The current trend seems to be that capitalism and, by implication, large corporations are bad. Small companies are seen as better from both an economic and social perspective. The justification for these bold statements is generally the financial crisis and fat cat bonusses. Is small always beautiful and big always bad? Perhaps not. Surely, small companies create jobs in the short run, but out of those that survive only very few create more jobs then the ones created in the start-up phase. This is in part attributable to the fact that only very few get past the paternalistic leadership style. The lack of succession planning and fear of handing over control are two of the main challenges with this. In addition, small companies tend to be inefficient in their use of resources due to the fact that they are often redirected to – or perhaps distracted by – less important tasks.

Now surely, if small is not beautiful than big must be. Not particularly true either. Because of their growth capacity they will often create more jobs in the long run, and have the resources for innovation and large Research and Development departments. True innovation, however, often comes from small companies with a larger capacity to think outside the box since they are not institutionalised.

The solution? I don’t know, but there might be some merit in big companies monitoring small ones and, once they get to a big enough size absorb them. It will work for the entrepreneurial types among us since after all, they won’t have to worry about managing a company and can just focus on what they really like to do. Equally it will work for large companies who, for a potentially lower cost, will be able to buy-in a higher level of innovation.

Dr Natalie Schoon, CFA