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Understanding the Dynamics of the Local Business Environment

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Presentation by Mark Hart at the Local Industrial Strategies event held in Sheffield on 5th April 2019

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Understanding the Dynamics of the Local Business Environment

  1. 1. Professor Mark Hart Deputy Director, Enterprise Research Centre & Aston Business School Local Industrial Strategies and Business Environment Workshop, Sheffield, 5th April 2019
  2. 2. Business Dynamism – the Challenge • Initial survival and scaling of start-ups a key concern – not interested in the volume of start-ups per se • Very few firms that can be categorised as ‘high-growth’ or have shown evidence of scaling • Growth ambition among early-stage entrepreneurs and micro-businesses is low • These ‘weak’ business growth metrics show some correlation with low levels of productivity
  3. 3. Start-ups per 10,000 Population (2017) & Start-ups scaling to £1m T/O (14-17)
  4. 4. An alternative story of Firm Entry and Exit!
  5. 5. Measuring Business Dynamism • There is a clear connection between ‘business dynamism’ and the growth in productivity at the national level. Unpacking what this means in the context of the UK will drive the nature and intensity of local industrial strategies and future business support interventions. • Measure of ‘business dynamism’? - The sum of the job creation rate and the job destruction rate is referred to as the job reallocation rate. It summarises the overall volume of change and in essence represents the ‘reshuffling of job opportunities across locations’ (Davis et al., 1996). • Tracking the job reallocation rate allows us to arrive at a measure of business dynamism for the economy.
  6. 6. Job Reallocation Rates (JAR) JAR – summation of 4 components Little variation in these rates of job creation and destruction over the period Averaging around 20-28% over 20 years (i.e., the job reallocation rates).
  7. 7. Business Dynamism by Sector
  8. 8. Business Dynamism in the English Regions (1998-2017)
  9. 9. Productivity - Dispersion and Persistence • ERC analysis using the ONS firm-level data (2008-2015) suggests that, in a population of survivor firms, firms at the top 10% mark of the productivity distribution are ten times more productive than those at the bottom 10% mark. • And, just as important, this dispersion is persistent: about a decade later the 90/10 ratio was still around ten.
  10. 10. Jobs or Productivity? Turnover Growth Job Growth Zero Zero ‘Green Zone’ + + + - - - Only one ‘space’ where growth in T/O; Jobs and productivity are all +ve – the ‘green zone’ But sparsely populated with firms – 9% …and more than half of them where there is very little growth Rule of thumb – 74% of firms which grow turnover grow productivity; 21% of firms which grow jobs grow productivity Source: Anyadike-Danes, M and Hart, M (2016) “Seeing the trees for the wood: going with the grain of the extraordinary heterogeneity of firm-level productivity”, ERC WP, November 2016; Anyadike-Danes, M (2016) “Locating High Growth Firms in Productivity Growth Space” – Slide deck available from author. British Business Bank (2018) 11% 6% 6% 27% 7% 9%
  11. 11. Firm Productivity Growth (2014-17) Firms who grow both in terms of jobs and revenues but have a faster rate of growth in revenues
  12. 12. 60 65 70 75 80 85 90 95 Median productivity by LEP from 2013-2017 (Ordered by 2017 estimates) 2013 2014 2015 2016 2017
  13. 13. Productivity Variations • No major productivity distribution differences year to year for each LEP • Same top LEPs for productivity – London, Thames Valley, Hertfordshire (South East concentration) • Same bottom LEPs – Cornwall, Cumbria, North East etc • Using consensus ranking we can see these top and low productivity LEPs…
  14. 14. Consensus Ranking using 2013- 2017 median productivity values LEP Consensus Ranking LEP Consensus Ranking LEP Consensus Ranking LOND 1LEIC 11GLIN 19 THAM 2SOLE 11HUMB 19 BUCK 3LEED 12SHEF 19 HERT 3THEM 12YORK 19 ENTE 4WEST 12NORE 20 COAS 5WORC 12HEAR 21 SOUH 5GLOU 13CUMB 22 SOUM 5COVE 14CORN 23 OXFO 6LANC 15 CHES 7LIVE 16 BLAC 8NEWA 16 GBIR 9STOK 16 GCAM 9TEES 17 GMAN 9DORS 18 SWIN 10DERB 19
  15. 15. Local Productivity Distributions - Method (2) • We can see that the distribution of LEPs across time in terms of productivity does not change. • We now want to test whether LEPs next to each other (i.e. London and Thames Valley), once ordered, have significantly different distributions, as well as, LEPs on opposite ends of the productivity order (i.e. London and Cumbria). • A simple way to view this is by plotting the quantiles against productivity levels, however, statistical testing is better. • We use the two sample Kolmogorov-Smirnov (K-S) test which compares whether the empirical distribution function of the same variable from two datasets differ significantly. • This was the chosen test as there is no prior assumption on the distribution of the data and is nonparametric. • We do this analysis for LEP pairs for each year between 2013-2018
  16. 16. Quantiles Productivity(TurnoverperEmployee) 2.5% 5% 7.5% 10% 12.5% 15% 17.5% 20% 22.5% 25% 27.5% 30% 32.5% 35% 37.5% 40% 42.5% 45% 47.5% 50% 52.5% 55% 57.5% 60% 62.5% 65% 67.5% 70% 72.5% 75% 77.5% 80% 82.5% 85% 87.5% 90% 92.5% 95% 97.5% 0 50 100 150 200 250 300 350 400 450 500 550 600 650 Worcestershire LEP Cornwall LEP Buckinghamshire LEP London LEP This is the top two preforming LEPs (Buckinghamshire and London) and the two bottom preforming LEPs (Worcestershire and Cornwall) for 2018. Distributions look very similar, which is confirmed through the KS test.
  17. 17. Results • We find that there are no significant differences between productivity distribution across LEP pairs. • This also holds when looking at LEPs at the opposite sides of the productivity order. • In fact, results suggest no evidence of productivity distribution differences between any LEP pairs. • So we can rule out overall productivity distribution differences as a possible explanation to local (LEP-level) disparities in productivity. • However, this may change when looking at subsamples by size and sector….
  19. 19. Operationalising a ‘Scale-up’ Strategy • Currently, as flagged in the Industrial Strategy, the Scale-up agenda is to have a prominent role in driving local growth, with the focus on the importance of identifying, targeting and supporting more HGFs or scale-ups. • ERC analysis provides for the first time a clearer understanding of the dynamics of HGFs over time, and although there is a clear age decay effect, it reveals the importance of High-Growth Episodes (HGEs) in driving growth in these firms. • This is an important consideration in any attempt by policy- makers to identify the lead indicators for HGFs, a group of firms which plays such an important role in job creation.
  20. 20. High-Growth Firms (HGFs) – 20% employment growth p.a. (2014-17) • HGFs are a very small proportion of UK businesses population (n=10,778 and static for last 3 periods) yet they have a disproportionate impact on job creation. • Typically, over a three year period, high-growth SMEs represent less than 1% of established businesses, but generate 20% of all job growth amongst established businesses which grow. • Interestingly, the areas of more high growth incidences are not necessarily those which benefit most from it! (Du et al., 2019)
  21. 21. Operationalising a ‘Scale-up’ Strategy (2) • In practice though, identifying a firm about to have its first HGE may involve quite different lead indicators or triggers than the indicators which might be relevant for firms having a second or third HGE. • We might hypothesise that: – the first episodes of high-growth might be related to strategic decisions to innovate and/or engage in international activity for the first time. – Repeat episodes may stimulated by different factors such as the decision to look for additional debt or equity finance to consolidate and kick-on after an initial burst of high-growth. This will require further research to test such hypotheses.
  22. 22. A final word about ‘Scale-ups’! • Yes, ‘scaling’ is an important dynamic to nurture in the UK economy. • But, it needs to be deployed across each stage of the growth pipeline: – Nascent entrepreneurs or start-ups growing – Accelerating the growth of businesses already showing signs of ambition and growth – Getting scaled businesses to scale again and more quickly • Current discussions about ‘scale-ups’ profoundly unhelpful from a policy perspective. • Having started the ball rolling a decade ago with our work for NESTA (i.e., the Vital 6%) we are now clearly of the view that: “There’s no such thing as a High-Growth Firm (or ‘scale-ups’) only firms that have high-growth episodes”
  23. 23. Business Support Policy - Agenda for Action • Develop a private and public business support framework based on robust evidence. • Challenging owner-manager mindsets and developing/deepening growth ambition – especially among the ‘growth ambivalent’ & ‘growth inclined’ – the challenge is ‘early identification’ (data filters only go so far) • Enhancing Leadership, Management and Entrepreneurial Skills – creates the business context for the impact of on- going reviews on finance; skills, productivity (e.g. Long Tail Review) and growing domestic and international markets.
  24. 24. Why are leadership/management/ entrepreneurial skills crucial? • Chartered Institute of Personnel and Development shows that nearly three-quarters of SMEs in England report a deficit in L&M Skills. Source: Hayton, J (2015) “Leadership and Management Skills in SMEs: Measuring Associations with Management Practices and Performance” BIS Research Paper No. 211, March 2015 Skills Practices Performance Leadership Skills Entrepreneurship Skills Organisational Skills Strategy Centralisation Strategy Formalisation Strategy Responsiveness Technical Skills HRM Best Practices Turnover Productivity Growth
  25. 25. What also needs to change? • Developing a growth-oriented mindset within more small business leaders in the region is crucial – need to create a pipeline of demand for investment. How? Programmes abound and the Scale-up Institute provides a focus on good practice • Growth Hubs are in the local frontline of business support policy - but, need to be more explicit on how their activities connect to this agenda – we need greater segmentation of what the business support offer will be and resource it accordingly. • Within an overarching set of LIS priorities (including sectors) the focus on business support policy should be not who to support but when to support!!. • Challenge to the investor community – recent BBB report on Small Business Finance Markets (2019) sets out the current state of supply and take-up – regionally, sectorally and individually – especially regarding women-led businesses!
  26. 26. Concluding Remarks • Emerging variations in business dynamism and productivity at regional and local level. • Focus in the Industrial Strategy on growth support is too narrowly focused. • Local Industrial Strategies should not be developed in isolation from an understanding of the dynamics of the private sector.
  27. 27. Thank you More information at http://enterpriseresearch.ac.uk/ Contact us: Mark Hart mark.hart@aston.ac.uk This work contains statistical data from ONS which is Crown Copyright. The use of these data does not imply the endorsement of the data owner or the UK Data Service at the UK Data Archive in relation to the interpretation or analysis of the data. This work uses research datasets which may not exactly reproduce National Statistics aggregates.