Small businesses are run and owned by private owners, and they comprise of small numbers of employees and low sales volume. These businesses do not have market power; therefore, they cannot affect their business environment in terms of sales or prices. Secondly, they are managed by their owners; therefore, they are independent, especially in decision-making (Lecture notes section 2, N.d, p8). Some of the world’s multinationals started with the formation of small business, and with time, grew to larger corporations. Small businesses are vital in any economy, as they bring up new ideas and processes, filling in the niche markets that are not accessed by the larger businesses (Headd, 2000, p.13). Small businesses also employ fewer employees compared to the larger businesses, with low level of education such as a high school diploma; they also create opportunities for all age groups (Headd, 2000, p.17). The aim of this paper is to discuss the motivation of small business owners in relation to the government and the economic theory.
Motivations of small business owners
There are several types of small businesses, including limited companies, sole traders, and partnerships among others. A sole trader involves an individual having full control in how the business is run; this kind of business only has few employees and is small. The main advantage of a sole trader is that decisions are made by the owner and he also enjoys all the profits; it is also very easy to start up the business, since only a small amount of capital is required (Anon, 2007).
However, the sole trader is faced with the hardship of not being able to expand easily because only one individual controls the business and is responsible for financing it. Another disadvantage is that, when business experience losses, the sole trader suffers the loss alone. In addition, the sole trader has unlimited liability, therefore putting the individual’s personal wealth at the risk of settling a debt incase the venture fails (Lecture notes section 2, N.d, p. 10). On the other hand, a partnership is a business structure that involves uniting of two or more individuals in running of a business, such that, problems of the business are equally shared, and knowledge is also shared. In addition, it is easier for the business to expand via partnership, since the capability of raising more money is higher.
However, there is possibility of disagreements on a certain issue between the partners. Decision-making takes longer compared to a sole trader business, mainly because more people are involved and need to be consulted. The business can also suffer tremendously if one partner makes a mistake, therefore costing other partners (Anon, 2007).
Limited company comprises of two types; those individuals whose shares are publicly traded on the stock market and the privately owned shares. The business is its own legal entity; therefore, the owners are liable for only the amounts they invested, therefore securing their personal wealth. Moreover, if the business ends up being insolvent, the owners only lose the money they invested in form of shares. All the above types of small businesses aim at making profits and expanding at some point. Blanchard (2009, p. 142) adds that, small business owners need to review how they can effectively manage their employees, especially in recruiting more employees.
Small businesses returns are not very high, therefore, to avoid collapse, they should only have what they can handle and manage. Nevertheless, it is common for small business to desire to remain small as a result of several motivations. First, the owners may enjoy the satisfaction of running a small business, compared to heading a larger organization. Secondly, the owner of the business may be concerned about quality of products and its importance to the society rather than being concerned about profits and expansion. Thirdly, some businesses choose to be related to the community; therefore, they do not aim at expanding their operations (Lecture notes section 2, N.d p. 17). It is normal for every individual to maximize on their happiness and satisfaction, especially through the purchase of items and services. However, in case of business owners, they aim at maximizing their business profits, which are interpreted as owner’s income (Lecture notes section 2, N.d, p. 15). Nevertheless, these businesses can be forced to grow in an attempt of avoiding losing to the larger firms in the market. Indeed, competition can be stiff in terms of quality, marketing, and range of services and products.
Economic theory of small business motivation
Economic theory explains that motivations for profitable businesses are influenced by human nature, which seeks to maximize on satisfaction. This theory indicates that satisfaction is mostly derived from purchasing of products and services. Therefore, small business owners can maximize on satisfaction if they have enough business resources. Moreover, a sole trader desires to run his business with an aim of achieving a high income.
The static theory of competitive equilibrium states that the size of a firm is determined by its resources. Growth of the firm is determined by the profit making behavior of the firm, however, the author insists that economic theories emphasizes on profit maximization in small business growth (Industry Canada, 2009). The economic theory therefore ignores the willingness of a small business to grow; this theory expects the small firms to produce goods and then sell these goods in an open market for the highest price the customer is willing to pay (Murphy and Quinlan, 2007, p. 93). This theory emphasizes that, the competition between firms leads to the fall in price of commodities and services, hence leading to a fair price for the consumers.
Nevertheless, the government should regulate competition to avoid unfair and illegal competition among firms. In addition, the economic theory expects the small businesses to maximize their profits; majority of small businesses aim at making profits while others enjoy being small and would rather not expand. This theory fails to consider all the goals of small businesses by insisting that they should prioritize on maximizing their profits.
Competitive capitalism on the other hand insists that small businesses face many rivals in the operating market; therefore, raising their prices would be a bad idea due to this stiff competition. Therefore, keeping their prices as low as possible is the only way they can survive and attract customers. Needless to say, buying cheap goods, operating for long hours, and ensuring employees work in speed are ways that enhance profit making according to capitalists. Therefore, despite the owners and partners of small businesses’ unwillingness to maximize on their profits, market factors such as stiff competition and threat of new entrants force them to maximize on profits (Lecture notes section 2, N.d, p. 16).
Does the government understand the motivations of small business firms?
Small firms are dependent on banks for financial support compared to larger businesses, which have the capability of making huge profits, some of which they retain for later investments (lecture notes section 3, N.d, p. 30). According to Reuters (2011), United Kingdom banks are on the verge of failing to fulfill their commitment in lending enough loans to the small businesses in the country. The banks are blaming the small businesses on their low demand of goods and services. However, United Kingdom Prime Minister warned the banks against backing down on their commitment, stating that their taxes would increase (Reuters, 2011).
This is a clear indication of the support some governments offer to small businesses. Gebremariam, Tesfa, and Jackson (2004, p. 3) insist that large businesses are the driving force of the economy. The role of the small businesses has been ignored and undermined in the growth of the economy; however, small business are vital to the economy, as they boost community development by spreading the benefits of economic growth to places that are ragging behind. They also create jobs for many individual, thus contributing towards the growth of the economy, therefore alleviating poverty (Gebremariam, Tesfa, and Jackson, 2004, p. 5).
According to Toder (N.d, p. 5), the United States reduces the cost of capital for small businesses with up-to-date machinery. Business owners are also offered with easy accessibility to gain the advantages of limited liability minus corporate tax. Hudson (N.d, p. 4) insists that small businesses suffer, since compliance costs vary with the size of a firm; regulations of business affect all businesses, however, the small businesses are highly affected due to the limitation in administrative resources, a common case in the developing nations.
Recently, the government of United Kingdom announced that 50 biggest companies in the country would be given a hotline plan that would boost investments, hence saving them from any problems in the market (Yahoo finance 2011). What happens to the smaller businesses? In Britain, the smaller companies are faced with the problem of administration red tape, which results to the shareholders’ drop in returns. In the United Kingdom, 23 million individuals are employed by the small businesses, therefore the big firms add up to a small number of the overall businesses.
However, such big firms result in being favored by the government compared to the small businesses, which receive minimal attention (Yahoo finance, 2011). Lager firms are at an advantage of achieving price leadership, hence maintaining dictatorship in the industry’s price, which other businesses follow. Generally, the price leader is usually the firm with the highest profits and lowest cost per unit; such a firm is a threat to other rival firms. The disadvantaged firms in this case are the small businesses, which hardly attain price leadership.
Larger businesses can also control the entry of small firms; they can use huge sums of money on advertisement globally, therefore the new entrants can only be competitive if they match their advertisement to that of the larger firms. This is an expensive strategy, which is an impossible mission for the new entrants (lecture notes section 3, N.d, p. 31).
Neither the economic theory nor the government understands the motivations of small business owners. From the research, it is evident that the economic theory insists on profit maximization rather than the growth of the business. This theory argues that the evident stiff competition in the market will eventually force small businesses to maximize on their profits. Nevertheless, some business owners are comfortable running small businesses, hence paying limited attention to growth as long as they get an income. Government on the other hand favors large companies, as their returns are high; these companies are at an advantage of being price leaders and may control the market against entrants. Small businesses are mostly undermined, despite playing a vital role in the economy; they provide employment, invent new ideas, and reach to the undeveloped areas, where larger firms have not ventured. Therefore, it is important for the government to pay attention to these small firms and implement measures that can boost their growth.
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- Gebremariam, G., Tesfa, G., & Jackson, R., 2004. The role of small business in economic growth and poverty alleviation in West Virginia: an empirical analysis. (Online).
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- Reuters. 2011. Banks fall short of lending goal to small firms.
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