Observations on micro-entrepreneurship and being an employer

Micro-enterprises are an important group for Finnish entrepreneurship, as the majority, more than 90%, of Finnish companies are micro-enterprises. Micro-enterprises are also important employers, as more than one fifth of all jobs provided by companies are in micro-enterprises. Micro-enterprises are often innovative and flexible. They have the opportunity to react quickly to market changes and develop new products or services. Micro-enterprises are also often decentralised to different regions, including smaller municipalities and rural areas. They can contribute to regional development and balance in the distribution of jobs and economic activity.
Jaana Lappi

Micro-enterprises often interact closely with the local community. They can promote regional development and help maintain vitality even in smaller municipalities. As a result, micro-enterprises generate tax revenue for the state and municipalities, which is important for financing public sector activities and services. It is important to note that the importance of micro-enterprises may vary by sector and region. Micro-enterprises also include a group of companies that are important for the renewal of business life and entrepreneurship, start-ups aiming for strong international growth.

Micro-enterprises are a very heterogeneous group of companies of different ages, sizes and operating in different industries and in different parts of Finland. Some companies are growth-oriented and direct their business to the world, and others want to operate locally or domestically without growth targets. Thus, no two companies are alike, and as a result it is difficult to understand the changes in the statistics, and typically there are several explanatory factors behind them.

Several factors affect the decrease in the number of employer companies

Recent debate has drawn attention to the decline in the number of employer companies. The Labour Force Survey has examined the development of the number of entrepreneurs, and the survey also shows a decline in the number of employer entrepreneurs over a longer period of time. However, the decline has been stronger in recent years. The Labour Force Survey does not divide entrepreneurship according to different size categories, but the survey gives a good picture of recent developments also for smaller enterprises. According to the Labour Force Survey, the increase in the number of entrepreneurs is explained especially by the increase in solo entrepreneurship. The total numbers of both entrepreneurs and solo entrepreneurs have peaked in 2021, after which they have decreased slightly.

Several trends are likely to affect the decline in the number of employer companies. Employing companies may also be troubled by a lack of prospects, as the weakening of the economic outlook and lack of trust may manifest as a lower willingness to grow and thus also a lower need for labour. Companies have gone through quite a mill of change in recent years. Typically, those changes have come from outside the companies – first the COVID pandemic affected society as a whole, then Russia's invasion of Ukraine, and now, most recently, inflation and rising interest rates. The changes have been reflected in enterprises and industries in different ways, mostly in smaller enterprises.

The decline in the number of employer companies may also be due to the fact that it is more difficult for small companies in particular to recruit employees. Labour shortage has been a challenge to companies' daily operations and growth for several years. While the bleak economic outlook may temporarily reduce the demand for labour, it is estimated that the economic recession will be short-term and that the challenges related to the availability of labour will reappear as the recession eases. The ability of smaller companies to employ people is affected by the recruitment resources of small companies and the recognition of companies. Small companies tend to be less well-known and have fewer resources available for recruitment. In a situation of labour shortage, smaller companies are also likely to find it more difficult to recruit labour from abroad.

Another explanation offered for the number of employer entrepreneurs is that companies with lower productivity levels would have left the market, which would result in fewer employer companies on the market, but that they would also be more productive. Helsinki GSE and the University of Jyväskylä have discovered that despite the fact that there are fewer employer companies, the number of hours worked has nevertheless increased between 2015 and 2022. In addition, gross value added has also increased by 13%. There are also no signs of declining business dynamics: more companies are still being established than closed down, although the number of companies leaving has accelerated. This may also be a sign of acceleration in the renewal of companies. The report by Helsinki GSE and the University of Jyväskylä has not been prepared on micro-enterprises, but include employer companies of all sizes.

There is cause for concern about the decline in companies' willingness to grow

The declining trend in micro-enterprises and employership in general should at least be monitored. Particularly worrying is the decline in companies' willingness to grow, although according to the latest SME Barometer, the continued decline in the willingness to grow has stopped. The share of highly growth-oriented companies is modest and is the result of developments in the longer term. Seven years ago, according to the SME Barometer, there were still 50% growth-oriented SMEs, of which 11% were strongly growth-oriented. This autumn, 38% of SMEs are growth-oriented and 6% are strongly growth-oriented. A company's willingness to grow is linked to the desire to renew and invest in investments. Renewing and growing companies also spur other companies, which is why incentives for growth, such as sufficient growth funding, must be ensured.

Although all types of entrepreneurship are important, a trend with fewer and fewer employer companies may affect the renewal, growth and internationalisation of companies. In renewal and growth, competent employees are key production factors, without which it is difficult to renew and grow. It would be good to have more research data on how network-based entrepreneurship differs from entrepreneurship, where a company hires employees in order to grow. One might well think that the latter has ended up with a strategy that aims at goal-oriented growth. It would also be important to understand what kind of solutions could be used to stimulate micro-enterprises to achieve goal-oriented growth.

Author: Jaana Lappi, Ministerial Adviser, Ministry of Economic Affairs and Employment