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«The business size distribution in Australia Jan A. Swanepoel and Anthony W. Harrison September 2015 Abstract This paper identifies trends and ...»

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The business size

distribution in Australia

Jan A. Swanepoel and Anthony W. Harrison

September 2015


This paper identifies trends and features in the business size structure (by employment) in

Australia and investigates some of the drivers of these trends. We find that the dynamics of

business counts at the jurisdictional, regional and sectoral level have been variable over the

past few years given the interplay of various factors such as local economic conditions and structural characteristics of sub-national economies. Particular focus is placed on the drivers of trends of non-employing firms, which are a heterogeneous class subject to social and personal factors which do not generally influence the dynamics of employing firms. Self-employment, it is argued, is highly dependent on the size of an economic area and is driven by the relative prominence of particular sectors in the economy. The results indicate that an enhanced understanding of the role and differentiated behaviour of firms according to their size and location will assist in guiding effective industry policy in Australia.

JEL Codes: L11, L16, L22 Keywords: Business counts, Firm size distribution, Industrial structure

For further information on this research paper please contact:

Abrie Swanepoel Economic and Analytical Services Division Department of Industry, Innovation and Science GPO Box 9839 Canberra ACT 2601 Phone : +61 2 6102 9385 Email: abrie.swanepoel@industry.gov.au Disclaimer The views expressed in this report are those of the author(s) and do not necessarily reflect those of the Australian Government or the Department of Industry, Innovation and Science.

 Commonwealth of Australia 2015.

This work is copyright. Apart from use under Copyright Act 1968, no part may be reproduced or altered by any process without prior written permission from the Australian Government.

Requests and inquiries concerning reproduction and rights should be addressed to chiefeconomist@industry.gov.au. For more information on Office of the Chief Economist research papers please access the Department’s website at: www.industry.gov.au/OCE Creative Commons Licence With the exception of the Coat of Arms, this publication is licensed under a Creative Commons Attribution 3.0 Australia Licence.

Creative Commons Attribution 3.0 Australia Licence is a standard form license agreement that allows you to copy, distribute, transmit and adapt this publication provided that you attribute the work. A summary of the licence terms is available from http://creativecommons.org/licenses/by/3.0/au/deed.en. The full licence terms are available from http://creativecommons.org/licenses/by/3.0/au/legalcode.

The Commonwealth’s preference is that you attribute this publication (and any material sourced

from it) using the following wording:

Source: Licensed from the Commonwealth of Australia under a Creative Commons Attribution

3.0 Australia Licence. The Commonwealth of Australia does not necessarily endorse the content of this publication.

Key points  Business size growth is uneven across Australian jurisdictions and industries, implying that various factors impact on business activity.

 Generally, the larger an economy, the greater the number of firms and the higher the proportion of larger firms.

 Compared to other OECD countries, Australia appears to have a total business count proportionate to the size of its economy.

 Regression results show that population estimates (proxy for the size of an economic area) have a positive and statistically significant impact on non-employing and large firms.

 The unemployment rate has a positive and statistically significant impact on non-employing firms, implying that a significant proportion of self-employment is characterized by persons seeking to secure income by means of alternative employment when they encounter a lack of paid employment opportunities (‘unemployment-push’ effect).

 The share of non-employing firms in the Agriculture, Forestry & Fishing industry is negatively related to educational attainment, the working age population and equivalised disposable income levels.

 The Professional, Scientific & Technical Services industry nonemploying business count proportions are strongly positively related to educational attainment.

 There are strong correlations between some regional industry shares for non-employing businesses. A relatively high (low) share of non-employing businesses in the Professional, Scientific &

Technical Services industry is associated with:

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The business size distribution in Australia 2

1. Introduction

Numerous policy measures, at the federal and state government level, are aimed at fostering business development, particularly with regard to small business. Support for small and medium enterprises is well-founded, with a multitude of research highlighting the contribution of this sector to supporting economic development, technological innovation and employment creation.1 Growth in the number of small businesses is often explicitly targeted in government policies.

There are various cyclical, structural, policy and other factors that impact on firm counts. Moreover, the business size structure varies between regions as well as between industries within each region in Australia. Similarly, the business size structure is not uniform across countries — substantial heterogeneity can be observed across the developed world. This points to the fact that the business size structure is complex, given the web of relationships that influence the dynamics of business formation. The main aim of this study is to identify trends and features in the business size structure (by employment) in Australia and to investigate some of the drivers of these trends. We investigate the role of macroeconomic and demographic factors, structural features of the Australian economy as well as some government policy settings that impact on the distribution of firms by employment size across industries and regions in Australia.

Studies of this kind present challenges with respect to the availability and methodological consistency of business count data. This paper uses data from the Australian Bureau of Statistics (ABS) publication Catalogue Number. 8165.0 — Count of Australian Businesses, including entries and exits, as well as the National Regional Profile available from the ABS.Stat Beta website. Businesses included in this data are those trading in the Australian market and actively remitting Goods and Services Tax (GST).2 Industry classifications in this paper are according to ANZSIC 2006, and in the absence of a robust method with which to convert ANZSIC 1993 to ANZSIC 2006, time series data investigating specific industry classifications are limited to 2007 onwards. In addition, while trends across aggregated groups of, for example, industry and firm size class have been explored, without access to unit 1 See for example Shaffer S (2002) Firms Size and Economic Growth, Economic Letters, 76, 195– 203; OECD (2004), Promoting Entrepreneurship and Innovative SMEs in the Global Economy, Second OECD Conference of Ministers Responsible for Small and Medium Enterprises (SMEs7), Istanbul, Turkey; Beck et. al. (2005) SMEs, Growth, and Poverty: Cross-Country Evidence, Journal of Economic Growth, 10, Issue 3, pp. 199–229; and Leegwater and Shaw (2008), The Role of Micro, Small, and Medium Enterprises in Economic Growth: A Cross-Country Regression Analysis, USAID micro report 135 2 Consistent with ABS methodology, the data cubes available in the ABS Cat. No. 8165.0 publication confidentialise business information by rounding data with few observations. As a result, data derived using these data cubes contain a small error, which is evident when comparing derived aggregate figures with those stated in the accompanying ABS publication. While acknowledging this limitation, it is important to note that the error is small; considerably smaller than 2 per cent for the vast majority of aggregate figures.

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The ABS’s Business Counts publication is useful, nevertheless, given that it

contains time series with detailed counts by:

 industry  main state and territory  type of legal organisation  institutional sector  employment size ranges  annual turnover size ranges Similarly, time series data are available for regional business counts by employment size from the ABS.Stat Beta website, although the size classes differ somewhat from that of the ABS Business Counts publication. As such, this paper provides an overview of the trends and features of the business size structure in Australia, as well as drivers and policy implications of such patterns, with the view to stimulating interest and further research in this sphere.

The rest of the paper is organised as follows. The next section analyses trends in the number of businesses by size in Australia. Following this, features of the business size structure are explored. The impact of macroeconomic factors on business counts are then investigated by means of regression analysis, followed by an examination of some other determinants of non-employing business activity. The final section concludes.

2. Trends in business counts by employment size Small businesses play an important role in any economy and account for the bulk of business counts. The proportion of business counts (actively trading businesses) by employment size in Australia remained broadly stable over the past decade, with non-employing businesses accounting for around 60 per cent of total business counts, followed by micro enterprises (1 to 4 employees) representing around 25 per cent of total business counts and businesses with 5 to 19 employees representing around 10 per cent of total business counts.

Larger businesses also play an important role in the economy given their competitive advantages through economies of scale. They are also more likely to innovate and export. Medium (20 to199 employees) and large businesses (200+ employees) together account for around 5 per cent of the total number of businesses in Australia over the past decade.

Figure 2.1 presents Australian business counts by firm size class between June 2007 and June 2012, indexed against June 2007 levels.

Given that nonemploying firms account for around 60 per cent of the total business counts in Australia, growth in this firm size class drives trends in the overall business demography. As reflected in Figure 2.1, the Global Financial Crisis (GFC) impacted negatively on all business size classes. Non-employing, small employing (1 to 19 employees) and medium (20 to199 employees) business

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The business size distribution in Australia 8 into retirement and elderly years. The Education & Training industry, while relatively modest in comparison, demonstrated strong growth, with almost 2,400 new firms (representing growth of 10.0 per cent) as of June 2012. In contrast, the count of firms in the Public Administration & Safety industry declined between June 2007 and June 2012, with almost 600 fewer firms in June 2012 (a contraction of 7.2 per cent).

3. Features of the Australian business size structure While there is some variation across countries, the distribution of firm counts by employment size is generally bottom-heavy, dominated by small and medium enterprises. Figure 3.1, presents a comparison of the distribution of employing firms across selected Organisation for Economic Cooperation and Development (OECD) countries, clearly demonstrating the dominance of small firms (between 1 and 9 employees, in this case) in total firm counts across all countries.

There is, however, some variation in firm size distribution. The country with the highest proportion of firms employing between 1 and 9 employees was Korea, where such firms accounted for 96.4 per cent of all firms. The smallest proportion of firms to employ between 1 and 9 employees was recorded in Switzerland, where such firms represented only 69.1 per cent of all firms.

Although these data suggest that Australian firms employing between 1 and 9 employees make up 95.3 per cent of all firms (markedly above the median value of 92.1 per cent), care must be taken when comparing this figure with 5 others, as the parameters vary slightly.

5 In this OECD data, the employment range for small Australian firms actually represents certain firms with between 0 and 9 employees, inclusive. This differs to the parameter for most other countries, which represents firms with between 1 and 9 employees. The parameters are sufficiently different that direct comparison should be treated with care.

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Notes: The linear trend line includes the observations of the United States and Japan that are not displayed on the chart given the size of their GDP.

Source: OECD (2013) Entrepreneurship at a Glance

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Figure 3.4: Non-employing and small employing businesses as a proportion of total firm count by industry, June 2012 Figure 3.

5: Non-employing and small employing firms as a proportion of all firms, top 5 moving industries, June 2007 to June 2012 Figure 3.6: Small employing to medium business size ratio vs. payroll tax thresholds by jurisdiction, 2011–12 Source: ABS Cat. No. 8165.0, ABS Cat. No. 6302.0 and State and Territory Governments

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The business size distribution in Australia 15 180 new employees to become a large firm. This pattern, however, does not hold for non-employing firms, who exhibit a relatively small upscale rate. This is likely to be the result of the different legal entities that make up non-employing firms (such as sole-traders), as well as the kind of business these operate. For example, many sole trading taxi drivers or people operating an internet retail business from home may not be motivated to expand their businesses by taking on new staff. Non-employing businesses are sometimes also operated due to lifestyle choices with little incentive to upscale.

In order to examine the rate of upscaling relative to downscaling, firm size transition ratios were calculated. These ratios represent the net flow, upward or downward, between the firm size classes. To illustrate, the firm size transition

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