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Understanding the Dynamics of the Local Business Environment
Professor Mark Hart
Deputy Director, Enterprise Research Centre
& Aston Business School
Local Industrial Strategies and Business Environment
Workshop, Sheffield, 5th April 2019
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
Start-ups per 10,000 Population (2017)
& Start-ups scaling to £1m T/O (14-17)
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.
Job Reallocation Rates (JAR)
JAR – summation
of 4 components
Little variation in
these rates of job
20-28% over 20
years (i.e., the job
Business Dynamism in the English
Productivity - Dispersion and
• 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.
Jobs or Productivity?
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
productivity; 21% of
firms which grow jobs
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)
Firm Productivity Growth (2014-17)
Firms who grow both in terms of
jobs and revenues but have a
faster rate of growth in revenues
Median productivity by LEP from 2013-2017
(Ordered by 2017 estimates)
2013 2014 2015 2016 2017
• No major productivity distribution differences year to year for
• 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
Local Productivity Distributions -
• We can see that the distribution of LEPs across time in terms of productivity does
• 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
• 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
This is the top two
and London) and
the two bottom
and Cornwall) for
very similar, which
through the KS
• 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
• 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
Operationalising a ‘Scale-up’
• 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.
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
• 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
• Interestingly, the areas of more high
growth incidences are not necessarily
those which benefit most from it! (Du
et al., 2019)
Operationalising a ‘Scale-up’
• 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
– 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.
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
– Getting scaled businesses to scale again and more quickly
• Current discussions about ‘scale-ups’ profoundly unhelpful from a policy
• 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”
Business Support Policy - Agenda
• 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.
Why are leadership/management/
entrepreneurial skills crucial?
• Chartered Institute of
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
Technical Skills HRM Best
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
• 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
• 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
• Emerging variations in business dynamism and productivity at
regional and local level.
• Focus in the Industrial Strategy on growth support is too
• Local Industrial Strategies should not be developed in
isolation from an understanding of the dynamics of the
More information at http://enterpriseresearch.ac.uk/
Mark Hart firstname.lastname@example.org
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.