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Launching The State of Small Business report

Nesta is today launching a new report, conducted in partnership with the technology firm Sage, which examines small and medium-sized businesses across the UK.

Together with an accompanying data-filled website containing profiles of every local authority in the UK, it provides a fine-grained view of how SMEs have performed since the recession.

Why is this of interest to Nesta?

Firstly, there are strong suggestions that the UK's productivity gap is linked to the rate of innovation diffusion from leaders to laggards, and increasing evidence that productivity dispersion is linked with wage dispersion. Therefore, a better understanding of productivity - especially, questions of where the low-productivity firms are within the UK, and what might encourage them to innovate - is a vital step in tackling social inequality and improving the quality of life for all.

Secondly, Nesta is a proponent of better use of timely data and evidence. There are good reasons to believe that, from business to government, better data and smarter use of data analytics helps improve performance. Many local governments are already making great strides towards local data analytics; other local authorities could increase their efforts to get more from their data. This project is a contribution towards that end, providing a range of data to help local authorities understand aspects of their local business environment. However, it also shows the limitations of the available data, underscoring the need for new metrics.

Thirdly, because we believe that entrepreneurs are agents of innovation, we have an interest in understanding the conditions under which new companies start and scale. Whilst one must be wary of treating startups like all SMEs (startups are a specialist subset), or of presuming that all SMEs are innovative (many are not), a better picture of local economic growth complements our other work such as the EDCI, in improving our understanding of how local conditions affect startups and other businesses.

What does the report conclude? Among other things, it finds that:

  • SMEs have disproportionately driven job creation since 2010 (having created 73 per cent of new private sector jobs, despite accounting for just 60 per cent of private sector employment).

  • There has been a huge variance in the growth of number of SMEs across the UK (from an increase of 41 per cent in London to just four per cent in Northern Ireland).

  • SME productivity (defined here as aggregate SME turnover divided by aggregate SME employment) varies significantly (with the most productive part of the UK, the City of London, being 26 times more productive than the least, West Somerset). At a regional level, there is not a vast difference in the least productive areas; rather, average productivity is typically pulled up by the top performers.

  • There is a negative relationship between productivity and survival rates. Whilst this will not be surprising to most economists, it is a helpful reminder that, whilst individual business failure is often regrettable, the churn and dynamism of ‘creative destruction’ is good for the economy as a whole.

  • Whilst broadband coverage is lower in rural areas and the devolved regions, it mirrors other work in finding that there is not yet evidence for connection speeds having an impact on SME activity, growth, or productivity at local authority level. Whilst we are not claiming that infrastructure is unimportant (quite the contrary), it suggests that infrastructure needs to be combined with digital skills and tools to reap the benefits.

So what should happen next?

At present, business support – and, perhaps more significant, the broader engagement between local authorities and local businesses – varies significantly between areas. Our research uncovered both authorities who were extremely active in gathering data about their local SMEs and supporting them, and others who seemed to offer very little support.

One significant change may come from the proposed ‘devolution revolution’ – plans to allow local government to retain all local tax income, including the £26 billion of revenue from business rates. Pilots of this are expected shortly.

The positive side of this rates devolution may be that local government can better tailor support to the specific needs of local entrepreneurs and SMEs, granting more freedom to experiment.

Conversely, however, this move may increase the fragmentation of business support, making it more complex to navigate. There are also concerns that, with economic hotspots generating more revenue that is reinvested locally, it might further entrench divisions.

In addition, there is no statutory obligation for local authorities to support local businesses – and with obvious financial pressures from other areas, some local governments may see SMEs as cash cows to be milked, rather than an area for investment. That would be a mistake.

The forthcoming Industrial Strategy White Paper will set out a national plan for growth and productivity across the UK economy. However, if we are to see wages rise and income inequality fall, then building a landscape of thriving, productive SMEs should be the priority of every layer of government from Whitehall to town hall.

This means supporting not burdening SMEs; involving them in local policymaking; and ensuring that policy interventions acknowledge both the diversity of the SME landscape across the UK and the variance of local conditions.

We hope that this online data tool and report will give policymakers and elected representatives at every level of government the data they need to make informed and evidence-led policy decisions to support their local entrepreneurs and SMEs.

 

Erratum: In the first publication of the report, Figure 11 incorrectly showed ONS data for 2013-16 rather than 2007-16. This has been amended.

Author

Christopher Haley

Christopher Haley

Christopher Haley

Head of New Technology & Startup Research

Chris leads Nesta's research interests into how startups and new technologies can drive economic growth, and what this means for businesses, intermediaries and for the government.

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