sme trends and achievements - 1 march 2007

8/7/2019 SME trends and achievements - 1 March 2007

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FINAL REPORT

Prepared For:

Telstra Business

25/320 Pitt Street

Sydney, New South Wales

SME Trends and

Achievements

Prepared By:

CRA International

27 Jardine Street

Kingston ACT 2604, Australia

Date: February 2007

CRA Project No: D10971-01

Author(s): Henry Ergas and Jennifer Orr


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SME trends and achievements

February 2007

Final Report Page i

TABLE OF CONTENTS

EXECUTIVE SUMMARY.................................................................................................1

1. INTRODUCTION......................................................................................................2

2.

THE OVERALL CONTRIBUTION OF SMES TO THE AUSTRALIAN ECONOMY ....3

3. SMES AS DRIVERS OF PRODUCTIVITY GROWTH IN THE ECONOMY ...............5

4. SMES AS CENTRES OF R&D AND INNOVATION ................................................11

5. HOW SMES ARE CONQUERING OVERSEAS MARKETS....................................14

6.

SME SURVIVAL, ENTRY AND EXIT......................................................................18


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Final Report Page 1

EXECUTIVE SUMMARY

Telstra Business has commissioned a series of research reports on Australias future and

the challenge for small and medium-sized enterprises (SMEs). This report, SME Trends

and Achievements, is the first in the Telstra Business SME Research Series. It brings

together data on the role of SMEs in the Australian economy, putting in a single place

information and facts that are currently hard to access.

Its key points are:

SMEs perform a critical role in the Australian economy as highly flexible and

responsive suppliers to large firm, customers of large firms and as suppliers to end-

use customers in their own right.

However, the mortality rate among SMEs is high. In 2005-06 99.5% (80,000) of

employing businesses that folded were SMEs.

The resilience of the SME sector is astounding. For every SME that 'died' in 2005-06

there was a new one born in fact, by the end of the year there were 3% more

employing SMEs than at the start of the year.

Nevertheless, the high mortality rate means that SMEs face a very pressing survival

challenge. An SME that entered the market during 2003-04 had a 96% chance of

surviving to June 2005 and then an 81% chance of surviving to June 2006.

Importantly, the number of SMEs facing this very pressing survival challenge isgrowing each year. At July 2006 there were 22,400 more SMEs than at July 2005

and 183,000 more SMEs than at July 2003.

Information and Communications Technologies (ICTs) play a very important role in

the race for SME survival. They assist SMEs to raise productivity by: lowering

business costs; facilitating the flow of information between buyers and sellers in a

global marketplace; facilitating rapid two-way communications between SME

managers and employees over distance; and encouraging more rapid diffusion of

new ideas and knowledge necessary for product process and organisational

innovation within SMEs.

Future (forthcoming) reports in the Telstra Business SME Research Series include:

Australias future prosperity: implications for SMEs: This report translates the

challenges to Australias future prosperity into threats and opportunities for SMEs.

Survey of SME leaders: This report will profile SME leader perceptions of the key

challenges they face and the factors that they believe can help them meet these

challenges, including ICT solutions.

Telecommunications a key enabler for SME competitiveness: This report will

examine in detail the potential that new telecommunications technologies create for

SMEs and how SMEs in Australia and overseas are moving to take advantage of

that potential.


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Final Report Page 2

1. INTRODUCTION

While a great deal of statistical information about SMEs is collected in Australia, thesources are very disparate, poorly linked and hence difficult to piece together. This report

puts in a single place information and facts that are currently hard to access. In doing so it

seeks to clarify the role of SMEs in the Australian economy and the way that role is

changing through time, including in individual industries.

The report draws mainly on data published by the Australian Bureau of Statistics (ABS),

the Productivity Commission and Sensis. It provides information on the size of the SME

sector, churn within the sector in the form of new entry and exits, the distribution of SMEs

across industries and the contribution that SMEs make to the value of domestic

production at the national and industry level. It also provides information on the

technological sophistication of SMEs, particularly in terms of their use of information and

communications technology (ICT), and examines the link between SME use of ICT and

productivity growth. It examines the role of SMEs as exporters and as innovators of new

products, services and processes.

It is presented in 6 sections:

Section 2 describes the overall contribution by SMEs to the Australian economy;

Section 3 examines the role that SMEs are playing as drivers of productivity growth

in the economy;

Section 4 investigates the role of SMEs as centres of R&D and innovation;

Section 5 profiles the role of SMEs as exporters and reveals how they are making

inroads in overseas markets; and

Section 6 investigates trends in entry, exit and survival of SMEs by state and by

sector.


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Final Report Page 3

2. THE OVERALL CONTRIBUTION OF SMES TO THEAUSTRALIAN ECONOMY

Australias estimated 1.426 million actively trading SMEs1 perform a vital role in the

Australian economy as highly flexible and responsive suppliers to larger firms, customers

of larger firms, and as suppliers to end-use customers in their own right.

The SME sector accounts for 73% of all actively trading businesses in Australia as at

June 2006.2 It employs around 4.1 million people or 42% of total employed persons in

Australia3 and is estimated to have contributed around $426 billion or 46% of the value of

Australias domestic production as measured by Gross Domestic Product (GDP) in 20064.

Importantly, the contribution of SMEs to the Australian economy is increasing over time.

At June 2006 there were 108,000 more employing SMEs than June 2004 and 183,000

more than June 2003.5 SMEs contribution to the value of Australias GDP is estimated to

have increased by $23.8 billion in real terms over the period 2004 to 2006.

SMEs are making a substantial contribution to domestic production in a wide range of

industries (see Chart 1). For example, SMEs contribute 95% of the value of Australias

agriculture, forestry and fishing production, 80% of the value of Australias Construction

industry output, 67% of Property and Business Services production and 42% of the value

of national Manufacturing industry output. SMEs contribution in these 4 industries alone

accounted for around 20% of the value of Australias GDP in 2006.

1 Throughout this report SMEs are defined as businesses with 0 to 199 employees. Businesses with up to 19

employees are referred to as small businesses and businesses with 20 to 199 employees are referred to as

medium-sized enterprises.

2Total actively trading business data sourced from ABS 2007, Counts of Australian Businesses, including entriesand exits, June 2003 to June 2006, Cat. No. 8165.0. Total number of SMEs is estimated by summing number

of active small and medium employing businesses and an allocation of non-employing businesses based on

the ratio of small to non-employing businesses from the 2001 Small Business survey counts (ABS Cat. No.

1321.0).

3 Latest available (June 2005) figures sourced from ABS 2006, Australian Industry 2004-05, Cat. No. 8155.0 and

ABS 2007, Labour Force, Cat. No. 6202.0.

4 GDP estimates sourced from ABS National Accounts data. The contribution of SMEs to GDP were calculated

from the share of value added by industry attributed to small and medium businesses in 2003-04 (ABS Cat. No.

81550.0 of 2006) multiplied by the industry contribution to GDP in 2003-04 and subsequent years.

5 Excludes non-employing SMEs. Figures sourced from ABS 2007, Counts of Australian Businesses, including

entries and exits, June 2003 to June 2006, Cat. No. 8160.0, Table 10, p. 14.


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Final Report Page 4

Chart 1: Estimated SME contribution to the value of GDP by industry, 2006

97%

40%

42%

19%

80%

64%

60%

78%

47%

12%

55%

67%

65%

63%

48%

76%

0

10000

20000

30000

40000

50000

60000

70000

80000

Agriculture, Forestry and Fishing

Mining

Manufacturing

Electricity, Gas and Water Supply

Construction

Wholesale Trade

Retail Trade

Accommodation, Cafes and Restaurants

Transport and Storage

Communication Services

Finance and Insurance

Property and Business Services

Education

Health and Community Services

Cultural and Recreational Services

Personal and Other Services

$ million

Note: Percentages reported at end of bars refers to SME share of industry contribution to the value of GDP.


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Final Report Page 5

3. SMES AS DRIVERS OF PRODUCTIVITY GROWTH IN THEECONOMY

Over the ten years to 2004-05 Australias multifactor productivity6 grew on average by

1.49% per year7 that is, for each unit of combined input (e.g. labour, capital) Australian

firms on average were able to produce 1.49% more output than the previous year.

Takeup and use of ICT has played a central role in Australias recent productivity

performance. According to DoCITA, ICT inputs are worth 40% more to firms in terms of

their contribution to output than what they pay for them.8

There are no empirical studies measuring SMEs contribution to Australias recent

productivity performance. However, there is strong positive correlation between

Australias total factor productivity performance over the period 1997-98 to 2004-05 and

small business takeup and use of computers and the internet.9

Chart 2 plots Australias multifactor productivity performance and the proportion of small

businesses using computers and the internet through time. There has been rapid growth

in the takeup and use of ICT by SMEs over the last decade. According to ABS data over

the period from 1997-98 to 2004-05, the proportion of small businesses with computers

increased from 61% to 88% and the proportion of small businesses using the internet

increased from 26% to 76%.10 Sensis Business Survey data generally reveals much

higher takeup of computers and use of the internet than indicated by the ABS data. For

example, Sensis reports that in 2006 96% of small businesses owned a computer and

90% of small businesses used the internet (up from 60% in 2000). According to Sensis,in 2006 96% of all SMEs owned a computer (up from 95% in 2005) and 90% of SMEs

were connected to the internet (up from 88% in 2005 and 62% in 2000).11

6 Multifactor productivity is a measure of the rate at which outputs of goods and services are produced per unit of

business input (labour, capital, raw materials, etc). It is calculated as the ratio of the real value of output to the

real value of combined labour and capital inputs.

7Based on multifactor productivity estimates published by the ABS as part of the Australian National Accounts(Cat. No. 5204.0) and available from the Productivity Commission website at

http://www.pc.gov.au/commission/work/productivity/performance/aggregate/marketsector2006.xls.

8 Department of Communications, Information Technology and the Arts (DoCITA) 2005, Estimating aggregate

productivity growth for Australia: the role of information and communications technology, Occasional Economic

Paper, September, p. 3.

9 Correlation analysis performed by comparing ABS Multifactor Productivity estimates (as reported in National

Accounts and by the Productivity Commission) with ABS time series data on use of computers and the internet

by businesses with less than 20 persons, as reported in ABS Cat. No. 8129.0.

10 ABS, Use of Information Technology by Australian Businesses, Cat. No. 8129.0.

11 Sensis 2006, e-Business Report The Online Experience of Small and Medium Enterprises, July.


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Chart 2: Australias multifactor productivity performance and the proportion of small

businesses using computers and the internet

60

65

70

75

80

85

90

95

100

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

Index/Percen

% of small businesses using computers % of small businesses using internet

Australia MFP Index base = 2005-06

Source: ABS Business Use of Information Technology Cat. No. 8129.0 and ABS Australian National Accounts

Cat. No. 5204.0.

ICT use raises SME and Australian multifactor productivity by:

directly lowering costs of production by providing a lower cost (capital) substitute for

labour employed in areas involving the handling of information. This in turn leads to

capital deepening within SMEs;

facilitating the flow of information and enhancing communication between buyers and

sellers, resulting in improved efficiency of market operations;

facilitating rapid two-way communications between SME managers and employees

over distance, which improves the capacity of managers to communicate with each

other and their workforce and leads to better decisions and business planning; and

encouraging the more rapid diffusion of new ideas and knowledge necessary for

product, process and organisational/managerial innovation within SMEs.

The reasons that SMEs give for choosing to be connected to the internet suggest that

those SMEs that use ICT recognise the productivity enhancing properties of ICT

described above. According to Sensis survey information, the four most common

reasons that SMEs give for connecting to the internet are:

To provide better service to customers (80% of all SMEs with internet connection);

To promote the business more effectively (57% of all SMEs with internet

connection);


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Final Report Page 7

To reduce the cost of business transactions (57% of all SMEs with internet

connection); and

To improve delivery of goods and services (56% of all SMEs with internet

connection).12

However, not all SMEs have taken advantage of the potential for ICT to raise productivity.

Takeup and use of ICT is generally weaker among small businesses (relative to medium-

sized enterprises) and rural SMEs (relative to their metropolitan counterparts). For

example, according to May 2006 Sensis survey data:

96% of small business have computers compared to 100% of medium-sized

enterprises;

90% of small businesses use the internet compared to 99% of medium-sized

enterprises;

93% of SMEs located in rural areas have computers compared to 97% of SMEs

located in metropolitan areas; and

88% of rural SMEs use the internet compared to 92% of metropolitan SMEs.13

SME takeup and use of ICT also varies significantly across industries (see Chart 3).

According to Sensis survey data, SME takeup of computers and internet use is highest in

Finance and Insurance, Wholesale Trade and Hospitality industries and lowest in

Building/Construction industries. 14

12 Sensis 2006, Sensis e-Business Report: The Online Experience of Small and Medium Enterprises, July, p. 11.




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Final Report Page 9

Chart 4: Distribution of internet download speeds for Australian SMEs, 2006

8

17

31

23

8

2

2

8

0 5 10 15 20 25 30 35

Less than 64kbps

256kbps

512kbps

1.5Mbps

2Mbps

4Mbps

8Mbps

More than 12Mbps

Percent

Source: GfK Marketing Services 2006, Pacific internet Broadband Barometer, October, p. 8.

Cable modem has become the most common method for SMEs to connect to the internet

(39% of connected SMEs in 2006, up from 26% in 2005), overtaking dial-up modem (20%

of connected SMEs in 2006, down from 38% in 2005) for the first time.19

More and more SMEs have established their own website. According to ABS data, 24%

of small businesses had a web presence in 2004-05, compared to 5% in 1997-98.20

Sensis reports that the percentage of small businesses with a website may be around

double the figure indicated by the ABS survey. According to the May 2006 Sensis

Business Survey, 48% of small businesses had a website in 2006 compared to 18% in

1999.21

Buying and selling over the internet has also become much more common place. Sensis

data indicates that between 2000 and 2006 the proportion of SMEs that place orders for

goods or services over the internet increased from 17% to 60% and the proportion of

SMEs purchasing goods or services over the internet increased from 12% to 66%.22 The

ABS reports more modest use of the internet for ordering goods or services (32% in

2004-05 compared to 17% in 1997-98).23


20 ABS 2006, Business Use of Information Technology Australia, Cat. No. 8129.0, Table 2.1. Small business

figures calculated as weighted average of micro business and other small business results.

21

Sensis 2006, Sensis e-Business Report: The Online Experience of Small and Medium Enterprises, July, p. 19.

22 Figures sourced from Sensis Business Index Survey, Sweeney Research, May 2006.


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Nevertheless, there are noticeable differences in the establishment of websites and e-

commerce between small and medium-sized enterprises. For example, using ABS data,

in 2004-05:

24

24% of small businesses and 59% of medium-sized enterprises had a web presence

(compared to 23% and 58%, respectively in 2003-04);

32% of small businesses and 47% of medium-sized enterprises placed orders via

the internet or web (compared to 30% and 43%, respectively in 2003-04); and

12% of small businesses and 21%25 of medium-sized enterprises received orders

via the internet or web (compared to 11% and 23%, respectively in 2003-04).

There are also differences between rural and metropolitan SMEs in placing orders or

paying for products or services over the internet. For example, using Sensis data:

61% of metropolitan SMEs used the internet to place orders for goods or services in

2006 (compared to 48% in 2003), whereas 58% of regional SMEs used the internet

to place orders for goods and services in 2006 (up from 45% in 2003); and

68% of metropolitan SMEs used the internet to pay for goods or services in 2006

(compared to 51% in 2003), whereas only 62% of regional SMEs used the internet to

place orders for goods and services in 2006 (up from 43% in 2003).26

Australian businesses generally are behind a number of other countries in the use of the

internet to pay for goods and services and receive orders for goods and services.

According to latest available ABS data, the proportion of business that place orders via

the internet is higher in Canada, the United Kingdom and Germany, while the proportion

of businesses receiving orders via the internet is higher in the United Kingdom, Denmark,

Sweden, Ireland, Japan, Germany and Belgium.27

23 ABS 2006, Business Use of Information Technology, Cat. No. 8129.0, Table 2.1. Small business figures

calculated as weighted average of micro business and other small business results.

24 Data used here comes from ABS 2006, Business Use of Information Technology, Cat. No. 8129.0, Table 2.1.

Small business figures calculated as weighted average of micro business and other small business results.

25 The ABS advises this estimate should be used with caution as it has a relative standard error 10% to less than

25%.

26 Sensis Business Index database, Sweeney Research, May 2006.

27 ABS 2006, Business Use of Information Technology, 2004-05, Cat. No. 8129.0, Table 5.2.


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4. SMES AS CENTRES OF R&D AND INNOVATION

Research and development

The SME sector is highly active in research and development and its expenditure on R&D

has increased substantially in real terms over the last decade (see Chart 5). In 2004-05

the SME sector spent $2.9 billion on R&D28, representing around 35% of total business

expenditure on R&D in Australia. Small businesses accounted for 39% of SME sector

spend on R&D in 2004-05. Total SME R&D expenditure in 2004-05 was $917 million

higher (in real terms) than in 2000-01 and $1.061 billion higher (in real terms) than in

1996-97.29

Chart 5: Real expenditure on R&D by SMEs: 1996-97 to 2004-05, 2004-05 dollars

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2003-02 2003-04 2004-05

$millio

SMEs Small business

Source: ABS Research and Experimental Development, Businesses, Cat. No. 8104.0.

Around one third (32.8%) of all SME non-agriculture R&D expenditure in 2004-05 was

directed at Manufacturing and a further 44.3% was directed at Property and Business

Services, which includes scientific research, computer services, and technical services.

These shares of R&D expenditure are more than proportional to the number of non-

agriculture SMEs in these industries SMEs involved in Manufacturing and Property and

Business Services are estimated to account for 25% of all SMEs as at June 2006.

28 All R&D estimates in this paragraph exclude agriculture forest and fishing R&D expenditure.

29 ABS 2006, Research and Experimental Development, Businesses, 2004-05, Cat. No. 8104.0


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Innovation

Australian data indicates that the proportion of businesses that are innovating tends to

increase with business size.30 Businesses that employ 100 or more persons on average

are more likely to introduce new products, services, operating processes and

managerial/organisational processes than businesses that employ 20-99 persons (see

Chart 6). And businesses that employ 20-99 persons on average are more likely to

introduce new products, services, operating processes and managerial/organisational

processes than businesses that employ 5-19 persons. However, there is one exception

medium-sized enterprises with 20-99 employees on average are the most likely to

introduce new products or services; even more likely than larger firms.

Chart 6: Proportion of businesses innovating by types of innovation and firm size, 2004 and

2005

15.816.9

20.7

29.2

34.435.634.7

40.0

28.9

0

5

10

15

20

25

30

35

40

45

Any new or significantly

improved goods or services


improved operational

processes


improved

operational/managerial

processes

Percen

5-19 persons 20-99 persons 100 or more persons

Source: ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 1.2.

30 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0


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February 2007


In recent years the proportion of small businesses (at least those with 5-19 people) that

are innovating either products, services or processes has increased. In 2002-03, 25.0%

of small businesses with 5-19 people reported that they were innovating, 11.2% reportedthat they had introduced a new or significantly improved good or service and 14.9%

reported they had introduced a new or significantly improved organisational or managerial

process. By 2004-05, 28.4% of such businesses reported that they innovating, 14.8%

reported that they had introduced a new or significantly improved good or service and

20.7% reported introducing a new or significantly improved organisational or managerial

process.31

There has also been significant innovation by medium-sized enterprises over the last 5

years. The proportion of medium-sized businesses with 20-99 persons that reported

introducing:

new products and services increased from 17.8% in 2002-03 to 29.2% in 2004-05;

new or significantly improved operational processes increased from 26.2% in 2002-

03 to 34.4% in 2004-05; and

new or significantly improved organisational or managerial processes increased from

28.1% in 2002-03 to 35.6% in 2004-05. 32

ABS survey data indicate that the main motivation for SMEs to innovate is to improve

productivity, increase revenue or increase responsiveness to customer needs. These

motivations rate higher than all other potential drivers of innovation, including desire toincrease market share, desire to increase export opportunities, high degree of price

competition in the relevant product market, and a desire to be at the cutting edge of

industry.33

ABS survey data also reveal that there are differences between small and medium-sized

firms in the skills or capabilities they seek for innovative activity. Innovation activity

among small businesses with 5-19 persons is most dependent on general business and

marketing skills, whereas among medium-sized enterprises with 20-99 persons general

business and IT skills are the most highly sought after. 34

31 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 1.2, p. 14 and 15.

32 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 1.2, p. 14 and 15.

33 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 2, p. 26.

34 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 2, p. 26.


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5. HOW SMES ARE CONQUERING OVERSEAS MARKETS

Australian exports account for around 1% of global exports35 and 21.1% of the value ofdomestic production36. The value of Australian exports as a share of domestic production

has increased significantly over the last four decades for example, in 1969-70 exports

accounted for 15% of the value of domestic production. This growth is being driven by the

resources boom (particularly from the early to mid 1990s), trade liberalisation,

technological change and microeconomic reforms.

Traditionally large firms have been responsible for the lions share of Australias exports in

value terms and this situation continues today. In 2005-06 around 4,136 large firms

representing 10% of all goods exporters accounted for 92% ($140.0 billion) of the total

value of goods exports.37

Even so, SMEs are playing a significant role as exporters in the Australian economy. In

2005-06 there were 19,898 small goods exporters (49% of total goods exporters) and

16,815 medium-sized exporters (41% of total goods exporters).38 Both the total number

of SMEs exporting goods and the proportion of SME exporters among total goods

exporters have recently increased. In 2005-06 90% (around 37,000) of Australias goods

exporters were SMEs up from 86.9% (around 26,000) in 2003-04.39

35Gabbitas, O. and P. Gretton 2003, Firm size and Export Performance: Some Empirical Evidence, ProductivityCommission Staff Research Paper, Canberra, April, p. XIII. Estimate based on 2001-02 data.

36 2005-06 estimate based on ABS National Accounts and Number and Characteristics of Australian Exporters

Cat. No. 5368.0.55.06

37 ABS 2006, Number and Characteristics of Australian Exporters, 2005-06, Cat. No. 5368.0.55.006, p. 5.


39 ABS 2006, Number and Characteristics of Australian Exporters: 2005-06, Cat. No. 5368.0.55.006 and ABS

2004, Australias Exporters: 2003-04, Feature Article under Cat. No 5368.0, International Trade in Goods and

Services, Australia, November.


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Moreover, whilst large firms may dominate Australian exports in value terms, the value of

SMEs contribution to Australian exports is material. Australian SMEs exported goods

valued at $12.382 billion in 2005-06, representing 8.1% of total Australian goods exportsby value.40 Over the period 2003-04 to 2005-06 the value of SME goods exports

increased in absolute (nominal) terms but declined as a share of the total value of

exports. This decline was mainly due to phenomenal growth in the value of mining

exports by 167 large mining exporters due to the resources boom and even stronger

growth in the value of exports by 312 large firms involved in property and business

services. 41

SMEs were also playing a significant role as exporters last decade. According to ABS

Business Longitudinal Survey data (covering only 4 years from 1994-95) in 1997-98 some

16,600 small businesses accounted for 77% of all exporters (i.e. including both goods

exporters and service exporters) and 13% of total export revenue.42 The same yearsome 4,500 medium-sized enterprises accounted for 21% of all exporters and 38% of

total export revenue. 43

Today SMEs in the Wholesale Trade, Manufacturing and Business Services industries

are more likely to be exporters of goods or services than their counterparts operating in

other industries (see Chart 7).


41 ABS 2006, Number and Characteristics of Australian Exporters: 2005-06, Cat. No. 5368.0.55.006 and ABS

2004, Australias Exporters: 2003-04, Feature Article under Cat. No 5368.0, International Trade in Goods and

Services, Australia, November.

42 ABS 2000, A Portrait of Australian Exporters: A report based on the Business Longitudinal Survey 1994-95 to

1997-98, Cat. No. 8154.0.

43 ABS 2000, A Portrait of Australian Exporters: A report based on the Business Longitudinal Survey 1994-95 to

1997-98, Cat. No. 8154.0.


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Chart 7: Proportion of SMEs exporting by industry

39

23

17

13

15

3

15

3

6

2

0 10 20 30 40 50

Wholesale trade

Manufacturing

Business services

Transport/Storgae

Personal Services


Retail Trade

Building and Construction

Health and Community Services

Accommodation/Cafes/Restaurants

Percent

Source: Sensis 2006, Business Index Small and Medium Enterprises, November

Of all small business goods exporters across Australia (i.e. with less than 20 employees),81% are located mainly in New South Wales, Victoria or Queensland and 54% are

exporters of Wholesale Trade goods or Manufacturing goods (see Chart 8).

Interestingly, recent empirical evidence suggests that SMEs are not disadvantaged by

small presence in the domestic market when it comes to export participation. In 2003 the

Productivity Commission analysed the relationship between firm size (domestic sales)

and the level of exports in manufacturing.44 The authors found no statistically significant

relationship between domestic sales and the level of exports and a negative and

statistically significant relationship between domestic sales and export intensity that is,

the more a firm focuses on exports, the lower its domestic sales, all other things equal.

This suggests that other factors such as the quality of firm-specific investments (includingin ICT) and managerial skill are likely to be far more important in explaining differences in

export participation across firms.

44 Gabbitas, O. and P. Gretton 2003, Firm size and Export Performance: Some Empirical Evidence, Productivity

Commission Staff Research Paper, Canberra, April, p. XIII. Estimate based on 2001-02 data.


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Chart 8: Number of small business goods exporters by industry, 2005-06

NSW, Queensland & Victoria

0 500 1000 1500 2000 2500


Mining

Manufacturing

Construction

Wholesale Trade

Retail Trade




Other(a)

NSW Vic Qld

WA, SA & Tasmania

0 100 200 300 400 500


Mining

Manufacturing

Construction

Wholesale Trade

Retail Trade




Other(a)

SA WA Tas

Source: ABS 2006, Number and Characteristics of Australian Exporters: 2005-06, Cat. No. 5368.0.55.006,

Table 9.


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6. SME SURVIVAL, ENTRY AND EXIT

We estimate there were 1.426 million active SMEs in Australia at 30 June 2006. Of these1.426 million SMEs, 703,190 (49%) were employing businesses45 and an estimated

722,487 (51%) were non-employing businesses46.

SMEs face a number of challenges and many find it difficult to survive. In fact, SMEs

account for the vast majority of business exits47 in Australia. For example, 99.5% of

employing businesses (80,000 businesses) that exited the market during 2005-06 were

SMEs. Most of the employing SMEs that exited during 2005-06 were micro businesses

with fewer than 5 employees (around 57,000 or 72% of SMEs). Other small businesses

accounted for 17,000 (22%) of employing SME exits in 2005-06 and mediumsized

businesses accounted for the remaining 6% of employing SME exits. 48

The number of SMEs exiting the market during 2005-06 represents 10% of employing

SMEs operating at the start of the year. This exit rate is substantially higher than the 2-

3% exit rates observed in the two years prior. Micro businesses had the highest exit rate

among employing businesses during 2005-06 12.2% of employing micro businesses

exited, compared to 7.6% of other small employing businesses and 6.1% of medium-

sized employing businesses (see Chart 9).49 The exit rate among non-employing

businesses is even higher than for employing micro businesses (18.2% in 2005-06),

however the ABS does not report data on exits of non-employing businesses by size of

business.

45 Consistent with the ABS definition, these are registered businesses that have an Australian Business Number,

have annual turnover of $50,000 or higher, have a GST role, operate in the market sector and are authorized to

withhold income tax on behalf of employees (though this does not mean they always have employees). Small

businesses that are active but have annual turnover less than $50,000 are excluded from the ABS counts ofAustralian businesses (Cat. No. 8165.0).

46 Consistent with the ABS definition, non-employing businesses are the set of businesses that have an Australian

Business Number but do not have an active Income Tax Withholding role or have not remitted income tax

withholding amounts for 5 consecutive quarters.

47 That is, their ABN was cancelled or the business ceased to remit GST for 5 consecutive quarters or their GST

role was cancelled.

48 ABS 2007, Counts of Australian Businesses, including entries and exits, June 2003 to June 2006, Cat. No.

8165.0, Table 10, p. 14.


8165.0, Table 10, p. 14.


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SMEs therefore face a very pressing survival challenge. An SME that entered the market

during 2003-04 had a 96% chance of surviving to June 2005 and then a 81% chance of

surviving to June 2006. In contrast, a large business with 200+ employees that enteredthe market during 2003-04 had a 91% chance of surviving to June 2005 but then an 88%

chance of surviving to June 2006.50

SMEs that employ 5-19 people tend to have a better chance of survival than micro

businesses. An employing micro business that entered the market during 2003-04 had a

95% chance of surviving to June 2005 and then a 77% chance of surviving to June 2006.

An employing small business with 5-19 persons that entered the market during 2003-04

had a 97% chance of surviving to June 2005 and then a 87% chance of surviving to June

2006. 51

The number of SMEs that are facing this survival challenge is growing over time. At thestart of 2006-07 there were 22,400 more SMEs than at the start of 2005-06 and 183,000

more SMEs than at the start of 2003-04.52

50 Business survival rates are even lower for non-employing businesses (54% of non-employing businesses

operating in June 2003 survived to June 2006), however the ABS does not report data on survival of non-

employing businesses by size of business.


8165.0, Table 11, p. 15.


8165.0, Table 11, p. 14.

sme trends and achievements - 1 march 2007

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