We shouldn’t underestimate the economic value of high-growth small firms

A new report from Octopus Investments and the Centre for Economics and Business Research uncovers the economic value of the UK’s fastest growing small companies. The report can be found here, and our director Philip Salter’s analysis of its findings – and its policy recommendations – can be found in his Forbes column here.

 

Are bad jobs at bad wages are better than no jobs at all?

In the wake of the “This is what a feminist looks like” 62p-an-hour t-shirts scandal, our director, Philip Salter, considers the words of noted economist Paul Krugman in his 1997 essay, “In Praise of Cheap Labor”.

The revelation that the t-shirts created by The Fawcett Society as part of a campaign for women’s equality were in fact manufactured in a Mauritian sweatshop has been described as a monumental own goal.

As Salter points out in his Forbes column, the t-shirts on sale are expected to be recalled and production moved to Britain. But what about the sweatshop workers, he asks? Was Krugman right to make the case, back in 1997, that bad jobs at bad wages are better than no jobs at all? Read more here.

Is Victoria Beckham really UK entrepreneur of the year?

Victoria Beckham has topped a list of Britain’s top entrepreneurs by Management Today magazine.

The former Spice Girl certainly deserves praise for expanding her fashion empire into a business with a £30m turnover and a staff of 100. But, asks The Entrepreneurs Network’s director Philip Salter in a Forbes column, does this make her the country’s top entrepreneur?

In his column, Salter rightly raises an eyebrow at one criterion in the ranking: the entrepreneurs’ wealth. “They are ranked by their own or their immediate family asset wealth, which we identify from their holdings in private or public companies, share sales, dividends, salaries, plus any other assets that they have revealed to us,” the report says.

It means that the designer’s entrepreneurial success owes much to her husband David’s right foot and chiselled abs. But, Salter says, we should not deny Victoria Beckham’s status as a top entrepreneur. It’s just a shame the list wasn’t compiled with a little more care.

Why the startup mentality may not be bound by age

History suggests that it’s never too late to innovate, a forthcoming thesis will say.

According to Anton Howes (pictured), who is undertaking a PhD in Political Economy at King’s College London, many of the world’s great innovations have come buy brand ativan from the mature mind.

For his Forbes column, The Entrepreneurs Network director Philip Salter has been given a sneak preview of the research, and has spoken to Howes about the findings of his thesis. Read more about age and innovation here.

 

Singapore comes top on ease of doing business

When it comes to evaluating the results of this year’s World Bank Doing Business report, the devil is in the detail – says The Entrepreneurs Network director Philip Salter.

As the World Bank’s Kaushik Basu notes in his foreword:

The laws that determine how easily a business can be started and closed, the efficiency with which contracts are enforced, the rules of administration pertaining to a variety of activities—such as getting permits for electricity and doing the paperwork for exports and imports—are all examples of the nuts and bolts that are rarely visible and in the limelight but play a critical role.

Find out more about which countries have shot up the rankings, and why, in Philip’s most recent Forbes column.

Size might not matter but age definitely does

It’s ironic that politicians are so obsessed with creating jobs, given that many interventions – such as employers’ national insurance contributions and a politically determined minimum wage – achieve the diametric opposite. Yet it remains a key metric for determining political success and failure, and it drives much that passes for entrepreneurship and enterprise policy.

When it comes to job creation there is a debate about whether small or large businesses contribute more. Those representing small businesses can claim that micro businesses account for around 95% of all private sector companies, while those representing large businesses can counter that despite making up less than 0.1 per cent of the total private sector stock, large businesses account for more than half of all turnover and more than 40% of UK private sector employment.

It’s a complicated debate. Nesta research suggests a small proportion of businesses are responsible for the majority of job growth, with the data showing that “just 7% of businesses are responsible for half of the jobs created between 2007 and 2010.”

Elsewhere, Nesta suggests focussing government resources on supporting what was then “the vital 6%” . But it isn’t best place to buy ativan online obvious that this is the right conclusion from the data. It’s entirely possible that current polices are limiting the size of this so-called vital 6% job-creating companies. If this were the case, instead of focussing on those businesses and sectors already succeeding, the right policy would be the exact opposite: focusing on increasing that 6% figure by targeting companies not in the 6%.

Although the ideal ratio of small to large businesses might be indeterminable, we do know one thing. Size might not matter but age definitely does: we want new businesses. As the Kaufman Foundation explains: “Policymakers often think of small business as the employment engine of the economy. But when it comes to job-creating power, it is not the size of the business that matters as much as it is the age.”

Therefore, politicians and policymakers should want the entrepreneurial process to happen quickly; they should want to make sure regulations don’t inhibit the process of business creation and destruction; they should, to paraphrase the lean startup, want entrepreneurs to start fast, grow fast and fail fast.

Should we worry about the surge in UK micro-businesses?

A new report from Royal Sun Alliance has concluded that the UK is now a “nation of micro-businesses”.

Many of these companies, the study says, are “zero-employee firms” with lower potential than “traditional” startups to expand and take on staff. However, as The Entrepreneurs Network director Philip Salter explains in his most recent Forbes column, there is more to this issue than the raw data. Many of these companies, for example, are hiring on a freelance basis.

But the question for policymakers, he says, should be: How can we get micro-businesses to hire more “formal employees”? And what other barriers to growth – such as business rates or red tape – should the government be addressing?

The tax system is the biggest barrier to growth

Outside of academic papers that too rarely see the light of day, most “research” is unremarkable in its optimism about the state of entrepreneurship in the UK. That’s why the RSA’s Growing Pains: How the UK became a nation of “micropreneurs” caught my eye. It paints a stark picture.

The UK, according to the report, has become a nation of micro businesses, while the proportion of high-growth businesses has plummeted: “UK businesses are becoming increasingly micro in size – reducing the overall potential for economic output and future growth, and increasing the economy’s reliance on a relatively small number of larger businesses.”

Since 2000, the proportion of businesses classified as micro (0-9 employees), as a share of all UK businesses has grown from 94.3 per cent of all private sector companies to 95.4%. This represents an additional 1.4 million micro firms and an increase over the same period of 43%.

“At the same time, the proportion of high-growth enterprises has declined sharply, falling by more than a fifth in the majority of regions since 2005.”

Although the number of high-growth firms is expected to rise over the coming years, the report cautions optimism: “performance is expected to remain below 2005 levels in all regions except London”.

So how can we solve the problem? According the entrepreneurs, the tax system (44%) is the biggest barrier to growth – ahead of a lack of bank lending (38%) and the cost of running a business (36%).

Another problem highlighted by the report is that entrepreneurs don’t know what the government is up to:

“Around three-quarters (73%) of small business leaders also say the Government must make it easier for SMEs to access the right information and support for growth. While several of the Government’s recent incentives to support SMEs are designed to address the top-cited barriers, perhaps this information is not reaching the people who need it the most.”

Two polices are put forward in the conclusion to help entrepreneurs. First, “continued reform of the apprenticeship scheme could help micro firms to grow out of this business size category”. Second, “more tax relief like the National Insurance holiday could also pay real dividends.” It would be worth exploring the former in detail (something I plan to work on), but I don’t think another NI holiday goes nearly far enough: Employers’ National Insurance should be scrapped entirely. And no just for small businesses.

Being an entrepreneur is tough. As the report points out, “the majority (55%) of new businesses don’t survive beyond five years.” Scrapping Employers’ NI is the logical place to start.

UK Entrepreneurs Divided Over Brexit

With our membership of the European Union now a key battleground ahead of next year’s General Election, The Entrepreneurs Network director Philip Salter has weighed up the impact of a Brexit on UK entrepreneurs in his most recent Forbes column.

Despite the extraordinary rise of Ukip and a growing resentment towards the EU’s democratic deficit, Euroscepticism is not as rife in Britain as one might expect. A recent British Chambers of Commerce survey found that most businesses would like to remain in the EU, but with specific powers transferred back from Brussels. Celebrity entrepreneurs have already locked horns on the issue: Sir Richard Branson wants to remain in, Sir Alan Sugar out, and Dragons’ Den star Theo Paphitis supports renegotiation.

Yet two things stand between the UK and a Brexit. First, in the event of a Tory victory, our relationship with Europe will depend on David Cameron’s success in his promised renegotiations. Secondly, Labour leader Ed Miliband has ruled a Brexit unless further powers are handed over to Brussels.

And many entrepreneurs fear losing access to the Single Market, which pro-Europeans argue would significantly weaken Britain’s economy. The EU remains the UK’s biggest trading partner, accounting for more than £400bn a year. But if a Brexit is on the cards, our political leaders should follow in the footsteps of Ireland, Norway and Switzerland, by remaining within the European Free Trade Association, Salter says. The only question is: Would Europe let Britain have the benefits of free trade without the political union?

The risk tolerant benefit more from entrepreneurship training

Policymaking always utilises a broad brush with which to redraw the lives of individuals. However, though broad, with the right evidence this brush can be narrowed by taking account of the heterogeneity of human behaviour.

Just consider the many and varied schemes designed to support entrepreneurs. Putting aside the debate over whether or not this is the best use of tax revenues, nobody could deny that if we are to spend money on promoting entrepreneurs we should do so in most efficient way.

In “Entrepreneurship Training, Risk Aversion and Other Personality Traits: Evidence from a Random Experiment”, Robert W. Fairlie and William Holleran from the University of California draw on data from Growing America through Entrepreneurship (Project GATE), the largest randomised control experiment on providing entrepreneurship training ever conducted in the United States. Fairlie and Holleran find that:

[I]ndividuals who are more risk tolerant benefit more from entrepreneurship training than buy canadian ativan individuals who are less risk tolerant. The estimated interaction effects are large: averaging our estimates across the three waves implies that individuals who have a one standard deviation higher level of risk tolerance experience a 2.9 percentage point larger increase in business ownership and a 3.7 percentage point larger increase in the likelihood of starting a business from receiving the treatment than individuals with the lower level of risk tolerance.

This is a useful insight and suggests that we should consider identifying specific groups that may benefit more or less from government programmes to help people start a business. There can be no sure-fire way for spotting the next Zuckerberg, but we can increase the odds. Interestingly, Fairlie and Holleran also find “no evidence that individuals who are more innovative benefit more from entrepreneurship training than individuals who are less innovative.”

As the paper states: “some of the most disadvantaged groups such as at-risk youth and individuals with a criminal background have high levels of risk tolerance, and thus might benefit more for entrepreneurship training than more traditional job training programs.” There might be something in this: John Timpson has found ex-offenders fit in well with his unique entrepreneurial, bottom-up model for running his high street retailer.

As things stand in the UK, we have a remarkably limited understanding whether the schemes used to support entrepreneurship are doing any good. According to Gov.uk, business owners have 278 schemes to choose from. With proper analysis it might turn out that this is the correct number and they are being targeted at exactly the right group in the most efficient way. But I doubt it.