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20/20 Economics exam essay answer on: Evaluate why the objectives of small and medium-sized enterprises may differ from those of large enterprises.$3.98
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Full mark exam essay (with diagrams) answer on: Evaluate why the objectives of small and medium-sized enterprises may differ from those of large enterprises.
For International A-Level Economics, Unit 3: Business behaviour, size of businesses, business objectives.
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Pearson Edexcel International Advanced Level
Economics Unit 3: Business behaviour (YEC11)
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According to a 2021 World Bank report, small and medium-sized
enterprises accounted for 98.5% of the businesses in Malaysia. The report
stated that these businesses were reluctant to invest in the technology
that would enable them to expand because many of them wanted to
remain small.
Evaluate why the objectives of small and medium-sized enterprises may
differ from those of large enterprises.
Small businesses are those that have less than 50 employees and annual
turnover of under £10m, whereas medium sized firms have less than 250
employees and annual turnover of under £50m
One reason for the difference in objectives pursued by SMEs and larger
enterprises may stem from the disparity in access to financial resources
which can limit the potential for growth. This is because SMEs often face a
shortage of finance owing to their limited sales revenue and insufficient
retained profit which may restrict their ability to invest in the capital or
labour necessary for organic expansion. The effects of this are further
exacerbated by the fact that SME’s have restricted access to external
finance given that they often do not operate on the stock market and may
struggle to obtain banks loans as banks may be uncertain of the firm’s
creditworthiness. Owing to such factors, SMEs may struggle to secure the
funds needed to finance the high financial costs associated with
expansion, including legal and administrative expenses, capital costs, and
the expense of hiring new employees – making growth an unlikely
objective. Contrastingly, larger firms (having greater access to finance)
are likely to pursue growth as an objective as it may enable them to
achieve economies of scale. For example, industry giants like Amazon
have pursued growth as a main objective not only to increase their market
share, but also to achieve the major cost-saving benefits associated with
increased output. Through bulk purchases, for instance, Amazon can
negotiate more favourable deals with suppliers, resulting in lower per-unit
costs and consequently reducing average production costs. Similarly,
Amazon may be able to benefit from advertising economies of scale,
sharing the cost of promotions and campaigns across a much larger
revenue base. The effects of this are illustrated in the figure below where,
as the quantity produced increases from Q1 to Q2, total average costs
also fall from AC1 to AC2. This may enable the firm to reach its minimum
efficient scale at output Q3, where average costs are lowest, enabling
them to generate increased profits. Hence, whilst SMEs may be prevented
, from pursuing growth as a core objective due to inadequate finance,
larger firms are likely to pursue expansion due to the availability of funds
and the cost-saving incentives.
However, the financial restrictions that may prevent SMEs from pursuing
growth as an objective can be alleviated by governmental schemes aimed
at helping the expansion of domestic businesses against larger
multinational corporations. Indeed, in the UK for instance, small domestic
startups are offered grant programs such as the Seed Enterprise
Investment Scheme (SEIS), which provides tax relief for investments, to
help finance the growth of start-up companies. Similarly, initiatives like
the “Enterprise Programme for Young People” offers loans ranging from
£1,000-5,000 for start-ups to help them invest in expansion. As such,
SMEs may gain access to sources of finance that’ll enable them make the
necessary investments for growth. This is especially true in countries that
have prioritized the protection and growth of infant industries. Due to
these smaller firms lacking the cost-saving benefits of larger MNCs, they
are unlikely to be able to compete against established firms both
domestically and in the international marketplace. This may risk domestic
employment if local firms are undercut by MNCs or may pose national
security risks if a country requires a particular domestic industry for
security purposes. As such, governments under these conditions are likely
to subsidize smaller, domestic firms in these industries and impose
protectionist barriers against foreign competitors, providing SMEs with a
climate conducive to growth. In 2018 for example, the EU imposed tariffs
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