for a trade sale in a few years time. The company seeks to provide value added services (non-preferred supplier list work) to raise margins. Regulation has stimulated an increase in client demand for temporary staff. The US Sarbanes-Oxley Act, whose purpose is to restore investor confidence in large corporations’ financial practices post-Enron, imposes harsh penalties for failure to present truthful financial accounts. This has motivated companies to recruit additional staff to ensure compliance. This has raised demand for recruitment agency staff.

• Regulation enables and motivates business performance by enabling customer purchases Government regulation authorising subsidy payments to particular customers to purchase particular goods and services is enabling for actual and prospective providers. One example is health services (Case 6). Without the subsidy, the market would be much smaller as few patients would be able to afford the service. Again, policymakers can facilitate the achievement of valued social objectives while simultaneously stimulating economic activity.

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The Impact of Regulation on Small Business Performance

Case 6: Domiciliary eye care service. Founded 1990. Employment: 43 employees.
Operates a high street retail optician (founded 1961) from the same premises. Earns a low profit on £1.5m turnover. Mainly NHS funded patients with approx 12% private sales. Longestablished and one of the first into home eye-care so has a good reputation for a highquality service. Price unimportant as the vast majority of customers pay nothing. Government decided to subsidise domiciliary eye care services in 1990. This enabled the provision of eye care to patients unable to travel to receive the service, creating market opportunities and restricting them to licensed practitioners. The business had previously provided some eye care in patients’ homes without the subsidy. Having generated the demand by subsidising the service since 1990, the owner believed the Government now finds expenditure to be increasing rapidly and is looking to control it.

Regulation motivates process innovations

As with increases in the cost of factors labour, raw materials and premises, the costs of handling regulation can act as a stimulus to seeking alternative sources of supply, more efficient methods of deploying resources, and new ways of generating revenue. Process and product innovations, though costly to introduce in the short-term, might actually constitute a long-term investment for the business and lead to an improvement in performance. Whether business owners perceive regulation as a causal influence on decisions to adapt business practices and products is an empirical question - its impact on business activities and performance might go unrecognised. Process innovations include changes in equipment, work organisation and working methods. Such changes causally influence business performance outcomes by generating reductions in costs and/or improving product quality. A steel supplier adapts to health and safety legislation by implementing a wide range of improvements in working practices that lead to a marked reduction in insurance costs and working days lost through accidents (Case 7). Case 7: Steel supplier founded in 1976, bought out by two directors in 2002 on
retirement of previous owner. Current sales of £34m. Employment has risen from just over 100 to 159 staff since 2002. The product market is volatile with fluctuations in steel prices. The customer base has been widened to avoid dependence on a small number of large clients. The new management team used Health and Safety legislation to increase efficiency by reducing days lost to accidents. A health and safety officer was hired to tackle the large insurance bill of £200k per annum. This increased internal management capacity to deal with regulation and facilitated change in working practices (e.g. wearing hard hats and training for fork-lift truck drivers). As a consequence, the number of accidents dropped dramatically with a corresponding drop in the insurance premium to £85k.

3.5

Constraining Regulatory Influences

In this section, we examine how regulation constrains business performance. As previous studies have found, business owners often focus, initially at least,

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The Impact of Regulation on Small Business Performance

on the direct costs or constraints associated with regulation, including the money, time and psychological costs of handling regulation: • • • • • • Discovering and interpreting regulation; Licensing, registration and other fees; Documentation and record-keeping practices; Inspections, audits and monitoring practices; Fines, penalties and other sanctions for non-compliance; ‘Psychological costs’ refer to the felt anxiety and stress experienced by those who perceive regulation requires them to change their behaviour. Such costs might deter start-up, investment and business development.

Again, one needs to recognise that the constraining influences of regulation need not be manifested in low levels of business performance. First, constraining influences operate alongside the enabling and motivating influences identified above to generate a net impact on particular business owners. Second, regulation produces business performance effects through its impact on what business owners (and other stakeholders) do. Agents adapt to regulation in different ways and these diverse adaptations feed through into performance outcomes for particular firms. Those able to adapt better and/or more quickly to regulation are more likely to achieve performance improvements (or limit the performance decline), even where regulation-handling is perceived as onerous. • Regulation constrains business performance by raising the administrative costs of regulation-handling Regulation increases the costs of operating a business by placing demands on owners to supply information to Government bodies or third parties such as employees and shareholders. All of these can be described as direct constraining influences. The five areas that impose the highest administrative costs on businesses are planning law, employment law, company law, taxation law and health and safety law (BERR, 2007a). The primary thrust of the Better Regulation policy agenda is to reduce the administrative burdens of regulation. There were many examples of such burdens reported by business owners (Case 8). Case 8: Insurance Brokers, founded in 1963 (current owners were involved in a MBO
in 1995). The business has increased turnover from £1.5-1.8 million in the last two years and staffing levels have increased from 22-25 people. The owner reported the FSA & associated ‘red tape’ as the major constraint on the business. Less time has been spent managing the business (down from 50% to 20% in the last two years). £50k has been paid out in FSA consultancy fees (not including extra fee income for the company accountant), training sessions to ensure compliance with FSA regulations on documenting work practices (especially the Retail Mediation Activities Return which has never functioned properly online and the 25 day requirement to ensure there are sufficient funds to cover all financial outgoings). The owner is contemplating employing a full-time FSA specialist at an estimated cost of £60k per annum.

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The Impact of Regulation on Small Business Performance

Several owner-managers, for instance, reported that employment law restricted their capacity to manage employees as they saw fit. Others reported being unpaid Government tax collectors and subject to suspicion and punitive sanctions where the tax and regulatory authorities viewed them as not fulfilling their obligations correctly. Penalties for non- or late compliance were reported by several respondents. • Regulation mandates changes in working practices

In addition to the administrative costs associated with discovering, interpreting and implementing regulation, there are also the substantive policy costs of compliance.8 These include changes in working practices. For example, one garage owner reported the introduction of computerised MOT test procedures as the major influence on business performance at the time of interview, estimating that the new procedure would increase the time taken to conduct the test and result in £30k of lost revenue per annum. Interestingly, when asked about regulation directly, the new MOT procedures were not reported (Case 9). Case 9: Garage business bought in 2000 (founded 1973), where the owner had been an
employee since 1990. Employment: 7 employees. Annual turnover has more than doubled from £220k to £550-600k and has traded at a profit every year since 2000. A new national computerised MOT procedure introduced from April 2005 increases MOT test times and was estimated as likely to reduce sales by an estimated £30k per annum. Since price ceilings for MOTs are set by Government, the additional costs cannot be passed on to customers. Satisfactory business performance enabled the owner to absorb the lost sales.

One particular adaptation to working practices as a consequence of regulation that was deeply resented by several respondents was the recruitment (or redeployment) of staff specifically to deal with regulatory issues. The major concern of employers was the cost of an annual salary on what were commonly perceived as ‘unproductive’ workers. Yet, it could be argued that employing a dedicated regulation-handler might also be enabling for businesses, particularly in the longer term. It might enable a superior regulation-handling capacity and/or a proactive orientation towards managing regulatory change that could generate future benefits, particularly in relation to competitors who do are unwilling or unable to employ such a person. These examples illustrate the key point that regulation is not solely enabling, motivating or, most commonly perceived as, constraining but rather that regulation generates multiple influences, which are enabling, motivating and constraining simultaneously. Regulation that constrains business owners by placing obligations upon them, for example, to submit annual accounts, also offers opportunities to develop managerial skills which, over time, can contribute to enhanced business performance. Business owners frequently
8

Sometimes, the policy costs and the administrative costs are synonymous where the regulatory requirement is simply for businesses to record or supply information to third parties.

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The Impact of Regulation on Small Business Performance

adapt business practices and products in response to perceived external pressures – for example, falling competitor prices, increased input prices - in order to maintain or enhance competitiveness; regulation is a major, if often unacknowledged, source of such pressure. • Indirect Regulatory Constraints on Business Performance

Regulation can impact on the performance of a focal business in an almost infinite variety of ways. Where regulation influences prospective customers not to buy, job-seekers not to look for work, or suppliers not to sell to the focal business owner then these are indirect constraining influences on that focal business. This contrasts with regulations that enable or motivate customers to buy (more), increase the supply of labour by motivating individuals to seek employment, or encourage suppliers to trade with the focal business. Examples of indirect regulatory constraints include: alcohol licenses that forbid sales to minors; traffic regulations that restrict the number of motorists able to pass by, or park near, businesses in order to stop and buy goods (e.g. congestion charge, red lines, parking spaces); credit card regulations that protect card-holders; employment rights that prohibit employment of certain categories of people (e.g. minors, foreigners); switching from analogue to digital television broadcasting; and tax payments to Government inevitably reduce consumer spending power. A common complaint is that VAT rates are too high and should either be reduced or abolished. This would enable business owners to reduce their prices and, so the claim runs, achieve higher sales. But if all businesses could do this, it is not obvious that any individual provider would be any better off, particularly if the reduced tax revenues caused Government to supply less infrastructure and public goods – security from crime, transport, energy, education etc - that supported market activity. • Regulation constrains business performance by motivating employee turnover Regulation can impact on small business performance indirectly through its influence on employee behaviour (Case 10). In this small electrical contractor, regulation influenced five employees to quit the firm simultaneously in order to start their own businesses, causing major labour shortage problems for the employer. Had the employer taken action to pre-empt the mass quit or had suitably qualified workers been easily accessible in the labour market, some of these problems could have been mitigated. This example highlights the unpredictability of regulatory effects, particularly indirect ones that depend on the actions of important stakeholders – in this case, employees.

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The Impact of Regulation on Small Business Performance

Case 10: Electrical Contractor. Company bought in 1990. Employment: 10, plus
occasional subcontractors for peaks in work. The business had enjoyed steady growth in turnover and profits prior to last year (£900k sales per annum) with the owner expecting to break even this year. The introduction of Part P regulations in January 2005 stipulating that residential electrical installations be tested by ‘competent persons’ had encouraged five qualified employees to quit the business on the same day in order to set up their own businesses. This mass quit caused major business disruption. To service existing contracts, the employer personally had to go 'back on the tools' and also use labour subcontractors, a practice previously avoided on quality grounds. Moreover, the employer’s focus on servicing existing contracts restricted time spent on winning new work; consequently, there had been a decline in new contracts obtained.

3.6

Regulation Generates Multiple Influences

So far, our analysis has focused on illustrating specific regulatory influences – whether enabling, motivating or constraining – and their impact upon business performance. Yet business owners experience multiple, and often contradictory, regulatory influences simultaneously. For instance, business owners are simultaneously enabled by property and contractual rights to deploy assets they own or control as they wish, by consumer rights that give customers the confidence to buy goods and services, by employment laws that grant employers a general right to command employees, and by ‘fair trading’ laws that aim to prohibit anti-competitive behaviour.9 To illustrate how business owners manage these multiple and conflicting regulatory influences, data are presented from two cases, although many other examples exist within our dataset. The first is a highly successful storage services company that had expanded from 2-160 people since the early-1990s (Case 11); the second, is a much smaller plant hire business (Case 12). Both owner-managers report the diverse influences of regulation. In the first case, the owner was highly critical of regulation once the issue was raised in the interview but subsequent probing revealed a more nuanced, even contradictory, picture in which the owner-manager acknowledged how Case 11: Document market opportunities for the founded in 1991. Expanded regulation had enabledstorage and self-storage business,business. Without further from 2-160 research major have over-estimated the impact of regulation in probing, the people in 11would city locations and annual sales are up from £180k to £6m. Growth has come from existing clients requesting new services (electronic storage, most cases.destruction). Profitabilityinfluences were evident in many businesses. scanning, Such contradictory peaks and troughs depending on the timing of
investment in new premises to expand the business. Competitive advantage initially derived from being a prime mover in storage services in the home city during the early1990s. Price is much more important now as larger rivals have entered the market and competition has intensified. Regulation constrained business activity in many ways - high business rates limited the finance available for business development; the compliance cost of time, though unmeasured, was a 'pain in the arse' (tempered by the knowledge that other companies have to deal with the same regulations); and employment law made it difficult to dismiss employees. Pressed on these issues, the owner reported that impacts were difficult to measure and were perhaps more of an irritant than a major impediment to performance. Impacts seem to refer to less tangible aspects such as eroding personal responsibility 9 and lack of rights, of course, are absolute; all are on owners' decisions and actions. Any None of thesetrust rather than having direct effects circumscribed. additional costs arising from regulation are passed onto the consumer wherever possible. Initially unacknowledged, the owner agreed that regulation creates market opportunities 26 by placing a statutory obligation on certain businesses to maintain records (e.g. health, law businesses). For businesses occupying expensive high street locations, contracting out document storage can help achieve economies.

The Impact of Regulation on Small Business Performance

Case 12: Plant Hire business, specifically to the utility contracting market. Employment:
13 staff. Business is currently growing after the worst year (2004) since taking over the business. Turnover now up to £1.6m per annum. The business appears to be professionally managed and since regulation is an integral part of their business, regulation is managed in the same way as all external relationships. Regulation was reported as both enabling and constraining. Privatisation of the utilities had led to increased externalisation and this, indirectly, had increased business opportunities. Although not acknowledged it seems very likely that contracting with large utilities will make compliance with health and safety regulation a competitive necessity. The respondent also reported “some red tape issues, but nothing too serious”, including environmental regulations, impact of maternity leave and employment tribunal procedures, and compulsion to pay the Construction Industry Training Board levy.

3.7

Adapting to Regulatory Change

Case Study Sector: Residential Care The residential care sector has undergone considerable change in recent years as policy has reduced funding with serious consequences for both care home operators and patients. Recent regulatory changes required care home owners to adapt premises in order to meet new minimum care standards, for example, patient numbers per room. Financial resources will influence whether, and how, care home owners are able to adapt to the new policy and regulatory framework. Lack of resources might mean some owner-managers are unable to make the changes necessary to comply with the new

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The Impact of Regulation on Small Business Performance

regulations and/or they will have to reduce patient numbers to ensure compliance. Our first case illustrates how regulatory change can enable higher levels of business performance (Case 13). Businesses with substantial resources possess the wherewithal to cope with any additional costs imposed by regulation and to be able to adapt to those changes. Competitors who cannot might be forced to exit the market, leaving remaining operators in a stronger position. High property prices had, the respondent believed, tempted many to sell homes to property developers. This had reduced capacity in the sector but offered greater market opportunities to remaining care providers. Case 13: Residential Care home for elderly (2 establishments). Founded in 1984.
Approximately 50 staff. Sales have increased dramatically in the past few years to £1.4m after a period of loss-making. The homes were operated at a very high level of capacity most of the time, currently 38.6 out of 40 beds. Block contracts with the local authority have guaranteed revenue though this practice was about to change. Regulation was increasingly perceived as an irritant, increasing costs to such an extent that he would not start a care home today! New care standards since 2000 have forced care homes to provide more spacious facilities for patients. Existing homes have been exempt from some new regulations but have been unable to replace patients until changes have been made to meet the new standards. Regulation sets maximum prices that can be charged to NHS patients and patient-staff ratios that largely determine labour costs. Multiple inspections were perceived as time-consuming and unrelated to risk. Form-filling was perceived as a waste of time as no-one uses the information collected. But: several regulatory influences though not reported, are clearly enabling for business performance. First, care homes have to be licensed by local authorities, thus limiting competition. Second, the new care standards have encouraged some care home business owners to exit the market, often selling to property developers, reducing the supply of care beds but increasing opportunities for those that remain. Indeed, the owner felt that standards were already adhered to and so incurred no additional charges for him, thereby improving business competitiveness.

Such options were not available to all care home owners. Another owner reported that regulation had contributed to business closure (Case 14). The new national care standards had increased time spent on paperwork and reduced time for care. The greatest influence on business performance, however, had been late payments by local authorities. The respondent believed that NHS reforms had made it more difficult for local authorities to pay care homes. Late payment provoked a crisis of cash flow and eventually, the owner-manager was forced to close down.

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The Impact of Regulation on Small Business Performance

Case 14: This 20 year old Residential Care Home was bought in 2000 complete with an
existing staff of 18 people. Turnover is £230k. The new owners inherited a £35k per annum loss and eventually late payments and bad debts by a number of local authorities forced business closure in 2004. National care standards meant more paperwork and less care time with residents. Late payments by local authority clients became a major issue and the business ran up a high level of bad debts. NHS reforms were viewed as affecting the ability of local authorities to pay. The irony is that late payment legislation exist to penalise late payment practices. Employment law was perceived as making it difficult to dismiss abusive staff and this had led the owner to engage an employment law firm to go to a tribunal case. The case was won but at considerable additional expense.

Under the same regulatory framework, care home businesses adapt in different ways depending upon the resources available to them, and their adaptations generate various performance outcomes, in part depending on the actions of other stakeholders, including major clients. It seems unlikely that regulation – in the form of National Care Standards - was anything more than a minor contributory factor in the business closure decision in Case 19. Clients’ payment practices were clearly the crucial issue, although, ultimately, NHS payment practices are in large part shaped by regulation – in this case, Government decisions on NHS funding. It is worth noting that the existence of late payment regulation was of little use to the care home owner because he was either unaware of it or chose not to enforce it against a recalcitrant client. Case Study Sector: Taxi Services Taxi services in London have become subject to greater regulation in recent years. The Private Hire Vehicles (London) Act 1998 provides for the licensing and regulation of private hire operators, drivers and vehicles in London. The Public Carriage Office (PCO) undertakes day-to-day licensing activities on behalf of Transport for London and sets license, application and inspection fees. The declared purpose of regulation is to raise passenger confidence that they are dealing with honest organisations, reliable drivers and safe vehicles. Proprietors are responsible for maintaining vehicles, making them available for inspection, and keeping driver records. Drivers must undergo a medical and a Criminal Records Bureau check. All licensed vehicles must meet certain minimum design criteria and undergo an annual inspection. There are approximately 25,000 licensed drivers10 and 20,000 vehicles11 licensed in London. Two cases below are presented to highlight differences in operators’ adaptations to regulation and levels of business performance. Licensing, documentation and inspection all entail costs for operators and in that sense exert a constraining influence on performance. But, they also illustrate how regulation might enable improved business performance, for example, by encouraging customers to use taxis because they consider them safer to
10 11

http://www.tfl.gov.uk/businessandpartners/taxisandprivatehire/1366.aspx http://www.tfl.gov.uk/businessandpartners/taxisandprivatehire/1380.aspx

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The Impact of Regulation on Small Business Performance

travel and by reducing the number of unsafe or unlicensed drivers and vehicles. The licensing requirement might deter entry by prospective operators and/or exit by existing operators unable or unwilling to comply with the new regulatory regime. By the same token, licensing might also make it more difficult for firms to recruit drivers. In the first case, the owner-manager reports that the intention to regulate the sector formed part of his motivation to set up a mini-cab business (Case 15). Drivers are reported to be attracted to ‘more professional’ operators prepared to embrace regulation and make it easier for drivers to become legitimate. Regulation was also perceived as reducing the number of illegal competitors. In the second case, business performance was less impressive though satisfactory (Case 16). Case 15: Taxi service. Employment: 5 employees (plus 35 self-employed drivers).
Founded in 2001 when the owners realised the sector was being legitimised. Current turnover is up from £90k at start-up to £150k (20% profit on turnover). The company takes a weekly ‘depot rent’ of £100 from its 35 drivers guaranteeing revenue. Contracts with local supermarkets attract drivers to the business and have been a key factor in achieving an annual turnover of £150,000 within 4 years. Respondent reported regulation costs the business but has helped professionalise it too. Regulation imposes costs in terms of maintaining driver records. Each record is four pages of A4 (e.g. copies of drivers' details; driving licence; insurance; MOT; vehicle registration documents etc). Lots of photocopying and administration is required. The owner says he would not be in business if it was not for regulations. One of the reasons for start-up was the increase in regulation and attempted elimination of illegal operators. “The drivers themselves feel more professional. They see it more of a job … they feel a lot more secure because they’ve legitimised – important for the long-term future of the industry … By professionalising the business, the margins are going to increase.”

In the second example, the business was surviving but not prospering (Case 16). Regulation was reported as an influence on the business but one whose impact was fairly predictable and manageable; indeed, the owner was as keen to report benefits associated with perceived customer confidence in mini-cab services arising from regulation. Most important as an influence on business performance was the impact of a recent rent increase which cut into profits severely. Case 16: Taxi service. Founded 1992. Workforce: 6 employees (plus 30 self-employed
drivers). No turnover or profit data provided but ‘satisfactory sales’ reported. Main issues concern the licensing of drivers, cars and the company with the Public Carriage Office. Self-employed drivers are responsible for licensing themselves and their cars. This incurs a financial cost and has perhaps restricted the number of drivers available, particularly those operating on a part-time basis. The owner also believes that the new regulations might stimulate demand because customers feel safer in licensed cabs.

These firms encountered the same regulatory constraints regarding the licensing of proprietors, drivers and vehicles, difficulties hiring drivers, and similar enablements regarding higher customer confidence. The firms had,

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The Impact of Regulation on Small Business Performance

however, experienced different business performance outcomes, with one achieving much higher sales growth than the other. Business owners were able to adapt to regulation in different ways to achieve different levels of performance. Operating in the same sector within an identical regulatory framework, does not guarantee similarity in firms’ adaptive responses or in business performance outcomes. The wider market context shapes business adaptations and performance outcomes. Regulation, understood in terms of obligations imposed on business owners, for example, those associate with licensing, may only be a minor influence on their capacities to improve business performance. Resources, including financial assets and managerial expertise are critical influences on how businesses adapt to the regulatory framework and the consequent business performance. Case Study Sector: Clothing Manufacture In this section, two business cases from the clothing industry are presented to illustrate the diversity of responses to regulatory change. The UK clothing manufacturing sector has declined substantially in recent years due to intense competition from low-cost overseas producers, mainly from Asia, particularly for mass-market items (Key Note, 2006). Consequently, the number of VATregistered businesses and manufacturers’ sales have both fallen by a third since 2001, and employment has fallen by 75 per cent to approximately 40,000 people between 1998-2005. From 1st January 2005 the quota system which limited imports into the UK from overseas was removed and this has enabled countries such as China to supply the UK with cheap garments. We present two business cases illustrating very different business development paths albeit within the same regulatory framework. The first case focuses on a more successful company, one with the resources and the will to pursue an innovative business strategy, supplying high street fashion retailers, where issues of design and quality are crucial (Case 17). The second highlights the difficulties of competing with overseas producers using conventional business technologies and methods (Case 18).

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The Impact of Regulation on Small Business Performance

Case 17: Clothing designer and manufacturer, founded in 1997, has grown to 67
employees & sales to £25m. As the company has expanded, focus has shifted to the larger high street retailers in UK (60% of sales) and increasingly Europe. In an extremely price-sensitive market due to the power of retailers, high levels of performance were attributed to competitive prices and product innovation. The company aim to achieve a 15% profit margin but this varies with each order and on contingencies (e.g. late delivery). Regulation constrains the business in several ways: • health and safety inspections and audits undertaken by several bodies; • paperwork/admin activities take up management time; • taxation and utility costs drain financial resources; • customs delays associated with importing/exporting often led to late delivery & clients seeking compensation; • compensation for goods lost by customs authorities was impossible to obtain (customs authorities allegedly said losses should be claimed on insurance); • minor currency exchange rate fluctuations could mean the difference between making a profit and making a loss on sales to overseas customers • recruitment problems were attributed partly to low wage/benefits differential, hinting that wages were ‘so low, some workers would prefer to be on the dole’. Inspections and audits were reported as often leading to minor improvements in working practices that increased efficiency.

Case 18: Embroidery service for corporate uniforms. Founded in 1997 and employs 11
staff. Intense product market competition, especially from low cost foreign operators, has led to the disappearance of the local clothing industry. The company switched from embroidery work for adult fashion and children’s wear into corporate wear in order to ‘keep the business going in a dying trade’. Uses relatively old technology and lacks resources needed to update. Current turnover is £338k per annum, of which 25% is profit, but the future is perceived as precarious. Relocation of the industry to Poland, Romania and Turkey where production costs are lower has followed the removal of the quota system. Paying employees the National Minimum Wage (NMW) was reported as the main regulatory concern and this has eroded profits.

Although the UK clothing industry might be in serious decline, some businesses are able to chart a path, often precarious, through the product market in order to remain viable. Regulatory change has reshaped the product market context to facilitate higher levels of competition from overseas producers but the source of this change was unacknowledged. Other measures concerned with the NMW, Health and Safety and other regulations were considered an irritant but were perceived as minor in comparison to changes in the competitive context. Business owners, with variable levels of resources, adapted to the changing context by seeking new markets and through product and process innovation, including subcontracting production overseas, to maintain their (variable) levels of competitiveness.

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The Impact of Regulation on Small Business Performance

3.8

Summary

Regulation generates multiple influences – enabling, motivating and constraining - that contribute to small business performance outcomes. These influences, operating simultaneously, influence the activities of small business owners and other stakeholders whose actions causally affect them (actual and prospective competitors, customers, employees, suppliers, infrastructure providers and regulatory authorities) through market entry, resource acquisition and deployment, and attempts to realise product sales. All of these activities causally influence small business performance. These influences operate whether or not owner-managers (and other stakeholders) are explicitly aware of them. One advantage of the data collection method adopted was the ability to delve beneath the surface of owners’ general perceptions of regulation to discover in depth how owner-managers had adapted their behaviour as a result of regulation and how this had influenced business performance. Had we terminated our inquiry with owner-managers’ initial responses, we might have concluded, as have others, that regulation is a major impediment to small business performance. With careful probing, we were able to discover that while business owners often complain about regulation, the actual impact on business performance outcomes is frequently beneficial and/or quite limited. We have identified many specific ways in which regulation has enabled and motivated business owners to act in ways that have contributed to higher levels of business performance as well as those which constrain them. Owner-manager emphasis on the cost and constraining influences of regulation reflect both the human tendency to attach importance to those things that prevent us reaching our goals, rather than those which are enabling, and also the prevalence and power of ‘anti-regulation’ discourses in society which business owners can draw upon to account for performance outcomes. The impact of regulation on business performance is not simply a reflection of the properties of regulation (for example, the scope of obligations or their complexity), important though these are, but crucially depends on how business owners, and other stakeholders whose actions causally affect them, adapt to it. Agents’ adaptations to regulation, as well as their business performance outcomes, depend on firms’ internal resources and capabilities, and on the external context of adaptation, particularly product, labour and capital market conditions. Business owners vary in their capacity to discover, interpret and adapt to regulation. They also vary in the business objectives they seek to achieve and these will also shape how they adapt to regulation. Those with greater resources – finance, equipment, management capability, workforce knowledge and skills – are better placed to deal with regulation but owners must be motivated to deal with it in particular ways, for example, consider the differences between businesses complying minimally with those implementing wide-ranging reforms of business practices and products. Where businesses lack the resources to develop new practices and products, their capacity to

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The Impact of Regulation on Small Business Performance

adapt to regulation is constrained. This is an important conclusion and we will develop this aspect of the study in subsequent chapter which draw upon the quantitative survey results. Whether regulation motivates changes in practices and products beyond minimum compliance, and the consequences for business performance, depend on the wider context within which particular businesses operate. Possessing sufficient resources is one thing, but unless business owners perceive a benefit in adapting in particular ways, they will not do so. For instance, where businesses perceive product or process innovation as essential to maintaining competitiveness, regulatory change will likely motivate, whether acknowledged explicitly or not, the search for new products and processes. Moreover, external conditions shape how successful adaptations to regulation are in terms of business performance. If competitors, for example, adapt better or more quickly to regulatory change, adaptation by the focal business might not suffice to improve performance.

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The Impact of Regulation on Small Business Performance

4:

Attitudes to Regulation and Characteristics and Performance: from the Telephone Survey
Introduction

Business Evidence

4.1

The purpose of this Chapter is to provide descriptive statistics from the telephone survey of 1,205 independent small and medium sized enterprises (SMEs). Univariate and bivariate data analysis are presented to highlight key empirical patterns. Survey questions were developed on the basis of the findings from the causal account of regulation and business performance set out in Chapter 3. Overall, our aim is to offer a more balanced picture of the influence of regulation on small business performance than has been put forward hitherto. We do this by constructing a core set of 15 regulation questions that we ask of the full sample. In summary, these questions were designed to encompass the various aspects of how regulation may impact on the small business as perceived by the business owner (see Appendix 2 for a copy of the CATI questionnaire). There were two guiding principles for these 15 core questions. First, a major task has been to inquire into the enabling and motivating influences generated by regulation as well as the constraining influences that have typically been the focus of study. Second, we introduced an additional layer of inquiry which revolved around three notions: the extent to which regulations may be considered as ‘fair’; the way regulations affect changes in business behaviour and finally, the direct impact on business performance. The structure of the chapter is as follows. First, details of the conduct of the telephone survey are provided. Second, key descriptive sample statistics are presented. Third, we focus on the relationships between regulation, knowledge of regulation, innovation and business growth. 4.2 The Telephone Survey: Sampling Characteristics and Questionnaire Approach, Sample

The purpose of the telephone survey was to collect data from a wide variety of SME owners in order to be able to generalise the findings to the small business population and for certain sub-samples within that population. The approach adopted is one which uses disproportionate random sampling within size and sector stratifications in order to allow adequate representation of less numerous but potentially more 'interesting' enterprises. A business within the robustness businesses sample of 1,200 was the largest sample that could be delivered budget, to minimise overall sampling errors, and maximise of sub-sample analysis. The upper size threshold for sample was determined at 250 employees, primarily to ensure that fast

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The Impact of Regulation on Small Business Performance

growing small business were captured in the sample. Because business size was seen to be a crucial variable, exerting a strong influence on both the determinants of growth and attitudes towards regulation, there was a need to examine the data by size within the sub-250 employee limit. Following consultation with the Steering Group, it was decided that the survey should cover all sizes of SME, down to, and including, zero employee businesses. Larger samples offer greater scope for sub-sample analysis. Equally, it is better to have larger sub-samples, where possible, to ensure robustness. In order to achieve a minimum standard of statistical reliability, quotas of equal size were established for businesses by sector and employment size (Table 4.1). Each size/sector combination had a target quota of 75 achieved interviews. Table 4.1: Sample Quotas by Size of Enterprise and Sector
0 employees D: Manufacturing; F: Construction G: Wholesale & retail trade; H: Hotels & restaurants I: Transport & comms J: Financial intermediation; K: Real estate Others (L-O). Total 75 1-9 employees 75 10-49 employees 75 50-249 employees 75 Total 300

75 75 75 300

75 75 75 300

75 75 75 300

75 75 75 300

300 300 300 1,200

To be included in the survey, businesses had to meet the following criteria: • Employment – businesses must employ fewer than 250 people at the time of interview; • Independence – businesses must be legally independent entities, that is, not owned by, nor part of, another enterprise; • Industry – businesses must be in one of four broad sectors (production, distribution, financial and business services, personal services); • Location – businesses were located in England. Business owner respondents were identified using a commercial database providing details of principals’ names, business names, addresses, telephone numbers, industry, employment and turnover information. Once checks had been made to ensure the business satisfied the criteria outlined above, interviews were conducted. A market research company was contracted to conduct the telephone interviews. The overall response rate was 20 per cent.12 Interviews were conducted between January-March 2007 and took an average of 23 minutes. Some important characteristics of the telephone survey sample are shown in Table 4.2.
12

Response rate was calculated as follows: achieved interviews/ (achieved interviews + refusals).

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The Impact of Regulation on Small Business Performance

In the remainder of this chapter, data is presented to explore the relationships between regulation and business characteristics, with a particular focus on business growth, within the sample of 1,205 firms. To begin, we identify some key characteristics of the sample. Table 4.2: Selected Characteristics of Telephone Survey Enterprises
% Employment Size Zero 1-9 10-24 25-49 50-99 100+ No data Annual Turnover Zero Under £100k £100k-499k £500k-2m £2m-10m £10m-50m No data Legal Status Self employed sole trader Partnership/LLP Ltd company Other No data Sector Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present No data Business Growth Performance 50% turnover growth over last two years 50% employment growth over last two years 50% turnover and 50% employment growth over last two years 7.1 43.9 17.8 9.5 12.4 9.0 0.2 1.0 21.7 20.2 14.9 15.9 4.6 21.5 27.0 11.9 55.8 5.0 0.2 25.9 25.6 24.0 24.5 48.6 27.5 23.2 0.7 7.1 6.8 2.4 N 86 529 215 114 150 108 3 12 262 243 180 192 56 260 325 143 673 62 2 312 309 289 295 586 331 280 8 1,205 1,205 1,205

Base: all businesses Notes: sub-sample percentages do not always sum to 100 due to rounding. 77% of ‘zero’ employee businesses in the sample were sole traders and partnerships.

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The Impact of Regulation on Small Business Performance

We now turn to the design of the questionnaire. An investigation of the impact of regulation on small business performance must be couched in the wider conceptual framework of the determinants of growth and performance. Accordingly, as in Stage 1, the research team propose that the survey of small businesses would seek to collect data on firm level factors likely to influence performance and growth. We would argue that without the additional in-company information it is not possible to accurately isolate the effects of regulation in the small business population. There were five sections of the questionnaire which provided a large number of covariates for the subsequent analysis of the attitudes of business owners towards regulation. • • • • • Business Profile Market orientation and Local Linkages Technology, Innovation and Technological Capacity Strategic Direction of the Business Owner-manager Characteristics

The final section of the questionnaire focused on regulation and here we developed a core set of 15 statements which were presented to the respondent using a 5-point Likert scale ranging from ‘strongly agree’ to ‘strongly disagree’ (Table 4.3). These statements, identified through the case studies, clearly reflected the wide range of ways regulations may have effects on the business. We viewed them as, a priori, representing three broad groups of regulation effects13: • • • Awareness and knowledge of regulation and their ‘fairness’ Changing business behaviour Affecting business performance

There were follow-up questions to these statements which sought to obtain more information on, for example, the reasons why a respondent replied in a particular way and the specific regulation which prompted the response. In addition, we asked a direct question on the mechanisms identified in Chapter 3: whether the business owner viewed regulations as constraining, beneficial or both constraining and beneficial to their business.

13

In Chapter 5 we undertake a very basic reliability test of these three ‘dimensions’ which we hypothesise to represent the broader latent construct of ‘regulation’.

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The Impact of Regulation on Small Business Performance

Table 4.3: Core Regulation Statements
Statement: “To what extent would you agree that …..” You are well informed about the range of regulations affecting your business? Business regulations create a level playing field for your business? Your business adapts to the introduction of new regulations than you competitors? Regulations provide you with an opportunity to gain a competitive advantage over other firms? Regulations have resulted in your business being run more efficiently Your business is able to deal with the introduction of new regulations? The introduction of new regulations has encouraged you to take action to ensure your business remains competitive? Having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? There are costs to your business of meeting the minimum regulation requirements? Regulations in the UK have increased the level of employee productivity in your business? Regulations in the UK provide new market opportunities for your business? Regulation increases the level of customer confidence in your business and its products and services? Regulations encourage businesses to enter the markets you operate in? Regulations have encouraged your business to recruit? The level of inspection associated with business regulations in the UK is appropriate? Hypothesised ‘Bundle’ Fairness Fairness Behaviour Behaviour Performance Behaviour Behaviour Performance Performance Performance Performance Fairness Fairness Performance Fairness

4.3

Owner-managers’ Perceptions of Regulation

A key argument from Chapter 3 is that regulation generates enabling and motivating influences in relation to small business performance as well as constraining ones. This is the case whether or not business owners are actually aware of these influences; property and contract rights were used to illustrate the enabling powers of regulation with or without business owner acknowledgement. But business owners might be aware of the enabling role regulation plays in the conduct of business activities. To examine this issue, business owners were asked whether regulation was beneficial for their business, constraining, or both. Disaggregating the responses to the ‘both’ category and adding them to the ‘beneficial’ and ‘constraining’ categories enables us to provide a second measure of whether regulation is beneficial and constraining. Perhaps surprisingly, given the public discourse surrounding the issue of regulation, half of the sample was prepared to report that regulation provided some benefits for their businesses (Table 4.4). We presented a number of examples in the previous chapter (section 3.4) of how this manifested itself in a variety of business contexts ranging from engineering, financial services, environmental services, business services (recruitment agency) and personal services (Cases 2 – 10).

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The Impact of Regulation on Small Business Performance

Table 4.4: In general, would you say that regulations in the UK have… ? Been beneficial for your business Constrained your business activities Or, been both beneficial and constraining No data Disaggregated measure Regulation is beneficial Regulation is constraining N % 10.5 32.3 39.8 17.4 50.3 72.0 1,205

Business owners were then asked which regulations were beneficial or constraining (or both) for their businesses. For those reporting regulations as beneficial, health and safety rules were reported most frequently. For those reporting regulation as constraining, health and safety, taxation and employment law were reported most often. A sizeable number also reported all regulations or general regulations, suggesting a fairly widespread perception among owner-managers that regulation was constraining across the piece. Respondents were asked to what extent they agreed with a series of statements relating to regulation on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ with the statement. Mean scale values are presented as an index of respondent agreement with particular statements; the higher the mean scale value, the greater degree of respondent agreement with the statement across the sample. The 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (coded as 4 or 5 on the original question), and the remainder (coded 1-3). Initial ‘don’t know’ or ‘refused’ responses were coded as 3s in the new variable. This simplified measure is presented here (Table 4.5). Higher mean scale values generally reflect a higher proportion of the sample reporting high levels of agreement with statements, although values vary with the skewness of the distributions. For ease of understanding, respondents’ replies are presented in order of level of respondent agreement. Understandably, perhaps, given the tendency for agents to concentrate on direct constraining regulatory influences, business owners were most likely to agree with the statement that regulation entails costs for their business (66% of the sample). But it is also interesting to note the number of business owners who were able to report the enabling and motivating influences of regulation. For instance, 37 per cent of the sample reported being able to adapt more quickly to regulations than competitors, 33 per cent reported that regulation encouraged them to take action to ensure the business remains competitive, and 29 per cent reported that regulation increased customer confidence in their business and its products and services. Other, lesser reported, examples include the impact of regulation on creating a level playing field, enhancing business efficiency, 40

The Impact of Regulation on Small Business Performance

gaining a competitive advantage, providing new market opportunities, and raising employee productivity. It must be remembered, of course, that these figures relate to business owners’ reported views; regulation might also enable and constrain business owners in ways of which they are unaware. Regulation can be enabling for business owners, and thereby perceived as beneficial, in a variety of ways. These include encouraging business owners to take action to adapt business practices and products with the aim of increasing revenue and/or cutting costs. It is important to recognise that there is no necessity in regulation generating particular business performance effects: business owners and their employees must take action to bring these outcomes about. 4.4 Managing Regulation

Of those business owners reporting high levels of agreement that their businesses were able to deal with the introduction of new regulations (coded 4 or 5), the majority reported dealing with them by taking personal responsibility for them (67%), training existing staff (58%), seeking external advice (42%) or by recruiting new staff with the necessary skills (13%). For those business owners disagreeing that they were able to deal with new regulations (those coded 1 or 2), most reported that there were too many regulations, that they were unnecessary, that the business employed a small workforce and there was little time available to understand their implications, and that it was difficult to adapt to them. As reported in Table 4.5, approximately one-third of the sample (33%) reported that the introduction of new regulations had encouraged them to take action to ensure your business remains competitive. This group of business owners were asked which actions they had taken from a prompt list. The results were: • • • • • • increasing employee training (62% of the relevant respondents); improving existing products and services (58%); changing working practices or equipment used (54%); introducing new products or services (36%); reducing costs (30%); or none of these things (6%).

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The Impact of Regulation on Small Business Performance

Table 4.5: Owner-managers’ Perceptions of Regulation
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… … there are costs to your business of meeting the minimum regulation requirements? … your business is able to deal with the introduction of new regulations? … you are well informed about the range of regulations affecting your business? … your business adapts more quickly to the introduction of new regulations than your competitors? … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? … the level of inspection associated with business regulations in the UK is appropriate? … regulation increases the level of customer confidence in your business and its products and services? … regulations have encouraged your business to recruit additional employees? … that business regulations create a ‘level playing field’ for your business? … regulations encourage businesses to enter the markets you operate in? … regulations have resulted in your business being run more efficiently? … regulations provide you with an opportunity to gain a competitive advantage over other firms? … regulations in the UK provide new market opportunities for your business? … regulations in the UK have increased the level of employee productivity in your business? N % reporting ‘high levels of agreement’ 66.6 48.1 47.4 36.8 34.7 32.7 30.1 29.0 29.0 26.2 23.7 16.4 12.5 8.0 7.1 1,205 Mean scale value 3.90 3.42 3.41 3.27 3.06 2.92 3.05 2.71 2.62 2.81 2.60 2.34 2.22 1.95 2.01 1,205

Base: all businesses Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Mean values similarly take upper and lower limits of 1 and 5, with higher values reflecting higher levels of agreement among sample businesses.

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The Impact of Regulation on Small Business Performance

A small number of business owners reported either that regulation provided new market opportunities (8%), or that regulations had increased the level of employee productivity in their businesses (7%). In both cases, where a specific regulation was cited by respondents, health and safety was the most frequently mentioned. These findings suggest that regulation motivates small business owners to adapt business practices and products in order to improve or enhance business performance. Regulation is not merely constraining but, like increases in the cost of inputs, can stimulate the search for new ways of cutting costs and/or increasing business revenue. Two-thirds of the sample (67%) agreed that there were costs to meeting the necessary minimum regulation requirements (coded 4 or 5). It might have been expected that all respondents would have agreed with this statement which represents the arguments of many of the critics of regulation who regard regulation as imposing costs that impede business performance and growth. Of these respondents, 48 per cent disagreed that their business was able to easily deal with these costs while 22 per cent agreed that their business was able to easily deal with these costs (30% neither agreed nor disagreed). Of those respondents agreeing costs could be dealt with easily, a variety of methods of dealing with these costs were reported: • reducing profit levels (46% of the relevant respondents); • passing on the costs to customers (43%); • raising employee skills (42%); • changing working practices or equipment (36%); • raising employee productivity (35%); • introducing new products and services (29%); • increasing business scale (24%); or • none of the above (8%). It is interesting to note that when asked whether business regulations had any impact on the firm’s profit levels, more than half of the sample (53%) reported they had not. Again, this is a surprisingly high figure in light of the claims made by many commentators that regulation is a serious drag on business performance. It would appear that for many business owners, regulation either is not a problem at all or one perceived as manageable with little major impact on profits. 4.5 Regulation-Handling Capacity is Crucial

Regulation does not have uniform impacts on businesses. How regulation feeds through into business performance outcomes depends not only on the properties of regulations themselves, though these are important, but also on how business owners adapt to them. Regulation-handling capacity has a number of components. Put simply, the first is the capacity to discover and interpret regulation, the second is the capacity to adapt business practices

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The Impact of Regulation on Small Business Performance

and products to the prevailing regulatory environment. Small business owners vary in their knowledge of regulation and of their rights and obligations. Business owners highly informed about regulation might be more comfortable with it and better placed to adapt business practices and products in order to exploit any opportunities offered by regulation as well as better able to minimise any adverse consequences arising. The three sector case studies summarised in the previous chapter (section 3.7; Cases 13-18) provide examples of the importance of these regulation-handling processes. Turning now to the evidence from the telephone survey, overall, almost a half of sample respondents (47%) reported a scale score of 4 or 5 in relation to how ‘well informed’ they perceived themselves to be in relation to regulations affecting their business (Table 4.6). Of the one-fifth of the sample coded 1 or 2 for this question, indicating a high level of disagreement with the statement, respondents were most likely to report environmental regulations as the ones they felt least well informed about (23% of the relevant respondents reported this), followed by health and safety and employment laws; some reported ‘all regulations’, suggesting limited awareness of regulations across the board. Table 4.6: To what extent would you agree that you are well informed about the range of regulations affecting your business? % 1 - Completely disagree 2 3 4 5 - Completely agree N 8.3 10.9 33.4 26.4 21.0 1,205

Business owners reporting themselves to be well-informed about regulation were much more likely to report a range of potentially beneficial consequences of regulation for their enterprises (Table 4.7). Well-informed owner-managers were significantly more likely than less informed respondents (at the 5% level) to agree that: • • • • • • Business regulations create a level playing field for the business Their business adapted more quickly to the introduction of new regulations than competitors Regulations provide an opportunity to gain a competitive advantage over other firms Regulations have resulted in their businesses being run more efficiently Their businesses are able to deal with the introduction of new regulations The introduction of new regulations has encouraged them to take action to ensure the business remains competitive

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The Impact of Regulation on Small Business Performance

• • • •

Regulations have increased the level of employee productivity in the business Regulations provide new market opportunities for the business Regulation increases the level of customer confidence in the business and its products and services The level of inspection associated with regulations is appropriate

These findings have profound implications for policy. Informing business owners with regard to regulation might reduce the compliance costs associated with regulation and encourage a more proactive orientation towards it. At the very least, we would expect those businesses with greater knowledge of regulation to be less anxious and fearful about it. Fear arising from a lack of detailed knowledge of regulation and the associated rights, obligations and penalties for non-compliance, might explain the hostile reactions of many actual and prospective business owners reported in previous studies equally as well as the problems of compliance. Policy measures implemented to improve the information flow regarding regulation to business owners cannot, of course, guarantee that all businesses will be more efficient and competitive, but they might reduce business owners’ fear and anxiety associated with meeting their regulatory obligations – such anxiety can be disabling and demotivating. More timely, comprehensible information can help business owners allay these fears. 4.6 Sources of Advice on Regulation

Businesses can develop their regulation-handling capacity in two ways – by employing someone in-house, or by using external support bodies. More than half of sample businesses (56%) reported employing a person whose job includes managerial responsibility for regulatory matters (Table 4.8). The presence of such an employee is related to enterprise size, with only half of all firms in the 1-9 employment size category employing such a person, while the proportion rises to two-thirds in all larger size categories. As with many other aspects of managing a business, owner-managers might choose to take advice from third parties in order to help them manage their business affairs better. A recent study suggests that every year almost half of business seek external advice about how to follow regulations and spend at least £1.4 billion (BERR, 2007b). Sample business owners were asked if they had used any external sources of information, advice and support to help them deal with regulation issues in the last two years (Table 4.8). The data suggests the experiences of sample SME owners are broadly in line with the findings of the BERR study. More than six in ten business owners reported using external sources of support on regulation issues during the two years prior to interview. Both private sector and public sector sources of advice were reported by business owners. A third of the sample reported private sources and almost three in ten reported public sources.

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The Impact of Regulation on Small Business Performance

Table 4.7 Business Owner Knowledge of Regulation and Perceptions of Regulation
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… (% reporting’ high level of agreement’) Their businesses are able to deal with the introduction of new regulation (**) Their business adapted more quickly to the introduction of new regulations than competitors (**) The introduction of new regulations has encouraged them to take action to ensure the business remains competitive (**) The level of inspection associated with regulations is appropriate (**) Regulation increases the level of customer confidence in the business and its products and services (**) Business regulations create a level playing field for the business (**) Regulations have resulted in their businesses being run more efficiently (**) Regulations provide an opportunity to gain a competitive advantage over other firms (**) Regulations provide new market opportunities for the business (**) Regulations have increased the level of employee productivity in the business (**) N Well Informed (%) 62.2 45.2 43.1 39.4 37.1 39.6 22.2 16.6 10.2 10.2 571 Not well informed (%) 35.5 29.2 23.3 21.8 21.8 14.2 11.2 8.8 6.2 4.4 634 All 48.1 36.8 32.7 30.1 29.0 26.2 16.4 12.5 8.0 7.1 1,205

Base: all businesses Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Fast growth businesses defined as those reporting an increase of 50% or more in sales turnover in the previous two years. Cases with missing data excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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The Impact of Regulation on Small Business Performance

Table 4.8: Owner-managers’ Use of Sources of Support to Deal with Regulation Issues % reporting Employee with managerial responsibility for regulatory 56.2 matters ANY EXTERNAL SOURCE Private sector sources (e.g. consultants, accountants, bank, solicitors, etc) Public sector sources (e.g. Government departments, Trade Associations, regulatory bodies, an employers federation, Revenue & Customs, Business Link, the Chamber of Commerce, etc) Other business owners Internet Friends or relatives Other source No data N Base: all businesses Firms’ regulation-handling capacity is strongly correlated with perceptions of the enabling and motivating influences of regulation (Tables 4.9 and 4.10). Employing someone with managerial responsibility for regulatory issues or taking external advice on regulatory issues in the two years prior to interview are both significantly associated (at the 5% level) with: • • • • • • The business being able to deal with the introduction of new regulations being well informed about the range of regulations affecting the business the business adapting more quickly to the introduction of new regulations than competitors the introduction of new regulations encouraging action to ensure the business remains competitive regulation increases the level of customer confidence in your business and its products and services regulations in the UK provide new market opportunities for your business 61.6 33.3 28.7

4.5 3.2 1.7 1.3 1.2 1,205

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The Impact of Regulation on Small Business Performance

Table 4.9: Internal Regulation-Handling Capacity and Perceptions of Regulation
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… (% reporting’ high level of agreement’) … there are costs to your business of meeting the minimum regulation requirements? (**) … your business is able to deal with the introduction of new regulations? (**) … you are well informed about the range of regulations affecting your business? (**) … your business adapts more quickly to the introduction of new regulations than your competitors? (**) … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? (**) … the level of inspection associated with business regulations in the UK is appropriate? … regulation increases the level of customer confidence in your business and its products and services? (**) … regulations have encouraged your business to recruit additional employees? … that business regulations create a ‘level playing field’ for your business? … regulations encourage businesses to enter the markets you operate in? … regulations have resulted in your business being run more efficiently? … regulations provide you with an opportunity to gain a competitive advantage over other firms? … regulations in the UK provide new market opportunities for your business? (**) … regulations in the UK have increased the level of employee productivity in your business? N % In-house employee 72.7 51.7 50.4 39.9 35.0 37.2 31.9 31.5 31.2 26.0 25.0 17.9 13.4 9.7 6.9 677 % None 59.0 43.5 43.3 32.5 34.2 26.9 28.1 25.8 26.2 26.3 22.1 14.8 11.3 5.8 7.3 520 ALL 66.6 48.1 47.4 36.8 34.7 32.7 30.1 29.0 29.0 26.2 23.7 16.4 12.5 8.0 7.1 1,205

Base: all businesses, Ns vary by question Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Fast growth businesses defined as those reporting an increase of 50% or more in sales turnover in the previous two years. Cases with missing data excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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The Impact of Regulation on Small Business Performance

Table 4.10: Use of External Sources of Advice and Perceptions of Regulation
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… (% reporting’ high level of agreement’) … there are costs to your business of meeting the minimum regulation requirements? (**) … your business is able to deal with the introduction of new regulations? (**) … you are well informed about the range of regulations affecting your business? (**) … your business adapts more quickly to the introduction of new regulations than your competitors? (**) … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? (**) % Use of external sources of advice 74.7 57.0 50.4 40.6 34.6 36.8 % None 53.6 33.9 42.5 30.7 34.8 26.1 ALL

66.6 48.1 47.4 36.8 34.7 32.7

… the level of inspection associated with business regulations in the UK is appropriate? (**) 33.0 25.5 30.1 … regulation increases the level of customer confidence in your business and its products and services? (**) 34.1 21.0 29.0 … regulations have encouraged your business to recruit additional employees? 29.9 27.4 29.0 … that business regulations create a ‘level playing field’ for your business? (**) 29.0 21.8 26.2 … regulations encourage businesses to enter the markets you operate in? 25.2 21.4 23.7 … regulations have resulted in your business being run more efficiently? (**) 18.7 12.7 16.4 … regulations provide you with an opportunity to gain a competitive advantage over other firms? (**) 15.1 8.4 12.5 … regulations in the UK provide new market opportunities for your business? (**) 9.4 5.8 8.0 … regulations in the UK have increased the level of employee productivity in your business? 7.5 6.5 7.1 N 742 463 1,205 Base: all businesses, Ns vary by question Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Fast growth businesses defined as those reporting an increase of 50% or more in sales turnover in the previous two years. Cases with missing data excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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The Impact of Regulation on Small Business Performance

In addition, taking external advice (but not employing someone with managerial responsibility for regulatory issues is also significantly associated, at the 5 per cent level, with reporting that (Table 4.10): • • • • the level of inspection associated with business regulations in the UK is appropriate business regulations create a ‘level playing field’ for your business regulations have resulted in the business being run more efficiently regulations provide an opportunity to gain a competitive advantage over other firms

External advice-seeking does not appear to be a substitute for a lack of internal capacity in relation to regulation-handling. Businesses that employ someone with managerial responsibility for regulatory issues were significantly more likely (at the 5% level) to report the use of external sources of support in relation to regulatory issues in the two years prior to interview. Whereas, 71 per cent of firms with such an employee reported using external support, only 49 per cent of those without such an employee did so. 4.7 Regulation and Innovation

Critics often claim that regulation constrains business growth by imposing too great a burden, whether in the form of substantive obligations or in the form of administrative costs associated with form-filling and inspection, thereby diverting resources and effort from enterprise per se and affecting productivity. Freeing up business resources for investment and innovation by cutting the administrative tasks associated with regulation is the underlying rationale for the Government’s Better Regulation policy agenda. Here we examine the relationship between regulation and innovation using the following questions in the survey: • • • • • whether innovation is perceived by business owners to be an important influence on competitiveness whether the business has introduced any new or significantly improved goods or services in the two years prior to interview whether the business has introduced any new or significantly improved goods or services that are new to the market in the two years prior to interview whether the business has introduced any major changes to working practices or equipment in the two years prior to interview whether the business held any intellectual property rights in its products and/or processes

For six of the 15 core regulation variables, firms’ responses do not differ according to whether they are defined as ‘innovative’ as measured by any of the five innovation variables above. The major regulation variable where owner-managers views are significantly different is ‘the introduction of new regulations has encouraged action to ensure business competitiveness’.

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The Impact of Regulation on Small Business Performance

Such action was significantly more likely (at the 5% level) to be reported in those firms (Table 4.11): • • • • where innovation is perceived by business owners to be an important influence on competitiveness which had introduced any new or significantly improved goods or services in the two years prior to interview which had introduced any major changes to working practices or equipment in the two years prior to interview which held any intellectual property rights in its products and/or processes

Such associations suggest that regulation might motivate such businesses – reasonably described as innovative - to take action to remain competitive. Less innovative businesses were not motivated to take such action to the same extent. Again, one interpretation of the data might be to the extent that regulation is perceived as a cost, as with other costs of doing business, it serves to stimulate owner-managers to seek out new ways of operating and/or to develop new goods and services in order to maintain their competitive position. Without such a regulatory stimulus, the motivation to innovate might be perceived as less pressing.

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The Impact of Regulation on Small Business Performance

Table 4.11: … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive?
% reporting high agreement Employment Size (**) Less than 10 10-49 50+ Annual Turnover (**) Under £100k £100k-500k £500k-2m £2m+ Sector (**) Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years (**) NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years (**) No Major changes to working practices or equipment #4 Use of IPR (**) Non-users of IPR #5 Innovation is important for competitive position (**) Innovation is not important for competitive position Exporting Exporters Non-exporters N 26.5 37.4 41.1 24.5 31.3 37.8 33.9 31.4 27.8 30.1 41.7 31.7 30.8 35.4 35.6 29.8 39.5 34.6 39.0 28.5 38.5 30.4 34.6 24.9 29.8 33.4 32.7 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1,205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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The Impact of Regulation on Small Business Performance

4.8

Regulation and Business Growth: Does Regulation Constrain or Enable Business Growth?

Critics often claim that regulation constrains business growth by imposing too great a burden, whether in the form of substantive obligations or in the form of administrative costs associated with form-filling and inspection. We examine this question in two ways: first, by looking at the data disaggregated by business size; and, second, by disaggregating the data by growth performance. The 15 core regulation variables were cross-tabulated with a measure of business size. The sample was divided into three size groups using the conventional UK definitions – micro, small and medium-sized enterprises with less than 10, 10-49 and 50 or more employees respectively. The relationships are shown in Table 4.12. The data reveal mixed patterns that are not always easy to interpret. Statistically significant positive associations (at the 5% level) were found between business size and: • • • • • • • costs of meeting minimum regulation requirements the business being able to deal with the introduction of new regulations being well informed about the range of regulations affecting the business the business adapting more quickly to the introduction of new regulations than competitors the introduction of new regulations encouraging action to ensure the business remains competitive regulation increases the level of customer confidence in your business and its products and services encouraging the business to recruit additional employees

Associations between business size and the following were broadly positive but not entirely linear: • • regulations in the UK provide new market opportunities for your business regulations have resulted in the business being run more efficiently regulations provide an opportunity to gain a competitive advantage over other firms

Together, these findings suggest that owner-managers of micro-businesses feel less able and/or motivated to adapt their enterprises to regulation than owners of larger firms. Not only are such respondents less likely to report being well-informed about regulation, they may also be less likely to possess the resources to adapt their businesses promptly and effectively to a changing regulatory framework. The issue here, therefore, is one of the capacity of the business to cope with the regulatory environment. For micro business owners, regulation appears more likely to exert a constraining influence on performance, first by requiring effort to discover and interpret regulation, and, second, because limited resources restrict their capacity for action to adapt

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The Impact of Regulation on Small Business Performance

business practices and products. It might be countered that because many micro-business owners feel under-informed about regulation, they might, in fact, be vulnerably compliant, that is, operating without knowledge of whether they are in compliance or not with a raft of regulations. As is well-established, fast growth among small business owners is quite rare (e.g., CBR, 2005). This is true of the sample investigated here. Two indices of business growth were used to distinguish ‘fast growth’ from other types of enterprise: one for sales turnover; the other for employment. Fast growth businesses were those defined as experiencing a 50 per cent increase in sales in the two years prior to interview, or a 50 per cent increase in employment during the same period. Only 7 per cent of businesses reported such increases in either turnover or employment (2% reported both types of increase) (see Table 4.3). Fast turnover growth businesses were more likely to agree that (Table 4.13): • • their businesses adapt more quickly to the introduction of new regulations than competitors; and, that new regulations have encouraged them to take action to ensure their business remain competitive.

Fast employment growth businesses were more likely to agree that (Table 4.14): • • their businesses adapt more quickly to the introduction of new regulations than competitors; and, regulations increase customer confidence in the business and its products and services.

Fast growth businesses were more likely, though not significantly at the 5% level, to report an employee with managerial responsibility for regulatory matters. Both internal capacity-building and external advice-seeking in relation to regulation could, of course, be complementary adaptations to business growth. In addition to these relationships, two others came very close to the 5% significance threshold. Fast growth firms were more likely to agree that regulations have resulted in their business being run more efficiently, and that new regulations have encouraged them to take action to ensure their business remain competitive.

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The Impact of Regulation on Small Business Performance

Table 4.12: Business Size and Perceptions of Regulation
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… (% reporting’ high level of agreement’) … there are costs to your business of meeting the minimum regulation requirements? (**) … your business is able to deal with the introduction of new regulations? (**) … you are well informed about the range of regulations affecting your business? (**) … your business adapts more quickly to the introduction of new regulations than your competitors? (**) … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? (**) … the level of inspection associated with business regulations in the UK is appropriate? … regulation increases the level of customer confidence in your business and its products and services? (**) … regulations have encouraged your business to recruit additional employees? (**) … that business regulations create a ‘level playing field’ for your business? … regulations encourage businesses to enter the markets you operate in? … regulations have resulted in your business being run more efficiently? (**) … regulations provide you with an opportunity to gain a competitive advantage over other firms? (**) … regulations in the UK provide new market opportunities for your business? … regulations in the UK have increased the level of employee productivity in your business? N % Micro firms 56.1 43.3 41.1 30.4 36.3 26.5 29.1 24.2 23.9 25.0 22.3 12.8 9.1 6.7 5.5 615 % Small firms 76.0 49.5 52.9 37.7 33.3 37.4 29.5 31.6 32.5 28.3 24.9 21.0 16.1 9.1 9.4 329 % Medium firms 79.1 57.8 55.4 50.4 32.6 41.1 33.3 37.2 36.8 26.4 25.2 19.0 15.9 10.1 7.8 258 ALL 66.6 48.1 47.4 36.8 34.7 32.7 30.1 29.0 29.0 26.2 23.7 16.4 12.5 8.0 7.1 1,205

Base: all businesses, Ns vary by question Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Fast growth businesses defined as those reporting an increase of 50% or more in sales turnover in the previous two years. Cases with missing data excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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The Impact of Regulation on Small Business Performance

Table 4.13: Owner-managers’ Perceptions of Regulation and Turnover Growth
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… (% reporting’ high level of agreement’) … there are costs to your business of meeting the minimum regulation requirements? (**) … your business is able to deal with the introduction of new regulations? … you are well informed about the range of regulations affecting your business? … your business adapts more quickly to the introduction of new regulations than your competitors? (**) … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? (**) % Fast Growth Businesses 76.7 43.0 39.5 47.7 34.9 44.2 % Non-Fast Growth Businesses 65.7 48.6 48.1 36.0 34.7 31.9 ALL

66.6 48.1 47.4 36.8 34.7 32.7

… the level of inspection associated with business regulations in the UK is appropriate? 26.7 30.3 30.1 … regulation increases the level of customer confidence in your business and its products and services? 37.2 28.4 29.0 … regulations have encouraged your business to recruit additional employees? 29.1 29.1 29.0 … that business regulations create a ‘level playing field’ for your business? 26.7 26.2 26.2 … regulations encourage businesses to enter the markets you operate in? 22.1 24.0 23.7 … regulations have resulted in your business being run more efficiently? 23.3 16.0 16.4 … regulations provide you with an opportunity to gain a competitive advantage over other firms? 15.1 12.4 12.5 … regulations in the UK provide new market opportunities for your business? 7.0 8.0 8.0 … regulations in the UK have increased the level of employee productivity in your business? 7.0 7.2 7.1 N 86 1,111 1,205 Base: all businesses Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Fast growth businesses defined as those reporting an increase of 50% or more in sales turnover in the previous two years. Cases with missing data excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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The Impact of Regulation on Small Business Performance

Table 4.14: Owner-managers’ Perceptions of Regulation and Employment Growth
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… … there are costs to your business of meeting the minimum regulation requirements? (**) … your business is able to deal with the introduction of new regulations? … you are well informed about the range of regulations affecting your business? … your business adapts more quickly to the introduction of new regulations than your competitors? (**) … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? … the introduction of new regulations has encouraged you to take action to ensure your business remains % Fast Growth Businesses 79.3 46.3 39.0 50.0 36.6 42.7 % Non-Fast Growth Businesses 67.5 49.0 48.7 36.8 34.7 32.3 ALL

66.6 48.1 47.4 36.8 34.7 32.7

competitive? … the level of inspection associated with business regulations in the UK is appropriate? 28.0 29.9 30.1 … regulation increases the level of customer confidence in your business and its products and services? (**) 39.0 28.7 29.0 … regulations have encouraged your business to recruit additional employees? 37.8 28.6 29.0 … that business regulations create a ‘level playing field’ for your business? 26.8 25.7 26.2 … regulations encourage businesses to enter the markets you operate in? 19.5 24.0 23.7 … regulations have resulted in your business being run more efficiently? 24.4 16.2 16.4 … regulations provide you with an opportunity to gain a competitive advantage over other firms? 15.9 12.2 12.5 … regulations in the UK provide new market opportunities for your business? 6.1 8.0 8.0 … regulations in the UK have increased the level of employee productivity in your business? 7.3 7.0 7.1 N 82 1,009 1,205 Base: all businesses Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). ‘Fast growth businesses’ defined as those reporting an increase of 50% or more in employment in the previous two years. Cases with missing data excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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The Impact of Regulation on Small Business Performance

Fast growth firms (both in terms of turnover and employment) were also more likely than other business owners to agree that there are costs to business of meeting the minimum regulation requirements. So, even though they perceive costs more powerfully than other firms, owner-managers of such enterprises also perceive various enablements afforded by regulation and have achieved higher levels of turnover and/or employment performance in the two years prior to interview. Fast growth businesses in terms of employment were significantly more likely (at the 5% level) to report using external sources than non-fast growth businesses. Although fast turnover growth businesses were more likely to report external sources than non-fast growth firms, this finding was not significant. This suggests increasing employment might be a more important trigger to external advice-seeking than increasing sales. One possible interpretation of this finding is the need for fast-growth employers to supplement their knowledge of a wider body of employment law as one component of the greater formalisation of human resource management practices than has hitherto been necessary. To gauge the overall impact of regulation on businesses, owner-managers were asked whether regulations in the UK have been beneficial for their business, constraining business activities, or both. From their responses, Table 4.15 was constructed. Fast growth enterprises are more likely to report regulation as beneficial and as constraining. Although a higher proportion of business owners report regulation as constraining (72%), differences between fast growth and non-fast growth businesses are not significant at the 5% level. In contrast, fast growth firms are much more likely to report regulation as beneficial for their businesses in comparison with non-fast growth businesses. One interpretation might be that fast growth businesses develop means of adapting to the regulatory environment that other businesses are either unable or unwilling to do and then describe the outcomes of these adaptations as beneficial to the business. Table 4.15: Business Growth and Owner-Manager Perceptions of Regulation as Beneficial and Constraining Fast Fast ALL turnover growth employment growth % reporting regulation is 64.0 59.8 50.3 beneficial (**) % reporting regulation constraining N is 74.4 86 75.6 82 72.0 1,205

Base: all businesses Notes: fast growth defined as an increase of 50% or more in turnover (or employment) in the previous two years. Cases excluded where data missing for one or both variables. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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The Impact of Regulation on Small Business Performance

Taken together, these findings suggest regulation can generate both enabling and motivating influences for small business owners. For instance, regulation can stimulate action by business owners to adapt business processes and products with the aim of enhancing efficiency and competitiveness. Second, owner-managers of fast growth enterprises were more likely to report specific enabling and motivating regulatory influences than owner-managers of other types of enterprise. 4.9 Regulation and Management Characteristics

We have already demonstrated that small businesses manage or handle regulations in many different ways and that knowledge of regulation coupled with the internal capacity to respond positively can and does enable business owners to adapt business practices and products to overcome some of the constraining influences of regulation. We extend this argument by introducing other evidence from the survey on more formal aspects of the internal capacity of the business. In particular, we examine whether the number of owners, their level of qualifications and age, the presence of non-executive directors and the existence of a formal business plan have any bearing on the reported perceptions of regulation. Small businesses that possess a formal business plan were more likely to report perceptions of the enabling and motivating influences of regulation (Table 4.16). For example, having a business plan was significantly associated (at the 5% level) with: • • • • The business being able to deal with the introduction of new regulations being well informed about the range of regulations affecting the business the business adapting more quickly to the introduction of new regulations than competitors the introduction of new regulations encouraging action to ensure the business remains competitive

It is not, of course, the business plan per se which facilitates these perceptions but rather that its existence is interpreted as indicative (a proxy variable if you like) of how the business is managed. One simple interpretation is that the preparation of a business plan may point to a more professional run business and that the owners and management are more outward looking and aware of the context (including relevant regulations) within which the business operates. The responses to the regulation questions would seem to support this interpretation. Interestingly, when we examine the costs question it is those businesses with a business plan that are more likely to report that there are costs associated with meeting minimum regulation requirements. The implication here is that business planning can reveal more effectively the actual costs of the regulations that affect the business. 59

The Impact of Regulation on Small Business Performance

In a similar vein, small businesses with more than one owner and with nonexecutive directors were more likely to report positive perceptions associated with regulations (Tables 4.17 and 4.18 respectively). Again these characteristics may serve as proxies for the various aspects of the managerial competence of the business. The implication here is that as a result of these additional senior managers these businesses are more likely to have a wider knowledge of regulations and also have a greater experience to draw upon in order to deal and adapt to them more quickly and effectively. However, with respect to the question on costs, businesses with nonexecutive directors and other owners were more likely to be associated with higher levels of agreement that regulation imposes costs on the business. Why this should be the case is more difficult to understand but the point to note is that these businesses are more able to adapt and respond to the challenges posed by regulations. Perceptions of regulation vary significantly with the age of the respondent with those aged less than 45 years of age more likely to agree with the enabling and motivating aspects of regulation (Table 4.19). Older respondents were significantly more likely to report that they were well informed about regulations perhaps indicating that knowledge itself was not sufficient for these individuals to enable them to report the more positive affects of regulation on their business. Finally, an investigation of education and perceptions of regulation revealed only one statistically significant association. Those respondents with a degree or equivalent were significantly more likely to report that regulations imposed costs upon their business.

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The Impact of Regulation on Small Business Performance

Table 4.16: Existence of a Business Plan and Perceptions of Regulation
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… (% reporting’ high level of agreement’) … there are costs to your business of meeting the minimum regulation requirements? (**) … your business is able to deal with the introduction of new regulations? (**) … you are well informed about the range of regulations affecting your business? (**) … your business adapts more quickly to the introduction of new regulations than your competitors? (**) … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? (**) % Business Plan 74.9 55.7 52.7 45.3 34.3 39.9 % None 60.4 41.5 42.7 30.7 35.3 25.8 ALL 66.6 48.1 47.4 36.8 34.7 32.7

… the level of inspection associated with business regulations in the UK is appropriate? 31.7 27.9 30.1 … regulation increases the level of customer confidence in your business and its products and services? (**) 34.3 23.9 29.0 … regulations have encouraged your business to recruit additional employees? (**) 34.5 24.7 29.0 … that business regulations create a ‘level playing field’ for your business? (**) 30.7 22.3 26.2 … regulations encourage businesses to enter the markets you operate in? 25.1 22.9 23.7 … regulations have resulted in your business being run more efficiently? (**) 19.0 13.6 16.4 … regulations provide you with an opportunity to gain a competitive advantage over other firms? (**) 16.4 9.3 12.5 … regulations in the UK provide new market opportunities for your business? (**) 11.0 5.8 8.0 … regulations in the UK have increased the level of employee productivity in your business? 8.6 5.5 7.1 N 499 677 1,205 Base: all businesses, Ns vary by question Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Fast growth businesses defined as those reporting an increase of 50% or more in sales turnover in the previous two years. Cases with missing data excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

Table 4.17: Presence of Non-Executive Directors and Perceptions of Regulation
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… (% reporting’ high level of agreement’) … there are costs to your business of meeting the minimum regulation requirements? (**) … your business is able to deal with the introduction of new regulations? (**) … you are well informed about the range of regulations affecting your business? … your business adapts more quickly to the introduction of new regulations than your competitors? … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? % Non-Executive Directors (Yes) 77.5 53.8 52.7 41.2 28.6 % None 64.3 46.8 46.2 35.7 35.8 ALL 66.6 48.1 47.4 36.8 34.7

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The Impact of Regulation on Small Business Performance

… the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? (**)

39.0

31.5

32.7

… the level of inspection associated with business regulations in the UK is appropriate? 33.0 29.4 30.1 … regulation increases the level of customer confidence in your business and its products and services? (**) 34.1 27.5 29.0 … regulations have encouraged your business to recruit additional employees? (**) 39.0 27.4 29.0 … that business regulations create a ‘level playing field’ for your business? 26.4 25.9 26.2 … regulations encourage businesses to enter the markets you operate in? (**) 29.7 22.5 23.7 … regulations have resulted in your business being run more efficiently? (**) 20.9 15.4 16.4 … regulations provide you with an opportunity to gain a competitive advantage over other firms? (**) 16.5 11.5 12.5 … regulations in the UK provide new market opportunities for your business? 8.8 7.9 8.0 … regulations in the UK have increased the level of employee productivity in your business? 5.5 7.3 7.1 N 182 998 1,205 Base: all businesses, Ns vary by question Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Fast growth businesses defined as those reporting an increase of 50% or more in sales turnover in the previous two years. Cases with missing data excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

Table 4.18: Number of Owners and Perceptions of Regulation
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… (% reporting’ high level of agreement’) … there are costs to your business of meeting the minimum regulation requirements? (**) … your business is able to deal with the introduction of new regulations? (**) … you are well informed about the range of regulations affecting your business? (**) … your business adapts more quickly to the introduction of new regulations than your competitors? (**) … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? (**) … the level of inspection associated with business regulations in the UK is appropriate? … regulation increases the level of customer confidence in your business and its products and services? (**) … regulations have encouraged your business to recruit additional employees? (**) … that business regulations create a ‘level playing field’ for your business? … regulations encourage businesses to enter the markets you operate in? % One Owner 57.5 42.7 43.9 33.0 34.4 26.5 27.3 26.1 26.3 24.1 21.7 % More than One Owner 72.8 51.4 49.8 38.9 35.0 37.0 32.1 30.7 31.2 27.4 25.2 ALL 66.6 48.1 47.4 36.8 34.7 32.7 30.1 29.0 29.0 26.2 23.7

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The Impact of Regulation on Small Business Performance

… regulations have resulted in your business being run more efficiently? 15.2 17.3 16.4 … regulations provide you with an opportunity to gain a competitive advantage over other firms? (**) 10.1 14.2 12.5 … regulations in the UK provide new market opportunities for your business? 7.7 8.3 8.0 … regulations in the UK have increased the level of employee productivity in your business? 6.3 7.6 7.1 N 506 683 1,205 Base: all businesses, Ns vary by question Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Fast growth businesses defined as those reporting an increase of 50% or more in sales turnover in the previous two years. Cases with missing data excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

Table 4.19: Age of Respondent and Perceptions of Regulation
On a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, to what extent would you agree that… (% reporting’ high level of agreement’) … there are costs to your business of meeting the minimum regulation requirements? … your business is able to deal with the introduction of new regulations? … you are well informed about the range of regulations affecting your business? (**) … your business adapts more quickly to the introduction of new regulations than your competitors? … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? (**) … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? (**) % Less than 45 Years 63.8 50.5 42.2 38.9 31.4 39.2 % 45 Years and over 66.7 46.0 49.3 35.7 36.5 28.8 ALL 66.6 48.1 47.4 36.8 34.7 32.7

… the level of inspection associated with business regulations in the UK is appropriate? 30.5 29.3 30.1 … regulation increases the level of customer confidence in your business and its products and services? (**) 32.7 26.8 29.0 … regulations have encouraged your business to recruit additional employees? (**) 32.7 26.8 29.0 … that business regulations create a ‘level playing field’ for your business? (**) 30.8 24.1 26.2 … regulations encourage businesses to enter the markets you operate in? (**) 28.9 21.8 23.7 … regulations have resulted in your business being run more efficiently? (**) 21.4 13.6 16.4 … regulations provide you with an opportunity to gain a competitive advantage over other firms? (**) 15.9 10.3 12.5 … regulations in the UK provide new market opportunities for your business? 8.6 7.6 8.0 … regulations in the UK have increased the level of employee productivity in your business? (**) 9.2 6.4 7.1 N 370 765 1,205 Base: all businesses, Ns vary by question Notes: respondents’ replies were used to construct a new variable indicating ‘high levels of agreement’ (initially coded as 4 or 5), or not (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). Fast growth businesses defined as those reporting an increase of 50% or more in sales turnover in the previous two years. Cases with missing data

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The Impact of Regulation on Small Business Performance

excluded. (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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The Impact of Regulation on Small Business Performance

4.10

Summary

The data presented suggest the following conclusions. First, regulation is enabling and motivating for small business owners as well as constraining. Although the costs and constraints associated with regulation were at the forefront of business owners’ minds, the data also suggest that many business owners were aware that regulation offers opportunities to develop more efficient ways of working and/or of increasing income. Almost a half of the sample claimed their businesses were able to deal with new regulations and sizeable minorities reported impacts on their firms that provide benefits. Such accounts neglect the impacts of regulation on business that go unacknowledged. Second, a key correlate of many of the core regulation variables is ownermanager knowledge. Those owners reporting being well-informed about the range of regulations affecting their businesses were the ones most likely to agree with the statements indicative of the enabling and motivating influences of regulation, such as regulations providing an opportunity to gain a competitive advantage over other firms or encouraging them to take action to ensure competitiveness. This suggests that knowledge of regulation might enable business owners to adapt business practices and products to overcome the constraining influences of regulation. The presence of additional owners and non-executive directors would seem to be an important source of additional knowledge that leads to a more positive perception of the impact of regulations. Third, owners of fast growth enterprises were significantly more likely to report that the introduction of new regulations had encouraged them to take action to ensure their businesses remain competitive and to claim that that they were able to adapt more quickly than competitors. Fast turnover growth firms (but not fast employment growth firms) were more likely to report regulation as beneficial. This is further evidence that it is not the regulations themselves that cause business performance outcomes but, rather, it is how businesses adapt to new regulations that is the major influence on performance. As with other aspects of the business environment – such as increased input prices, changing technologies and patterns of consumer demand – it is those goods and service providers best able to adapt quickly and effectively to the changing landscape that are most likely to prosper.

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The Impact of Regulation on Small Business Performance

PART THREE THE IMPACT OF REGULATION ON BUSINESS PERFORMANCE: A MULTIVARIATE APPROACH

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The Impact of Regulation on Small Business Performance

5: Unravelling the Relationship between Regulation and Business Performance
5.1 Introduction

We have seen from the previous section, which presented both qualitative and quantitative evidence from small business owner managers, that regulation is a complex issue and demands analysis in a very careful manner before an understanding of how it may impact upon performance can be developed. It is clear that there cannot be a ‘single observable measure’ of regulation that can be obtained from businesses. What we seek to present in this chapter are analytical approaches to handling this complexity which will provide insights into the way the various dimensions of regulation interact with the performance and growth of small businesses. In the first instance we present a reminder of the range of views expressed by business owners in response to our battery of questions on regulation. The next step is to try and explore the possibility that within the overall notion of a construct labelled ‘regulation’ there may be a number of other latent dimensions. The remaining sections of the chapter present a formal exploration of the nature and validity of a regulation construct and develop a model of regulation and business performance using Structural Equation Modelling (SEM) techniques. 5.2 Multiple Voices on Regulation: a Clarification

A brief recap of the responses to the core regulation questions14 is presented in Figure 5.1. For ease of reference we include again the full set of these questions in Table 5.1 along with their codes that are used in all the subsequent analysis. While we can see that many business owners (41.4%) strongly agree that there are costs associated with meeting minimum regulation requirements, this negative view does not necessarily connect to their responses to the other regulation questions. From the pattern of responses it is clear that there is no support for the proposition that individual respondents have similar responses to each of the 15 core regulation questions. To illustrate this point further we present a simple cross-tabulation of the responses to two of the 15 core regulation statements (Tables 5.2 and 5.3). In other words, we can assert that it is not always the same respondent simply agreeing or disagreeing with each question posed, nor opting for the neutral option each time a question is asked. This is an important methodological comment about the data and illustrates a sense of careful engagement by the business owner with the questions asked. This does allow us to proceed with more confidence in employing multivariate estimation techniques. Figure 5.1: The 15 ‘Core’ Regulation Questions
14

A reminder – we refer to them as ‘core’ because they were deemed to capture the full range of regulation effects and were asked of all the respondents.

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The Impact of Regulation on Small Business Performance

100 90 Table 5.1: Core Regulation Statements: Codes for Analysis 80 70 60 50 40 30 20 8. 9. 10 0 11.
Statement: “To what extent would you agree that …..”
1. 2. 3. 4. 5. 6. 7.

Hypothesised ‘Bundle’
Fairness Fairness Fairness Fairness Fairness

Shorthand name for SEM
Informed Level

Letter code for Correspondence Analysis
I L B G J Q C N F

You are well informed about the range of regulations affecting your business? Business regulations create a level playing field for your business? Regulation increases the level of customer confidence in your business and its products and services? Regulations encourage businesses to enter the markets you operate in? The level of inspection associated with business regulations in the UK is appropriate? Your business adapts more quickly to the introduction of new regulations than you competitors? Regulations provide you with an opportunity to gain a competitive advantage over other firms? Your business is able to deal with the introduction of new regulations?

Confid Entry

Insapp Quick

Behaviour Behaviour Behaviour Behaviour

Compad New Enc

The introduction of new regulations has encouraged you to take action to ensure your business remains competitive? 10. Regulations have resulted in your business being run more efficiently

Performance Performance

Eff

E M

12. 13. 14. 15.

W Le e ll I nf ve or lP m la ed ap yi ng ts to Fi Ne e ld pe w tit R ive eg Ad cr s ea va se nt ag s E es e
Performance Performance Performance Performance Costs D P Prody Opport O R Recruit

Having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? There are costs to your business of meeting the minimum regulation requirements? Regulations in the UK have increased the level of employee productivity in your business? Regulations in the UK provide new market opportunities for your business? Regulations have encouraged your business to recruit?

Min

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The Impact of Regulation on Small Business Performance

Looking at the relationship between the regulation questions also serves to illustrate the complexity of the concept under investigation and how difficult it is to measure the effects of regulation on the individual business with some accuracy. For example, we can see that a small number of business owners who report that they strongly agree that there are costs associated with their business meeting minimum regulation requirements also report that regulations provide new market opportunities for their business (coded 4 or 5 in Table 5.2). Table 5.2: Costs and Market Opportunities
There are costs to your business of meeting the minimum regulation requirements? 1 – Strongly disagree 2 3 4 5 - Strongly agree N= Regulations in the UK provide new market opportunities for your business? 1- Strongly 2 3 4 5- Strongly disagree agree 49 32 87 92 304 564 6 26 50 98 81 261 10 19 99 78 77 283 2 2 16 28 25 73 1 0 4 7 12 24 N=

68 79 256 303 499 1,205

Similarly, when we examine the correlation between costs and efficiency in terms of the impact of regulation on the business, there are small but significant number of business owners who, while strongly agreeing that there are costs to the business, also report that regulations have resulted in the business being run more efficiently (coded 4 or 5 in Table 5.3). So, while these two examples remove any concerns about how respondents reacted to the survey, it does underline the importance of using analytical techniques specifically designed to handle the complexity of regulation. Table 5.3: Costs and Business Efficiency
There are costs to your business of meeting the minimum regulation requirements? 1 – Strongly disagree 2 3 4 5 - Strongly agree N= Regulations have resulted in your business being run more efficiently 1- Strongly 2 3 4 5- Strongly disagree agree 37 23 55 50 217 382 15 26 61 75 106 283 9 19 102 104 108 342 4 10 28 61 42 145 3 1 10 13 26 53 N=

68 79 256 303 499 1,205

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The Impact of Regulation on Small Business Performance

5.3

Revisiting the ‘Bundle’ of Regulation Questions

In the previous chapter we introduced three ‘dimensions’ that guided the construction of the concept of regulation used in the telephone survey. Are these dimensions robust in the sense that they may be seen to represent reliable measures of the unobservable construct we are calling ‘regulation’? The reliability of these three ‘dimensions’ of the latent construct of regulation is investigated through an initial internal reliability test on the data using Cronbach’s Alpha. Internal consistency is the extent to which each item correlates with the rest and how well it correlates with the total item pool in the dimension (or construct). Values range between 0 and 1 with higher values indicating higher reliability among the items. There is some debate over what constitutes an acceptable Cronbach’s Alpha score. The generally agreed upon lower limit for Cronbach’s Alpha is 0.70, although it may decrease to 0.60 in exploratory research (Hair et al., 1998). Others, such as Nunnally (1978) recommend 0.50 as an acceptable threshold in the development and testing of an overall model. The results indicate that there is some justification for these ‘bundles’ of effects as the following scores illustrate: Fairness (0.55); Behaviour (0.66) and Performance (0.41). However, we will explore this in more detail using Structural Equation Modelling (SEM) analytical techniques later in the Chapter. We now move on to treat the responses to these 15 core regulation questions in another way in order to aid our understanding of the nature of their interdependence. We do this by using Correspondence Analysis (CA) which is a technique for analysing cross-classified categorical data. The analysis can be used to produce a 2-D plot which captures the interdependence between rows and columns. It provides a method for displaying the contribution of each cell of a contingency table to the chi-square value of the table. However, given the nature of our data we need to employ a development of this – multiple correspondence analysis (MCA). This is used when there is a single phenomenon of interest (here, regulation) which has a range of dimensions (i.e., 15 core regulation statements) which can be captured by similarly structured measures (here a 5-point scale). Again, it can be used to produce a 2-D display, but, in this case, the plot indicates the interdependence between each variable and the rest of the variables in the dataset. Figure 5.2 displays the results of applying MCA to the responses to the 15 core regulation questions. To assist its interpretation the plotted points have been coloured and labelled as follows: • • • The plotted points are coloured red for ‘disagree’ and blue for ‘agree’ with black representing ‘don’t know’; Two most extreme responses – ‘strongly disagree’ and ‘strongly agree’ are filled circles (D1 and A1 respectively); The milder responses - ‘disagree’ and ‘agree’ - are open circles (D2 and A2); 70

The Impact of Regulation on Small Business Performance

Finally, the filled circles are labelled with a letter which identifies the specific regulation question and the key can be found in Table 5.1.

The results show quite clearly that the ‘clouds’ of moderate and extreme responses are located in quite different areas of co-ordinate space. This is suggestive of a polarisation of views about regulation between those who have strong opinions (either way) and those who do not. For most questions the two extreme responses are generally well separated. For most of these questions the D1 point is some distance from the corresponding A1 point. Similarly, for the milder responses the cloud of ‘disagree’ points is quite well separated from the ‘agree’ points, and the ‘don’t know’ points lie in between them. Figure 5.2: The ‘Core’ Regulation Questions: Correspondence Analysis
multiple correspondence analysis: regulation questions
D1 D2 N A2 A1 E FL B Q I C O P R G D J D G M R M I NQ F L -4 P C -5 E -3 -2 -1 0 1 2 3 B O 2 0 1

N

-2

-1

The D1 points from a compact cloud, whilst the A1 points are more widely distributed, implying that strong agreement to the regulations questions varies more between questions than strong disagreement. The A1 points are in a handful of small clusters which we can identify as follows: 71

-3

J

The Impact of Regulation on Small Business Performance

• • • •

Cluster 1: entry, costs, min, recruit Cluster 2: insapp, new, quick, informed Cluster 3: level, confide, opport, enc Cluster 4: compad, eff, prody

Does the membership of the A1 ‘clusters’ match the three conceptual ‘bundles’ (fairness, performance, behaviour) underlying the questionnaire design? The first cluster does overlap the ‘performance’ dimension quite substantially (defined originally as questions E,M,D,P,O and R – see Table 5.1), but otherwise there seems to be little relationship between the two groupings. Nonetheless, at least three of the four clusters do seem to be interpretable: • • • Cluster 2: regulatory environment (insapp, new, quick, informed) Cluster 3: market environment (level, confide, opport, enc) Cluster 4: business operations (compad, eff, prody)

Are these dimensions any more reliable in terms of having a higher degree of internal reliability? The Cronbach’s Alpha for each of the clusters are 0.24, 0.55, 0.70 and 0.74 respectively which suggests that, apart from Cluster 1, the other three clusters have a higher degree of internal reliability. With respect to Cluster 1 we imply that the ‘strongly agree’ response to the four questions has been given by those who ‘strongly disagree’ on other questions. What this analysis suggests is that there may well be latent constructs within the item pool of 15 regulation questions which we need to model more formally in order to arrive at a model of regulation which has both conceptual and statistical validity. Once that is done we can then seek to estimate an overall model of business performance which includes the latent construct of regulation, if indeed such a construct can be validated, and a range of other co-variates. These co-variates will seek to capture aspects of the management capacity of the business as well as business strategy.

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The Impact of Regulation on Small Business Performance

5.4

Developing Measurement Models of Regulation, Management and Performance

5.4.1 The Analytical Approach What we are proposing is to construct exploratory ‘Path Analysis’15 (or Structural Equation Modelling – SEM) approach of the way in which a range of variables may connect to measures of firm performance and growth. A SEM approach is a multivariate technique which combines aspects of multiple regression (examining dependence relationships) and factor analysis (representing unmeasured concepts – factors – with multiple variables) to estimate a series of interrelated dependence relationships simultaneously16. For the remainder of this chapter we will be analysing a dataset containing 734 small businesses. This is much smaller than the 1,205 in the original dataset but it is the maximum number for which we have a complete set of data on all the variables to be included in the analysis. The objective here is to harness appropriate techniques that allow an in-depth investigation of how observables in the business (responses to particular questions on regulation) are associated directly with performance and growth outcomes (another set of observables), or whether they work through other variables or latent constructs. In short, it can identify which variables are direct causes and which are direct effects. Historically SEM has been referred to as ‘causal modelling’. However, just like in regression, causality in SEM remains a design issue: there is nothing causal about SEM in the statistical sense as many wrongly believe. In every uncontrolled observational study the change in the dependent variable that accompanies a unit change in any one predictor does include not only the effect of that predictor but also the effect of any confounding variables that might be changing simultaneously. 5.4.2 Deriving a Regulation Construct We start by specifying a base model with all 15 regulation variables uncorrelated with each other and connected to the latent construct of ‘regulation’. In this specification 13 variables were significant at the 5% level, with the remaining two (costs to the business and meeting minimum standards was the only impact of regulation) were insignificant. Interestingly, the ‘costs’ variable is unrelated (i.e., it is negative and insignificant) to the overall model of regulation indicating that the responses
15

A method that employs simple bivariate correlations to estimate the relationships in a system of structural equations (Byrne, 2001; Hair, et al., 1998). The method is based on specifying the relationships in a series of regression-like equations that can then be estimated by determining the amount of correlation attributable to each effect in each equation simultaneously. When employed with multiple relationships among latent constructs and a measurement model it is termed Structural Equation Modelling (SEM). 16 The software used in this application of the SEM modelling is AMOS 6 for SPSS.

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The Impact of Regulation on Small Business Performance

provided by the business owners do not ‘belong’ to a broader set of attitudes towards other aspects of regulation. On its own this is an important finding as it supports our earlier argument that if we only ask business owners about the costs to the business of regulation then we run the risk of provoking a set of skewed responses which do not fully capture the way they think about the regulatory environment in which they operate. Our approach to this study has now been able to provide a clear illustration of that risk. The outcome, reported in Table 5.4, is a statistically significant model of a latent construct ‘Regulation’ - which can be represented by 13 of the 15 questions on regulation (i.e., excluding costs and min). Table 5.4: A Model of Regulation - Regression Weights (n=734)
Dimensions informed level enc prody opport entry confid inspapp recruit compad eff quick new min costs <-<-<-<-<-<-<-<-<-<-<-<-<-<-<-Construct Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Estimat e 1 1.594 1.823 1.436 1.368 0.761 1.78 0.885 0.766 1.899 2.129 0.866 0.923 0.171 -0.1 P

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.178 0.42

Model Fit Measures CMIN/DF (χ2) 2.459 Goodness of Fit Index (GFI) 0.965 Root Mean Square Error of 0.045 Approximation (RMSEA) Note: Definitions of the dimensions is contained in Table 5.1.

Further, the model of regulation does not identify any other latent variables which implies that the notions of ‘fairness’, ‘behaviour’ and ‘performance’ we had been using earlier for the correspondence analysis cannot be identified here. Nevertheless, we are confident that viewing regulation in this composite way (i.e., based on these 15 regulation questions) has both conceptual meaning and statistical robustness. This is an important conclusion for many reasons not least of which is the opportunity it now provides to investigate the nature of the relationship between regulation and small business performance. Crucial to the specification of that relationship from the survey data was the ability to obtain an observable measure of regulation. This we have now achieved.

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The Impact of Regulation on Small Business Performance

5.4.3 Deriving a Management Construct We can deal with a range of co-variates in a number of different ways but here we want to introduce a ‘bundle’ of variables from the survey that tell us something about the capacity of the business. These dimensions have been shown to be important in models seeking to understand the drivers of small business growth and for that reason we introduce them into the analysis (see for example, Barkham et al., 1996). There are five dimensions: age of the owner, highest qualification of the owner, the number of owners in the business, the presence of non-executive directors and the existence of a Business Plan that has been developed and recently used. Once again the number of observations is the 734 businesses for which we have data on all the dimensions used in the analysis. Table 5.5 shows that these five dimension of the ‘management team’ have statistical meaning and we are able to estimate a second latent construct that we call ‘management’. Table 5.5: A Model of Management - Regression Weights (n=734)
Dimensions MD’s age (mdage) MD qualifications (mdqual) Non-Exec Directors (nonexec) Business Plan (busplan) No. of Owners (ownersno) Model Fit Measures CMIN/DF (χ2) Goodness of Fit Index (GFI) Root Mean Square Error of Approximation (RMSEA) <-<-<-<-<-Construct Management Management Management Management Management Estimat e 1 4.096 0.879 2.843 1.987 P

0.006 0.009 0.007 0.007

0.747 0.998 0.000

5.4.4 Deriving a Performance Construct We now turn our attention to developing a performance construct. In linear regression, when we are seeking to explain business performance, we specify a single dependent variable. Why then here do we choose to identify a performance construct which contains a variety of measures of growth alongside variables which have been shown to be highly correlated with performance (e.g., size, exporting and innovation propensities)? There are many dimensions to performance and no one measure will suffice and for that reason we develop a latent variable for performance. There are 9 performance variables (dimensions) which are typically coded with larger numbers for the more desirable end of the performance attribute scale (exporting, innovating, intellectual property and growth in international sales) and smaller for the less desirable end. In addition, there are variables capturing size, age and actual performance in the previous two years. Table 5.6 shows that the

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The Impact of Regulation on Small Business Performance

construct has statistical validity and each of the nine dimensions are significant at the 5 per cent level. Table 5.6: A Model of Performance - Regression Weights (n=734)
Dimensions Actual turnover growth (turngrow) Actual employment growth (empgrow) Growth intentions (growint) Business Age (age) Turnover Size (turnsize) Employment Size (empsize) Registered IPR (intprop) Exporter (export) Innovator (innov) Model Fit Measures CMIN/DF (χ2) Goodness of Fit Index (GFI) Root Mean Square Error of Approximation (RMSEA) <-<-<-<-<-<-<-<-<-Construct Performance Performance Performance Performance Performance Performance Performance Performance Performance Estimat e 1 1.696 1.402 1.881 11.125 11.972 0.841 1.197 1.542 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 P

4.159 0.97 0.066

5.5

A SEM Model Management

of

Regulation,

Business

Performance

and

The first step in the modeling of the impact of regulation on small business performance takes the three latent constructs that have been estimated and found to have both statistical validity and, equally important, conceptual meaning: that is, regulation, performance and management. There are the 15 variables (dimensions) in the regulation construct of which 13 are statistically significant. There are nine variables (dimensions) making up the performance construct which are typically coded with larger numbers for the more desirable end of the performance attribute scale (exporting, innovating, intellectual property and growth in international sales) and smaller for the less desirable end. In addition, there are variables capturing size, age and actual performance in the previous two years. All nine variables were significant in the initial measurement model. Finally, there is the management construct which contains five variables (dimensions) which provide some measure of the capacity of the business (number and characteristics of the owners and the presence of an active Business Plan). Once again we use the dataset with 734 observations to estimate a full model which represents the number of cases with complete data on all the dimensions used in the three latent constructs. At the outset we can think about four alternative specifications of the

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The Impact of Regulation on Small Business Performance

relationship between the two latent constructs of regulation and performance: • • • • performance ’causes’ regulation regulation ’causes’ performance the causal relationship between regulation and performance runs both ways regulation and performance are ’associated’ i.e. there is significant covariance between their errors

Figure 5.3 is a graphical representation of the full SEM model17 of regulation, management and performance and there is evidence that supports the fourth specification of the relationship. The negative and significant covariance (highlighted in bold in Table 5.7) between the regulation and performance constructs indicates that they are mutually linked and ‘move together’ which means that it is not possible to conclude that one construct is causally linked to the other irrespective of direction. The individual parameter estimates of the overall SEM model are set out in Table 5.7. A variable not included in the model is industry sector as it is a categorical variable and has to be handled rather differently. We do this by specifying the model for individual sectors and testing for the statistical significant differences between them18. Figure 5.3: Model of Regulation, Management and Performance (n=734)

tu

prody opport
17 18

Specified using the modification indices protocols in AMOS 6. We can report that the model holds for the four broad sectors used in this study.

confid

77

inspapp

The Impact of Regulation on Small Business Performance

Table 5.7: A SEM Model of Regulation, Management and Performance Regression Weights (n=734)
Estimate
informed level enc prody opport entry confid inspapp recruit compad eff quick new min empsize empgrow intprop growint age turngrow turnsize innov export nonexec busplan ownersno mdqual Performance Regulation Management Regulation informed prody Covariances eregul eturng erecr eexpo eoppo einf eage eprody einf equi enew eage emdqaul Model Fit Measures CMIN/DF (χ2) Goodness of Fit Index (GFI) Root Mean Square Error of Approximation (RMSEA) <--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--<--> <--> <--> <--> <--> <--> <--> <--> <--> <--> <--> <--> <--> 4.159 0.97 0.066 Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Regulation Performance Performance Performance Performance Performance Performance Performance Performance Performance Management Management Management Management Management Management costs costs mdage turnsize eperf eempg eentry eintpr econfi enew eturng eoppo ecomp enew eenc emdage eturns 1.000 1.314 1.474 1.144 1.079 .618 1.420 .715 .607 1.544 1.692 .721 .751 .109 1.000 .145 .076 .112 .149 .088 .899 .135 .099 1.000 1.912 2.609 2.538 9.718 .754 .035 -.042 .233 -.091 -.071 .055 .791 .042 .260 .171 -.041 .112 -.160 .221 .143 .173 -.177

S.E.
.138 .152 .119 .120 .118 .152 .105 .127 .160 .161 .100 .097 .101 .013 .013 .015 .022 .015 .030 .015 .012 .241 .312 .451 1.171 .271 .006 .019 .048 .024 .028 .008 .076 .006 .040 .039 .013 .028 .035 .036 .038 .023 .031

C.R.
9.496 9.719 9.585 8.975 5.244 9.352 6.828 4.762 9.673 10.522 7.246 7.773 1.080 11.308 5.949 7.481 6.620 5.843 29.796 9.109 8.003 7.944 8.368 5.629 8.298 2.781 6.325 -2.223 4.813 -3.703 -2.528 7.281 10.456 6.698 6.484 4.366 -3.278 3.942 -4.616 6.139 3.793 7.546 -5.764

P
0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.280 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.005 0.000 0.026 0.000 0.000 0.011 0.000 0.000 0.000 0.000 0.000 0.001 0.000 0.000 0.000 0.000 0.000 0.000

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We can now discuss the various elements of this model. In summary, we have statistically significant model which captures the complexity of the relationship between the three constructs. This model is specified at various levels. The three constructs in this full model are broadly similar to their individual specifications set out in the previous section which underlines the stability of the constructs once we specify them in the full SEM model. There are two important exceptions. First, the age of the MD is now not part of the management construct but is directly related to how well informed business owners are about the range of regulations affecting their business. The interpretation here is that the older the MD the more likely they are to report that they are well informed about regulation (see Table 4.19). Second, costs are now significantly related to the regulation construct but the sign is negative which strengthens the earlier conclusion that owner-managers simultaneously hold ‘mixed views’ on regulation. We also saw in Chapter 4 that responses to the costs question In this full model the wide range of covariates represented in the management and performance constructs allow us to capture the complexity of the individual business circumstances and as a result the ‘costs’ dimension now plays its role. Meeting minimum standards (min) remains insignificant in the regulation construct. The remaining 13 regulation indicators are significantly and positively associated with the regulation construct. We observe that all nine originally specified dimensions of the performance construct are significant. The management construct contains four significant and positive dimensions with the age of the MD, as mentioned above, having a direct connection to one of the regulation variables (informed). What the model also reveals is that these two constructs are significantly connected with management having a positive effect on performance. The interpretation here is that the ‘performance’ of the business is causally related to management as represented by the number of owners and non-executive directors, the presence of a business plan and the educational qualifications of the owner (i.e., possesses a degree). This ‘performance’ is, of course not confined to some narrow employment or turnover measure but includes related processes of export and innovation behaviour. There is also a significant and positive connection between management and regulation which, like the influence of the age of the MD, we can interpret in simple terms as the greater the level of ‘managerial capacity’ in the business the more likely the ownermanager is to possess a complex set of views on regulation. Interestingly, the costs variable has a direct and positive connection to this management construct indicating that it really

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does sit apart in the model as an exogenous and ‘extreme’ influence on many aspects of the model, but not importantly on performance. Another way of expressing this is to say that ‘costs’ has indirect effects on everything else in the system through its significant connections to the regulation and management constructs. This is not that surprising given the nature of the discussion that is more often that not associated with regulation – red tape, burden, administrative costs. The costs variable in our study clearly operates as a touchstone for that discourse. What is important here is that it is modeled in our model in that way and that it sits alongside other simultaneously held views on regulation. In addition to these significant parameters involving the three latent constructs there are two other significant direct connections. First, as reported above the age of the MD (mdage) is directly and positively connected to informed. Second, turnover size is negatively related to whether the owner-manager agrees that regulations in the UK have increased the level of employee productivity in their business (prody). The interpretation here is that the larger the turnover of the business the more likely the respondent is to disagree with that statement. Looking at the results in a slightly different way we can observe that there are 13 two-way associations between dimensions of the model which give rise to significant covariances (i.e. correlation between the error terms). The significant covariance between regulation and performance has already been referred to above. This is the main conclusion to be drawn from the SEM model and reveals that these two concepts are intrinsically connected and can be said to be mutually interlocking. The other 12 can be divided between those on the performance construct and those on the regulation construct. They are: • • Regulation Cluster: informed, quick, compad, new, enc, opport, prody, confidence, recr, entry Performance Cluster: turnsize, export, intprop, empgrow, turngrow, age

The covariances portrayed by the regulation cluster are interesting as it opens up a possible point of entry for business support. We can see that being well informed about regulation is associated with the business being able to deal with the introduction of new regulations and also with regulations providing an opportunity to gain a competitive advantage over other firms. Being able to deal with new regulations is also connected to the business being encouraged to take action to remain competitive and that the

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business adapts more quickly to regulations than competitors. The implication here is that ensuring businesses are well informed about regulation can for some firms produce important wider benefits which sit well with a policy seeking to enhance the competitiveness of the small business sector. Moves towards developing a simplified regulation framework would seem to make this objective more achievable. There are also one or two significant interconnections between these two clusters which once again illustrates the complexity of what it is we are seeking to measure. For example, the performance cluster is connected to the regulation cluster by turnsize to lprody. Further, the age of the MD and the age of the business are connected and turnover size and the qualifications of the MD link the performance and management constructs. 5.6 Summary Given the variety of attitudes to regulation captured in our survey of 1,205 small business owners we set out to ascertain whether it was possible to identify and test a model of regulation based on a set of 15 regulation questions (or indicators). This we were able to do and we now have significant conceptual and empirical depth to the construct of regulation as viewed in the context of small businesses. The survey also collected data on business attributes and growth performance and we used a SEM approach to model the relationships between the three latent constructs of regulation, management and performance. The outcome is a multi-layered model reflecting the complexity of the relationship with many significant direct and indirect connections between the individual regulation and performance indicators. The overall conclusion to emerge is that a significant model can be specified using a subset of 734 small businesses for which we have full data on all the required variables. The significant negative covariance between regulation and performance is important and leads us to conclude that there is a mutually interlocking relationship between regulation and performance which in simple terms does not allow us to draw the conclusion that one construct (regulation) causes another (performance). This conclusion is highly significant and supports a need for a more nuanced understanding of the way these two concepts interact. For example, as the performance of a business evolves in terms of say, exporting behaviour or a rapid increase in output, then the model suggests that views on regulation and the related outcomes (which include a ‘do nothing’ option) will also change. Similarly, we can also state that attitudes and actions related to the introduction of say new regulations will be connected to ‘performance’ as owner-managers adjust their business objective accordingly, or not depending upon the capacity to react.

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This analysis is consistent with the arguments of Chapter 3 that regulation generates multiple tendencies – enabling, motivating as well as constraining – that shape business performance outcomes. Regulation influences small business owners directly and indirectly via its influence on the behaviour of others whose actions casually influence a real business owner. We have, therefore, identified a very realistic view of regulation within the small business context which allows owner-managers to hold ‘mixed’ views on regulation that connect to a range of management and performance circumstances. The objective of the Better Regulation agenda is to enhance business competitiveness. This research has shown that this can be achieved in other ways which do not solely rely upon re-formulating the regulatory framework.

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PART FOUR PROJECT OVERVIEW

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6:
6.1

Conclusions and Policy Implications
Summary of Argument and Findings

A new approach to explaining how regulation influences small business performance has been presented. Our approach was specifically designed to capture the complexity and inter-related nature of the factors that underpin differences in small business performance. And within this to explain why and how small businesses tend to experience different performance outcomes despite a common regulatory environment. We use both qualitative and quantitative data to demonstrate how and in what contexts regulation impacts upon the performance of small businesses. Our analysis of the interviews with the 124 small business owners lead us to conclude that regulation generates multiple influences which can be enabling and motivating as well as constraining. These influences, operating simultaneously, shape the activities of small business owners and other stakeholders whose actions underpin small business performance outcomes. These influences operate whether or not owner-managers (and other stakeholders) are explicitly aware of them. The impact of regulation on business performance is not simply a reflection of the properties of regulation (for example, the scope of obligations or their complexity), important though these are. The performance outcomes experienced in practice also depend on how business owners, and other stakeholders respond to it. Agents’ adaptations to regulation and thus the business performance outcomes that result depend on firms’ internal resources and capabilities, and on the external context in which they operate; particularly product, labour and capital market conditions. Business owners vary in their capacity to discover, interpret and adapt to regulation. They also vary in the business objectives they seek to achieve and these will also shape how they adapt to regulation. Those with greater resources – finance, equipment, management capability, workforce knowledge and skills – are better placed to deal positively with regulation. Where businesses lack the resources to develop new practices and products, their capacity to adapt to regulation is constrained. Businesses also vary in the business objectives they seek to achieve and these also shape how they adapt to regulation. Whether regulation enables and motivates small business owners to change practices and products, as opposed to simply absorbing any additional costs that arise, also depends on the wider conditions within which business owners operate. For instance, where business owners perceive product or process innovation as essential to maintaining competitiveness, regulatory change will likely motivate, whether acknowledged explicitly or not, the search for new products and processes.

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The findings from this survey of a stratified random sample of 1,205 small businesses can be summarised as follows. First, the results confirm that regulation is enabling and motivating for small business owners as well as constraining. It should be stressed that this is a potential. It does not mean that business owners do, in fact, act upon these enablements. Business owners must have the resources, and be motivated, to exploit them. Causal powers exist independently of events and experiences. This has important implications for the future development of business support and the regulatory environment which we discuss below. Although the costs and constraints associated with regulation were at the forefront of business owners’ minds, the data also suggest that many business owners were aware that regulation offers opportunities to develop more efficient ways of working and/or of increasing income. Almost a half of the sample claimed their businesses were able to deal with new regulations and sizeable minorities reported impacts on their firms that provide benefits. Second, a key correlate of many of the core regulation variables is ownermanager knowledge. Those owners reporting being well-informed about the range of regulations affecting their businesses tended to adapt more dynamically and to experience the best business performances. This suggests that knowledge of regulation coupled with the internal capacity to respond positively can and does enable business owners to adapt business practices and products to overcome some of the constraining influences of regulation. Third, owners of fast growth enterprises were significantly more likely to report that the introduction of new regulations had encouraged them to take action to ensure their businesses remain competitive and to claim that that they were able to adapt more quickly than competitors. Fast turnover growth firms (but not fast employment growth firms) were more likely to report regulation as beneficial. This is further evidence that it is not simply the regulations themselves that cause business performance outcomes but, rather, it is how businesses adapt to new regulations that is the major influence on performance. As with other aspects of the business environment – such as increased input prices, changing technologies and patterns of consumer demand – it is those goods and service providers best able to adapt quickly and effectively to the changing landscape that are most likely to prosper. The challenge for the Better Regulation agenda is to seek to develop ways in which ‘slow growing’ small businesses can be more able to cope with the regulatory environment. The outcome from our multivariate analysis was a statistically significant model of ‘Regulation’ which can be represented by 13 of the 15 questions on regulation. A key finding in this model is that the response to the question on costs – “to what extent would you agree that there are costs to your business of meeting the minimum regulation requirements” – is clearly unrelated statistically to owner-manager responses to the other regulation questions. The implication here is that owner-managers hold strong views on the way regulations imposes costs upon their business but that they simultaneously

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hold strong views about other aspects of regulation which do not impact on business outcomes in quite the same way. We believe that this disassociation is important in a number of respects. Not least is how it might inform the conduct of future research which seeks to capture some measure of the costs of regulation or administrative burden. We now have significant conceptual and empirical depth to the construct of regulation as viewed in the context of small businesses. This is an important conclusion for many reasons not least of which is the opportunity it provides in moving on to the next stage of the analysis which is to investigate the nature of the relationship between regulation and small business performance. The survey also collected data on business attributes and growth performance and we developed a model of the relationships between the three latent constructs of regulation, management and performance. The outcome is a multi-layered model reflecting the complexity of the relationship with many significant direct and indirect connections between the individual regulation and performance indicators. The significant negative covariance between regulation and performance is important and leads us to conclude that there is a mutually interlocking relationship between regulation and performance which in simple terms does not allow us to draw the conclusion that one construct (regulation) causes another (performance). The two constructs move together, yet as we noted above this does not include the dimension which relates to the costs of regulation. We are confident that this way of viewing regulation has both conceptual meaning and statistical robustness. We now have significant conceptual and empirical depth to the construct of regulation as viewed in the context of small businesses. 6.2 Policy Implications - Informing the Better Regulation Agenda

Regulation is often perceived as something additional and external to the market; this conceptualisation is fundamentally flawed. Regulation is an integral component of advanced market economies; without regulation modern economies simply would not function. The effective regulation of property rights, contracts, financial and labour markets is a necessary precondition for the operation and development of an advanced market economy. It is important that policy development is informed by a deeper understanding of the role of regulation and its effects on business performance than currently exists. These study findings, shaped by a broader conceptualisation of regulation and its influence on small business performance, complement existing knowledge and have implications for how policymakers should think about regulation in the context of the Better Regulation agenda.

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The objective of the Better Regulation agenda is to enhance business competitiveness. This research has shown that this can be achieved in ways which do not solely rely upon re-formulating the regulatory framework. There is an implicit assumption at the core of the Better Regulation agenda that, simply put, argues that the more tightly regulation is formulated the clearer the impact will be. However, this assumption has the potential to ignore the range of conditions that impact upon the outcome. We have seen that small businesses operating in the same regulatory context can and do experience very different performance outcomes; some perform well and grow, others struggle. Understanding this differentiation and how it is produced is vital to the development and application of better regulation. The explanatory model of regulation, management and performance presented in this report provides a further point of entry for policy interventions. There are two main areas where we suggest this can take place. 1. Implications for Business Support: • Regulatory outcomes depend on both the nature of the specific regulation involved and the internal and external conditions of small businesses that mediate its impact. Outcomes at the level of the firm can be influenced either by changing the regulation or by changing the conditions. To date, policy has focussed almost exclusively on the first of these options. This study has demonstrated clearly that the second has considerable potential. • Related to this is the finding that owner managers, when prompted, will report significant costs to their business as a result of meeting the minimum requirements of regulation. However, we have shown that, for some owner-managers, this strongly held view sits alongside more positive views about the impact of regulation in terms of, for example, increasing efficiency and creating new market opportunities. What this underlines is the complexity surrounding the mediation of regulation by the small business owner. It is the nature of this complexity, which our multi-layered model has captured, that provides the challenge for the development of business support. • Business owners have variable capacities and motivations to adapt to regulation. Accordingly, policymakers must recognise that variation in business performance outcomes reflects, in part, different small business owners’ motivations, resources and capabilities. This offers the opportunity for new, complementary, and potentially highly effective policy measures.

• We cannot assume that the effects of better regulation will be uniformly felt across the small business sector. Some firms will benefit while other will continue to struggle with the regulatory environment they find themselves in. There needs to be a greater emphasis upon building capacity within small 87

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businesses to cope with regulation. By internal capacity we are referring to the resources available to the business as well as the motivations to respond. Business support can effectively engage with the provision of information, the ease of adaptation to new regulations and the development management skills to respond to the challenges of regulation. We have seen from the multivariate analysis that simply being well informed about regulation can have wider effects upon the competitiveness of the small business sector (see Figure 5.3 and the discussion in Section 5.5) • New forms of businesses support designed to encourage and enable businesses to deal more positively with regulation can make a major contribution to achieving the fundamental aims of the Better Regulation project. Business support programmes, therefore, should include an explicit focus of familiarising business owners about relevant regulation and its potential impact on their business. Support, however, should aim to go beyond making clear what owners must do to comply with regulation to consider how regulatory change might stimulate new thinking with regard to resource acquisition and deployment, and finding new markets. In short, business owners should be encouraged to develop their capacity to exploit the enabling and motivating influences of regulation as well as managing its constraining influences. An extension of this argument would be that as the regulatory environment is simplified the outcome for small business may well be less than optimum without support to enable them to adapt effectively. The research has shown how the small business market place can be segmented and therefore targeted. Businesses with more than one owner and/or non-executive directors are more likely to be well informed and able to adapt to the challenges of regulations. Further, growth businesses have been shown to seek external advice to deal with regulation. While the obvious policy outcome is to help slower growing businesses cope with regulation there is also the need to ensure that these faster growing businesses are not hindering longer term growth with decisions that increase the short-term cost base of the business.

2. Developing the Impact Assessment Procedures: • Policymakers must recognise there will not be a single ‘small business effect’ but many different ones. Small enterprises operate in every sector of the UK economy and in widely different market conditions, suggesting a variety of strategic responses to particular regulations, themselves dependent on business owners’ capabilities, resources and objectives and the wider contexts that enable, motivate and constrain their actions. This research has provided evidence on the way in which the Impact Assessment (IA) procedure and the Small Firms Impact Test (SFIT) in

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particular, could be developed. In very simple terms the IA should not be thought of solely as a written rationale and check-list (characteristics of businesses likely to be affected) but also as a process for thinking through the various ways in which a new regulation can affect a small business in a structured way. The discussion in Chapters 3-5 has provided much of the detail on how regulations affect the business environment of the small business. In short, we would argue that central to this process is the need to recognise that regulation is enabling and motivating for small business owners as well as constraining. Although the costs and constraints associated with regulation were at the forefront of business owners’ minds, the data also suggest that many business owners were aware that regulation offers opportunities to develop more efficient ways of working and/or of increasing income. • There are direct and indirect regulatory influences on small businesses and by setting them out as part of the IA process should be an important first step (see Figure 2.1). Further, we saw in the discussion of Figure 5.3 that being well informed about regulation is associated with the business being able to deal with the introduction of new regulations and also with regulations providing an opportunity to gain a competitive advantage over other firms. Being able to deal with new regulations is also connected to the business being encouraged to take action to remain competitive and that the business in turn adapts more quickly to regulations than competitors. The implication here is that ensuring businesses are well informed about regulation can for some firms produce important wider benefits which sit well with a policy seeking to enhance the competitiveness of the small business sector. The obvious implication here is that the move to regulatory exemptions (step B in the SFIT) need not necessarily come early in the process of the IA and certainly should be based on aspects of the internal capacity of the business rather than on the more obvious criteria such as size. Size on its own, as we have seen, is not always a good indicator of the capacity of a business to cope effectively with the introduction of new regulations. For example, evidence from the survey would suggest that slower growing businesses and businesses with only one ownermanager are more likely to perceive regulation as constraining their business. Where this leads is to incorporate into the SFIT some assessment of the ability of various small businesses to comply with the new regulation. If, as we argue above, there is to be a greater emphasis on familiarisation and capacity within the business support framework to help small businesses cope better with the regulatory environment then the associated range of costs need to be built into the ex ante impact assessment of the evolving regulatory environment. In brief, there is a

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need to acknowledge the costs of building capacity within small businesses. • Exclusive emphasis on the quantification of costs and benefits encourages a narrow and static focus on outcomes at a particular point in time, rather than recognising the dynamic influence of regulation on business activity and performance over time. Policymakers should consider the dynamic effects of regulation on small business performance. What enabling, motivating and constraining influences will particular interventions generate, taking into account likely levels of compliance by those regulated and the market conditions encountered by business owners? Such assessments could be added to the SFIT. Indirect regulatory influences are a major source of dynamism, though perhaps largely unacknowledged, in the competitive market system. In developing Impact Assessments, more emphasis should be placed on indirect influences on small business performance. Recognising that regulations that constrain small business owners by placing obligations upon them might also enable and motivate them and other small businesses to adapt products and processes in order to reduce costs and/or increase trading revenues would be a step forward. Regulatory interventions always generate unintended consequences. Consultations with regulated parties might enable the identification of at least some of these prior to implementation. The IA procedure would benefit from face-to-face discussions with small business owners as well as representative groups at an early stage. While it is understandable for resource-constrained policymakers to save time and effort by consulting with representative groups, more value might be added to the IA by consulting with a carefully selected sample of business owners chosen on the basis of prior thinking concerning those considered likely to be most affected by specific regulatory proposals. Policymakers need to take into account likely levels of compliance, business closure and/or market withdrawal when assessing regulatory proposals. Levels of compliance will vary with the perceived severity of a regulatory shock and business owners’ capacities of adjustment.

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Davidsson, P., Delmar, F. and J. Wiklund, (2002) ‘Entrepreneurship as Growth; Growth as Entrepreneurship’ in M .A. Hitt, R. D. Ireland, S. M. Camp and D. L. Sexton (Eds.), Strategic Entrepreneurship: Creating a New Integrated Mindset, pp. 328-342. Oxford: Blackwell. Davidsson, P. (2004) Researching Entrepreneurship. New York: Springer Delmar, F (1997) ‘Measuring Growth: methodological considerations and empirical results’. In R. Donckels and A. Miettinen (eds.) Entrepreneurship and SME Research: On its Way to the Next Millennium. Ashgate: Aldershot, pp 199-216. Department of Business, Enterprise and Regulatory Reform (BERR) (2007a) Next Steps on Regulatory Reform, http://www.cabinetoffice.gov.uk/regulation/reform/next_steps/ Department of Business, Enterprise and Regulatory Reform (BERR) (2007b) Regulation and Business Advice, http://www.cabinetoffice.gov.uk/regulation/documents/next_steps/business/bu siness.pdf Djankov, S., La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (2002) ‘The Regulation of Entry’, Quarterly Journal of Economics, 117, 1, 1-37. Grimshaw, D. and Carroll, M. (2006) ‘Adjusting the National Minimum Wage: Constraints and Incentives to Change in Six Low-Paying Sectors’, Industrial Relations Journal, 37, 1, 22-47. Hair, JF; Anderson, RE; Tatham, RL and Black, WC (1998) Multivariate Data Analysis (5th Edition). Prentice-Hall: New Jersey. Hampton, P. (2005) Reducing Administrative Burdens: Effective Inspection and Enforcement: Final Report, http://www.hmtreasury.gov.uk/budget/budget_05/other_documents/bud_bud05_hampton.cf m Hart, M. and McGuinness, S. (2003) ‘Small Firm Growth in the UK Regions 1994-97: Towards an Explanatory Framework?’, Regional Studies, 37, 2, 109122. HM Government (2006) Simplification Plans: A Summary, http://www.cabinetoffice.gov.uk/regulation/documents/simplification/summary. pdf HM Treasury (2005) ‘Chancellor launches Better Regulation Action Plan’ http://www.hmtreasury.gov.uk/newsroom_and_speeches/press/2005/press_50_05.cfm Ho, Y-P. and Wong, P-K. (2007) ‘Financing, Regulatory Costs and Entrepreneurial Propensity’, Small Business Economics, 28, 187-204.

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Vickers, I. James, P., Smallbone, D. and Baldock, R. (2005) ‘Understanding Small Firm Responses to Regulation: the Case of Workplace Health and Safety’, Policy Studies, 26, 2, 149-169. World Bank (2007) Doing Business in 2008: Overview, World Bank, Washington. http://www.doingbusiness.org/documents/DB-2008-overview.pdf Yapp, C. and Fairman, R. (2005) ‘Assessing Compliance with Food Safety Legislation in Small Businesses’, British Food Journal, 107, 3, 150-161.

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APPENDIX 1 Face-to-Face Interview Topic Guide

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Business Performance Questionnaire
Thank you for agreeing to meet me/us. The SBRC has been commissioned by the Small Business Service to conduct a study looking at the factors that both influence and constrain the performance of businesses. The purpose of our visit is to collect information on the influences and barriers you face as a business owner. Rather than simply looking for ‘yes/no’ answers, the questions allow you to give your answers at length if you wish. Your replies will, of course, be treated in the strictest confidence. At the end of the study we will send you a summary of the research findings so you can compare your own experiences with those of other business owners.

Name of respondent (with position) Name of business Business address Interviewer Date of interview Introduction I’d like to begin by asking you a few background questions about the business. • • In what year did the business start trading? If respondent not a founder: when did you join the business? Thinking back, what were your motives for starting/joining the business at that time? Probe: Have these changed since you first started/joined the business? Why have these changed? What products and services does the business provide to its customers? Probe: Have these changed at all since you first started/joined the business? Why did you introduce those changes? Who are your customers – other businesses (large/small), public sector organisations, personal consumers?

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Probe: Have your customers changed at all since you first started/joined the business? How has that come about? • How easy or difficult is it to find new customers and to retain existing ones? Probe: Why do you think that is? Who are your main competitors? Is competition based primarily on price or on quality? Including yourself and any other owners, how many people does the business currently employ? Probe: Full/part-time split? What kinds of jobs do people do? Any changes in the past two years? • How easy/difficult is it to recruit suitable employees? Probe: For which staff? Why do you think that is? How often have you tried to recruit this year? • How is the business funded? Probe: How important is external funding to the business (e.g. gifts/loans from family and friends, bank overdraft, bank loans, equity)? • How easy/difficult is it for the business to obtain external funding? Probe:Why do you think that is? How often have you tried to obtain external funding? Business Performance I’d now like to move on to some questions about the performance of the business and the reasons for this. • How well has the business been doing in the past two years? Probe: Allowing for inflation, has turnover increased/decreased/stayed the same over the past two years? (obtain specific data if possible) Has the business been trading at a profit for the past two years? Thinking back, has the business performed better or worse than you expected over the past two years? Probe: In what ways is it better/worse? Why do you think that is? What do you think has helped the business to perform as well as it has?

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Probe: Why do you think that is? What has been most important? • What have been the main problems you have faced as a business owner in the past two years? Probe: In what ways have these affected you as a business owner? • How have you tried to cope with, or adapt to, these problems? Probe: why did you choose to cope in this way? • How successful have these actions been in tackling these problems/barriers? Probe: Why do you think these actions have (not) been as successful as you hoped? Business Regulation If direct reference to one or more regulations made: You mentioned ‘regulation’ as an influence on your business. I’d now like to ask some questions about the influence of regulation on you as a business owner. • What regulation(s) affected business performance? Probe: need precise detail on this (so we awareness/perception). can gauge

• • •

How did that/those regulations affect business performance? Probe: need precise detail on this (to identify mechanisms). What did you to cope with the effects of these regulations? Probe: why did you choose to cope in this way? How successful have those actions been? Probe: Why do you think these actions have (not) been as successful as you hoped? Did this cause any new problems?

Do you think there are any benefits of regulation for you as a business owner? Probe: what benefits? • If that/those regulation(s) had NOT been in place, what difference do you think it would have made to your business? Probe: Why do you think that is? • Overall, how important has regulation been in relation to other influences on business performance? Probe: Why do you think that is?

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If no reference to regulations made: • Some commentators have suggested that ‘regulation’ can be a major influence on business performance. How important has regulation been as an influence on your business? If ‘regulation’ reported as an influence – repeat Q sequence above. If ‘regulation’ NOT reported as an influence: • Why do you think that you are not affected by regulation as a business owner? Any other comments? Thank you and close interview.

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APPENDIX 2 Telephone Interview Questionnaire

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REGULATION AND SME PERFORMANCE STUDY
TELEPHONE QUESTIONNAIRE (9th February 2007)

OMB Research and SBRC, Kingston University for the Small Business Service (DTI)

Good morning/afternoon, my name is … and I’m calling on behalf of OMB Research, an independent market research agency. We have been commissioned by the Department of Trade & Industry and the Small Business Research Centre at Kingston University to undertake research on the factors associated with small business performance. Could I speak to the owner/managing director or the person responsible for business development in the firm or at this site? This research will cover areas such as the profile (i.e. size and sector) and strategic focus of your business, your general business performance, as well as your views on barriers to growth and will take around 20 minutes depending on your answers. Is it convenient to speak to you now or would you prefer to make an appointment for another time? The research is being conducted under the Code of Practice of the Market Research Society, which means that all of the answers you give are strictly confidential and anonymous The responses of all organisations taking part will be combined into a statistical report Your organisation was selected at random from a list of all UK businesses If you wish to check that OMB Research is a bona fide market research agency, you can contact the Market Research Society on 0500 396999, or call Rachel Olding at OMB Research on 01622 790900

  

OFFER FAX REASSURANCE IF NECESSARY

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SECTION A: BUSINESS PROFILE
READ OUT TO ALL We’d like to start by getting some information on the background of your business and its organisational structure. ASK ALL A1 So firstly, is the business UK or foreign-owned? SINGLE CODE ONLY UK-owned........................................................................1 Foreign owned.................................................................2 (Joint UK and foreign-owned)..........................................3 (Don’t know).....................................................................4 IF CODE 2 or 3 THANK AND CLOSE INTERVIEW A2 Is your business…? READ OUT AND SINGLE CODE A single-site organisation.................................................1 Or, part of a multiple-site organisation.............................2 (Don’t know).....................................................................3 IF MULTIPLE SITE ORGANISATION (CODE 2 AT A2) A3 Can I just ask, is the site at which you work…? READ OUT – SINGLE CODE The headquarters of your organisation............................1 A franchise.......................................................................2 A wholly-owned subsidiary of a UK firm...........................3 A joint venture with UK firms............................................4 Other (SPECIFY).............................................................95 (Don’t know).....................................................................97 IF MULTIPLE SITE (CODE 2 AT A2) From now on, when I ask about your business I’d like you to answer based on your business as a whole, not just the site at which you work. ASK ALL A4 Is the business a . . .? READ OUT - SINGLE CODE Sole proprietorship...........................................................1 A partnership...................................................................2 A limited company (Ltd)...................................................3 A public limited company (Plc).........................................4 Or, something else (SPECIFY)........................................95 (Don’t know).....................................................................97 ASK ALL A5a I have < READ OUT SIC DESCRIPTION ON SAMPLE> as a general classification for your main business activity. Bearing in mind that this is a general classification, does this sound about right? Yes...................................................................................1 No....................................................................................2

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(Don’t know).....................................................................3 IF NO AT A5a A5b What is the main business activity of your firm? ADD AS NECESSARY What does it make, or what service does it provide? WRITE IN AND CODE TO 1 LEVEL SIC ........................................................................................ ........................................................................................ ASK ALL A6a How many people are currently employed by your business <IF MULTISITE (CODE 2 AT A2) across all sites>? Please give me the full time equivalent, so count part time employees according to the proportion of time that they work. WRITE IN NUMBER (0+) (ROUND TO NEAREST WHOLE NUMBER) (Refused) (Don’t know) – PROMPT WITH RANGES CLOSE SURVEY IF VALUE AT A6a IS 250 OR MORE (BUT NOT IF DON’T KNOW OR REFUSED) IF DON’T KNOW AT A6a A6b If you had to estimate, approximately how many people are employed by your business? READ OUT AS NECESSARY No employees ……………………………………………….1 1-9...................................................................................2 10-24...............................................................................3 25-49...............................................................................4 50-99...............................................................................5 100-249...........................................................................6 250+................................................................................7 - CLOSE (Don’t know).....................................................................8 (Refused).........................................................................9 ASK ALL A7a In what year was the business first established? < IF MULTIPLE SITE ORGANISATION (CODE 2 AT A2) Please answer for your business as a whole, not just the site at which you work. > WRITE IN YEAR (Don’t know) - PROMPT WITH BANDS (Refused) IF DON’T KNOW AT A7a A7b Was your business first established in….? READ OUT 2006.................................................................................1 Between 2000-2005.........................................................2 Between 1990-1999.........................................................3 Or, was it before 1990......................................................4 (Don’t know).....................................................................5 (Refused).........................................................................6

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SECTION B: MARKETS & LOCAL LINKAGES
READ OUT TO ALL I would now like to ask you some questions about the markets in which you sell your goods and services and the nature of your supply chain and your competitors. ASK ALL B1a So firstly, can I just check does your business currently export outside the UK? ADD AS NECESSARY: And by that I mean sell goods or services to businesses or individuals based outside the UK? Yes........................................................................................................1 No.........................................................................................................2 (Don’t know)..........................................................................................3 (Refused)..............................................................................................4 ASK IF EXPORT (YES AT B1a) B1b Approximately what proportion of your current sales are accounted for by exports? Would you say that it is…? READ OUT. Up to 10%.............................................................................................1 Between 11-25%...................................................................................2 Between 26-50%...................................................................................3 Between 51-75%...................................................................................4 More than 75%......................................................................................5 (Don’t know)..........................................................................................6 (Refused)..............................................................................................7 ASK ALL B2 And to which of the following types of customers do you currently sell to? READ OUT - MULTICODE Direct to Consumers or private individuals............1 Public sector organisations...................................2 Business customers.............................................3 (Other (specify))....................................................95 – DO NOT READ OUT (Don’t know).........................................................97 ASK ALL B3a I’d now like you to describe the nature of the competition in your main markets. Would you say that there is…? READ OUT. SINGLE CODE. Very intense competition..................................................1 Intense competition..........................................................2 Moderate competition......................................................3 Weak competition............................................................4 Or no competition at all....................................................5 (Don’t know).....................................................................6

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B3b

How important have changes to your products and/or services been in maintaining your competitive position. Would you say that it is ….. ? Very important.................................................................1 Important.........................................................................2 Not at all important...........................................................3 (Don’t know).....................................................................4

SECTION D: TECHNOLOGY, INNOVATION AND TECHNOLOGICAL CAPABILITY
READ OUT TO ALL I would now like to ask you some questions about any ways in which you may have sought to make improvements to production processes or the way you deliver services to your customers. < IF MULTI-SITE (CODE 2 AT A2) Again, please think about your business as a whole, not just the site at which you work. > TECHNOLOGY & INNOVATION ASK ALL D1a So firstly, have you introduced any new or significantly improved goods or services over the last two years? Please do not include any goods that you simply purchase from other businesses for resale, or improvements that are essentially cosmetic in nature, such as improvements to packaging. Yes.....................................................................................................1 No......................................................................................................2 (Don’t know).......................................................................................3 ASK IF YES AT D1a D1b Are these new or improved goods and services…? READ OUT – SINGLE CODE New to your market – and by that I mean you introduced them to your market before any of your competitors .................................................................................................................................... 1 Or, only new to your firm – and by that I mean you introduced goods or services to your market that you had not supplied previously but were essentially the same as others already available from your competitors ......................................................................................................................... 2 (Both) .................................................................................................................................... 3 (Don’t know) .................................................................................................................................... 4 ASK ALL

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D2a

And have you made any MAJOR changes to your working practices or to the equipment that you use over the last two years? Yes.....................................................................................................1 No......................................................................................................2 (Don’t know).......................................................................................3

ASK ALL D6 Does your business have any registered protection for any of its products or services, such as copyrights, trademarks, patents, licences, design rights, etc? Yes.....................................................................................................1 No......................................................................................................2 (Don’t know).......................................................................................3

SECTION E: STRATEGIC DIRECTION OF THE BUSINESS
ASK ALL E1a Thinking now about your main business objectives, which ONE of the following would you say is the key focus for your business at this time? READ OUT. SINGLE CODE IF POSSIBLE BUT MULTICODE ALLOWED Maintaining sales of your current products or services.......................1 Increasing sales of your current products or services.........................2 Or, developing new products or services............................................3 (None of these)..................................................................................4 (Don’t know).......................................................................................5 IF CODE 2 AT E1a E1b Are you mainly looking to…? READ OUT. SINGLE CODE Increase sales in markets in which you are already operating............1 Or, introduce your current products or services into new markets......2 (Both).................................................................................................3 (None of these)..................................................................................4 (Don’t know).......................................................................................5 ASK ALL E4 Does your business have a formal written business plan? Yes.....................................................................................................1 No......................................................................................................2 (Don’t know).......................................................................................3

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IF YES (CODE 1 AT E4) E5 How long ago was this business plan written or last revised? Was it…? READ OUT. INTERVIEWER NOTE: IF PLAN HAS BEEN REVISED RECORD TIME OF MOST RECENT UPDATE Within the last 2 years........................................................................1 2-5 years ago.....................................................................................2 Or, over 5 years ago...........................................................................3 (Don’t know).......................................................................................4 IF YES (CODE 1 AT E4) E6 And was this business plan created primarily for external use, such as to obtain funding from a bank or for approval by an accountant? Yes, primarily for external use............................................................1 No......................................................................................................2 (Don’t know).......................................................................................3 ASK ALL E7a Over the last 2 years have you used any external sources of information, advice or support to help you develop the business. Yes...................................................................................1 No....................................................................................2 (Don’t know).....................................................................3 IF USED EXTERNAL SOURCES OF SUPPORT (CODE 1 AT E7a) E7b Did you have to pay for any of this information, advice or support? Yes...................................................................................1 No....................................................................................2 (Don’t know).....................................................................3

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SECTION C: BUSINESS PERFORMANCE 2004-2007
READ OUT TO ALL I’d now like to focus on how your business has developed over the last few years. EMPLOYMENT ASK ALL ESTABLISHED IN 2005 OR EARLIER AT A7a/b OR REFUSED AT A7a OR DON’T KNOW/REFUSED AT A7b C2a IF VALUE GIVEN AT A6a/b: You mentioned earlier that < CATI TO INSERT NUMBER FROM A6a/b > people are currently employed by your business. And Approximately how many people were employed by your business in January 2005, so around this time two years ago? < IF MULTI-SITE (CODE 2 AT A2) Please answer for your business as a whole, not just the site at which you work. > IF DON’T KNOW/REFUSED AT A6a/b: Approximately how many people were employed by your business in January 2005, so around this time two years ago? < IF MULTI-SITE (CODE 2 AT A2) Please answer for your business as a whole, not just the site at which you work. > INTERVIEWER TO NOTE AS NECESSARY: Please give me the full time equivalent, so count part time employees according to the proportion of time that they work REASSURE AS NECESSARY: We are just after your best estimate WRITE IN TO NEAREST WHOLE NUMBER (0+) (Refused) (Don’t know) (Site not in existence two years ago) IF DON’T KNOW AT C2a C2b In comparison with now, were there more people employed by your business around this time two years ago (January 2005), less people employed, or about the same number? READ OUT AS NECESSARY More.................................................................................1 Less.................................................................................2 About the same number...................................................3 (Don’t know).....................................................................4 (Refused).........................................................................5 (Site not in existence two years ago)...............................6

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TURNOVER/SALES ASK ALL C4a Moving on now to thinking about your annual turnover. What is the current annual turnover of your business for the year ending December 2006? < IF MULTI-SITE (CODE 2 AT A2) Again, please answer for your business as a whole, not just the site at which you work. > ADD AS NECESSARY By that I mean your annual sales, income or receipts REASSURE AS NECESSARY: We are just after your best estimate WRITE IN AMOUNT IN £ (£0+) (Refused) (Don’t know) – PROMPT WITH RANGES VALIDATION OF AMOUNT ENTERED USING RANGES AT C4b IN WORDS EG. LESS THAN ONE HUNDRED THOUSAND IF DON’T KNOW AT C4a C4b If you had to estimate your current annual turnover, into which of the following bands would you put yourself? READ OUT AS NECESSARY £0..........................................................................................................1 Less than £100,000...............................................................................2 £100,000 - £500,000.............................................................................3 £500,000 – £2 million............................................................................4 £2 million - £10 million...........................................................................5 £10 million - £50 million.........................................................................6 More than £50 million............................................................................7 (Don’t know)..........................................................................................8 (Refused)..............................................................................................9 ASK ALL ESTABLISHED IN 2004 OR EARLIER OR REFUSED AT A7a OR DON’T KNOW/REFUSED AT A7b (UNLESS CODE 6 AT C2b) C7a What was the annual turnover of your business two years ago, so for the year ending December 2004? REASSURE AS NECESSARY: We are just after your best estimate WRITE IN AMOUNT IN £ (£0+) (Refused) (Don’t know) (Site not in existence two years ago/in 2004) VALIDATION OF AMOUNT ENTERED USING RANGES AT C7b IN WORDS EG. LESS THAN ONE HUNDRED THOUSAND

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IF DON’T KNOW AT C7a C7b For the year ending December 2004, was the annual turnover of your business higher than it is now, lower, or about the same? READ OUT AS NECESSARY Higher..............................................................................1 Lower...............................................................................2 About the same................................................................3 (Don’t know).....................................................................4 (Refused).........................................................................5 (Site not in existence two years ago/in 2004)...................6 ASK ALL C9a IF ESTABLISHED IN 2004 OR EARLIER OR REFUSED AT A7a OR DON’T KNOW/REFUSED AT A7b (UNLESS CODE 6 AT C2b OR C7b): Thinking back, has the business performed better or worse than you expected over the past two years? IF ESTABLISHED AFTER 2004 (OR CODE 6 AT C2b OR C7b): Thinking back, has the business performed better or worse than you expected since you began trading? Better than expected........................................................1 Worse than expected.......................................................2 About the same................................................................3 (Don’t know).....................................................................4 (Refused) …………………………………………………… 5 ASK IF BETTER THAN EXPECTED (CODE 1 AT C9a) C9b What was the MAIN reason for your business performing better than expected? INTERVIEWER NOTE: IF RESPONDENT MENTIONS REGULATIONS PROBE FOR FULL DETAILS (N.B: Cover in code frame) ........................................................................................ ........................................................................................ ASK IF WORSE THAN EXPECTED (CODE 2 AT C9a) C9c What was the MAIN reason for your business performing worse than expected? INTERVIEWER NOTE: IF RESPONDENT MENTIONS REGULATIONS PROBE FOR FULL DETAILS (N.B: Cover in code frame) ........................................................................................ ........................................................................................

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SECTION F: REGULATION
READ OUT TO ALL I’d now like to ask you some questions about the range of business regulations that operate in the UK and how they impact upon your business. By business regulations we mean ALL of the laws which might affect you when running your business in the UK, including general regulations relating to areas such as employment, taxation and health and safety as well as any regulations that are specific to your particular industry or business activity. ASK ALL F1a First of all, to what extent would you agree that you are well informed about the range of regulations affecting your business? Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 IF DISAGREE (CODES 1-2 AT F1a) F1b What types of regulation are you less well informed about? PROBE FULLY ........................................................................................ ........................................................................................ ASK ALL F2a And to what extent would you agree that business regulations create a ‘level playing field’ for your business? Again, please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6

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ASK ALL F3 To what extent would you agree that your business adapts more quickly to the introduction of new regulations than your competitors? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 ASK ALL F5a And to what extent would you agree that regulations provide you with an opportunity to gain a competitive advantage over other firms? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 IF AGREE (CODES 4-5 AT F5a) F5b Can you provide ONE example of a regulation that has helped you gain a competitive advantage? PROBE FULLY ........................................................................................ ........................................................................................ ASK ALL F6 To what extent would you agree that regulations have resulted in your business being run more efficiently? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6

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ASK ALL F7a And to what extent would you agree that your business is able to deal with the introduction of new regulations? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 IF AGREE (CODES 4-5 AT F7a) F7b Generally speaking, how do you deal with the introduction of new regulations? Is it through…? READ OUT. CODE ALL THAT APPLY. DO NOT RANDOMISE Training existing staff..............................................................................1 Recruiting new staff with the necessary skills.........................................2 Seeking external advice..........................................................................3 Taking on the responsibility yourself (i.e. dealing with it personally).......4 (Don’t know)............................................................................................5 IF EXTERNAL ADVICE (CODE 3 at F7b) F7c Can I ask what sources of external advice you use in these circumstances? PROBE AS PER PRECODES. CODE ALL THAT APPLY Friends or relatives ..................................................................................................................................... 1 Other business owners ..................................................................................................................................... 2 Private sector sources (e.g. consultants, accountants, bank, solicitors, etc) ..................................................................................................................................... 3 Public sector sources (e.g. Government departments, Trade Associations, regulatory bodies, an employers federation, Revenue & Customs, Business Link, the Chamber of Commerce, etc) .......................................................................................................................... 4 Other (SPECIFY) ..................................................................................................................................... 95 (Don’t know/can’t remember) ..................................................................................................................................... 97 IF EXTERNAL ADVICE (CODE 3 at F7b) F7d And do you pay for any of that advice? Yes.........................................................................................................1 No...........................................................................................................2

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(Don’t know)............................................................................................3 (Refused)................................................................................................4 IF DISAGREE (CODES 1-2 AT F7a) F7e Why do you say that? PROBE FULLY ........................................................................................ ........................................................................................

ASK ALL F9a To what extent would you agree that the introduction of new regulations has encouraged you to take action to ensure your business remains competitive? AS NECESSARY: For example you could have been prompted to improve your products or services, increase staff training, etc REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 IF AGREE (CODES 4-5 AT F9a) F9b Have these actions included doing any of the following? READ OUT. MULTICODE. RANDOMISE (BUT ALWAYS DISPLAY CODE 2 AFTER CODE 1) Introducing new products or services.............................................1 Improving your existing products or services.................................2 Reducing your costs......................................................................3 Changing your working practices or the equipment you use..........4 Increasing employee training.........................................................5 (None of the above).......................................................................6 ASK ALL F10 To what extent would you agree that having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6

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ASK ALL F11a And to what extent would you agree that there are costs to your business of meeting the minimum regulation requirements? AS NECESSARY: This could include the administration costs as will as the cost of implementing a particular regulation, such as the minimum wage. REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 IF AGREE (CODES 4-5 AT F11a) F11b And to what extent would you agree that your business is able to easily deal with these additional costs? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 IF AGREE (CODES 4-5 AT F11b) F11c Do you deal with these costs in any of the following ways…? READ OUT. CODE ALL THAT APPLY. ROTATE (BUT ALWAYS ASK CODE 8 AFTER CODE 7) By passing on the costs to customers............................................1 By reducing your profit levels.........................................................2 DELETED......................................................................................3 By introducing new products or services ......................................4 By changing your working practices or the equipment you use ....5 By increasing the scale of the operation........................................6 By raising the skill levels of employees..........................................7

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By raising the productivity of employees........................................8 (None of these)..............................................................................9 IF MORE THAN ONE MENTIONED AT F11c F11d And which of these is the MAIN way in which you absorb the costs of meeting the regulation requirements? READ OUT AS NECESARY. SINGLE CODE. USE SAME CODES AS F11c (PLUS A ‘DON’T KNOW’ CODE) BUT CATI TO ONLY DISPLAY THOSE CODED AT F11c ASK ALL F12a To what extent would you agree that regulations in the UK have increased the level of employee productivity in your business? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 IF AGREE (CODES 4-5) AT F12a F12b Can you provide ONE example of a regulation that has increased employee productivity, AND explain why? PROBE FULLY FOR REGULATION AND REASON ........................................................................................ ........................................................................................ ASK ALL F14a I’d still like you to think about all business regulations in the UK, such as those relating to employment, health and safety, taxation, etc. Ignoring any wider economic factors, over the last 3 years have regulations in the UK had any impact on the number of people employed by your business? Yes...................................................................................1 No....................................................................................2 (No change).....................................................................3 (Don’t know).....................................................................4 IF YES AT F14a F14b Has the number of people employed by your business increased or decreased as a result of regulations? Increased.........................................................................1 Decreased........................................................................2 (Don’t know).....................................................................3 IF INCREASED OR DECREASED AT F14b

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F14e Which specific regulations have led to this <IF INCREASED AT F14b increase / IF DECREASED AT F14b decrease > in employee numbers? PROBE FULLY FOR REGULATION ........................................................................................ ........................................................................................ ASK ALL F16a And ignoring any wider economic factors, over the last 3 years have general business regulations in the UK had any impact on your firm’s profit levels? Yes................................................................................................1 No..................................................................................................2 (Don’t know)..................................................................................3 AS NECESSARY: Please take account of ALL regulations in the UK such as those relating to employment, health and safety, taxation, etc. IF YES AT F16a F16b Have your profit levels increased or decreased as a result of regulations? Increased.......................................................................................1 Decreased.....................................................................................2 (No change)...................................................................................3 (Don’t know)..................................................................................4 IF INCREASED OR DECREASED AT F16b F16c And have your profit levels <IF INCREASED AT F16b increased / IF DECREASED AT F16b decreased>…? READ OUT By less than 10%...........................................................................1 Or, by 10% or more.......................................................................2 (Don’t know)..................................................................................3 IF INCREASED OR DECREASED AT F16b F16d Which specific regulations have led to this <IF INCREASED AT F16b increase / IF DECREASED AT F16b decrease > in your profit levels? PROBE FULLY FOR REGULATION ........................................................................................ ASK ALL F17a To what extent would you agree that government regulations in the UK provide new market opportunities for your business? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 IF AGREE (CODES 4-5 AT F17a)

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F17b Can you give me an example of ONE of these opportunities AND tell me which particular regulation provided this opportunity? PROBE FULLY FOR BOTH OPPORTUNITY AND REGULATION ........................................................................................ ........................................................................................

ASK ALL F18a To what extent would you agree that regulation increases the level of customer confidence in your business and its products and services? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 CATI TO ALLOCATE RESPONDENTS RANDOMLY TO GROUP 1 & GROUP 2 (50/50 SPLIT) ASK ALL F19 And to what extent would you agree that regulations < IF GROUP 1 encourage businesses to enter the markets you operate in / IF GROUP 2 discourage businesses from entering the markets you operate in >? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 ASK ALL F22 To what extent would you agree that regulations have < IF GROUP 1 encouraged your business to recruit / IF GROUP 2 discouraged your business from recruiting > additional employees? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1

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2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6

ASK ALL F20a And to what extent would you agree that the level of inspection associated with business regulations in the UK is appropriate? REMIND AS NECESSARY: Please answer on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’ 1 – Completely disagree..................................................1 2.......................................................................................2 3.......................................................................................3 4.......................................................................................4 5 – Completely agree.......................................................5 (Don’t know).....................................................................6 IF DISAGREE (CODES 1-2 AT F20a) F20b Can you provide an example of ONE regulation where this is not appropriate? PROBE FULLY FOR REGULATION ........................................................................................ ........................................................................................ ASK ALL F21b In general, would you say that regulations in the UK have…? READ OUT. SINGLE CODE Been beneficial for your business....................................1 Constrained your business activities................................2 Or, been both beneficial and constraining........................3 (Don’t know).....................................................................4 IF CODES 1-3 AT F21b F21c What particular regulations did you have in mind when you said that regulations have < IF CODE 1 AT F21b been beneficial to your business / IF CODE 2 constrained your business activities / IF CODE 3 been both beneficial and constraining to your business >? PROBE FULLY ........................................................................................ ........................................................................................ IF CODES 1-2 AT F21b F21d Have business regulations always <IF CODE 1 AT F21b been beneficial for your business / IF CODE 2 AT F21b constrained your business activities > or is this just a recent occurrence?

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Always been this way....................................................................1 Just a recent occurrence................................................................2 (Don’t know)..................................................................................3 IF CODE 3 AT F21b F21e You said that regulations were both beneficial and constraining for your business, but has the balance changed at all over the last few years? Would you say that…? Regulations are more beneficial than they used to be...................1 Regulations are more constraining than they used to be...............2 Or has there been no change over the last few years....................2 (Don’t know)..................................................................................3 IF CODE 2 AT F21d OR CODES 1-2 AT F21e F21f What has happened to cause this change? PROBE FULLY ........................................................................................ ........................................................................................ IF CODE 4 AT F21b F21g INTERVIEWER TO CODE REASON FOR SAYING ‘DON’T KNOW’ AT F21b IF NECESSARY ASK: Can I just ask why you said that? Was it…? Because regulations have had no meaningful impact on your business......1 Or, for some other reason...........................................................................2 ASK ALL F24 Is there anyone employed by your business whose job includes managerial responsibility for regulatory matters? Yes...................................................................................1 No....................................................................................2 (Don’t know).....................................................................3 (Refused).........................................................................4 ASK ALL EXCEPT CODE 3 AT F7b (RESPONSES FROM F7b/c/d TO BE INCLUDED IN ANALYSIS OF F25a/b/c) F25a Over the last 2 years have you used any external sources of information, advice or support for helping the business deal with regulation issues? Yes...................................................................................1 No....................................................................................2 (Don’t know).....................................................................3 IF YES (CODE 1 AT F25a) F25b Who did you get this information or advice from? PROBE AS PER PRECODES. CODE ALL THAT APPLY Friends or relatives ..................................................................................................................................... 1 Other business owners ..................................................................................................................................... 2

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Private sector sources (e.g. consultants, accountants, bank, solicitors, etc) ..................................................................................................................................... 3 Public sector sources (e.g. Government departments, Trade Associations, regulatory bodies, an employers federation, Revenue & Customs, Business Link, the Chamber of Commerce, etc) .......................................................................................................................... 4 Other (SPECIFY) ..................................................................................................................................... 95 (Don’t know/can’t remember) ..................................................................................................................................... 97 IF YES (CODE 1 AT F25a) F25c Did you have to pay for any of this information, advice or support? Yes...................................................................................1 No....................................................................................2 (Don’t know).....................................................................3

ASK ALL MENTIONING AT LEAST 2 SOURCES AT F25b F25d Thinking about these sources of external advice or support, which one has been the MOST IMPORTANT for your business? CATI TO DISPLAY ALL USED AT F25b. READ OUT AS NECESSARY. SINGLE CODE. Friends or relatives ..................................................................................................................................... 1 Other business owners ..................................................................................................................................... 2 Private sector sources (e.g. consultants, accountants, bank, solicitors, etc) ..................................................................................................................................... 3 Public sector sources (e.g. Government departments, Trade Associations, regulatory bodies, an employers federation, Revenue & Customs, Business Link, the Chamber of Commerce, etc) .......................................................................................................................... 4 Other advice or support ..................................................................................................................................... 95 (Don’t know/can’t remember) ..................................................................................................................................... 97

SECTION G: PARTNERS/DIRECTORS
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ASK ALL G1 Finally, I’d just like to ask you a few questions about the owners, partners and directors in your business. Including yourself, how many owners, partners or directors are there in day to day control of the business? <IF MULTI-SITE (CODE 2 AT A2) Again, please answer for your business as a whole, not just the site at which you work. > IF NECESSARY: Please do not include any non-executive directors. PROBE FOR BEST ESTIMATE ENTER NUMBER (ALLOW FOR ZERO) (Don’t know) (Refused) G2 In addition to the owners, partners or directors in day to day control of the business, does your business have any non-executive directors? Yes.....................................................................................................1 No......................................................................................................2 (Don’t know).......................................................................................3 (Refused)...........................................................................................4 G3 Are you the main partner or managing director in this business? IF RESPONDENT IS AN EQUAL PARTNER IN THE BUSINESS CODE ‘YES’. Yes.....................................................................................................1 No......................................................................................................2 (Don’t know).......................................................................................3 (Refused)...........................................................................................4 TEXT IF NOT MAIN PARTNER/MD (CODE 2 AT G3) For the following questions I’d like you to answer, to the best of your knowledge, about the main partner or managing director. If you’re not sure of the answer just let me know and I’ll move on to the next question. INTERVIEWER NOTE: IF MORE THAN ONE MAIN PARTNER OR MANAGING DIRECTOR ASK RESPONDENT TO ANSWER ABOUT THE ONE THEY KNOW BEST ASK ALL G4 <IF CODE 1 AT G3 Do you / IF CODE 2-4 AT G3: Does the main partner or managing director> hold more than 20% of the equity in this firm? Yes.....................................................................................................1 No......................................................................................................2 (Don’t know).......................................................................................3 (Refused)...........................................................................................4 G5 Is this the only business with which <IF CODE 1 AT G3: you are / IF CODE 2-4 AT G3: they are > currently involved in any capacity? Yes.....................................................................................................1 No......................................................................................................2 (Don’t know).......................................................................................3 (Refused)...........................................................................................4

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G6

What is the HIGHEST level of qualification <IF CODE 1 AT G3: that you hold / IF CODE 2-4 AT G3: that they hold >? PROBE AS PER PRECODES. STOP AFTER FIRST ONE CODED. SINGLE CODE A degree or equivalent (inc. HND, masters degree or other higher degree)1 A-levels or equivalent (inc. AS-levels, Highers or OND).....................2 Other qualifications lower than A-level standard.................................3 None..................................................................................................96 (Don’t know).......................................................................................97 (Refused)...........................................................................................98

G7

And which of the following age bands do <IF CODE 1 AT G3: you / IF CODE 2-4 AT G3: they> fall into? READ OUT. SINGLE CODE. Under 25..........................................................................1 25 - 34..............................................................................2 35 - 44..............................................................................3 45 - 54..............................................................................4 55 - 64..............................................................................5 65 and over......................................................................6 (Don’t know).....................................................................7 (Refused).........................................................................8

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SECTION H: WRAP-UP
ASK ALL H1 That is the end of the interview, thank you very much for taking part. I just need to check a few things, so firstly would you be willing to take part in any future research on this topic conducted on behalf of the DTI or the Small Business Research Centre at Kingston University? Yes.....................................................................................................1 No......................................................................................................2 (Don’t know).......................................................................................3 ASK ALL H2 Finally, can I just confirm that your business postcode is…? CATI TO DISPLAY POSTCODE IF AVAILABLE – AMEND IF MISSING OR INCORRECT ASK ALL H3 And may I take a note of your name? WRITE IN STANDARD THANK & CLOSE INCLUDING THE FOLLOWING: READ OUT TO ALL If you want to know any more about UK regulations, I can give you details of the Government website for regulation issues? IF YES You can access a checklist of the regulations that are likely to affect you at www.businesslink.gov.uk/regulationchecklist You can also find details of new regulations at www.businesslink.gov.uk/regulationupdates

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APPENDIX 3 Regulation Questions Descriptives

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X-tabs of regulation variables Table A3.1: …you are well informed about the range of regulations affecting your business?
% reporting ‘high agreement’ Employment Size (**) Less than 10 10-49 50+ Annual Turnover (**) Under £100k £100k-500k £500k-2m £2m+ Sector (**) Production Distribution Financial & Business Services Personal Services Business Start Date (**) Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 41.1 52.9 55.4 39.1 40.7 53.9 44.8 44.2 42.1 47.4 56.3 52.0 42.3 42.9 48.6 45.4 53.5 46.8 48.6 46.4 46.5 47.1 47.4 48.0 43.7 48.2 47.4 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.2: … that business regulations create a ‘level playing field’ for your business?
% reporting ‘high agreement’ Employment Size Less than 10 10-49 50+ Annual Turnover Under £100k £100k-500k £500k-2m £2m+ Sector Production Distribution Financial & Business Services Personal Services Business Start Date (**) Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting (**) Exporters Non-exporters N 25.0 28.3 26.4 25.5 23.0 29.4 18.5 23.4 23.3 27.3 31.2 23.2 25.1 32.5 26.3 25.6 31.8 24.7 26.0 26.0 27.6 25.2 25.9 28.9 19.2 28.0 26.2 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 1205 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.3: … your business adapts more quickly to the introduction of new regulations than your competitors?
% reporting high agreement Employment Size (**) Less than 10 10-49 50+ Annual Turnover (**) Under £100k £100k-500k £500k-2m £2m+ Sector (**) Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years (**) NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 30.4 37.7 50.4 34.7 30.9 32.8 46.0 34.9 31.4 37.7 43.4 34.6 37.2 39.6 38.6 34.9 46.5 36.5 38.6 35.1 39.9 35.7 37.1 35.8 34.3 37.4 36.8 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.4: … regulations provide you with an opportunity to gain a competitive advantage over other firms?
% reporting high agreement Employment Size (**) Less than 10 10-49 50+ Annual Turnover Under £100k £100k-500k £500k-2m £2m+ Sector Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 9.1 16.1 15.9 9.1 12.8 12.2 12.1 12.2 8.7 13.8 15.6 10.6 13.0 15.4 13.4 11.6 16.3 12.5 13.9 11.5 13.3 11.9 13.0 10.4 9.0 13.5 12.5 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.5: … regulations have resulted in your business being run more efficiently?
% reporting high agreement Employment Size (**) Less than 10 10-49 50+ Annual Turnover Under £100k £100k-500k £500k-2m £2m+ Sector (**) Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years (**) NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 12.8 21.0 19.0 13.5 17.3 12.2 14.5 12.2 15.2 13.8 24.7 14.3 17.5 18.2 18.6 14.1 20.9 17.7 18.3 14.9 17.8 15.5 16.6 16.2 13.1 17.3 16.4 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.6: … your business is able to deal with the introduction of new regulations?
% reporting high agreement Employment Size (**) Less than 10 10-49 50+ Annual Turnover Under £100k £100k-500k £500k-2m £2m+ Sector Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years (**) NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR (**) Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 43.3 49.5 57.8 44.9 43.6 49.4 49.2 44.2 44.7 50.5 53.6 46.2 49.5 49.6 50.3 45.8 59.7 47.7 49.0 47.3 54.2 45.6 48.4 49.1 48.6 48.0 48.1 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.7: … the introduction of new regulations has encouraged you to take action to ensure your business remains competitive?
% reporting high agreement Employment Size (**) Less than 10 10-49 50+ Annual Turnover (**) Under £100k £100k-500k £500k-2m £2m+ Sector (**) Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years (**) NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years (**) No Major changes to working practices or equipment #4 Use of IPR (**) Non-users of IPR #5 Innovation is important for competitive position (**) Innovation is not important for competitive position Exporting Exporters Non-exporters N 26.5 37.4 41.1 24.5 31.3 37.8 33.9 31.4 27.8 30.1 41.7 31.7 30.8 35.4 35.6 29.8 39.5 34.6 39.0 28.5 38.5 30.4 34.6 24.9 29.8 33.4 32.7 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.8: … having to meet the minimum legal requirements is the ONLY impact of UK regulations on your business?
% reporting high agreement Employment Size Less than 10 10-49 50+ Annual Turnover Under £100k £100k-500k £500k-2m £2m+ Sector Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position (**) Innovation is not important for competitive position Exporting Exporters Non-exporters N 36.3 33.4 32.6 34.3 39.5 32.2 33.1 30.8 35.9 40.5 31.9 34.6 33.5 36.1 35.3 34.6 35.7 34.8 32.0 37.2 33.9 35.3 32.7 46.2 32.2 35.4 34.7 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.9: … there are costs to your business of meeting the minimum regulation requirements?
% reporting high agreement Employment Size (**) Less than 10 10-49 50+ Annual Turnover (**) Under £100k £100k-500k £500k-2m £2m+ Sector Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years (**) NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years (**) No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position (**) Innovation is not important for competitive position Exporting (**) Exporters Non-exporters N 56.1 76.0 79.1 50.4 65.8 75.0 82.7 71.2 65.7 65.7 63.4 67.9 68.3 62.1 74.2 59.1 75.2 74.0 73.6 61.7 66.1 66.5 68.7 55.5 73.5 64.8 66.6 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.10: … regulations in the UK have increased the level of employee productivity in your business?
% reporting high agreement Employment Size Less than 10 10-49 50+ Annual Turnover Under £100k £100k-500k £500k-2m £2m+ Sector Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 5.5 9.4 7.8 6.2 7.0 7.2 4.0 6.4 8.1 4.5 9.5 6.7 6.6 7.9 6.4 7.8 8.5 5.7 7.7 6.6 4.9 7.6 7.5 5.8 5.3 7.6 7.1 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

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Table A3.11: … regulations in the UK provide new market opportunities for your business?
% reporting high agreement Employment Size Less than 10 10-49 50+ Annual Turnover Under £100k £100k-500k £500k-2m £2m+ Sector Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 6.7 9.1 10.1 6.2 9.5 7.2 10.1 8.3 6.1 11.1 6.8 7.8 8.2 8.2 9.0 7.2 7.8 9.4 9.6 6.8 7.7 8.0 8.5 6.4 6.5 8.5 8.0 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

136

The Impact of Regulation on Small Business Performance

Table A3.12: … regulation increases the level of customer confidence in your business and its products and services?
% reporting high agreement Employment Size (**) Less than 10 10-49 50+ Annual Turnover (**) Under £100k £100k-500k £500k-2m £2m+ Sector (**) Production Distribution Financial & Business Services Personal Services Business Start Date (**) Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years (**) NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 24.2 31.6 37.2 21.5 30.5 32.2 29.0 27.2 23.0 25.6 40.7 26.6 26.3 36.1 32.4 25.3 36.4 31.3 30.5 27.8 30.1 27.9 29.7 27.2 24.1 30.3 29.0 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 1205 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

137

The Impact of Regulation on Small Business Performance

Table A3.13: … regulations encourage businesses to enter the markets you operate in?
% reporting high agreement Employment Size Less than 10 10-49 50+ Annual Turnover Under £100k £100k-500k £500k-2m £2m+ Sector (**) Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 22.3 24.9 25.2 21.9 21.4 27.8 25.8 24.0 24.9 28.4 17.6 23.9 22.7 24.6 24.2 23.5 22.5 24.9 23.3 24.0 23.1 23.7 24.1 23.1 24.5 23.5 23.7 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

138

The Impact of Regulation on Small Business Performance

Table A3.14: … regulations have encouraged your business to recruit additional employees?
% reporting high agreement Employment Size (**) Less than 10 10-49 50+ Annual Turnover (**) Under £100k £100k-500k £500k-2m £2m+ Sector Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years (**) No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting Exporters Non-exporters N 23.9 32.5 36.8 25.2 22.6 32.2 36.7 24.4 30.4 30.8 30.5 28.3 28.1 31.4 29.5 28.1 31.8 29.1 32.2 26.7 27.3 29.0 29.1 27.2 30.6 28.5 29.0 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

139

The Impact of Regulation on Small Business Performance

Table A3.15: … the level of inspection associated with business regulations in the UK is appropriate?
% reporting high agreement Employment Size Less than 10 10-49 50+ Annual Turnover Under £100k £100k-500k £500k-2m £2m+ Sector (**) Production Distribution Financial & Business Services Personal Services Business Start Date Pre-1990 1990-99 2000-present Innovation Activity #1 New/significantly improved goods or services over the last two years NO new/significantly improved goods or services #2 New or significantly improved goods or services new to the market over the last two years NO new or significantly improved goods or services new to the market #3 Major changes to working practices or to the equipment used over the last two years No Major changes to working practices or equipment #4 Use of IPR Non-users of IPR #5 Innovation is important for competitive position Innovation is not important for competitive position Exporting (**) Exporters Non-exporters N 29.1 29.5 33.3 28.1 34.6 29.4 25.0 24.4 29.4 28.0 39.0 28.7 33.8 28.2 30.3 29.5 34.1 29.3 30.7 30.0 30.8 29.8 29.3 35.3 21.2 32.4 30.1 Unweighted N 615 329 258 274 243 180 248 312 309 289 295 586 331 280 590 601 129 457 469 716 286 896 1010 173 245 958 1205

Base: all businesses Notes: respondents were asked on a scale of 1 to 5, where 1 means ‘completely disagree’ and 5 means ‘completely agree’, whether they agreed with a series of statements. These 5-point scales were then reduced to two categories – those indicating ‘high levels of agreement’ (initially coded as 4 or 5), and the remainder (initially coded 1-3, or 6 for ‘don’t know’ or ‘refused’). (**) indicates a relationship significant at the 5% level using Pearson’s chi-square.

140

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