Defining Small and Medium-Sized Enterprises
This report provides information broken down by the following firm size categories:1
- Zero employees
- 1-5 employees
- 6-19 employees
- 20-49 employees
- 50-99 employees
- 100-499 employees
- 500 or more employees
SMEs are defined as enterprises with 19 or fewer employees.
For policy development purposes, MED is interested in SMEs' general behaviour, performance and growth patterns. Therefore it takes the view that a characteristics-based definition of an SME with an employment threshold of fewer than 20 employees is more useful than a multi-layered definition.
International Definitions
SMEs internationally constitute a diverse and dynamic group of enterprises. The OECD notes: "The characteristics of a SME reflect not only the economic, but also the cultural and social dimensions of a country. Not surprisingly, very different patterns are used across countries and over time".2
These differing patterns are reflected in different definitions of SMEs. Given their diversity, most countries use broad definitions to capture the basic characteristics of SMEs. Criteria used include the number of employees, invested capital, turnover and industry type. Some countries, such as the UK, use a legal definition. However, the main criterion that OECD countries, including New Zealand, use for statistical purposes is the number of persons employed.3
There is general agreement in OECD countries about the basic characteristics of small firms. Most of them are managed by their owners.4 The US Small Business Act reflects this fact in its definition of a small business concern as "one that is independently owned and operated and which is not dominant in its field of operation". The UK also has adopted a broad definition, drawn mostly from the findings of the 1971 Bolton Report. That report found that a small firm is an independent business, managed by its owner or part-owners, which has a small market share. The Australian government in its Small Business in Australia 2001 report notes that small businesses tend to be characterised by independent ownership and operations; close control by owners or managers who also contribute most, if not all, the operating capital and undertake the principal decision-making of the firm.
In New Zealand in the 1980s the government used criteria established by the Small Business Agency5 to define small businesses. Small businesses were defined as exhibiting any of the following features:6
- they were personally owned and managed
- the owner/operator made most management decisions
- they did not have specialist staff at management level
- they were not part of a larger business or group of companies with access to managerial expertise.
A Change of Definition?
While there is general agreement on the characteristics of small firms, there is less international consensus on medium-sized firms and hence the definition of an SME. This again reflects the diversity of SMEs both within and between countries.
There are various SME definitions in use around New Zealand. The Ministry has been invited to review the usefulness of maintaining its "fewer than 19 employees" definition of SMEs. MED wants to ensure that it remains up-to-date with the latest research and thinking on SMEs. It also wants to remain consistent with international developments in this field.
The Ministry had already begun to examine this issue in the light of discussion at the OECDSME Ministerial Conference in Istanbul in 2004, and work at the OECD towards improving the accuracy and comparability of international business statistics. MED also considered it timely to review the current definitions because Statistics New Zealand is changing the way it collects business data.
MED has not decided whether the definition needs to be changed. Therefore it welcomes contributions from readers of this report to the debate on this issue.
For the Ministry, any proposals for change will have to be within the following limits:
- Information used can be sourced from Statistics New Zealand.
- The definition must be comparable with trends in definitions used in other countries, and especially the OECD.
- There is some consistency with the Structure & Dynamics report series.
To facilitate readers' input into this debate and to gauge their views on the content and structure of this annual SME Report, there is a form attached to the back of this report.
You are warmly encouraged to complete and return that form.
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