More businesses would deliver jobs and GDP. Blog 4/4

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More businesses would deliver jobs and GDP. Blog 4/4

We have a great bakery in our part of town.  We have a Greggs also – equally great, just different. In the former, I can buy a tremendous fruit loaf and their croissants are great too. But, for those who don’t live close to me, their choice is confined to Greggs.  If I were to live in Brighton, it would be very different.  We need more businesses in Newcastle to deliver jobs, GDP – and lots more cakes.

Why can I taste the smell of bread, floating on the air in Brighton? It’s because there are more bakeries pumping their wares through the Sussex suburbs. Newcastle needs moe firms

Put crudely, there are probably close to twice as many bakeries in Brighton as Newcastle. I’ve picked Brighton because the population is roughly the same size as that of Newcastle, even though it’s a seaside town and the business mix will be very different. If I abandoned population size as a constraint and stick with suburban places, then comparison with other South East locations suggests greater difference. For every one bakery in Newcastle, there will be 2.5 in Sevenoaks, Winchester and High Wycombe.

The chart shows how many businesses there are in Newcastle (per 10,000 people) by comparison with other cities.  The differences are considerable.

Why does business density matter?

There are 2 reasons why the number of businesses in a place is important.

There is an impact on competition.

It is a crude concept, but the reason that I cannot secure excellent patisserie across Newcastle is that there are too few bakeries. Therefore, there is little incentive to create scrumptious cakes.  Or let me bring this closer to my own experience (in spite of my example, I’m not a frequent consumer of cakes).

When we were developing The Racquets Court, we tried hard to place small contracts locally. These captured things like furniture, phones, internal switching gear and so on.

We failed.

There were usually three reasons or this. Firstly prices were too high and/or secondly, response times were too slow. Or, thirdly, our demands for particular style and quality were too onerous.

Contracts for switching gear and phones went to Leeds based businesses and furniture contracts went to London based businesses.  Competition, particularly services competion, is not significant enough close to home, here in Newcastle.

There is an impact on innovation

The impact on innovation follows on from the impact on competition. In research for the then Scottish Development Agency, we found that firms in the South East took up innovation faster than firms in Scotland. We attributed this to the impact of density / impact. It will always be the case that fewer people and businesses will mean less innovation, but this was something in addition.  There is less incentive to take up new ways of doing things.

Business density captures a virtuous or vicious feedback loop

Business density has a partner in the business birth rate / business death rate.

Let us assume two hypothetical locations – ‘dense’ and ‘sparse’.  Dense houses 200 businesses and Sparse houses 150. Both however have the same business birth rate of 10%.  Next year, Dense will therefore house 220 businesses and Sparse will house 165.

What began as a business stock difference of 50, has grown to 55.  The rich really do get richer, while the poor really do get poorer.

The impact on productivity

If low business density has an impact on competition and innovation, it follows that productivity will be lower also.  We have to increase the number of businesses.

A thought experiment for more businesses

This is a ‘thought experiment’ that starts with 2019 data –
but of course the principle applies if we were to start today.
Economies to 2024

Today, Newcastle has a business density of 432 businesses per 10,000 people. North Tyne (the area covered by the Mayor) has a business density of 449 per 10,000 people. The business birth rate across North Tyne varies between 11% and 15%. If birth rates stay the same until 2024, and we assume working age projections from ONS, then business density for North Tyne will increase to 502 businesses per 10,000 people.

This is shown in the Table.

But of course, everywhere else is changing also.  The table shows how a stable business birth rate interacts with ONS projections for the working age population to 2024.  The table indicates the degree to which, over this 5/6 year period, places will catch up with one another.  For example, in North Tyne, we’ll have 53 more businesses per 10,000 people; Greater Manchester will have 41 more.  So we’ll have caught up a bit with Manchester. But we will have lost our advantage over Liverpool because they will have 80 more businesses per 10,000 people in 2024 than they had in 2019.

More than this, the table emphasises the significant differences between the South East and everywhere else that I indicated at the beginning.

How do we catch up – better?

I have argued in an earlier post that we should not be picking winners. There are two reasons for this. Firstly, it’s too hard. Secondly, attempting to pick winners consumes a lot of resource. Advisers, bankers, financiers, all combining skills to deliver some kind of alchemy.

What we should do instead is let the market pick our winners.

We’d be better off throwing (I use the word advisedly) a ‘start and run a business’ education pack to anyone who wants to start a business. It doesn’t matter whether it’s a haidresser or a search engine to rival Google.  More people running businesses means more role models for others to do the same; more businesses means more competiton; more competition means innovation;  more businesses will enhance productivity.  More productivity means greater GDP. And so on.  This is the virtuous circle we need.

A second thought experiment on more businesses

Let’s imagine that the other places in the UK identified in the table above, pursue the growth trajectory I show there.  Let’s imagine that in North Tyne, we add 10,000 MORE businesses by 2024.  That’s not a lot – but IF we did that, we’d shoot up the table to within a whisker of Greater Manchester.

And let’s not forget how those 10,000 businesses to 2024 might be delivered. Firstly, it’s not 2,000 a year and secondly, the effort is distributed across four local authorities.

It is not 2,000 a year because it builds up – this is the virtuous circle effect. The final table below shows (a) how the effect accumulates over the years to 2024 and (b) how the heavy lifting would be distributed across local authorities.

It’s possible; it’s doable.