SME Trends and Achievements - 1 March 2007

FINAL REPORT
Prepared For:
Telstra Business
25/320 Pitt Street

Sydney, New South Wales
SME Trends and

Achievements
Prepared By:
CRA International
27 Jardine Street
Kingston ACT 2604, Australia
Date: February 2007
CRA Project No: D10971-01
Author(s): Henry Ergas and Jennifer Orr

SME trends and achievements
February 2007
TABLE OF CONTENTS
EXECUTIVE SUMMARY .................................................................................................1
1. INTRODUCTION ......................................................................................................2
2. THE OVERALL CONTRIBUTION OF SMES TO THE AUSTRALIAN ECONOMY ....3
3. SMES AS DRIVERS OF PRODUCTIVITY GROWTH IN THE ECONOMY ...............5
4. SMES AS CENTRES OF R&D AND INNOVATION ................................................11
5. HOW SMES ARE CONQUERING OVERSEAS MARKETS ....................................14
6. SME SURVIVAL, ENTRY AND EXIT ......................................................................18
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February 2007
EXECUTIVE SUMMARY
Telstra Business has commissioned a series of research reports on Australia’s future and
the challenge for small and medium-sized enterprises (SMEs). This report, SME Trends
and Achievements, is the first in the Telstra Business SME Research Series. It brings
together data on the role of SMEs in the Australian economy, putting in a single place
information and facts that are currently hard to access.
Its key points are:
• SMEs perform a critical role in the Australian economy as highly flexible and
responsive suppliers to large firm, customers of large firms and as suppliers to end-
use customers in their own right.
• However, the mortality rate among SMEs is high. In 2005-06 99.5% (80,000) of
employing businesses that folded were SMEs.
• The resilience of the SME sector is astounding. For every SME that 'died' in 2005-06
there was a new one born — in fact, by the end of the year there were 3% more
employing SMEs than at the start of the year.
• Nevertheless, the high mortality rate means that SMEs face a very pressing survival
challenge. An SME that entered the market during 2003-04 had a 96% chance of
surviving to June 2005 and then an 81% chance of surviving to June 2006.
• Importantly, the number of SMEs facing this very pressing survival challenge is
growing each year. At July 2006 there were 22,400 more SMEs than at July 2005
and 183,000 more SMEs than at July 2003.
• Information and Communications Technologies (ICTs) play a very important role in

the race for SME survival. They assist SMEs to raise productivity by: lowering
business costs; facilitating the flow of information between buyers and sellers in a
global marketplace; facilitating rapid two-way communications between SME
managers and employees over distance; and encouraging more rapid diffusion of
new ideas and knowledge necessary for product process and organisational
innovation within SMEs.
Future (forthcoming) reports in the Telstra Business SME Research Series include:
• Australia’s future prosperity: implications for SMEs: This report translates the
challenges to Australia’s future prosperity into threats and opportunities for SMEs.
• Survey of SME leaders: This report will profile SME leader perceptions of the key
challenges they face and the factors that they believe can help them meet these
challenges, including ICT solutions.
• Telecommunications – a key enabler for SME competitiveness: This report will

examine in detail the potential that new telecommunications technologies create for
SMEs and how SMEs in Australia and overseas are moving to take advantage of
that potential.
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February 2007
1. INTRODUCTION
While a great deal of statistical information about SMEs is collected in Australia, the
sources are very disparate, poorly linked and hence difficult to piece together. This report
puts in a single place information and facts that are currently hard to access. In doing so it
seeks to clarify the role of SMEs in the Australian economy and the way that role is
changing through time, including in individual industries.
The report draws mainly on data published by the Australian Bureau of Statistics (ABS),
the Productivity Commission and Sensis. It provides information on the size of the SME
sector, churn within the sector in the form of new entry and exits, the distribution of SMEs
across industries and the contribution that SMEs make to the value of domestic
production at the national and industry level. It also provides information on the
technological sophistication of SMEs, particularly in terms of their use of information and
communications technology (ICT), and examines the link between SME use of ICT and
productivity growth. It examines the role of SMEs as exporters and as innovators of new
products, services and processes.
It is presented in 6 sections:
• Section 2 describes the overall contribution by SMEs to the Australian economy;
• Section 3 examines the role that SMEs are playing as drivers of productivity growth
in the economy;
• Section 4 investigates the role of SMEs as centres of R&D and innovation;
• Section 5 profiles the role of SMEs as exporters and reveals how they are making
inroads in overseas markets; and
• Section 6 investigates trends in entry, exit and survival of SMEs by state and by
sector.
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February 2007
2. THE OVERALL CONTRIBUTION OF SMES TO THE

AUSTRALIAN ECONOMY
Australia’s estimated 1.426 million actively trading SMEs1 perform a vital role in the
Australian economy as highly flexible and responsive suppliers to larger firms, customers
of larger firms, and as suppliers to end-use customers in their own right.
The SME sector accounts for 73% of all actively trading businesses in Australia as at
June 2006.2 It employs around 4.1 million people or 42% of total employed persons in
Australia3 and is estimated to have contributed around $426 billion or 46% of the value of
Australia’s domestic production as measured by Gross Domestic Product (GDP) in 20064.
Importantly, the contribution of SMEs to the Australian economy is increasing over time.
At June 2006 there were 108,000 more employing SMEs than June 2004 and 183,000
more than June 2003.5 SMEs contribution to the value of Australia’s GDP is estimated to
have increased by $23.8 billion in real terms over the period 2004 to 2006.
SMEs are making a substantial contribution to domestic production in a wide range of

industries (see Chart 1). For example, SMEs contribute 95% of the value of Australia’s
agriculture, forestry and fishing production, 80% of the value of Australia’s Construction
industry output, 67% of Property and Business Services production and 42% of the value
of national Manufacturing industry output. SMEs contribution in these 4 industries alone
accounted for around 20% of the value of Australia’s GDP in 2006.
1 Throughout this report SMEs are defined as businesses with 0 to 199 employees. Businesses with up to 19
employees are referred to as “small businesses” and businesses with 20 to 199 employees are referred to as
“medium-sized enterprises”.
2 Total actively trading business data sourced from ABS 2007, Counts of Australian Businesses, including entries
and exits, June 2003 to June 2006, Cat. No. 8165.0. Total number of SMEs is estimated by summing number
of active small and medium ‘employing’ businesses and an allocation of non-employing businesses based on
the ratio of small to non-employing businesses from the 2001 Small Business survey counts (ABS Cat. No.
1321.0).
3 Latest available (June 2005) figures sourced from ABS 2006, Australian Industry 2004-05, Cat. No. 8155.0 and
ABS 2007, Labour Force, Cat. No. 6202.0.
4 GDP estimates sourced from ABS National Accounts data. The contribution of SMEs to GDP were calculated
from the share of value added by industry attributed to small and medium businesses in 2003-04 (ABS Cat. No.
81550.0 of 2006) multiplied by the industry contribution to GDP in 2003-04 and subsequent years.
5 Excludes non-employing SMEs. Figures sourced from ABS 2007, Counts of Australian Businesses, including
entries and exits, June 2003 to June 2006, Cat. No. 8160.0, Table 10, p. 14.
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February 2007
Chart 1: Estimated SME contribution to the value of GDP by industry, 2006
Agriculture, Forestry and Fishing 97%
Mining 40%
Manufacturing 42%
Electricity, Gas and Water Supply 19%
Construction 80%
Wholesale Trade 64%

Retail Trade 60%
Accommodation, Cafes and Restaurants 78%
Transport and Storage 47%
Communication Services 12%

Finance and Insurance 55%
Property and Business Services 67%
Education 65%
Health and Community Services 63%
Cultural and Recreational Services 48%

Personal and Other Services 76%
0
10000
20000
30000
40000
50000
60000
70000
80000
$ million
Note: Percentages reported at end of bars refers to SME share of industry contribution to the value of GDP.
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February 2007
3. SMES AS DRIVERS OF PRODUCTIVITY GROWTH IN THE

ECONOMY
Over the ten years to 2004-05 Australia’s multifactor productivity6 grew on average by
1.49% per year7 – that is, for each unit of combined input (e.g. labour, capital) Australian
firms on average were able to produce 1.49% more output than the previous year.
Takeup and use of ICT has played a central role in Australia’s recent productivity
performance. According to DoCITA, ICT inputs are worth 40% more to firms in terms of
their contribution to output than what they pay for them.8
There are no empirical studies measuring SMEs contribution to Australia’s recent

productivity performance. However, there is strong positive correlation between
Australia’s total factor productivity performance over the period 1997-98 to 2004-05 and
small business takeup and use of computers and the internet.9
Chart 2 plots Australia’s multifactor productivity performance and the proportion of small
businesses using computers and the internet through time. There has been rapid growth
in the takeup and use of ICT by SMEs over the last decade. According to ABS data over
the period from 1997-98 to 2004-05, the proportion of small businesses with computers
increased from 61% to 88% and the proportion of small businesses using the internet
increased from 26% to 76%.10 Sensis Business Survey data generally reveals much
higher takeup of computers and use of the internet than indicated by the ABS data. For
example, Sensis reports that in 2006 96% of small businesses owned a computer and
90% of small businesses used the internet (up from 60% in 2000). According to Sensis,
in 2006 96% of all SMEs owned a computer (up from 95% in 2005) and 90% of SMEs
were connected to the internet (up from 88% in 2005 and 62% in 2000).11
6 Multifactor productivity is a measure of the rate at which outputs of goods and services are produced per unit of
business input (labour, capital, raw materials, etc). It is calculated as the ratio of the real value of output to the
real value of combined labour and capital inputs.
7 Based on multifactor productivity estimates published by the ABS as part of the Australian National Accounts
(Cat. No. 5204.0) and available from the Productivity Commission website at
http://www.pc.gov.au/commission/work/productivity/performance/aggregate/marketsector2006.xls.
8 Department of Communications, Information Technology and the Arts (DoCITA) 2005, Estimating aggregate
productivity growth for Australia: the role of information and communications technology, Occasional Economic
Paper, September, p. 3.
9 Correlation analysis performed by comparing ABS Multifactor Productivity estimates (as reported in National
Accounts and by the Productivity Commission) with ABS time series data on use of computers and the internet
by businesses with less than 20 persons, as reported in ABS Cat. No. 8129.0.
10 ABS, Use of Information Technology by Australian Businesses, Cat. No. 8129.0.
11 Sensis 2006, e-Business Report – The Online Experience of Small and Medium Enterprises, July.
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February 2007
Chart 2: Australia’s multifactor productivity performance and the proportion of small

businesses using computers and the internet
100
95
90
Index/Percent
85
80
75
70
65
60
1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005-
98 99 00 01 02 03 04 05 06
% of small businesses using computers % of small businesses using internet

Australia MFP Index base = 2005-06
Source: ABS Business Use of Information Technology Cat. No. 8129.0 and ABS Australian National Accounts
Cat. No. 5204.0.
ICT use raises SME and Australian multifactor productivity by:
• directly lowering costs of production by providing a lower cost (capital) substitute for
labour employed in areas involving the handling of information. This in turn leads to
capital deepening within SMEs;
• facilitating the flow of information and enhancing communication between buyers and
sellers, resulting in improved efficiency of market operations;
• facilitating rapid two-way communications between SME managers and employees

over distance, which improves the capacity of managers to communicate with each
other and their workforce and leads to better decisions and business planning; and
• encouraging the more rapid diffusion of new ideas and knowledge necessary for
product, process and organisational/managerial innovation within SMEs.
The reasons that SMEs give for choosing to be connected to the internet suggest that
those SMEs that use ICT recognise the productivity enhancing properties of ICT
described above. According to Sensis survey information, the four most common
reasons that SMEs give for connecting to the internet are:
• To provide better service to customers (80% of all SMEs with internet connection);
• To promote the business more effectively (57% of all SMEs with internet
connection);
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February 2007
• To reduce the cost of business transactions (57% of all SMEs with internet
connection); and
• To improve delivery of goods and services (56% of all SMEs with internet
connection).12
However, not all SMEs have taken advantage of the potential for ICT to raise productivity.
Takeup and use of ICT is generally weaker among small businesses (relative to medium-
sized enterprises) and rural SMEs (relative to their metropolitan counterparts). For
example, according to May 2006 Sensis survey data:
• 96% of small business have computers compared to 100% of medium-sized

enterprises;
• 90% of small businesses use the internet compared to 99% of medium-sized

enterprises;
• 93% of SMEs located in rural areas have computers compared to 97% of SMEs
located in metropolitan areas; and
• 88% of rural SMEs use the internet compared to 92% of metropolitan SMEs.13
SME takeup and use of ICT also varies significantly across industries (see Chart 3).
According to Sensis survey data, SME takeup of computers and internet use is highest in
Finance and Insurance, Wholesale Trade and Hospitality industries and lowest in
Building/Construction industries. 14
12 Sensis 2006, Sensis e-Business Report: The Online Experience of Small and Medium Enterprises, July, p. 11.
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February 2007
Chart 3: Takeup of computers and use of internet by SMEs by sector
Manufacturing 93
88
Building/Construction 89
81
Wholesale Trade 97
94
Retail Trade 98
86
Transport/Storage 92
87
Communications, Property & Business Services 99

97
Finance and Insurance 100

100
Health/Community Services 98
92
91
Personal Services 88
Hospitality 98
94
0 20 40 60 80 100
Percent
% SMEs with computer % SMEs using internet
Source: Sensis Business Index, May 2006
The main type of internet connection used by SMEs is broadband. According to ABS
data, 59% of micro businesses (employing up to 4 people), 67% of small businesses
employing 5-19 people, and 73% of medium-sized enterprises used broadband as at
June 2005.15 Sensis Survey data indicates that 79% of small businesses had broadband
internet access in 2006, almost double what it was two years ago.16 Notwithstanding this,
Australian businesses generally are behind a number of countries in the use of
broadband. The proportion of businesses using broadband is higher in Korea, Canada,
Denmark, Sweden, Spain and Finland.17
Speed of access is the most commonly cited reason for preferring broadband over other
connection types, according to Sensis Survey information.18 Notwithstanding this, SME
internet connection speeds in Australia are much slower than in many other countries,
which currently limits the productivity-enhancing properties of broadband technology in
this country. In Australia 56% of SMEs have internet connection speeds of 512 kbps or
less and 79% of SMEs have internet connection speeds slower than 2 Mbps (see Chart
4).
15 ABS 2006, Business Use of Information Technology, Cat. No. 8129.0, 2004-05.
17 ABS 2006, Business Use of Information Technology, 2004-05, Cat. No. 8129.0, Table 5.1.
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February 2007
Chart 4: Distribution of internet download speeds for Australian SMEs, 2006
More than 12Mbps 8
8Mbps 2
4Mbps 2
2Mbps 8
1.5Mbps 23
512kbps 31
256kbps 17
Less than 64kbps 8
0 5 10 15 20 25 30 35
Percent
Source: GfK Marketing Services 2006, Pacific internet Broadband Barometer, October, p. 8.
Cable modem has become the most common method for SMEs to connect to the internet
(39% of connected SMEs in 2006, up from 26% in 2005), overtaking dial-up modem (20%
of connected SMEs in 2006, down from 38% in 2005) for the first time.19
More and more SMEs have established their own website. According to ABS data, 24%
of small businesses had a web presence in 2004-05, compared to 5% in 1997-98.20
Sensis reports that the percentage of small businesses with a website may be around
double the figure indicated by the ABS survey. According to the May 2006 Sensis
Business Survey, 48% of small businesses had a website in 2006 compared to 18% in
1999.21
Buying and selling over the internet has also become much more common place. Sensis
data indicates that between 2000 and 2006 the proportion of SMEs that place orders for
goods or services over the internet increased from 17% to 60% and the proportion of
SMEs purchasing goods or services over the internet increased from 12% to 66%.22 The
ABS reports more modest use of the internet for ordering goods or services (32% in
2004-05 compared to 17% in 1997-98).23
20 ABS 2006, Business Use of Information Technology Australia, Cat. No. 8129.0, Table 2.1. Small business
figures calculated as weighted average of micro business and other small business results.
22 Figures sourced from Sensis Business Index Survey, Sweeney Research, May 2006.
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February 2007
Nevertheless, there are noticeable differences in the establishment of websites and e-

commerce between small and medium-sized enterprises. For example, using ABS data,
in 2004-05:24
• 24% of small businesses and 59% of medium-sized enterprises had a web presence
(compared to 23% and 58%, respectively in 2003-04);
• 32% of small businesses and 47% of medium-sized enterprises placed orders via
the internet or web (compared to 30% and 43%, respectively in 2003-04); and
• 12% of small businesses and 21%25 of medium-sized enterprises received orders

via the internet or web (compared to 11% and 23%, respectively in 2003-04).
There are also differences between rural and metropolitan SMEs in placing orders or
paying for products or services over the internet. For example, using Sensis data:
• 61% of metropolitan SMEs used the internet to place orders for goods or services in
2006 (compared to 48% in 2003), whereas 58% of regional SMEs used the internet
to place orders for goods and services in 2006 (up from 45% in 2003); and
• 68% of metropolitan SMEs used the internet to pay for goods or services in 2006
(compared to 51% in 2003), whereas only 62% of regional SMEs used the internet to
place orders for goods and services in 2006 (up from 43% in 2003).26
Australian businesses generally are behind a number of other countries in the use of the
internet to pay for goods and services and receive orders for goods and services.
According to latest available ABS data, the proportion of business that place orders via
the internet is higher in Canada, the United Kingdom and Germany, while the proportion
of businesses receiving orders via the internet is higher in the United Kingdom, Denmark,
Sweden, Ireland, Japan, Germany and Belgium.27
23 ABS 2006, Business Use of Information Technology, Cat. No. 8129.0, Table 2.1. Small business figures
calculated as weighted average of micro business and other small business results.
24 Data used here comes from ABS 2006, Business Use of Information Technology, Cat. No. 8129.0, Table 2.1.
Small business figures calculated as weighted average of micro business and other small business results.
25 The ABS advises this estimate should be used with caution as it has a relative standard error 10% to less than
25%.
26 Sensis Business Index database, Sweeney Research, May 2006.
27 ABS 2006, Business Use of Information Technology, 2004-05, Cat. No. 8129.0, Table 5.2.
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February 2007
4. SMES AS CENTRES OF R&D AND INNOVATION
Research and development
The SME sector is highly active in research and development and its expenditure on R&D
has increased substantially in real terms over the last decade (see Chart 5). In 2004-05
the SME sector spent $2.9 billion on R&D28, representing around 35% of total business
expenditure on R&D in Australia. Small businesses accounted for 39% of SME sector
spend on R&D in 2004-05. Total SME R&D expenditure in 2004-05 was $917 million
higher (in real terms) than in 2000-01 and $1.061 billion higher (in real terms) than in
1996-97.29
Chart 5: Real expenditure on R&D by SMEs: 1996-97 to 2004-05, 2004-05 dollars
3,500
3,000
2,500
2,000
$ million
1,500
1,000
500
0
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2003-02 2003-04 2004-05
SMEs Small business
Source: ABS Research and Experimental Development, Businesses, Cat. No. 8104.0.
Around one third (32.8%) of all SME non-agriculture R&D expenditure in 2004-05 was
directed at Manufacturing and a further 44.3% was directed at Property and Business
Services, which includes scientific research, computer services, and technical services.
These shares of R&D expenditure are more than proportional to the number of non-
agriculture SMEs in these industries – SMEs involved in Manufacturing and Property and
Business Services are estimated to account for 25% of all SMEs as at June 2006.
28 All R&D estimates in this paragraph exclude agriculture forest and fishing R&D expenditure.
29 ABS 2006, Research and Experimental Development, Businesses, 2004-05, Cat. No. 8104.0

February 2007
Innovation
Australian data indicates that the proportion of businesses that are innovating tends to
increase with business size.30 Businesses that employ 100 or more persons on average
are more likely to introduce new products, services, operating processes and
managerial/organisational processes than businesses that employ 20-99 persons (see
Chart 6). And businesses that employ 20-99 persons on average are more likely to
introduce new products, services, operating processes and managerial/organisational
processes than businesses that employ 5-19 persons. However, there is one exception –
medium-sized enterprises with 20-99 employees on average are the most likely to
introduce new products or services; even more likely than larger firms.
Chart 6: Proportion of businesses innovating by types of innovation and firm size, 2004 and
2005
45
40.0
40
34.7 35.6
34.4
35
29.2 28.9
30
Percent
25
20.7
20
16.9
15.8
15
10
0
Any new or significantly Any new or significantly Any new or significantly
improved goods or services improved operational improved
processes operational/managerial
processes
5-19 persons 20-99 persons 100 or more persons
Source: ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 1.2.
30 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0

February 2007
In recent years the proportion of small businesses (at least those with 5-19 people) that
are innovating either products, services or processes has increased. In 2002-03, 25.0%
of small businesses with 5-19 people reported that they were innovating, 11.2% reported
that they had introduced a new or significantly improved good or service and 14.9%
reported they had introduced a new or significantly improved organisational or managerial
process. By 2004-05, 28.4% of such businesses reported that they innovating, 14.8%
reported that they had introduced a new or significantly improved good or service and
20.7% reported introducing a new or significantly improved organisational or managerial
process.31
There has also been significant innovation by medium-sized enterprises over the last 5
years. The proportion of medium-sized businesses with 20-99 persons that reported
introducing:
• new products and services increased from 17.8% in 2002-03 to 29.2% in 2004-05;
• new or significantly improved operational processes increased from 26.2% in 2002-

03 to 34.4% in 2004-05; and
• new or significantly improved organisational or managerial processes increased from

28.1% in 2002-03 to 35.6% in 2004-05. 32
ABS survey data indicate that the main motivation for SMEs to innovate is to improve
productivity, increase revenue or increase responsiveness to customer needs. These
motivations rate higher than all other potential drivers of innovation, including desire to
increase market share, desire to increase export opportunities, high degree of price
competition in the relevant product market, and a desire to be at the cutting edge of
industry.33
ABS survey data also reveal that there are differences between small and medium-sized
firms in the skills or capabilities they seek for innovative activity. Innovation activity
among small businesses with 5-19 persons is most dependent on general business and
marketing skills, whereas among medium-sized enterprises with 20-99 persons general
business and IT skills are the most highly sought after. 34
31 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 1.2, p. 14 and 15.
32 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 1.2, p. 14 and 15.
33 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 2, p. 26.
34 ABS 2005, Innovation in Australian Business, Cat. No. 8158.0, Table 2, p. 26.

February 2007
5. HOW SMES ARE CONQUERING OVERSEAS MARKETS
Australian exports account for around 1% of global exports35 and 21.1% of the value of
domestic production36. The value of Australian exports as a share of domestic production
has increased significantly over the last four decades – for example, in 1969-70 exports
accounted for 15% of the value of domestic production. This growth is being driven by the
resources boom (particularly from the early to mid 1990s), trade liberalisation,
technological change and microeconomic reforms.
Traditionally large firms have been responsible for the lion’s share of Australia’s exports in
value terms and this situation continues today. In 2005-06 around 4,136 large firms
representing 10% of all goods exporters accounted for 92% ($140.0 billion) of the total
value of goods exports.37
Even so, SMEs are playing a significant role as exporters in the Australian economy. In
2005-06 there were 19,898 small goods exporters (49% of total goods exporters) and
16,815 medium-sized exporters (41% of total goods exporters).38 Both the total number
of SMEs exporting goods and the proportion of SME exporters among total goods
exporters have recently increased. In 2005-06 90% (around 37,000) of Australia’s goods
exporters were SMEs — up from 86.9% (around 26,000) in 2003-04.39
35 Gabbitas, O. and P. Gretton 2003, Firm size and Export Performance: Some Empirical Evidence, Productivity
Commission Staff Research Paper, Canberra, April, p. XIII. Estimate based on 2001-02 data.
36 2005-06 estimate based on ABS National Accounts and Number and Characteristics of Australian Exporters
Cat. No. 5368.0.55.06
37 ABS 2006, Number and Characteristics of Australian Exporters, 2005-06, Cat. No. 5368.0.55.006, p. 5.
39 ABS 2006, Number and Characteristics of Australian Exporters: 2005-06, Cat. No. 5368.0.55.006 and ABS
2004, Australia’s Exporters: 2003-04, Feature Article under Cat. No 5368.0, International Trade in Goods and
Services, Australia, November.

February 2007
Moreover, whilst large firms may dominate Australian exports in value terms, the value of
SMEs contribution to Australian exports is material. Australian SMEs exported goods
valued at $12.382 billion in 2005-06, representing 8.1% of total Australian goods exports
by value.40 Over the period 2003-04 to 2005-06 the value of SME goods exports
increased in absolute (nominal) terms but declined as a share of the total value of
exports. This decline was mainly due to phenomenal growth in the value of mining
exports by 167 large mining exporters due to the resources boom and even stronger
growth in the value of exports by 312 large firms involved in property and business
services. 41
SMEs were also playing a significant role as exporters last decade. According to ABS
Business Longitudinal Survey data (covering only 4 years from 1994-95) in 1997-98 some
16,600 small businesses accounted for 77% of all exporters (i.e. including both goods
exporters and service exporters) and 13% of total export revenue.42 The same year
some 4,500 medium-sized enterprises accounted for 21% of all exporters and 38% of
total export revenue. 43
Today SMEs in the Wholesale Trade, Manufacturing and Business Services industries
are more likely to be exporters of goods or services than their counterparts operating in
other industries (see Chart 7).
41 ABS 2006, Number and Characteristics of Australian Exporters: 2005-06, Cat. No. 5368.0.55.006 and ABS
2004, Australia’s Exporters: 2003-04, Feature Article under Cat. No 5368.0, International Trade in Goods and
Services, Australia, November.
42 ABS 2000, A Portrait of Australian Exporters: A report based on the Business Longitudinal Survey 1994-95 to
1997-98, Cat. No. 8154.0.
43 ABS 2000, A Portrait of Australian Exporters: A report based on the Business Longitudinal Survey 1994-95 to
1997-98, Cat. No. 8154.0.

February 2007
Chart 7: Proportion of SMEs exporting by industry
Wholesale trade 39
Manufacturing 23
Business services 17
Transport/Storgae 13
Personal Services 15
Finance and Insurance 3
Retail Trade 15
Building and Construction 3
Health and Community Services 6
Accommodation/Cafes/Restaurants 2
0 10 20 30 40 50
Percent
Source: Sensis 2006, Business Index – Small and Medium Enterprises, November
Of all small business goods exporters across Australia (i.e. with less than 20 employees),
81% are located mainly in New South Wales, Victoria or Queensland and 54% are
exporters of Wholesale Trade goods or Manufacturing goods (see Chart 8).
Interestingly, recent empirical evidence suggests that SMEs are not disadvantaged by
small presence in the domestic market when it comes to export participation. In 2003 the
Productivity Commission analysed the relationship between firm size (domestic sales)
and the level of exports in manufacturing.44 The authors found no statistically significant
relationship between domestic sales and the level of exports and a negative and
statistically significant relationship between domestic sales and export intensity – that is,
the more a firm focuses on exports, the lower its domestic sales, all other things equal.
This suggests that other factors such as the quality of firm-specific investments (including
in ICT) and managerial skill are likely to be far more important in explaining differences in
export participation across firms.
44 Gabbitas, O. and P. Gretton 2003, Firm size and Export Performance: Some Empirical Evidence, Productivity
Commission Staff Research Paper, Canberra, April, p. XIII. Estimate based on 2001-02 data.

February 2007
Chart 8: Number of small business goods exporters by industry, 2005-06
NSW, Queensland & Victoria
Agriculture, Forestry and Fishing

Mining
Manufacturing
Construction
Wholesale Trade
Retail Trade
Transport and Storage

Finance and Insurance
Property and Business Services
Other(a)
0 500 1000 1500 2000 2500
NSW Vic Qld
WA, SA & Tasmania
Agriculture, Forestry and Fishing
Mining
Manufacturing
Construction
Wholesale Trade
Retail Trade
Transport and Storage
Finance and Insurance

Property and Business Services
Other(a)
0 100 200 300 400 500
SA WA Tas
Source: ABS 2006, Number and Characteristics of Australian Exporters: 2005-06, Cat. No. 5368.0.55.006,
Table 9.

February 2007
6. SME SURVIVAL, ENTRY AND EXIT
We estimate there were 1.426 million active SMEs in Australia at 30 June 2006. Of these
1.426 million SMEs, 703,190 (49%) were ‘employing’ businesses45 and an estimated
722,487 (51%) were ‘non-employing’ businesses46.
SMEs face a number of challenges and many find it difficult to survive. In fact, SMEs
account for the vast majority of business exits47 in Australia. For example, 99.5% of
employing businesses (80,000 businesses) that exited the market during 2005-06 were
SMEs. Most of the employing SMEs that exited during 2005-06 were micro businesses
with fewer than 5 employees (around 57,000 or 72% of SMEs). Other small businesses
accounted for 17,000 (22%) of employing SME exits in 2005-06 and medium–sized
businesses accounted for the remaining 6% of employing SME exits. 48
The number of SMEs exiting the market during 2005-06 represents 10% of employing
SMEs operating at the start of the year. This exit rate is substantially higher than the 2-
3% exit rates observed in the two years prior. Micro businesses had the highest exit rate
among employing businesses during 2005-06 – 12.2% of employing micro businesses
exited, compared to 7.6% of other small employing businesses and 6.1% of medium-
sized employing businesses (see Chart 9).49 The exit rate among non-employing
businesses is even higher than for employing micro businesses (18.2% in 2005-06),
however the ABS does not report data on exits of non-employing businesses by size of
business.
45 Consistent with the ABS definition, these are registered businesses that have an Australian Business Number,
have annual turnover of $50,000 or higher, have a GST role, operate in the market sector and are authorized to
withhold income tax on behalf of employees (though this does not mean they always have employees). Small
businesses that are active but have annual turnover less than $50,000 are excluded from the ABS counts of
Australian businesses (Cat. No. 8165.0).
46 Consistent with the ABS definition, non-employing businesses are the set of businesses that have an Australian
Business Number but do not have an active Income Tax Withholding role or have not remitted income tax
withholding amounts for 5 consecutive quarters.
47 That is, their ABN was cancelled or the business ceased to remit GST for 5 consecutive quarters or their GST
role was cancelled.
48 ABS 2007, Counts of Australian Businesses, including entries and exits, June 2003 to June 2006, Cat. No.
8165.0, Table 10, p. 14.
8165.0, Table 10, p. 14.

February 2007
Chart 9: Trends in SME exit and entry by business size, 2003-04 to 2005-06
20
75494
18
79418
57983
16
23661
14
57487
23100
5460
12
1532
Percent
10
4627
18777
598
17244
1232
8
521
520
3430
975
6
2791
352
344
732
13527
267
4
10279
483
1166
345
3615
2563
739
0
1–4
5–19
20–49
50–99
100–199
1–4
5–19
20–49
50–99
100–199
1–4
5–19
20–49
50–99
100–199
2003-04 2004-05 2005-06
Entry rate % Exit rate %
Note: Numbers above bars refer to number of entries/exits by size of business.

Source: ABS 2007, Counts of Australian Businesses, including entries and exits, June 2003 to June 2006, Cat.
No. 8165.0.
However, the SME sector appears to be very resilient. While SMEs have a much higher
number of exits than larger businesses, this does not seem to deter other SMEs from
entering the market. Around 99.5% (102,000 businesses) of new employing businesses in
2005-06 were SMEs. Each year over the last 3 years the number of new entrant
employing SMEs more than replaces the number of exiting SMEs, although the rate of net
increase in 2005-06 (3%) was much lower than the rates observed in the two years prior
(12%). This slowdown of growth in the size of the employing SME sector was driven by
significant reductions in the rate at which new small businesses with 5-19 employees and
new medium-sized enterprises were replacing exiting businesses of similar size. In the
two years prior to 2005-06, small businesses with 5-19 employees accounted for 23-28%
of the increase in the number of employing SMEs, whereas in 2005-06 they accounted for
just 7% of the total increase. In the two years prior to 2005-06, medium-sized businesses
contributed 5-8% of the increase in the number of employing SMEs, whereas in 2005-06
they made a negative 5% contribution (following a net 1,000 reduction in the total number
of employing medium-sized enterprises in the economy).

February 2007
SMEs therefore face a very pressing survival challenge. An SME that entered the market
during 2003-04 had a 96% chance of surviving to June 2005 and then a 81% chance of
surviving to June 2006. In contrast, a large business with 200+ employees that entered
the market during 2003-04 had a 91% chance of surviving to June 2005 but then an 88%
chance of surviving to June 2006.50
SMEs that employ 5-19 people tend to have a better chance of survival than micro
businesses. An employing micro business that entered the market during 2003-04 had a
95% chance of surviving to June 2005 and then a 77% chance of surviving to June 2006.
An employing small business with 5-19 persons that entered the market during 2003-04
had a 97% chance of surviving to June 2005 and then a 87% chance of surviving to June
2006. 51
The number of SMEs that are facing this survival challenge is growing over time. At the
start of 2006-07 there were 22,400 more SMEs than at the start of 2005-06 and 183,000
more SMEs than at the start of 2003-04.52
50 Business survival rates are even lower for non-employing businesses (54% of non-employing businesses
operating in June 2003 survived to June 2006), however the ABS does not report data on survival of non-
employing businesses by size of business.
8165.0, Table 11, p. 15.
8165.0, Table 11, p. 14.

SME Trends and Achievements - 1 March 2007

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FINAL REPORT

25/320 Pitt Street

SME Trends and

Kingston ACT 2604, Australia

Date: February 2007

CRA Project No: D10971-01

Author(s): Henry Ergas and Jennifer Orr

EXECUTIVE SUMMARY .................................................................................................1

2. THE OVERALL CONTRIBUTION OF SMES TO THE AUSTRALIAN ECONOMY ....3

3. SMES AS DRIVERS OF PRODUCTIVITY GROWTH IN THE ECONOMY ...............5

4. SMES AS CENTRES OF R&D AND INNOVATION ................................................11

5. HOW SMES ARE CONQUERING OVERSEAS MARKETS ....................................14

6. SME SURVIVAL, ENTRY AND EXIT ......................................................................18

Final Report Page i

Its key points are:

• Information and Communications Technologies (ICTs) play a very important role in

• Telecommunications – a key enabler for SME competitiveness: This report will

Final Report Page 1

• Section 2 describes the overall contribution by SMEs to the Australian economy;

• Section 4 investigates the role of SMEs as centres of R&D and innovation;

Final Report Page 2

2. THE OVERALL CONTRIBUTION OF SMES TO THE

SMEs are making a substantial contribution to domestic production in a wide range of

Final Report Page 3

Chart 1: Estimated SME contribution to the value of GDP by industry, 2006

Agriculture, Forestry and Fishing 97%

Electricity, Gas and Water Supply 19%

Wholesale Trade 64%

Accommodation, Cafes and Restaurants 78%

Transport and Storage 47%

Communication Services 12%

Property and Business Services 67%

Health and Community Services 63%

Cultural and Recreational Services 48%

Final Report Page 4

3. SMES AS DRIVERS OF PRODUCTIVITY GROWTH IN THE

There are no empirical studies measuring SMEs contribution to Australia’s recent

10 ABS, Use of Information Technology by Australian Businesses, Cat. No. 8129.0.

Final Report Page 5

Chart 2: Australia’s multifactor productivity performance and the proportion of small

% of small businesses using computers % of small businesses using internet

ICT use raises SME and Australian multifactor productivity by:

• facilitating rapid two-way communications between SME managers and employees

Final Report Page 6

• 96% of small business have computers compared to 100% of medium-sized

• 90% of small businesses use the internet compared to 99% of medium-sized

Final Report Page 7

Chart 3: Takeup of computers and use of internet by SMEs by sector

Communications, Property & Business Services 99

Finance and Insurance 100

% SMEs with computer % SMEs using internet

Source: Sensis Business Index, May 2006

Final Report Page 8

Chart 4: Distribution of internet download speeds for Australian SMEs, 2006

More than 12Mbps 8

Less than 64kbps 8

Final Report Page 9

Nevertheless, there are noticeable differences in the establishment of websites and e-

• 12% of small businesses and 21%25 of medium-sized enterprises received orders

26 Sensis Business Index database, Sweeney Research, May 2006.

Final Report Page 10

4. SMES AS CENTRES OF R&D AND INNOVATION