Gavin C Reid

Professor of Economics
   Home      Books

The Kinked Demand Curve Analysis of Oligopoly: theory and evidence by Gavin C Reid

Publication details: © Gavin C Reid (1981), Edinburgh University Press, Edinburgh. ISBN 0-85224-390-1. pp. 1-113 +  i-ix.

Book Review by Professor George Stigler, University of Chicago

‘[Reid] Discusses the literature which is directly addressed to the kinked demand curve, the origins, the theory.., and the empirical tests. The treatment is sophisticated….Reid leans towards a generalised theory of kinked demand curves…in which the kink is reversed in periods of high demand (so the upper branch of the firm’s demand curve becomes less elastic than the lower branch). Here, after a period of low demand and price rigidity, the price becomes volatile and remains so until a new period of low demand arrives’ 

George Stigler, Economic Journal, 1982

Book Review by Professor Mark Blaug, London School of Economics


I argued in The Methodology of Economics (1980) that the root cause of the present ‘crisis’ in economics is the failure of economists to practice the methodology of falsificationism which they invariably preach, and I provided a series of case studies of particular economic theories to support my contention. Had I known of this book, the theory of the kinked oligopoly demand curve would have become another case in point.

The book under review is divided into three sections: the genesis of the theory of the kinked demand curve; the analytics of the kinked demand curve (where the author breaks new ground in an elegant exposition of the geometry and algebra of the argument); and the empirical evidence for and against the notion of kinks in the demand curve of both firms and industries under oligopoly.

….I can think of no more instructive example of the perennial problem of testing economic theories than this one: time and time again, it is not at all self–evident what is actually being predicted by reigning economic theories, or what are the appropriate operational counterparts of the variables being predicted…Doubly kinked demand curves have been explored, leading towards the theory of ‘contingent demand functions’ that may have kinks, gaps and cusps, depending on the capacity limitations of rival firms, the degree of product differentiation, the reactions speed of buyers, the quality of market information etc. ..

We are left at the end of this well told story with the author’s pointed conclusion: ‘If the kinked demand curve is to merit the continuous attention it receives in the training of economists, there is a strong need for a great deal more empirical examination to be applied to it.’

Mark Blaug, Economica, 1982.

Theories of Industrial Organization by Gavin C Reid

Publication Details: © Gavin C Reid, Basil Blackwell, Oxford 1987, (ISBN 0 631 15172 9).  Paperback edition, 1989, (ISBN 0 631 168869) pp. 1-234 + i-x


This book expounds compares and contrasts various approaches to the analysis of industrial organization. In particular, it presents a number of coherent alternatives to the widely used structure-conduct-performance paradigm. The approaches are grouped under three broad headings: Dominant Schools; Rival Approaches and New Departures.

Under Dominant Schools, Gavin Reid considers structure/conduct performance, case study and structural modelling. In Rival Approaches he evaluates some methods which have been neglected or only partially assimilated into cotemporary literature including the Marshallian tradition, the Austrian School and workable competition. The final section, New Departures, considers contestability theory and recent developments in natural monopoly analysis in its first chapter, and in the second, on the organizational view of the firm, considers managerialism, markets and hierarchies and principal-agent analysis.


 ‘This book represents a considerable academic achievement.  It is likely to be used in a wide variety of courses in industrial and business economics, and should remain an important work of reference for a long time’

Michael Utton, Professor of Economics, University of Reading

‘Gavin Reid has combined his talents as an industrial economist and a historian of economic thought to write a guide to the range of approaches to industrial economics.  The analysis is rigorous and the book will provide a useful source for students to gain an appreciation of the field’

Michael Waterson, Professor of Economics, University of Warwick, The Economic Journal

‘A useful introduction to the literature which will be particularly useful for graduates wishing to broaden their knowledge of the industrial organization literature’

Roger Clarke, Professor of Economics, University of Cardiff, The Manchester School

‘Although the book covers approaches to industrial organization with a long pedigree, it does nevertheless reflect the recent mathematization of industrial economics…This book represent an interesting and dispassionate overview of the present state of industrial economics, and as such will be useful for those, especially graduate students, wishing to find the range of ideas current in industrial economics’

Malcolm Sawyer, Professor of Economics, University of Leeds,  Economica

‘What the author is attempting to do is to establish a conceptual framework within which the empirical analysis of industrial organization at the “real world”, often normative, level can take place, but with a clearer understanding of which competing theoretical approach is being drawn upon…The book is well written and stimulating…As an overview and comparison of many theories and approaches to the organization of industries, and a basis for stimulating practitioners of industrial organizational analysis to examine more seriously some of the alternative approaches to their field of endeavour, the book serves its purpose.’ 

Dudley W Blair, Professor of Economics, Clemson University, Southern Economic Journal

The Small Entrepreneurial Firm by Gavin C Reid and Lowell R Jacobsen Jr

Publication details: Gavin C Reid and Lowell R Jacobsen Jr (1988) The Small Entrepreneurial Firm, Aberdeen University Press, Aberdeen, (ISBN 0-08-0365779), pp. 1-92 + i-x.


Although much has been written on policies towards the small entrepreneurial firm, this work is unique in giving a ‘firm’s eye view’ of these policies and how they bear on the struggle to gain entry into highly competitive markets. A special feature of this work is an in-depth analysis of the relation between small entrepreneurial firms and the Enterprise Trusts. This analysis is then used to offer an original critique of current policy measures. In undertaking this critique, this work develops its argument under the following headings: economic theory of the small entrepreneurial firm; financial structure – gearing and cash-flow; the forces of competition; the role of enterprise trusts; ‘picking winners’ and the enterprise culture.


‘The authors set themselves a formidable task which I believe they complete entirely successfully. The core of this task is to unravel the strands of modern economic analysis which offer guidance on the behaviour of small firms. The authors realise that this analysis may be unfamiliar to many of our readers, but clearly demonstrate how much closer economist have been drawn than hitherto towards analytical propositions which have a solid empirical foundation.

That task behind them, they turn to the further one of reviewing how far the conventional wisdom concerning small firms’ problems accords with the perception of small firms themselves of their market position. Their investigations fully justify the view that economic analysis has much to offer as a point of departure for categorising the reactions of small firms to different market conditions. Their ‘policy’ chapters offer the first fruits of the authors’ research into the role played by Enterprise Trusts in supporting the growth of small firms and establishing their role as creators of employment. They believe that this role has been effective by any standard, not least because Enterprise Trusts are a variety of small firms with a clear understanding of and sympathy for their clients. They contrast this conclusion with the curious survival of myths about industrial policy which perpetuate the fallacies associated with confining policy to trying to exploit economies of scale only in the manufacturing sector, and therefore selective aid policies in which bureaucrats strive to ‘pick winners’. The selection process is not likely to be efficiently conducted if the wrong ‘horses’ are being backed, and the ‘punters’ suffer no penalties for making wrong decisions!...

This is a work of high quality and one which deserves wide public attention.

Sir Alan Peacock, The David Hume Institute

 ‘[This book] covers an ambitious range of topics.  Firstly, recognising the lack of a truly coherent economic theory on the topic of the Small Entrepreneurial Firm (SEF), it reviews some of the traditional and contemporary material which has an application both to the initial decision of the entrepreneur and to the role for the SEF in modern markets.  Secondly, it examines empirical evidence, not so much on why there are SEF as on how these small firms operate.  Financial structure and reactions to the forces of competition are the two main themes which are explored. Thirdly, [it] looks at some of the policy implications for SEF promotion and support; the role of the Enterprise Trusts (or Agencies), and the problems of ‘picking winners’ are main themes here…[the book] can be recommended as a very readable and useful introduction to the topic’. 

Mark Brownrigg, Economic Journal

Classical Economic Growth

by Gavin C Reid

Publication details: © Gavin C Reid (1989) Classical Economic Growth: an analysis in the tradition of Adam Smith, Basil Blackwell, Oxford, 1989, (ISBN 0 631 162984). pp. 1-210 + i-xiv.


This is the first book to treat classical economic growth, as derived from the work of Adam Smith, in a modern analytical fashion. The themes discussed are firmly rooted in the tradition of classical growth analysis; the methods and concerns are modern.

The necessary background in classical economics and growth theory is provided to make the book self contained. Then a modern approach is applied to the central themes of classical economic growth analysis: technical change, the division of labour, capital accumulation, thriftiness, the competitive process, increasing returns, sectoral disequilibrium, and the functional distribution of income.

The book develops a sequence of models, developing numerous new results. This sequence starts with growth and accumulation at the industry level, moves to fluctuations and growth at the aggregate level, and then the bargaining power of capital, and de-skilling, are analysed in an aggregate model. A sectoral disequilibrium analysis, which emphasizes the role of increasing returns and extends the work of Allyn Young and Nicholas Kaldor, is provided. The book concludes by relating classical growth analysis to the problems of a modern post-industrial economy.


‘Many themes are explored in this book.  The book as a whole is a very individual mix of institutional economics and analytical growth theory and represents a valuable and timely contribution’ 

Renee Prendergast, The Times Higher Education Supplement

‘The dominant themes are division of labour in the widest sense, and the process of disequilibrium growth and accumulation. The first theme is concerned with dynamic technological progress rather then an allocative mechanism.  Though the formal parts of the text concentrate on aggregate variables, such as the total labour force, the supply of capital and the like, the relationships between the variables are firmly grounded in micro-behavioural and institutional frameworks, and considerable emphasis is also placed on the importance of sectoral relationships…For all the major and sub-themes discussed, recourse is had to a rich and varied analytical literature… The book should certainly be read …and the discussion of alternative formulations of Smith’s growth model in the literature is particularly commended.  The clarity of exposition makes the book suitable for undergraduate studies.  It can provide a starting point for post-graduate projects.  It may even serve to educate some of my clever but ill-informed colleagues.’

  J M Alec Gee, The Economic Journal

Reid uses present-day analytical economics to expound his basic Smithian growth model, and to critique previous representations of it by Adelman, Barkai, Eltis, Galbraith, Higgins, Hollander and Samuelson.  Reid models the division of labour using an aggregate production function Y = Y(K, N, T, M) where K is capital, N is labour, T the fixed stock of land, and M = M(Y) represents the division of labour (or endogenous technical progress) dependent upon the extent of the market…This… provides the basis for the …stadial view of societal evolution…This book provides  useful service in emphasizing the continuing relevance of Smithian growth analysis and correcting some of the misapprehensions which have arisen regarding its nature.

Andrea Maneschi, History of Political Economy

Smith’s prime concern, it is argued, was with economic growth and capital accumulation.  Here, the crucial element is the division of labour, which, in the context of competition, is responsible for generating a climate of dynamic increasing returns.  But, from the perspective of this author, it is this process which is responsible for creating disequilibrium situations, the resolution of which provides the key to subsequent accumulation and economic growth.  Indeed, ‘the emergence of a new stage involves converting a state of stable but undesirable equilibrium into one of unstable but desirable growth’.  The need is to analyse disequilibrium departures from the steady state growth path…

This is a scholarly work, concisely written, well referenced and up-to-date.  In discussing the division of labour, economies of scale and technical progress it ranges widely over many issues, encompassing, for example, …Keynesian and Classical models of fluctuations and growth.  It is of particular relevance to the doctrines of Adam Smith. 

G K Shaw, Economic Affairs

‘There are plenty of interesting ideas in this book’

Anthony Brewer, The Manchester School

Small Business Enterprise:  an economic analysis

by Gavin C Reid

Gavin C Reid (1993) Small Business Enterprise:  an economic analysis, Routledge, London, 1993, (ISBN 0 415 05681 0).  Paperback edition, 1995, (ISBN 0 415 13207X), pp. 1-337 + i-xvi


The treatment is analytical and empirical, well grounded in reality, and set within the context of the political economy of small business. It is based on a unique and extensive database of small business enterprise, gathered by field work within the firm. The book starts with a section on the database and then applies diverse methods: statistical analysis; enterprise case histories; econometrics; and political economy. In this way, a particularly rich picture of the modern small business enterprise emerges, because it is viewed from different perspectives. The author brings to this work his long-standing research experience in industrial economics, and an established publication record in small business economics.


‘Professor Reid is almost religious in his drive to persuade researchers to gather primary data and devise new estimation techniques to advance the frontiers of small business economics.  To my knowledge this is the finest work of its kind.  It fills an important niche in our understanding of small firms and the effort must be judged a success.’

Zoltan Acs, Journal of Economic Literature.

‘In this expansive and persuasive study, Gavin Reid uses the lens of industrial organization analysis to shed considerable light on what the role of small firms is in advanced market economies.  An especially attractive feature of his book is that he links a painstakingly detailed and rich data base to a well-considered theoretical framework.  The result is a rich array of new and often striking insights into the contribution that small firms make in industrial markets… With the publication of this book and the bold research agenda he proposes, Reid has single-handedly moved the entire field of small business economics forward towards maturity. 

David Audretsch, Kyklos

‘Reid carries out some highly professional econometric analysis in attempts at resolving some important issues regarding small firms.  Undoubtedly, his testing of the conditions under which owners believe that they will face a kinked demand curve must be regarded as path-breaking in what is really unexplored territory….Reid’s book should undoubtedly be read by anyone with an interest in the small firm sector’. 

Graham Hall, Economic Journal

‘Gavin Reid’s new book is one of perhaps only half a dozen books in the past 20 years that attempts with any success to advance the subject…Any economist with a shelf of books on small firms has to add this one’. 

Graham Bannock, The Business Economist

‘This lucid, thought at times difficult book, will make an important contribution to knowledge.  It is a must for any economist or students with an interest in SMEs’

Graham Bannock, Economic Affairs

‘This book must be considered a valuable attempt to test standard industrial economics theory against the small-business evidence.  It imparts new information about small-firm survival, growth, profitability and pricing.  Moreover, it usefully introduces the (perhaps struggling) economist to specific concepts of market strategy originating from one of the gurus of the business management literature. The applicability of these tools to the small-firm domain is successfully demonstrated’.

Robert Cressy, Economica

This is one of the few books in the UK written by economists on the subject of smaller enterprises.  Given that smaller enterprises in Britain (with less than 200 employees) employ 12 million people, providing 58% of non-government employment, the topic deserves to be taken seriously…Reid is anxious to ensure that the analysis has a sound theoretical basis and takes the Coaseian view that firms exist because they economize on costs compared to the market alternative. He sees firm formation as a kind of coalition formation and, in subsequent writings, has been anxious to incorporate the role of the entrepreneur back into economic theory…The second area where the book makes a contribution is in illustrating the opportunities and additional insights available from more econometric analysis…Overall, the value of the book is that it is written by a good economist seeking to apply modern econometric analysis to the small enterprise sector.

David Storey, The Manchester School of Economic and Social Studies.

‘I enjoyed reading the book and found it shed light on many issues dealing with small business enterprise in industrialized economies.  The rigorous use of modern economic industrial organization theory and econometric analysis is its most appealing feature’. 

Gregoring E. Goering, Southern Economic Journal

‘Reid’s desire to combine case studies with large-scale data sets is one which will be both familiar and accessible to business historians.  Business historians should certainly be interested in the structure of the evidence which Reid has collected and the kinds of question which he can proceed to answer.  Ultimately, he offers a framework for the analysis of small businesses within which historians have much to contribute.’

Katherine Watson, Business History

‘I enjoyed this work for the enthusiasm of the author for field work.  The empirical work done is quite impressive.  The book can be recommended to small business economists who are active in this area.  For them the book is worthwhile for its research design and the way data are handled.’

Frank Suijker, De Economist

Profiles in Small Business by Gavin C Reid, Lowell R Jacobsen Jr and Margo E Anderson

Publication details: © Gavin C Reid, Lowell R. Jacobsen and Margo E. Anderson (1993), Profiles in Small Business: a competitive strategy approach, Routledge, London, ISBN 0-415098289, pp. 1- 211 + xii.


This book presents analytical case study material on modern small business enterprises, using the ‘five forces’ competitive strategy framework derived from Michael Porter.  These cases take the form of novel Profiles. These are constructed on a consistent basis for seventeen small firms, using a contemporary framework drawn from business strategy and industrial organization.

Each Profile shows how an entrepreneur has tried to achieve a competitive advantage in the market-place by fighting against the forces of extended rivalry, market competitors, buyers, suppliers, substitutes, and potential entrants. As well as looking at competitive and defensive strategies, the book extends the analysis to financial structure, including discussion of reasons for cash flow problems and problems associated with excessive gearing.

 A comparative analysis of the Profiles, grouped according to the degree of market concentration and associated market structure, enables new conclusions to be reached about the sources of competitive advantage. The co-authors of this book bring to it varied insight from managerial economics, industrial organization and small firms' consultancy. Their guiding light in writing this book was that the analysis should always be well-grounded in the reality of small business existence, deriving from their field work experience.

This approach helps them reach conclusions which are both grounded in contemporary small business practice, and analytically well founded.  Thus the book, while research based, ends up being highly practical, and therefore useful at a prescriptive level.


‘An interesting and useful addition to the literature of small business.  Economists have not been particularly prominent in small business research to date, and this book is therefore to be welcomed.  It offers some excellent case study materials for other researchers as well as those seeking well argued, analytical materials for teaching on the small business.’

James Curran, The Times Higher Education Supplement

‘Highly readable and provides a wealth of real life stories of applied economics.  Students, and other sceptics, who ask what the relevance is of the theoretical market models to business economics should be directed to this book.  The authors demonstrate that interviews and the other fieldwork techniques used in the less quantitative social sciences can have a significant role to play in collecting microeconomic and business data.  As an applied study of small business economics and for its methodological contribution this book is to be recommended’. 

Phil Hobbs, The Economic Journal

‘Develops a novel framework offering an insight into the realities of small business existence….an important advantage is that the clear framework and exposition mean that the potential is there for firms to analyse their own position and develop a strategy.  The work is also of interest to the academic and illustrates how many small firms operate in markets ranging from monopolistic competition to oligopoly.’

Catherine Kirk, Scottish Journal of Political Economy

‘The cases are rich in detail.  Clearly a lot of preparation has gone into the analysis portion of the book, which is thoughtful and interesting in its conclusions…the book provides a valuable and rich source of information and interpretation on both the markets in which small firms operate and the strategies they pursue’. 

Kimya Kamshad, International Journal of Industrial Organization 

Venture Capital Investment: an agency analysis of practice

By Gavin C Reid

Publication details: © Gavin C Reid (1998) Venture Capital Investment: an agency analysis of practice, Routledge (Studies in the Modern World Economy), London, pp. 1-360 + i-xxii.


Technicalities of the principal-agent framework (e.g. efficient contracting, incentives for entrepreneurial effort, information and monitoring) are simply and clearly expounded, and background information on the UK venture capital industry is provided, before the reader is presented with the main body of the work. This is composed of in-depth, analytical case studies of investor-entrepreneur relations, which are structured around the principal-agent framework.  The work is well grounded, being based on extensive empirical field-work conducted in the UK venture capital industry. Thus it provides valuable insights into UK venture capital practice, as well as reflecting on the efficacy of the approaches adopted by investors and entrepreneurs alike. Venture Capita Investment also considers: risk management, from the perspective of both the contracting parties; information system development, pre- and post- contract; and the ‘trading’ of risk and information, in pursuit of superior contracting between investors and entrepreneurs. The author concludes by anticipating trends in UK venture capital activity, and by making prescriptions on better business practice.

Written in a clear and accessible fashion, this volume is an excellent source of theory and evidence, for academics, students and research workers in economics, finance, commerce, accountancy and business studies who are interested in the functioning of the venture capital industry.  It will also be of use to practitioners wanting to know more about the technicalities of venture capital investment, and needing an accessible guide.


This book-length treatment, Venture Capital Investment, presents a systematic analysis of what drives relations between investors and entrepreneurs in venture capital markets. In the first analytical work to use a book-length, unified framework in this financial setting, Reid draws upon a modern and general approach to contracting relations, namely principal-agent analysis. The book establishes a clear theoretical framework involving risk management, information handling and the 'trading' of risk and information. Using modern theory as a general and coherent frame of reference to analyze an extensive body of empirical evidence, Reid shows how top investors manage risk and monitor entrepreneurs, and examines the best relationship between investor and entrepreneurs. In its exploration of the principles governing high-risk/high-return investment, the book provides unique insight into the turbulent world of the venture capitalist.


‘The author provides a wealth of new information and sheds new light on the workings of the British venture capital market.  Above all, the study raises many new questions to which future researchers should turn their attention’
(Andrea Schutler, Kiel Institute of World Economics, Review of World Economics);

 ‘Gavin Reid’s Venture Capital Investment is a welcome addition to the literature … This book represents an exciting initial step in our empirical understanding of the British venture industry.  Through his willingness to invest in the development of a detailed dataset, Gavin Reid has helped address the distressing paucity of work on venture capital outside of the United States’
(Josh Lerner, Harvard University, Small Business Economics).


Information System Development in the Small Firm

By Falconer Mitchell, Gavin C Reid and Julia A Smith

Publication details: © CIMA (2000), Information System Development in the Small Firm, CIMA Publishing, London (ISBN: 1 85971 453 6) pp. 1-114 + i-vii.

Reports on research funded by the Research Foundation of the Chartered Institute of Management Accountants (CIMA) and by the Leverhulme Trust


Sets out three modern theories of how information systems enhance performance: contingency theory; markets and hierarchies; principal-agent analysis

Considers the management accounting information system (MAS) as an exemplar of such a system in the small firm

Provides the latest evidence on the link between performance and information system development

Shows how in practice both struggling and successful small firms use information for improved decision-making and control

Reports on how small firms cope with the complexity and reliability of information

Statistically estimates the effects of markets, strategy, production and technology on the best organisation of the small firm

Shows which factors determine the complexity of MAS

Presents practical case studies of how information systems can be adapted to changed circumstances.

This work is grounded in contemporary evidence on current practice in small firms.  Such evidence was gathered by face-to-face interviews within the firms over a four-year period.  It covers all aspects of operations and strategy, with particularly detailed attention being given to the development and handling of accounting information.

After setting out the relevant theoretical and empirical background, the work uses this evidence to investigate the link between the form of the firm and the contingencies which impinge upon its information system.  It does so using both qualitative and quantitative evidence.  Thus concrete case studies of the experience of specific firms are backed up with statistical evidence of general patterns of behaviour across the sample of firms.

The work shows that accounting information can help a small firm in two major ways.  First, for the successful, growing firm, in a dynamic and competitive environment, it is used to integrate operational considerations within long-term strategic plans.  Second, for the struggling firm, it is used to manage short-term problems in areas like costing, expenditure and cash-flow, by appropriate monitoring and control.  Further, it shows how complex factors mould and develop the management accounting system.  These include external factors, like competitiveness, and internal factors, like the emergence of hierarchy.

Overall, the work suggests that the small firm need not be at the mercy of internal and external forces.  In all circumstances, it can take rational steps to modify monitoring and control mechanisms, typically by adjustments to its information system, to the end of enhancing economic performance.

Key Features

  • Information system in the small firm: management accounting system (MAS) as an exemplar information system
  • How is this information handled by MAS in the small firm?
  • How does this information structure change over time?
  • Can modern economic theory help to explain the nature and development of the management accounting system in the small firm?
  • The theories examined are:
  • contingency theory
  • agency theory
  • markets vs hierarchies

All these theories emphasise the use of information within the small firm’s organisation.

The Foundations of Small Business Enterprise: an entrepreneurial analysis of small firm inception and growth

By Gavin C Reid

Publication details: © Gavin C Reid (2007) The Foundations of Small Business Enterprise: an entrepreneurial analysis of small firm inception and growth. Routledge (Studies in Small Business), London, ISBN: 978-0-415-33877-6, pp. 1- 432 +  i -xxii

Catalogue Description

This volume is an excellent addition to Routledge’s Studies in Small Business series. In this extended and novel entrepreneurial analysis of small firm inception and growth, a leading authority in the field develops a new kind of ‘micro-micro’ analysis, applying rigorous methods from economics, accounting and finance to gain a deeper understanding of micro-firms. Reid examines performance, hierarchy, capital structure, monitoring and control, flexibility, innovation and information systems.

Using statistical, econometric and qualitative methods of empirical research, Foundations of Small Business Enterprise tracks and analyses the evolution of 150 small firms from their early years through to maturity.

This title will appeal to a wide range of students, specialists and practitioners in economics, accounting and finance.


The  Foundations of Small Business Enterprise provides an extended, and novel, entrepreneurial analysis of small firm inception and growth.  Gavin C Reid develops a new kind of 'micro-micro' analysis, applying rigorous methods from economics, accounting and finance to gain a deeper understanding of micro-firms, by examining their performance,  hierarchy, strategy,  capital structure, monitoring and control, flexibility, innovation, and information systems.

Written by a leading authority in the field, and using statistical, econometric and qualitative methods of empirical research, in The Foundations of Small Business Enterprise  the author tracks and analyses the evolution of small firms from their early years through to maturity.

Gavin C. Reid is Professor of Economics, School of Economics & Finance, University of St Andrews, Scotland, UK.  He is the Founder/Director of the Centre for Research into Industry, Enterprise, Finance and the Firm (CRIEFF). The author of over 70 papers in the leading economics, accounting and finance journals, he has published ten books, including Small Business Enterprise, Theories of Industrial Organization, Classical Economics Growth, and Venture Capital Investment.

Professor Lowell R Jacobsen, Elizabeth Harvey Rhodes Professor of International Business in Baker University, Kansas, USA, with a PhD from the University of Edinburgh, reviews The Foundations of Small Business Enterprise by Gavin C Reid in St Andrews in Focus, Issue 44, January-February 2011, p. 9.

Professor Gavin C. Reid’s The Foundations of Small Business Enterprise:  An Entrepreneurial Analysis of Small Firm Inception and Growth is a most remarkable academic achievement and for many reasons.  First, as the title suggests, the book is concerned with the founders of new businesses which are typically small in size yet, arguably, the most visible and potentially significant form of entrepreneurship.  New firm formation serves as the foundation from which economic development and indeed the wealth of a nation are manifested. 

Secondly, this book provides a foundation from which to carefully weigh and hence, to properly understand the multitude of critical factors confronting the new firm’s inception and early development.  Such factors for owner-managers to address include financing, business strategy, marketing, organizational form, information systems, human resources, cost structure, technical change in addition to performance.  These factors are particularly critical to the nascent firm as often there is such a fine line between success and failure in those initial years.  All of these factors are systematically addressed in no less than eighteen chapters covering nearly 300 pages.

Thirdly, the data analysis is founded on empirical work conducted ‘in the field’ - - i.e., on the companies’ premises with the owner-managers - -   by the author and co-workers over many years (extending as far back as 1983).  Undertaking such incredibly time-consuming tasks include constructing the interview instruments, conducting pilot studies, then revising the instruments to ‘work-out the bugs’, speak with ‘gate-keepers’ who will identify and perhaps offer introductions to owner-managers, making arrangements (often including introductory letters and follow-up phone calls) to visit (and later re-visit) the owner-managers at their company’s site for the purpose of gathering the data, and then recording the raw data into a computer data base to be later analysed.  Is it any wonder economists and other researchers prefer not to undertake the arduous gathering of primary data but rather rely on secondary data sets (often) provided by the government?   (By the way, the interview instruments of more than 100 pages are included at the end of the book.)  Of course, primary data especially that which is considered ‘thick’ and collected over a long time horizon is preferred as the researcher is best able to ensure the validity, accuracy, and proper interpretation of the data.  Further, the researcher has a heightened awareness of and appreciation for the significance of the data when collected directly from the owner-managers and on the premises of their business.  To quote the great Oskar Morgenstern:  (Only then can we) “carefully distinguish between what we think we know and what we really do and can know . . . (thereby, leading to) a more powerful and realistic theory”. 

The book’s data set features an incredible 150 small firms from across Scotland.  Indeed, Prof Reid must have spent an extraordinary amount of time in cars, trains, buses, taxis, and even on foot.  However, as he cheerfully and Scot-proud remarks in the Preface:  “All this fieldwork took the data-gathering process into the cities of Scotland, and also, to my delight, to its roads and pathways, its hamlets, villages and towns, and past the meadows, woods, hills, glens, river sides and burn banks of this bonnie land” (p. xvii).  Further, the data analysis is not only scientifically rigourous but also comprehensive as it involved statistical, econometric, as well as qualitative methods.   Consequently, such extensive formal analysis of rather rich primary data taken from a certainly large sample results in especially meaningful and compelling findings that are of interest to the entrepreneur, government policy-maker, as well as the academic researcher.  

Fourthly, this book has its roots in Prof Reid’s founding the Centre for Research into Industry, Enterprise, Finance and the Firm (CRIEFF) in the University of St. Andrews in 1991.  To borrow a phrase of Tobias Smollett, the 18th century Scottish author of Humphry Clinker, to describe Edinburgh during the Scottish Enlightenment, CRIEFF has been something of a ‘hotbed of genius’ in terms of research activity over the many years as it has attracted numerous researchers interested in small business and entrepreneurship from around the world.  During a sabbatical visit to CRIEFF in late 1992 and early 1993, I found myself immersed in a most congenial and intellectually-stimulating environment.   As an admirer of Marshall, as well as Adam Smith (of course!), Prof Reid over a good many years has successfully built on those early efforts of the ‘Oxford Economists’ at formalizing, indeed making more scientific, the systematic testing of theories with sound evidence regarding small business enterprise.   

May Prof Reid’s Foundations be read by many interested in entrepreneurship including those with a dream to start their own business, government policy-makers concerned with economic development as well as researchers looking for inspiration, and for generations to come.

Review Subject: The Foundations of Small Business Enterprise: An Entrepreneurial Analysis of Small Firm Inception and Growth by Gavin C. Reid, Routledge, 2007.

The Reviewer: Rana Tassabehji, University of Bradford School of Management, Bradford, UK  in International Journal of Entrepreneurial Behaviour & Research, Volume: 16, Number: 2; Year: 2010 pp. 172-174

…The book is mainly aimed at academics, to demonstrate rigour in the testing of theories and there are many. However the non-academic and non-economist can benefit from the very interesting conclusions in this book.

The book is divided into 18 chapters and six parts, covering 244 pages with an additional 130 page appendix on instrumentation, which includes pre-letters and a copy of the 4 questionnaires that were the basis of the face-to-face interviews with entrepreneurs, which highlights the rigour underpinning the research and analysis of the findings in the book….

The first part is made up of two chapters providing background information to the study. The first chapter is very useful and summarises the findings of the study for each of the four years in which the data were collected broken down into market data, finance, costs, business and pricing strategy, human resources, organisation and technical change. Data about information systems were only collected in the last year and are not included here. In the next two chapters full details are provided about the research instrument developed and the data acquisition process which is central to understanding the subsequent analysis using econometrics and statistical inference.

The second part (chapters 4-5) lays the theoretical ground for expounding theory about growth and profitability of micro-firms using variants of Gibrat's Law. Gibrat's Law is tested and refuted concluding that smaller small firms tend to grow faster than larger small firms following a stable growth process and an alternative managerial hypothesis is presented implying a growth/profitability trade off. Chapter 5 refutes neo-classical financial saturated hypothesis, rather suggesting that the flexibility of hiring part-time employees is successfully exploited by mature micro-firms to avert funding shortages. Other findings include funding shortages could be as a result of over-trading.

Part 3 (chapters 6-8) focuses on Finance, based on a literature review Reid identifies dynamic theory of the firm as the perspective which he will adopt to evaluate small firm financing and growth. Chapter 7 investigates whether financial structure at inception has an impact on early performance of the micro-firm. Many financial features were found not to change across firms that continue to trade compared to those that cease, gearing and assets appear unimportant but trade credit arrangements and purchase commitments are more important as were more macro-economic effects such as advertising, business planning, employment and innovation. Chapter 8 tests financial hypotheses using the dynamic financial theory of the firm which is lacking in the extant literature.

Part 4 deals with performance: the development of a classification for measuring performance (chapter 9); a statistical explanation of the ranking of performance by the business strategies deployed by owner managers (chapter 10) where long range planning and pursuit of pecuniary goals emerge as being particularly important; and finally (chapter 11) testing a model to estimate the effects of entrepreneurial action on new business survival. This had very interesting results, namely that product, and to a lesser extent process innovation, have a negative impact on survival where factors such as attitudinal variables (not often used in econometrics) and organisational structure have a positive impact on survivability. Part 5 looks specifically at information systems and information needs of organisations. A link between information and performance was found where the timing of events (based on contingency theory) was found to be associated with adaptations in IS. The final part explores flexibility, growth and survival and refutes Gibrat's Law (chapter 16) when considering scale flexibility and optimal size, niche flexibility (chapter 17) using Markov chain modelling and best market and organisational adaption to turbulence and flexibility of decision making (Chapter 18). The main factors that influenced the long-lived small business positively are: entrepreneurs being able to recognise change drivers; adapt their organisation to it quickly; make all the necessary adjustments for organisational change in particular investment decisions; and delaying adjustments might have a positive consequence for performance.

Overall, this book achieved its major objective, which was to consolidate all the results of Professor Reid's research in one place and link the different strands of the studies with a strong theoretical underpinning drawn from a number of different disciplines – economics, entrepreneurship and IS. It is well written and although intended to stand alone chapter by chapter, it is better read as a whole, as many of the early chapters form the foundations on which the following parts are built. Although much of this information is in the public domain already, by placing it in one book, it provides an overarching view by the author himself which adds to the explanation and understanding of the issues he raises.

Business Press Reviews:

Daily Record

June 19, 2007, Tuesday



LENGTH: 178 words

A THIRD of Scottish small businesses close within three years of start-up - but only five per cent failed because of money problems, according to a study.

Professor Gavin Reid, of the University of St Andrews, has finished a 15-year study of the performance of 150 small firms nationwide.

The researcher revisited a range of businesses with fewer than 10 employees - firms he tracked through the 1990s - to assess them.

By reassessing the firms, he was able to build a picture of their start-up, how they matured and whether they failed or succeeded. Professor Reid found there had been a 5.1 per cent rise in business survivors between 1995 and 2002.

But about 30 per cent of Scottish businesses that started in 2002 had closed by 2005, although only about five per cent of firms closed under "financial distress" such as insolvency.

Prof Reid said: "What we are finding is a common misclassification of many firms that go out of business as 'failures'.

"Such firms can find a niche, exploit it rapidly, wind up the business and start another elsewhere. This isn't a bad thing."

The Herald (Glasgow)

June 19, 2007

Company failure data muddies economic picture, says study



LENGTH: 542 words

A LEADING academic has cast doubt on Scotland's notoriously high business attrition rate, alleging that many firms which cease to trade are wrongly categorised as failures.

Only a minority of businesses which stop trading do so because of financial difficulties, he alleges. In many cases, their owners are serial entrepreneurs who have changed the focus of their money-making activities.

These are among the findings of a new study by Professor Gavin Reid of St Andrews University, director of think tank the Centre for Research into Industry, Enterprise, Finance and the Firm. Reid has sent a copy of the research to First Minister Alex Salmond.

Reid tracked 150 small Scottish businesses employing less than 10 people over a period of 15 years. He found that there has been a 5.1-per cent rise in business "survivors" between 1995 and 2002, and that about 30-per cent of Scots businesses which were established in 2002 had gone by 2005. However, only about 5-per cent of those firms which closed did so after suffering financial distress and becoming insolvent.

Reid, of St Andrews' School of Economics and Finance, said: "What we are finding is a common misclassification of many firms that go out of business as 'failures' - such firms can find a niche, exploit it rapidly, then wind up the business and start another one elsewhere. This isn't a bad thing - it should be viewed as good for both individuals and the economy - you put in the effort where it counts, then move to better opportunities, with no waste."

Reid's research covered a range of "micro-firms", ranging from sole traders to limited companies. "The statistics on failure rates are unconvincing," he added. "You run a business for a period to make a return which relates to your cost of capital. When that is below what you want, you move on. Portfolio entrepreneurs are becoming much more common now - people who run several firms at once."

Elsewhere, Reid's study found that most small businesses were service-based and that survival or good performance was not dependent on the sector. Established areas in and around Stirling were found to have a particularly encouraging entrepreneurial culture, while areas like Dalmarnock in Glasgow have struggled to foster entrepreneurship.

In terms of maturity, Reid describes small businesses as having a life cycle "much like humans or trees in a forest", with the "mature phase" typically corresponding to the maturity of the owner.

The study found that the best balance of experience and vitality is most likely to be achieved when owner-managers are in their forties and fifties.

"My research tracked and analysed the evolution of firms from their early years through to maturity. The findings have shown that, on the whole, Scotland has recaptured the entrepreneurial spirit - small businesses are very much in it for the long haul, " said Reid.

He added: "The key tip to any new small business starting up is to embrace technology and to do it at launch. The key 'innovative event' should be the start up itself. I'd say the challenge for new small firms in 2007 is thinking smart and going trans-national - there are huge overseas market opportunities emerging in Eastern Europe; if it sells in Edinburgh, why not see if it can sell in Prague?"

The Scotsman

June 19, 2007, Tuesday

1 Edition

Most 'failures' more a case of 'moving on'

BYLINE: Colin Donald Business correspondent


LENGTH: 459 words

A THIRD of small Scottish businesses shut up shop within three years of start-up - but only one-sixth of those closures are caused by cash shortages, a new study by one of Scotland's leading small business economists has found.

The study, by Professor Gavin Reid of St Andrews University, claims to be the most thorough carried out into the workings of small business in Scotland.

The study, conducted over 15 years, tracked 150 small firms in all parts of Scotland through all stages of their development.

In a sample of businesses that started in Scotland in 2002, about 30 per cent had closed by 2005. However, only about 5 per cent of firms that were launched closed under "financial distress" such as insolvency or bankruptcy.

"What we are finding is a common misclassification of many firms that go out of business as 'failures'," Prof Reid said. "Such firms can find a niche, exploit it rapidly, then wind up the business and start another one elsewhere.

"This isn't a bad thing - it should be viewed as good for both individuals and the economy. You put in the effort where it counts, then move to better opportunities, with no waste."

According to Prof Reid's research, there are two main challenges at start-up - building a customer base and controlling the debts and wages bill.

He added: "The challenge for new small firms in 2007 is thinking smart and going transnational - there are huge overseas market opportunities emerging in eastern Europe. If it sells in Edinburgh, why not see if it can sell in Prague?"

Prof Reid found that most small businesses were service-based and that survival or good performance was not dependent on the sector. Established areas in and around Stirling, for example, had a particularly encouraging entrepreneurial culture, while areas like Dalmarnock in Glasgow were now targeted for urban renewal, as they had struggled to foster entrepreneurship.

"My research tracked and analysed the evolution of firms from their early years through to maturity. The findings have shown that Scotland has recaptured the entrepreneurial spirit - small businesses are very much in it for the long haul," he said.

Andrew Watson, spokesman for the Federation of Small Businesses Scotland, said: "While the report tells us a lot of things we already know, it challenges some of the misconceptions people might have about small businesses and business failures.

"The report suggests that the majority of business 'failures' are planned, and come about because entrepreneurial owners want to wind up their businesses as they are nearing the end of their natural lifecycle in order to exploit new opportunities in different markets, which suggests that Scotland's business people are as dynamic, entrepreneurial, and open to risk as anyone else."

And, on a more humorous note, a social review:

The Express

June 19, 2007 Tuesday

Scottish Edition



LENGTH: 513 words

A CALL from Professor Gavin Reid, of St Andrews University, who tells me how small businesses should be run and how they shouldn't, eg: a failure to embrace new technology means certain collapse and penury, etc. I disagree. Hickey Estates (Intl) Offshore has made billions over the years with little more technology than the Biro and, of course, my innovative offers of an "insurance" scheme to various clients, a 65 per cent APR for late payment and a robust form of persuasion in the form of Gregori and his Bulgarian chums.

Risk Appraisal and Venture Capital in High Technology New Ventures

By Gavin C Reid and Julia A Smith

Publication details: © Gavin C Reid and Julia A Smith (2008) Risk Appraisal and Venture Capital in High Technology New Ventures, ISBN: 978-0-415-37351-7, pp. 1-240 + i-xxi.

Catalogue Description

This book is a 'crossover' treatment of quantitative and qualitative risk analysis within the setting of new high technology ventures in the UK. Reid and Smith have based their research on extensive fieldwork in patent-intensive, high-technology firms. This has included face-to-face interviews with leading investors, and is illustrated by two chapters of case studies. Their aim is to advance the understanding of methods of risk assessment and to illuminate current policy concerns about stimulating innovative output and securing intellectual property.

This book is unique in being academic in intent and purpose, yet strongly grounded in practice, without becoming merely a practitioner volume. Using tools from economics, accounting and finance, Reid and Smith find a considerable consensus in the venture capital industry on the spectrum of investments by risk, and on key commercial factors affecting risk. This book offers a useful and interdisciplinary approach to an increasingly popular field of study.

This book will be of considerable interest to students and academics of financial and industrial economics, and financial and management accounting, as well as practitioners in banking, private equity and business and management consultancies.

The work on which this book is based was sponsored by: the Research Foundation of the Chartered Institute of Management Accountants (CIMA); The Carnegie Trust for the Universities of Scotland; the British Academy; and the CNRS research unit MRSH, of the University of Caen. 

Gavin C. Reid is Director of CRIEFF and Professor in Economics & Finance at the University of St Andrews.  Julia A. Smith is Reader in Accounting and Finance at Strathclyde Business School.


This work examines how risk is handled in new high technology ventures in the UK. Both investors (those allocating funds to ventures), typically venture capitalists, and investees or entrepreneurs (those receiving equity funding support for their ventures) are considered.  The main evidence reported upon was gathered by face-to-face semi-structured interviews with key UK investors in high technology firms, and in addition by postal questionnaires.  That is, the study is unique in being largely based on primary source data. The venture capital investors examined have included those who have accounted for most of the funds allocated in this industry segment over the period of analysis of our research.  The interview evidence covered risk premiums, investment time horizons, sensitivity analysis, expected values, cash-flow, financial modelling, decision making, and qualitative appraisal.  A set of ten case studies of patent-intensive, high technology, entrepreneurial firms has also been constructed, using evidence from face-to-face interviews supplemented by additional company evidence.  The firms examined were operating in new technological areas like encrypting and enciphering for digital technologies, light emitting polymers for flexible screen displays, thermal imaging for security applications, and biopharmaceuticals for cancer therapies. 

From the evidence gathered on venture capital investors and entrepreneurs, the principal findings are as follows:

  • Standard determinants of company risk are a poor guide to an overall risk assessment of the high-technology firm.
  • Business risk, agency risk, and innovation risk are crucial categories in high-technology contexts.
  • Venture capital investors emphasise agency risk; entrepreneurs emphasise business risk.
  • Investors focus most on novelty in the marketplace and sales; while entrepreneurs focus most on getting to market and meeting innovation milestones.
  • There is considerable consensus in the venture capital industry on the spectrum of investments by risk, and on key commercial factors affecting risk.
  • There is little industry consensus on innovation risk.
  • Investors prefer to rely on their own procedures and processes (rather than on those of entrepreneurs) when evaluating potential investments.
  • Financial accounts seem to offer little to investors, in terms of risk disclosure, or the valuation of intangible assets like intellectual property.
  • Investors generally would not welcome compulsory risk disclosure, as this would provide too much information to rival investors.
  • Statistical models can explain levels of investment allocated by venture capitalists, using risk-based behavioural variables.
Book reviews
Gavin C. Reid and Julia A. Smith, Risk appraisal and venture capital in high technology new ventures. London and New York: Routledge, 2008. 220 pp.; 9780415373517, £85.00 (hbk)
The book, Risk Appraisal and Venture Capital in High Technology New Ventures, co-authored by Gavin C. Reid and Julia A. Smith, examines the issue of risk in new innovation and technologybased
firms from both the investor and the entrepreneur perspective. The book is based on a substantial research project, combining extensive quantitative work with qualitative measures –
questionnaires and face-to-face interviews. This latter component is a welcome addition to a literature that has remained relatively sparse in terms of qualitative treatment of venture capitalists’
decision-making strategies. The qualitative material adds much needed depth in our understanding of a complex topic where, as the authors note, ‘the complexity and novelty of the technological
setting may make standard methods of risk appraisal irrelevant or ineffectual’ (p. 33). The book focuses on three classes of risk: agency risk, innovation risk, and business risk, and explores how
these are managed by both investors and entrepreneurs.
The book is of particular value as it presents its results and main findings in a clear and precise form that will be of use not only to academics, but also to those practitioners and policy makers
involved in financing venture capital activities. While it remains an academic publication, the willingness of the authors to make their findings accessible for practitioners is particularly welcome.
The general reader will appreciate the summary of the main findings in the preface, the short conclusion section of each chapter and the nine pages of the final conclusion chapter summarizing the
contents and discussing the main findings. Specialist readers will be reassured by the rigour displayed in more technical chapters, particularly the review of project methodology in Chapter 3, and
detailed statistical and econometric analysis to be found throughout the book. Endorsed by key figures of the British Venture Capital Association, funded and supported by several research foundations,
the high level of quality of the book also reflects the impressive peer-review process including much intellectual feedback from venture capital institutions, experts and practitioners,
participants at numerous workshops and conferences.
The book’s eleven chapters are grouped into six parts. The first part (‘Conceptual Framework’) introduces the book’s purpose and objectives, reviews the literature on risk appraisal, provides
insight into the UK venture capital market, explains the policy context and details the three stages of the research approach underpinning this book (Chapter 1, ‘Background’: determining sampling
frames; designing questionnaire schedule for face-to-face interviews with venture capital investors and entrepreneurs; and, the postal questionnaire). The presentation of the methodology is very well
done; the reader will appreciate the key concerns for quantitative and qualitative risk assessment structuring the questionnaire and the presentation of the results. The second chapter (‘Risk and
Uncertainty’) provides theoretical and empirical background on risk and uncertainty and focuses on the following issues: qualitative and quantitative uncertainty; agency, innovation and business
risk; uncertainty and risk assessment; risk and uncertainty in high-technology ventures; and, intellectual property.
Part two (‘Sampling and Evidence’) explains how samples of venture capital investors and entrepreneurs were collected, how the questionnaires were designed for the interviews, and
how the postal questionnaire was constructed. Starting from preliminary fieldwork and selection of investees, the instrument design and interview agenda are detailed, the conduction of
interviews is explained, and construction and analysis of the final database is presented (Chapter 3, ‘Sampling, Fieldwork and Instrumentation’). The fourth chapter (‘Venture Capitalists’ and
Entrepreneurs’ Conduct’) investigates how UK venture capitalists and entrepreneurs approach the issue of risk in the high-technology sector. First, exploratory, descriptive results are presented
related to risk attitudes, factors in risk appraisal, features of innovation risk, and nonfinancial factors.
Part three (‘Statistical Analysis’) provides more sophisticated data treatment and includes a particular focus on first ranking the risk of investment stage, opposing venture capitalists to entrepreneurs
and, second, comparing key factors in risk appraisal of both groups (Chapter 5, ‘Investor and Entrepreneur’). Findings demonstrate that VC investors focus more on incentives and information
systems, as opposed to entrepreneurs focusing more on markets, growth and the local environment. A further positive point of the authors’ approach is to include somewhat neglected variables
in the venture capital and high-technology literature as illustrated by the ‘local environment’ (interestingly, this is much more deeply assessed by entrepreneurs than investors). Chapter 6 (‘Risk
Appraisal by Investors’) shifts the focus exclusively to the investor and presents, first, general quantitative evidence and, second, a more detailed focus on perceived riskiness of investment
types and the perceived importance of general factors in risk appraisal.
Part four (‘Case Study Analysis’) develops the empirical content of the book by providing further evidence of investment decision processes. Five cases are presented to illustrate the awareness
of three types of risk that have been identified as being important (business risk, agency risk, and innovation risk; cf. Chapter 7, ‘Case Study Analysis of Risk Appraisal by Entrepreneurs’). Chapter
8 (‘Further Illustrative Case Studies’) presents five further illustrative case studies. Part five (‘Reporting and Investment’) includes two chapters (entitled ‘Reporting, Risk and
Intangibles’, ‘Behavioural Variables and Investment’). The purpose of Chapter 9 is to examine the conduct of UK investors regarding their provision of finance capital. The findings highlight that
investors prefer to rely upon their own procedures and processes rather than those of investees in evaluating potential investments in the high-tech industry. Chapter 10 concludes the empirical part
of the book, examining the ways in which venture capitalists value new high-tech firms.
The final section (‘Concluding Material’) presents an excellent conclusion summarizing the contents and the main findings; the discussion opens directions for future research. In addition, the
appendices are very well presented and complete and include all relevant information documenting the different steps of the research program (pre-letters, face-to-face questionnaires, and postal
questionnaires, for example). In sum, this is a high quality volume that should be an essential library purchase and recommended reading, not only for scholars and advanced graduate students, but also a highly valuable book for all stakeholders involved in high-tech industry venture capital.
Frank Lasch and Philip Roscoe
GSCM-Montpellier Business School, France
Book review
Risk Appraisal and Venture Capital in High Technology New Ventures, Gavin C. Reid, Julia A. Smith. Routledge, Abingdon
(2008). pp. 220, £26, ISBN:10: 0-415-37351-4
This is a highly readable and informative book which will be of interest to a very wide audience. The book provides extremely useful insights and evidence for academics and practitioners specialising in entrepreneurship and new ventures. However, anyone with a general interest in corporate finance or business risk and theway it is assessed would also find much of value. The subject matter is approached from a multi-disciplinary view point and deliberately draws on methodologies from accounting, finance and economics. Consequently academics and practitioners with backgrounds in all these fields will find the approach both accessible and informative.
The research presented in the book is largely based on primary source data and has been funded by a number of bodies including CIMA, the Carnegie Trust for the Universities of Scotland and the ESRC. The research analyses the methods of risk appraisal in new high-technology ventures. The authors conducted face to face interviews with a sample of twenty leading UK investors in high-technology ventures and ten entrepreneurs engaged in bringing high-technology products to market. The investors accounted for most of the funds allocated in this industry segment over the period of analysis of the research. The content of the interviews is very comprehensive and includes details about the principal factors involved such as risk premium, time horizon, sensitivity analysis, expected values, cash flow, financial modelling, decision making and qualitative appraisal. Given the quality of the sample and the comprehensive nature of the information obtained this is clearly a major factual study into this research area which is unlikely to be surpassed for some considerable time.
The book contains many interesting and novel findings. It is impossible to summarise all these in a short review of this nature but some of the most important are concerned with the determinants of company risk, the aims and attitudes of venture capital, investors and investees, and the determinants of levels of investment using risk-based variables. It is found that standard determinants of company risk are not effective for the overall risk assessment of high-technology firms. The authors find the notion of dividing risk into different classes to be far more useful. In particular they focus on the following
three risk classes: agency risk which arises from a lack of alignment between the interests of the investor and the investee; innovation risk which arises from the potential problems of using new and unproven technologies; and business risk which arises from the uncertainty about the reactions of the customers and competitors of the firm. Interestingly, the study finds that investors tend to emphasise agency risk whereas investees are more concerned with business risk. In general, there are significant differences between the attitudes of investors and investees. Investors are found to be more focused on the outward facing aspects of the firm such as how novel its products are in the market and how its sales are growing. Investees are more focused on operational issues such as meeting innovation milestones and getting products to market on time. When evaluating potential investments investors prefer to use their own procedures and processes and seem to avoid undue
reliance on the entrepreneurs in this respect. Investors appear to find financial accounts to be of very limited value in terms of evaluating risk or placing values on intangible assets, such as intellectual property, which are so important in this area.
The research methodology in the book is very comprehensive and rigorous. The authors follow best practice by very carefully explaining and justifying the approaches they use. The underlying research philosophy adopted is that the best way to understand risk is by understanding the attitudes and actions of the economic agents who actually bear that risk. Thus the methodology adopted is one of direct fieldwork engagement between the researchers and investors and entrepreneurs. The stated aim of the authors is to develop a ‘detailed, direct knowledge of the world of investors in high-technology companies and the entrepreneurs whom they back’ (p37). To achieve their aim the authors have carefully gone through a number of research stages: performing unstructured preliminary fieldwork with some of the most important bodies and individuals in the industry to develop an appropriate framework for the inquiry; determining appropriate sampling frames of investors and investees; designing suitable administered questionnaire schedules; interviewing venture capitalists and entrepreneurs and then documenting and analysing the responses.
A wide variety of empirical analysis, ranging from using simple descriptive statistics to correlation analysis and multiple regressions, have been used to analyse the data and establish and verify the findings of the project. In addition to the empirical analysis there are ten case studies about the firms of the entrepreneurs. These make engrossing reading, particularly given the highly novel nature of many of the technologies and processes involved. The cases studies not only add ‘life’ to the discussions but give many interesting insights that cannot be obtained from the empirical analysis of relatively standardised questionnaires and interviews. The section of the book devoted to case studies does give the reader a good sense of the depth of detailed practical industry knowledge that the project has gathered.
In conclusion, the book presents the results of a very professional and thorough study into risk appraisal and venture capital in high-technology new ventures. It is certainly essential reading for anyone with specific interests in this area and will give a very good feel of the essentials of the industry to anyone with a more passing interest. However, one of the best aspects of the book is that it is much more than just a very well done research report. It is excellent at putting the research programme it covers into context. The authors are very experienced and knowledgeable in this general research area and the book includes a first-rate, multi-disciplinary, literature review and discussion of the subject of risk and uncertainty as it relates to corporate investment. A very wide range of readers could undoubtedly gain new perspectives and insights from reading this text.
Robert Hudson*
Newcastle University Business School, United Kingdom