Assessing the impact of leadership quality on SME performance

Objectives: This paper uses longitudinal data from businesses participating in an SME support programme since 2010 to assess the impact of leadership experience and quality on business growth.Prior Work: Penrose identified the importance of managerial resources and their performance to how firms grow over 50 years ago. Yet, SME growth literature is criticised for eclecticism and a failure to focus on “how” (McKelvie and Wiklund 2010). Recent work identifies the contribution of management practice, as well as leadership human and social capital, cognitive traits and motivations.Approach: A quantitative approach is adopted, using longitudinal data on 270 SME owners across manufacturing and services. A “black box” economic model of firm technology informs specification and choice of dependent variable. This is augmented with baseline data on owner characteristics and experience, ownership structure and type, as well as both baseline level and changes in cognitive traits. Programme participation allows potential variation in cognitive traits to be exploited. Hypotheses are developed and investigated using multiple regression analysis. Models for both business size and business growth are estimated.Results: Results show various dimensions of leadership quality to be associated with both size and growth. Sole owners, novices, and those starting from scratch have significantly smaller businesses; although, those who stick with their first venture on average achieve larger size. Older, female, and family business owners do not achieve as fast growth over the period of observation, controlling for changes in employee productivity. Faster growth is associated with reported changes in passion for work and in interpersonal locus of control, and with higher initial perceptions of resource management skills. Niche positioning is associating with growth.Implications: Simplistic economic models of firm size based solely on a “black box” are likely to miss important insight from augmenting the model to include the contribution of management and leadership quality to the way in which “factors” are combined. Who leads a small firm and how it is lead are likely to be as important as technology combining labour and capital to create output.Value: By providing further insights into which SMEs are more likely to grow and how changes in leadership traits may influence growth, it offers pointers to more useful categorizations of SMEs beyond merely sector and size. This has value for policy, not least, in the design of appropriate training interventions