Introduction

Small Business from Small Islands – Introduction

Small and medium sized enterprises (SMEs) are very important contributors to economic growth. Their positive contribution is all the more evident in the context of massive lay-offs from large firms and especially appreciated in epochs of long term, structural unemployment.

A firm with fewer than 10 employees is defined as “micro”; more than 10 but less than 50 employees is defined as “small”; while one with more than 50 employees but fewer than 250 employees is defined as “medium”.

SMEs play an even more pronounced role in the case of very small islands, since the typical average enterprise size is even smaller than elsewhere

SMEs are:

      – Major contributors to job creation
      – Major nurseries for the development of skills
      – Major providers of services to larger firms
      – Locations which offer more flexible, innovative and sustainable job practices
      – Activities which offer an easier route to business set-ups
      – Units which offer faster responses to changes in consumer taste and demands

Manufacturing is also seen as an important engine to economic growth and development. The factory has been a symbol of industrial progress for the last 200 years. Manufacturing creates many jobs, usually in large firms, develops technical skills, adds higher value to products and creates many supportive service industries.

However, many handicaps can affect the set-up and operation of SMEs when these are based in small island territories and are involved in manufacturing. How challenging are these handicaps? Can they be overcome? How? Can some small firms from small islands serve as models of successful export-oriented development? And if so, which? What would be their characteristics?

These are some of the main difficulties faced by an SME developing a manufactured product from a small island:

  • The domestic market is small and, in the case of an archipelago, fragmented and dispersed. There are therefore only limited domestic customers and some may be hard, or more expensive, to get to.
  • Because the domestic market is small, and some basic services need to be provided anyway, the per capita costs of providing communications, health, housing, road infrastructure, energy, education and other facilities may be higher.
  • Because the domestic market is small, competitive pressures are limited and it may be easier to become a dominant provider of a particular product.
  • Most raw material has to be imported from off-island, by ship or plane
  • Any products meant for off-island customers must be exported, by ship or plane.
  • Business linkages (for both inputs and outputs) to other domestic firms may be very poor.
  • Skilled labour and expertise may be lacking. Any that which may be available could be poached by better paying firms or could emigrate to better paying locations or countries.
  • Local banks and investors may prefer to support larger and/or foreign clients.
  • Technological innovations are usually developed off-island and eventually make their way to the island.

Finding a product with ‘cutting edge’ technology intended mainly for export that is developed by a small island-based business in a small-scale operation can only be described as exceptional.

One is hard pressed to imagine how manufacturing-based SMEs in small island territories can thrive. Instead, a common expectation is that of a sustained lack of local competitiveness in the face of imported goods. Protectionism and benevolent economic stewardship by the state or a regional authority may have encouraged local investment in producing for the small domestic market, such as in food, beverages and cottage industries, where this is allowed or tolerated. Such operations, however, are often stubbornly uncompetitive.

Moreover, even where small island territories have good quality and competitive products, there are difficulties in sourcing effective research and development capability, skilled human resources, suitable terms for financing and/or appropriate technology. The all-too frequent outcome is a steady deterioration in the competitive position of local SMEs, a short-to-medium term loss of markets and an erosion of profit margins. Finally, a dependence on typically more expensive transport, insurance and tele-communications costs acts as an additional, in-built structural disadvantage to such firms engaged in manufacturing, especially in bulk (high-volume), heavy and/or perishable imported raw material or exported products.

What is the outcome of all this? It is imports rather than exports, and it is trade and consumption rather than industrial manufacturing production, which attracts the interest of the local commercial community on the island. It is also the public sector, rather than the private sector, which creates more stable and secure jobs. Politically, the importing business elite typically enjoys the upper hand and tends to elbow out locally produced goods in preference for imported (possibly cheaper and better) ones, from off-island. Local island consumers may also prefer to patronize ‘high-status’, foreign goods coming from the mainland, at times even when they are more expensive or of inferior quality than the local counterpart. One may argue that the Cohesion Funds & Structural Funds of the European Union have facilitated the transformation of many island peripheries into relatively more affluent sites with upgraded infrastructure; but an added consumption capacity of imports may have been achieved along with the loss of all local productive capacity, except perhaps construction.

Thus, it is no surprise that hardly any small island economy has a significant manufacturing sector. Furthermore, where this manufacturing sector exists, it is mainly export-led investment fuelled by foreign investment and technology and often benefiting from export subsidies and other positively discriminatory legislation. In most cases, small island territories have abandoned the industrialization phase, leapfrogging from agricultural self-employment to service economies, specializing in tourism, banking, bunkering, berthing, communication and administrative jobs in both the private and public sectors.

As if this tragic picture was not enough, a heightened pace of transition to a knowledge-based economy presents still more bad news for the manufacturing prospects for small islands.

Globalization and global competitive trends are leading to the greater concentration of resources associated with the modern economy (high-tech industries, flexible IT-skilled labour pools, research and development institutes, ICT-specializing universities) in large urban centres and metropolitan areas. This trend suggests that new technologies are not altering a pattern of concentration ushered in by industrialization; but are actually helping to fuel it. Geography (measured as proximity to large centres of population) increasingly matters in the knowledge economy; while contemporary success (measured in terms of economic viability) means being a successful knowledge economy.

Thus, to sum up so far, islands are often conceived as isolated and disconnected locations, badly equipped to be competitive because of their defensive self-absorption. Within the parameters of the global knowledge economy, there is even less scope for places or firms to try and survive as “islands of self-sufficiency”. The implications of such an assessment are not good news.

What happens to a location which is unable to muster a significant knowledge critical mass?

  • It will find itself exporting people, brains, investment and other forms of capital to attractive metropolitan zones or their immediate suburbs.
  • Local employment opportunities will fall.
  • Actual entrepreneurs will move away.
  • Potential entrepreneurs will look away and lose interest.
  • The young and educated people will relocate and migrate first, often never to return except to briefly visit relatives and friends.
  • A decreasing island population reduces its political clout, rendering a lobbied political resolution to their adverse condition less likely.
  • The availability of state-of-the-art, public infrastructure (as in roads, health care, education) declines.

This vicious dynamic may appear irreversible. Depopulation, for many islands, is already a real threat.

Small islands are structurally cheated of markets, economies of scale and institutional “thickness”. Burdened as they are with these structural handicaps, small island communities must now navigate in a world that not only penalises the small and peripheral, but is also favouring big cities. At face value, they are amongst the most poorly equipped to respond to the challenges of the knowledge age. Do, and can, small islands offer interesting lessons in economic development?