Can small businesses save the UK economy?

1st December 2011

However, the Chancellor handed these businesses a lifeline this week, with access to cut-price bank loans following the creation of an initial £20bn national loan guarantee scheme.

The role of innovation – essential to recovery

Thriving, innovative businesses are vital to the UK's economic recovery. SMEs and entrepreneurs play a significant role in all economies and are the key generators of employment and income and drivers of innovation and growth. In the OECD area, according to this report, SMEs employ more than half of the labour force in the private sector. In the European Union, they account for over 99% of all enterprises. Furthermore, 91% of these enterprises are micro-firms with less than 10 workers.

Ground-breaking research

UK Innovations agency NESTA produced compelling statistics in ‘the vital 6 per cent' report. The research makes a powerful case that a small number of high-growth businesses are responsible for the lion's share of job creation and prosperity, and that innovation is instrumental in the success of these businesses.

The research shows that the 6% of UK businesses with the highest growth rates generated half of the new jobs created by existing businesses between 2002 and 2008.

Julie Meyer – online "dragon" for the BBC's Dragons' Den, chief executive of the investment firm Ariadne Capital, and a member of the Entrepreneurs' Forum, says: "This proves that SME activity isn't niche, but should make up the core of economic policy – these companies are really the growth engine of the economy, as research shows, driving the creation of new jobs and GDP growth. It's not about whether Tesco is creating jobs, but what these companies are doing as they have a disproportionately positive impact on the economy."

Overturning established structures

The digital business model is transforming all industries, particularly SMEs. Marc Andreessen says on the Wall Street Journal – ‘Why software is eating the world': "More and more major businesses and industries are being run on software and delivered as online services-from movies to agriculture to national defense.  Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.

"… On the back end, software programming tools and Internet-based services make it easy to launch new global software-powered start-ups in many industries-without the need to invest in new infrastructure and train new employees.

"…With lower start-up costs and a vastly expanded market for online services, the result is a global economy that for the first time will be fully digitally wired-the dream of every cyber-visionary of the early 1990s, finally delivered, a full generation later."

Industries of the future

But in which sectors are SMEs likely to thrive? Contrary to popular belief, they are not all tech companies. These companies, according to NESTA, come from across the country and from all sectors of the economy, and they had one important factor in common: they were far more likely to be innovative, and the research shows that their innovation was a source of growth.

High-growth firms are almost equally present in the ‘high-tech' and ‘low-tech' sectors. And all major UK sectors contained between 4 and 10 per cent high-growth firms.

Picking a specific sector that is blossoming in terms of SMEs is difficult, says Julie Meyer. "We can't say online travel companies or the publishing world is where SME growth is happening, as it is across all industries – SMEs naturally take on the digital business model and make their companies as efficient as possible, as the pressure of running a small business is so much greater than an established mature business."

Large companies borrowing innovation from smaller groups has become a wider trend, as this BBC article explores.

Ian Ellington, general manager of Walker's Crisps, part of global giant PepsiCo, says in the article:

"The genesis of it was: look, this landscape is shifting very, very quickly, we're kind of living in a little bit of a bubble in a big corporation. I think at its simplest the idea was how can we get ourselves really at the leading edge of some of those new technology ideas as an organisation?"

But can SMEs really create jobs?

There is no doubt that jobs in the future will be different. Just as we go back hundreds of years to the time of horse and cart, and now we have cars, with new jobs to cater for the motoring industry." The only certainty is change", says Julie, and that there will be new and different kinds of jobs. A younger, less-experienced workforce may be given breaks given SMEs need for keen, cheap employment in a changing world.

All this has important implications for the Government: it suggests that economic policy should focus on promoting innovation and on the small number of companies with high growth potential, rather than broadly based business support programmes for new start-ups and SMEs. More importantly, it shows that an approach of backing excellence and innovation is not an elitist policy: rather, it is the best way of generating employment and opportunity.


More from Mind
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The Innovation Revolution?

Front Page: SA ‘must shift focus to growing entrepreneurs’

How can we stop the unemployment epidemic?

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