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enterpriseA transformation unit concerned with converting FACTOR INPUTS into higher-valued intermediate and final GOODS or SERVICES. The firm or BUSINESS is the basic producing/supplying unit and is a vital building block in constructing a theory of the market to explain how firms interact and how their pricing and output decisions influence market supply and price (see THEORY OF THE FIRM, THEORY OF MARKETS). The legal form of a firm consists of:
- a sole proprietorship: a firm owned and controlled (managed) by a single person, i.e. the type of firm that most closely approximates to that of the ‘firm’ in economic theory.
- a partnership: a firm owned and controlled by two or more persons who are parties to a partnership agreement.
- a JOINT-STOCK COMPANY: a firm that is owned by a group of ordinary shareholders and the capital of which is divided up into a number of SHARES. See COOPERATIVE.
The economic form of a firm consists of:
- a horizontal firm: a firm that is engaged in a single productive activity, e.g. motor-car assembly.
- a vertical firm: a firm that undertakes two or more vertically linked productive activities, e.g. the production of car components (clutches, steel body shells) and car assembly.
- a diversified or conglomerate firm: a firm that is engaged in a number of unrelated productive activities, e.g. car assembly and the production of bread.
For purposes of COMPANY LAW and the application of many company taxes and allowances (e.g. CORPORATION TAX and CAPITAL ALLOWANCES), a distinction is made between ‘small and medium-sized’ companies and ‘large’ companies. Small and medium-sized companies are defined as follows (Companies Act, 1995):
- annual turnover of less than £11.2 million;
- gross assets of under £5.6 million;
- not more than 250 employees.
In 2004 there were some 3,800,000 firms in the UK, of which 70% were run by the self-employed. Most businesses were small, with around 3,766,000 firms employing fewer than 50 people, 27,200 firms employing between 50 and 249 people, while only 6,900 firms employed more than 250 people. In terms of their contribution to GROSS DOMESTIC PRODUCT (GDP), however, firms employing more than 50 people contributed in excess of 75% of total output.
The total stock of firms fluctuates from year to year, depending on the net balance of new start-up businesses and those businesses ceasing trading (see INSOLVENCY). Generally, the total stock of firms increases when the economy is expanding (or as a result of some ‘special’ factor, e.g. the surge in newly established INTERNET businesses) and falls in a recession.
A final point to note is that with the increasing globalization of the world economy, MULTINATIONAL COMPANIES are becoming more prevalent in economies such as the UK's (see FOREIGN INVESTMENT for further details). See HORIZONTAL INTEGRATION, VERTICAL INTEGRATION, DIVERSIFICATION, BUSINESS CYCLE.