Scaling up a small UK business is an issue. Many have referred to this. The chart shows it to be true. Growing a small business to be a medium one is difficult.

To address this, the UK has established the The Scale Up Institute. The mere establishment of this body lends weight to the problem and at the same time effectively downplays the importance of new business starts.  In a piece in the Financial Times, John Mullins, an Associate Professor at London Business School is quoted saying:

“A common mistake is to focus on simply increasing the number of start-ups. Policy should instead be directed towards “scale-up” companies, many of which will already be trading but need to change their business model to find a more growth-oriented niche. Encouraging start-ups, given the churn that will inevitably occur among them, is the wrong place for government support. A wiser course would be to support growth in companies that are ready to scale up”

To which I would say:

1. There will be a smaller pool of ‘scale-ups’ without a pool of ‘start-ups’
2. Business density is a vital driver of innovation and competition.
3. Competition is a vital motivator for a business to ‘scale up’.
4. The density of businesses in most areas of the UK outside London and the South East is very low. These places need more business starts.  This is particularly the case in Newcastle and the North East.

Therefore, I don’t agree that this is an ‘either / or’ for Government policy. It’s both.

More than this, in arguing for us to direct support towards businesses that are ‘ready’ to scale up, we are lead to trying to pick winners. We first tried to pick winners for business support during Margaret Thatcher’s premiership.  The UK returns to this theme regularly without any evidence that it is possible. It is true that the Scale Up Institute is saying that it is using AI to ‘pick winners’ so things may have changed.  We will see.

All I would say is that in the USA, the most successful economy we seek to emulate, there are NO federal or State programmes that could be described as based on ‘picking winners’.

Therefore, start up and scale up are both important.  How might we address deficincies in both?

The skill of our entrepreneurs

The commentary around growing business is heavily focused on the failings of the firms themselves. Management is insufficiently skilled to grow the business.  To remedy this, we have training and development programmes to ‘scale up’ small firms to large ones.

Of course it is possible  that our entrepreneurs do lack the skills to grow businesses, although I am not sure how this could be established with certainty. However, the evidence does suggest that there is indeed an issue to do with ‘entrepreneurship education’ which I cover here.

The size of the UK market

There is an equally plausible explanation why the UK struggles to grow its small businesses by comparison with the US.  This explanation is based on two things that distinguish the US and UK. Firstly, the US market is around 5.5 times that of the UK.  This means not only that there are more people to sell to, but it also means that prices can be lower. The price advantage enjoyed in the US market can easily be extended to smaller, overseas markets creating a highly virtuous circle.

The business-to-business market is similarly distinguished.

The chart above does not capture firms with zero employees. In the UK, there are 4.6 million businesses with no employees. In the US, there are 24.8 million. Again 5.5 times as many.  In total, (i.e. this number plus the numbers from the chart), there are 30.4 million businesses in the US; in the UK, there are 4.9 million.

This means that an SME developing business software has 30 million sales opportunities in the US and only 6 million in the UK. Pursuit of 0.1% of the business market in the US = 30,000 targets; in the UK = 6,000 targets. And so on.

This is a big deal.  Speaking as someone who springs from a company that develops business software, I know that the US dominates almost every niche, with products that are cheaper than home grown examples. Having said that, I am intrigued that Australia and New Zealand seem to punch above their weight. Xero and Atlassian are examples.

Customers don’t speak English

Our membership of the EU should have addressed the market size issue. The EU market is even larger than that of the US. However, our 40 year membership of the EU has not obviously addressed the issue.  This suggests the second of my speculative guesses about why the UK does not grow its small businesses. This is the British (losing) struggle with foreign languages. Not only does the US have 30 million business to business sales targets, those targets also all speak English.  Selling to 0.1% of them in the US, delivers a financial platform to develop foreign language versions of whatever it is being sold. Yet another virtuous circle.

While I recognise that our membership of the EU single market may not have impacted the chart above, it is surely the case that exiting the single market will not have helped.

But for the moment, we have three possible explanations why the UK does not grow its small businesses: our entrepreneurs are not skilled enough, the UK market is not big enough and we expect our customers to speak English more than we should.

The first of these explanations, that our entrepreneurs are insufficiently skilled, is supported by the findings of the Global Entrpreneuship Monitor. They are particularly pertinent to Newcastle and the North East.  This is discussed here.

When they are right, why are economists so easily ignored?  Simon Wren Lewis, a macro-economist wrote a recent, good, blog on this.  For those of us who have worked with regional economics, the problem is further complicated because the data is messy.  But, ‘levelling up’ regional economies requires us to grapple with these difficulties, all the while remembering that we’ve been here before.

For example, not too long ago, most of us accepted that small firms create jobs and big firms lose them. That conclusion is now mediated by some who say that the quality of the created jobs is poor and low skilled. Or, that we do not need jobs in more firms, we need more jobs in fewer, high growth firms.

The latter is a very seductive argument for regional players.  The PR that comes with association with a high growth business is attractive.  And in a small regional economy (like that of Newcastle and its neighbours) it is easy for a very small number of growing business to assume significant status.

So do we need more firms? Or better firms?

In the North East, what are the features the regional economy that need ‘levelling up’ and what do we do to make it happen?

Higher GDP is the outcome we want.

Along with others, I would argue that GDP is the key metric that would indicate that ‘levelling up’ has been succesful. If we achieve higher GDP, almost everything else follows.  So what needs to happen to raise regional GDP?

The golden age of regional economic research delivered little.

In the period of the last Labour government, a lot of money slushed around to deliver regional growth.  Agencies were created and research funded to answer what, at the time, appeared to be useful questions.

I think that a lot of that research was good, empirically robust and policy driven. Also, a significant number of good ideas were copied from the US.

However, the initiatives that flowed from the research were often badly implemented or non-existent. The project management was terrible.

Where ideas were copied from the US, there was little attempt to understand why they worked on the ground in America.  What was it about the particular US environment that made them work?.  ¹Two initiatives which are examples of this are SBIR (the Small Business Innovation Research initiative) and BIDs (Business Improvement Districts). The former is long abandoned in the UK, but going strong still in the US; the latter is going both here and in the US, but rather more succesfully in the US.  There is more detail about why these initiatives were poorly implemented in the UK here.

And at the end of this golden age of economic development initiatives, we’re still talking about the need to ‘level up’.

Truths from the Golden Age.

Unlike the ‘golden age’, the last decade has witnessed an almost complete absence of notable, centrally driven, regional economic research.  Picking the golden nuggets from the golden age, I would argue for the following, ‘truths’ :

1. Small firms DO create jobs; big firms DO lose them. The quality of those jobs is perhaps debateable, but the core finding holds.
2. The UK has fewer medium sized firms than, for example, the USA. Small firms find it easier to grow in the US than they do in the UK.
3. Starting a business in the UK is administratively easy but culturally / emotionally / educationally challenging.
4. Some places have appreciably more firms than others, per head of population. The impact of this on competition, levels of service, innovation and productivity is considerable.

In this post and others which follow, I discuss these point with a focus on the North East with an attempt to use official data (ONS / NOMIS).

I am not reviewing the academic work on all of this. I hope I manage to inject a measure of ‘it’s obvious isn’t it’ without referencing the literature.

Small firms and job creation

I am not going to say much about this.  The initial research was conducted by David Birch at MIT.   In 1979 he published The Job Creation Process, in which he showed that most new jobs in the US are created by small companies. This study caught the attention of politicians at home and abroad. Birch’s work, although criticised, is considered groundbreaking because it opened the study of small businesses, which had been disregarded by economists before this.

The research to see if what Birch had found in the US, applied in the UK, was funded by the Department of Education and undertaken by Trends Business Research (confession: this is a company which I founded).  More recently, but still more than 10 years ago, the Department of Business (BEIS) commissioned a team at Aston University to look again – and the core finding that small firms create jobs, holds true.

When I first got involved with these findings, like many, I was initially surprised by them. Surely, big firms must turn in big job creation alongside big revenue. But a few moments reflection tells us that the finding is accurate. The news we read is of big firms delivering real, significant job losses and the number of small firms an any economy far outweighs the number of big ones. Common sense affirms the core finding.  And although I am not reviewing the literature, I will say (because I know it to be true) that Trends Business Research went to the most enormous trouble to confirm the data.

This is not to say that other points about the quality of the jobs or the regional disparities or the sector distribution are not accurate. It is merely to say that job creation comes from small firms.

With that thought, the bigger question is why does the UK struggle to grow firms?  What is the size of the problem?  I discuss this in this post.