The Economic trends, challenges and behaviour of small businesses

Small businesses make an important contribution to the Australian economy. They account for the vast majority of the active private businesses in the country and represent a large share of employment and value added. Small businesses, however, face many operational challenges and, as a consequence, typically have higher failure rates than larger businesses. While these features have been noted in previous literature, there has been little work examining how these challenges affect the business decisions of small businesses relative to those of larger businesses.

To address this question, this paper uses official and private sector data, as well as information gathered through the Reserve Bank of Australia's business liaison program. Section 2 first provides a summary of the characteristics of the Australian small business sector followed by the contribution small businesses make to the Australian economy, and Section 3 outlines the recent economic conditions faced by the sector. Section 4 then outlines the nature of the operational challenges the sector faces, drawing in particular on the Bank's discussions with small businesses. Finally, Section 5 uses panel data compiled by the Bank to examine econometrically whether, and if so how, small businesses' economic decisions and behaviour differ from those of larger firms. The results suggest that the drivers of smaller firms' current price, employment and investment decisions are generally not statistically different from larger firms, though this may in part reflect the large degree of heterogeneity in the small business sector. There is some evidence, however, that smaller businesses are less forward looking in making their economic decisions. Section 6 concludes.