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<jats:p> Geoff Robson is a lecture and Colin Gallagher is emertius professor of managment at the school of busienss managment, univeristy of newcastle upon tyne. England, in this paper, the effect of the interaction between small and large firms on the creation of jobs in the united kingdom over the period 1971 to 1989 are examined in detail. the result of four recent studies are used to assess the contribution of different size of firms to aggregate employment change. small firms have a greater ability and potential to create jobs than do large firms. the advantages which account for this extra ability, both due to the nature of small firms themselves and to the nature of the intereaction which take place between small and large firms, are identified and evaluated. Governement funding for small firms should be directed in that manner by which the nation will gain the most. it would therfore be wise to target those firms which are based in the wealth creating parts of both manufacturing and service sectors, which have eitehr grown idependently of large firms or whose growth would not adversely affect large firm growth and in particular, those small firms in which new innovations and technologies are likely to be developed should have priority for aid. the practical problem to date is taht of our inability to identify successfully those firms, however there is a danger that by viewing the small firm sector in isolation from large firms, sub-optimal economic and political decision may be reached. Although small firms in jobgeneration terms are iherently advangeaged and thier perfomace numerically dominant, it is important that small meaningfull, changes in large firm perfomance should not as a result be overlooked. </jats:p>