Why Not a ‘Rodent’ Economy?

1.    A ‘Rodent’ Economy?

Squirrels and mice are quick, intelligent and gregarious; and as species, adaptable, collaborative and virtually indestructible. 

They favour large families over individual size. 

They generally sustain themselves on the surpluses and inefficiencies of mankind. 

Is this a useful analogy for a versatile business economy?

A ‘rodent’ business might acknowledge limits to growth and use its energies to succeed within them.  It might be more agile than its larger competitors, employ few people and little capital, but have a profitable niche and a satisfactory return on investment. 

Rodent businesses might be successful in exporting (like the smaller dairy companies), importing (like used Japanese cars) or local services (like regional law firms).  A country with an economy that largely consisted of rodent businesses might find that per capita, it had generally a high level of business ownership, high levels of employment, a culture of innovation and strong regional activity.  

The limits to growth of a business are both internal and external, determined by its owners and its trading environment.

2.    Owner (internal) Constraints on Business Size

·         Intellectual property – allows product differentiation;
·         Skills –to successfully recognise, take and build on growth opportunities; 
·         Ambition to grow – which may be large or small, inwards (about the person in control) or outwards (about staff, suppliers, customers and the wider public).

3.    Trading Environment (External) Constraints on Business Size

External factors may over-ride ambition, skills and IP.  Businesses may be small when there is one or more of 

·         Low barriers to entry – allowing many competitors (corner dairies);
·         Low storage capability – perishable items (fish, flowers, vegetables);
·         Low demand – limited earnings (performing arts); 
·         High demand but strong competition – encouraging boutique suppliers (food, clothing, recreation, art, housing etc); 
·         A rapidly changing situation demanding constant innovation (computer maintenance, mobile phone applications).

Businesses may be large when there is one or more of

·         Readily available capital – from historic earnings or confident shareholders;
·         Capital intensive products or services (refineries, airlines, insurance); 
·         Market stability – discouraging innovation (food processing);
·         High competition –encouraging economies of scale (consumer electronics); 
·         High demand – makes growth easier (Trade Me); 
·         High reliance – clients demanding high standards of compliance (legal, accounting, aerospace, military contractors).

4.    How Common is ‘Small’?

‘Small’ businesses, in broad terms, make up more than 99% of all companies in NZ.  The Companies’ Office registers around 45,000 new companies each year of which around 450 (1%) issue a prospectus, suggesting they plan to be large. 

The other 99% are either constrained to, or choose to, start small.  There were 592,350 companies in NZ at 30 June 2013. 

From the 2011 census, Statistics NZ confirms that the top 1,000 companies contributed 94% by value of the country’s exports and 80% of its imports. 

The other 591,000 companies in New Zealand (99.8%) contributed only 6% of exports in total.

5.    How ‘desirable’ is large?

Large businesses tend to have high ratios of employees to ‘controllers’ (Boeing for example has 10 corporate executives and 169,000 employees). 

The higher the ratio, the more isolated the ‘controllers’ are from the workforce.  

The ratios of top pay to lowest pay of businesses also correlate broadly with company size.  There is growing resentment about the extremes of pay ‘inequality’ now being discovered. 

Big businesses may also be vulnerable to changing conditions. 

For example the recorded music industry has suffered big declines in revenues and large scale lay-offs since the introduction of electronic file sharing. 

On the other hand, big businesses are more successful at exporting than small businesses, and NZ needs to generate a positive balance of payments.  Hence government support for big businesses (e.g. the Bluff aluminium smelter).

6.    Combining small and large

Small businesses with a common interest may assemble into large businesses to gain some of the advantages of size while working within the owners’ constraints. 

These may take the form of cooperatives such as Fonterra, Foodstuffs and Mitre 10; franchises such as Versatile Homes and Buildings and Postshop-Kiwibank; or “coopetition” where businesses in the same market work together in research while competing for market-share.

7.    Do we have a ‘rodent’ economy?

Given that we have over half a million companies in New Zealand and that we enjoy a relatively open market, we might assume that our national economy has evolved into both ‘large’ and ‘small’ businesses in statistically valid ways. 

That is, because our businesses are free to identify and service markets anywhere, and to form, grow, decline and dissolve without interference from Government, our overall mix of business sizes fairly reflects our culture and trading environment. 

This is not quite true of course as the Government influences the economy in many ways, through controls on investment, taxation, education, health, employment and (in some cases) resources; but perhaps in broad terms we generally have a ‘rodent economy.’  Is that good?

Well, yes.  Rodents are survivors. 

They are smart and fast and don’t feel guilty or inadequate about their size.  Our ‘rodent’ businesses meet customers’ needs, create dispersed employment, enjoy high levels of ownership, help income equality and contribute to a resilient and durable national economy.  I think we should celebrate that. 

Howard Moore, August 2014