Levelling up regional economies. Blog 1/4

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.