How Do Regulations Affect SMEs? A Review of the Qualitative Evidence and a Research Agenda

• Author: Robert Wapshott,Tim Vorley,Oliver Mallett
• Date: 01 July 2019
• Published date: 01 July 2019
• DOI: http://doi.org/10.1111/ijmr.12191

International Journal of Management Reviews, Vol. 21, 294–316 (2019)

DOI: 10.1111/ijmr.12191

How Do Regulations Affect SMEs?

A Review of the Qualitative Evidence

and a Research Agenda

Oliver Mallett, Robert Wapshott1and Tim Vorley1

Newcastle University Business School, Newcastle University,5 Bar rack Road, Newcastle upon Tyne NE1 4SE, UK

and 1Sheffield University Management School, Conduit Rd., Sheffield S10 1FL, UK

Corresponding author email: oliver.mallett@ncl.ac.uk

The effects of regulations on small and medium-sized enterprises (SMEs) havegarnered

significant political attention internationally, yet, in the academic literature, these ef-

fects remain contested. This article presents findings froma systematic literature review

of qualitative evidence on the effects of regulation on SMEs. It sets out the strengths

of qualitative approaches in relation to more prominent and influential quantitative

approaches. It conducts a thematic synthesis of the qualitative research to develop

a conceptual framework that provides a processual, embedded understanding of the

effects of regulations on SMEs. The conceptual framework highlights four key, in-

terconnected processes: identification–interpretation; strategization; negotiation; and

adaptation. This conceptual frameworkgenerates insights into dynamic and potentially

indirect effects of regulationsin relation to a complex array of influences external to and

within the business. On the basis of these insights a new research agendais proposed.

Introduction

The prominence of small and medium-sized enter-

prises (SMEs) in economies around the world,par tic-

ularly as employersand sources of potential economic

growth, has captured the attention of governments

and policymakers (OECD 2017). This is especially

true where threats are perceived to the viability and

prosperity of SMEs and, within this context, regula-

tions are often framed as burdens that threaten these

businesses. Consequently,questions about the effects

of regulations on SMEs have become a focus for re-

search, debate and government intervention (Kitching

et al. 2015a).

Notwithstanding the influence of assertions about

the burdens placed on SMEs by regulation, the re-

lationship between lower levels of regulation and

outcomes such as higher rates of SME growth re-

mains contested and problematic (Capelleras et al.

2008; Doern 2009). Many governments have moved

from a rhetoric of deregulation towards developing

‘better regulation’ (e.g. the EU’s Small Business Act

‘think small principle’; European Commission n.d.)

that seeks to limit negativeeffects on SMEs but which,

to be effective, requires a robust understanding of the

effects of regulation on these businesses. In reviewing

the evidence, Kitching and Smallbone (2010) identify

four main research areas: business perceptions; cross-

national comparisons; compliance costs; and qualita-

tive studies of compliance and adaptation. Debates

have tended to be dominated by quantitative stud-

ies, especially those surveying owner-manager per-

ceptions or making cross-country comparisons. The

value of these studies is acknowledged below but it

is vital to emphasize that they risk obscuring impor-

tant questions concerning how SMEs engage with and

adapt to regulations, which in turn, can influence the

effects of these regulations and what might constitute

‘better regulation’.

As Kitching and Smallbone (2010, p. 2) argue,

many studies have treated SMEs as a ‘black box’, re-

lying on inferences and aggregated trends to suggest

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How Do Regulations Affect SMEs? 295

what is happening within these businesses. The com-

plexity of the effects of regulation on SMEs, which

can take dynamic, direct and indirect forms, therefore

requires further consideration (Barrett et al. 2014;

Kitching et al. 2015a, b). In this article, we address

the category of qualitative studies that seeks to assess

this shortcoming through more detailed, in-depth re-

search (Edwards et al. 2003; Kitching and Smallbone

2010). We analytically synthesize the insights from

these studies (Walsh and Downe 2005) to answer the

research question: ‘how do regulations affectSMEs?’

Studying the effects of regulations

on SMEs

The OECD (n.d., n.p.) defines regulation as the ‘im-

position of rules by government, backed by the use

of penalties that are intended specifically to modify

the economic behaviour of individuals and firms in

the private sector’. Business regulations represent an

attempt by governments and other bodies to influence

or control organizations’ environment and practices,

for example, in maintaining open markets but also in

areas such as protecting employee rights. As SMEs

have received increasing attention in relation to eco-

nomic and social goals, so too have the effects of

regulations on these businesses. It is therefore impor-

tant to conceptualize SMEs and how they might differ

from larger businesses.

What is an SME?

The effects of regulations on SMEs have been re-

searched through a variety of approaches over many

years (Kitching and Smallbone 2010). These stud-

ies adopt variable definitions of SMEs, which can

cause problems in comparing their findings. Here we

therefore adopt the European Union’s broad defini-

tion of SMEs as including micro, small and medium-

sized enterprises, meaning those employing between

1 and 249 people, albeit we do not adopt criteria re-

lating to financial data that are often not reported in

the studies reviewed (European Union 2015). This

definition of an SME encompasses a broad range of

businesses which differ not only in terms of size but

also other factors such as their product market and

forms of internal organization that must be attended

to if we are to understand how regulationsaffect these

businesses.

This heterogeneity presents one of the biggest

barriers to understanding the operations of SMEs

and how they manage the challenges presented by

their external and internal environments. SMEs are

embedded in networksand influenced by a range of in-

stitutions, including regulations, leading to variations

in how they react to particular influences (Edwards

et al. 2006). As we will discuss in our analysis below,

these responses are shaped by both external factors,

for example, product markets, labour markets, social

networks and internal factors, for example, resources,

strategic choice and management style (Edwards

et al. 2006; Gilman and Edwards 2008). The variation

and complexity of SMEs therefore has implications

for understanding the effects of regulations on SMEs.

Discussing the effect of regulation is too crude

(Edwards et al. 2004); as Kitching et al. (2015a,

p. 136) argue, ‘there is no typical “small business

effect” of regulation; outcomes vary over time, con-

tingent on the agency of small businesses and their

stakeholders’.

Strategically and operationally, SMEs are often

considered to be dominated by the interests and goals

of their owner-managers(who generally express a dis-

like for any measures that could interfere with their

managerial prerogative) (Scott et al. 1989; Westrip

1986; Wilkinson 1999). Owner-manager prerogative

refers to the extent to which the owner-manager can

assert their will on the business and how it operates.

Where this is strong, the owner-manager is likelyable

to influence howa b usiness responds to competing de-

mands, for example, by avoiding them or otherwise

accommodating them.

Such prerogative, however, is not without con-

straints. ‘Resource poverty’ (Welsh and White 1981,

p. 18) describes how SMEs might lack important

resources that would enable them to cope with the

consequences of internal errors and external shocks

(Cassell et al. 2002; Gill 1985). In this way, SMEs

might have limited scope for adapting operations or

seeing out challenging circumstances. Further, pre-

rogative is unlikely to exist uncontested as the busi-

ness’s negotiated order (Ram 1994) might require

competing interests of stakeholders to be accommo-

dated (Holliday 1995; Moule 1998). These relations

and negotiations often occur in environments of high

degrees of informality, relative to larger businesses

(Ram et al. 2001), where policies might in some

senses exist but not be implemented (Hoque and Noon

2004; Ram 2000) and allow flexibility in the arrange-

ment and completion of tasks, although also proving

resistant to the increases in formality (Mallett and

Wapshott 2014; Marlow et al. 2010) that are often

associated with regulations.

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