Why younger SME entrepreneurs are key to productivity growth

Entrepreneurial small business successes have long been part of the folklore of Australian commerce.

Qantas, Cochlear, Atlassian and Canva all started small and later soared to great heights. Today, the hope is that a new generation of small businesses and startups can help propel the nation’s economy.

The Australian Government’s Intergenerational Report 2023: Australia’s future to 2063 forecasts the economy to “grow by an average of 2.2 per cent per year in real terms over the next 40 years compared to 3.1 per cent over the past 40 years”.

Weaker productivity growth is thought to be part of the reason for this decline.

Queensland small business commissioner Dominique Lamb believes small businesses can step up again and make a difference.

She cites the February 2024 Small Business Matters report from the Australian Small Business and Family Enterprise Ombudsman, which reveals that the nation’s 2.5 million small businesses account for a third of gross domestic product (GDP) and about 5 million jobs.

“The numbers are there,” Lamb says. “There is absolutely no doubt that investment in small business, particularly businesses that have one to five employees, is where you get the best returns.”

Room for improvement

Despite their potential, small businesses face many challenges.

The CPA Australia Asia-Pacific Small Business Survey 2023–24 highlights a “continuing gulf ” in the performance and outlook of small Australian businesses compared with many Asian counterparts. It reveals that Australian small businesses are “bottom or near to the bottom of the class when it comes to growth during the past 12 months”.

Although business owners aged 30 to 50 are most likely to innovate, the survey shows that there is little momentum for younger people starting enterprises in Australia.

“There is scope to improve the performance and productivity of the Australian small business sector,” says Gavan Ord, business investment and international lead at CPA Australia.

Australia cannot rely on government policy settings alone to address under-performance, Ord says. Small businesses will need to embrace technologies such as ecommerce, social media and digital tools, because the slow pace of technology adoption is hurting individual businesses and the broader economy.

The nation also needs to rebalance the demographics of small business ownership. The experience of business owners aged over 50 is crucial, but Australia also needs a larger group of younger, tech-savvy entrepreneurs who can deploy new technologies and ideas.

“The productivity discussion in Australia has been focused on competition policy, industrial relations and red tape,” Ord says. “They’re all important, but our data shows it is a more nuanced picture.

“We need to expand the debate to include other drivers of productivity, including how we increase the proportion of young Australians starting a business or buying a business.”

Michael Brennan, former chair of the Productivity Commission, says productivity growth comes down to the “individual decisions made by business managers” within large and small entities.

“There is always an implied critique of government when productivity growth is low, but ultimately productivity growth is a market sector phenomenon,” adds Brennan, who is now CEO of e61 Institute, an economic research organisation.

As to whether more small businesses could boost national productivity, Brennan believes the strength of innovative startups is that they pose “the threat of a new entry”, which can keep large businesses accountable and stimulate new ways of operating.

“In this way, the role of small business is very important. It is a very significant spur to competition and potentially a spur to a lot of innovation.”

 

"There is absolutely no doubt that investment in small business, particularly businesses that have one to five employees, is where you get the best returns."

 

With the Intergenerational Report endorsing a long-term productivity growth assumption of about 2.2 per cent per year, Brennan says the question is whether Australia can return to the higher levels of productivity growth it enjoyed between 1960 and 2020.

However, if productivity numbers end up far below the forecast it will result “in an environment where the growth in living standards is materially slower than that to which Australians have grown accustomed over the last few decades”, Brennan adds.

Pain points

There is also the question of what the Australian Government can do to support small businesses.

Dr Andrew Leigh, assistant minister for competition, charities and treasury, and assistant minister for employment, says it is essential for any country to have a healthy mix of large and small businesses.

Leigh says the Albanese Government is seeking to ease some of the pain points for small businesses by:

• streamlining tax-compliance rules to reduce time spent on tax returns
• addressing anti-competitive practices in certain sectors to deal with the imbalance in contractual bargaining power between large buyers and smaller suppliers
• supporting with their energy transition through incentives that encourage investment in better energy efficiency and storage
• assisting with cyber security and digital capabilities.

In terms of cyber security, Leigh says the government-sponsored Cyber Wardens program, which helps prevent digital threats through staff training and greater risk awareness, acknowledges that “staying on top of cyber threats can be a much bigger burden proportionately for small businesses than it is for a large firm”.

The Australian Government also oversees the Self-Employment Assistance program, which backs small or micro-businesses through free mentoring, workshops, accredited training and financial support.

While Lamb has seen Queensland businesses launch and create sustainable operations through the current program and its earlier iterations, she also says there is “a lack of awareness around a lot of these government programs”.

Ord adds that programs such as Self-Employment Assistance have helped only a tiny number of small businesses to date and need to level up.

“We need much more ambitious programs to assist businesses to develop the capacity and the capability to invest in technology,” Ord says.

Challenges to overcome

In Queensland, there are some promising signs, with the Small Business Commissioner’s Office estimating that the number of small businesses rose by about 9000 in the six-month period to April 2024 to a total of 482,836 across the state. However, shrinking margins are still taking a toll on too many of them.

Lamb says government has a key role to play with education and financial literacy, “particularly with our tax system in Australia, because it is incredibly complicated”.

Brennan attributes the declining rates of self-employment in Australia to two key factors.

First, the relative allure of being a wage earner is greater now, compared with the risk of being a business owner. “It could be that the rewards just aren’t as great as they once were,” Brennan says.

 

"The role of small business is very important. It is a very significant spur to competition and potentially a spur to a lot of innovation."

 

Second, there may be “too many frictions and barriers in the way” of businesses. “You have people who would be entrepreneurs, but they find the barriers, the paperwork and all of that too forbidding.”

Brennan argues that greater exposure to vocational and professional skills is essential, and that lifting financial literacy could promote a healthier risk appetite among investors and would-be entrepreneurs.

The nation also needs to consider whether the tax system is guilty of penalising success “more so than it cushions failure”, he says.

Targeting the under-40s

The Asia-Pacific Small Business Survey reveals that businesses owned by people under the age of 40 are more likely to invest in new technologies, innovate and grow, so CPA Australia has called on government to set targets to increase the number of people in that age group who own a business.

Lamb believes more can be done to address the declining number of younger people entering the small business sector. “We know that when people enter business is typically when they are the most innovative.”

 

"The productivity discussion in Australia has been focused on competition policy, industrial relations and red tape. They’re all important, but our data shows it is a more nuanced picture. We need to expand the debate to include other drivers of productivity, including how we increase the proportion of young Australians starting a business or buying a business."

 

Leigh also encourages younger entrepreneurs and potential business owners to back themselves and wants to see a younger cohort setting up their own enterprises, rather than joining big firms and corporations as the default option.

“A healthy ecosystem requires more new entrepreneurs to be starting up, and the average age of small business owners in Australia is going up faster than the average age of the population,” Leigh says.

“We must make sure that we have younger Australians thinking, ‘Yes, it is terrific to go off and join a big firm, but it is just as good to go off and start your own’.”

In many developing countries, entrepreneurship and running a small enterprise have long been seen as a pathway to financial success.

The e61 Institute’s Michael Brennan says economies in Asia and the US attach greater prestige to being an entrepreneur – something that Australia could do well to adopt.

In Australia, getting a job with a large company with a healthy salary and superannuation packages has traditionally been the go-to move for many graduates.

“In Australia, socially and culturally being part of a failed business carries greater stigma than it does in a highly entrepreneurial culture such as the US. That is not an easy thing to turn around,” Brennan says.

A lack of housing wealth among young Australians today compared with previous generations means they lack the asset base and financial buffer to borrow for business or to fund growth, he adds.

Brennan expects demand for unsecured credit to prompt the rise of new providers and products who use artificial intelligence and data tools to identify credit-worthy applicants.

“Funding is a perennial challenge for smaller businesses, but technology will often find a way if there is a business opportunity for smart people to get in there and provide a solution,” he says.

Lessons from social media

In the battle to get greater numbers of younger people setting up businesses in Australia, CPA Australia’s Gavan Ord says left-field options should be considered as part of the effort to improve the nation’s economy, productivity and dynamism.

That could entail government and industry promoting to young Australians the benefits of starting their own business – even a YouTube channel, or an Instagram or TikTok-inspired enterprise.

“The YouTuber of today is the kid who was selling lemonade 20, 30, 40 years ago,” Ord says. “We always encouraged that entrepreneurial behaviour, and we should look at YouTubing in that light as well.”

Social media platforms can inadvertently teach users business skills, such as content development and delivery, money-making strategies and contractual obligations when dealing with the big multinational platform operators.