Bad public policy is stunting UK high growth potential

Businesses
14 January 2014

Support for high-growth firms by the UK and Scottish Governments is substantially misconceived and could be holding back economic growth, according to new research to be published this week.

Researchers from the Universities of Stirling, St Andrews and Glasgow have found a mismatch between the true nature of Britain’s high growth firms and the policies developed to support them.

Their study concludes that the Westminster and Scottish governments have been over-subsidising technology firms many which are incapable of growing, while missing the target on businesses with genuine high growth potential.

The research – Increasing The Vital 6% - Designing Public Policy to Support High Growth Firms – is published this week by NESTA (National Endowment for Science, Technology and the Arts).

It calls for a ‘major’ overhaul of state support for firms with high-growth potential. High growth firms constitute around six percent - often referred to as the vital six percent - of the business population, but account for around half of all job creation and are crucial for growth and economic prosperity.

If public policy to foster the creation and growth of these firms is badly designed, economic growth will be stunted. The new research claims a number of myths have developed around the nature of high growth firms.

Policy makers typically conceive these firms to be new or very young high-tech businesses which often emerge from university spin-offs.  These firms are also perceived to be funded largely by sources of entrepreneurial finance such as venture capital or business angel funding.

The research finds these perceptions are mostly wrong, yet they have strongly shaped the nature of enterprise support within the UK both nationally and within the devolved administrations. In reality, most high growth firms fund their businesses through bank loans or retained earnings, not venture capital.

Most of the current support instruments designed to create high growth firms strongly focus on transactional forms of support in the form of R&D grants, standardised business development support services offered and public sector venture capital co-investment schemes. The bulk of this is aimed at technology-based firms, most of which don’t grow.

Dr Suzanne Mawson, from the University of Stirling’s Management School, said: “Given what we know about high growth firms - and what their unique needs are - it's frustrating that policy makers continue to push the same old support interventions.

“Simply providing funding is not the ultimate way of supporting growing firms. What these firms really need is a more flexible, responsive and relational support, where peer-to-peer support and specialised advice such as support for Management buy-outs or acquisition of another company, are prioritised.  Advice, often from peers, - not cash - is paramount.”

Report author Dr Ross Brown of the University of St Andrews said: “Our research clearly shows that there is a mismatch between the nature of high growth firms and the policies which have been developed to support them. The vast majority of high growth firms are in fact well established firms from traditional business sectors and do not equate with the hypothetical ‘techie’ view of these firms.  At present, through their interventions policy makers may be over- subsidising technology-based firms who are incapable of growing.  In the main, public policy is largely ineffective in this area which could be undermining economic growth.

“The UK has some fabulous growth-oriented firms, but in the main these tend to be in consumer-oriented or service industries not R&D intensive sectors like life sciences. This is particularly the case for regions such as Northern Ireland and Scotland which have less well developed high-tech sectors than the south of England.”

The authors of the report call for a major overhaul of enterprise support to generate more high growth firms. Professor Colin Mason from the University of Glasgow said:  “If organisations such as BIS and Scottish Enterprise genuinely wish to create more of these firms a significant overhaul of their activities is needed away from their dominant policy focus on transactional forms of R&D support and co-investment funding- which largely goes to high-tech firms- towards a stronger support on growth-oriented firms irrespective of their sectoral orientation.”

In future, greater emphasis should be placed on what the authors term ‘economic gardening’, which tries to maximise the growth of existing SMEs rather than focusing support on generating new start-ups. Dr Ross Brown states that enterprise policy makers need to be much more innovative in their policy frameworks and that “policy interventions to create linkages between firms and their customers should be a particular priority.”

The researchers cite the new Department for Business Innovation & Skills recently launched ‘FutureFifty programme’ as an example of the type of bespoke support programme which on paper does reflect the needs of these firms.

Background information

The research is available from NESTA

Dr Suzanne Mawson

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