A Programme of Research and Engagement on Small Business Growth

Professor Mark Hart

Deputy Director, Enterprise Research Centre

mark.hart@aston.ac.uk

Introducing the Enterprise Research Centre

• The Enterprise Research Centre (ERC) is an independent research centre which conducts policy relevant research on SME growth and development – launched January 2013 (www.enterpriseresearch.ac.uk)

• ERC is a research partnership of Warwick Business School, Aston Business School, Imperial College Business School, Strathclyde Business School and Birmingham Business School.

• £3m funding from the Economic and Social Research Council, the UK government Department for Business, Innovation and Skills, the Technology Strategy Board, and through the British Bankers Association (BBA), by the Royal Bank of Scotland PLC, HSBC Bank PLC, Barclays Bank PLC and Lloyds TSB Bank PLC.

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ERC in numbers

• ERC funding is for £2.9m over three years initially

• The ERC involves 28 staff from 6 UK institutions; 16 of these are based at the host institutions Warwick and Aston

• Overall, ERC involves 19 faculty members, 5 full-time post-doctoral Research Fellows, 2 PhD students and 2 administrative staff

• The ERC’s research programme comprises 29 separate research projects in 6 work programmes

ERC Research Themes• Theme 1: Entrepreneurial Ambition and Growth • Theme 2: Entrepreneurial Leadership, Capabilities and Growth

• Theme 3: Diversity and SMEs

• Theme 4: Finance and Growth

• Theme 5: SME Innovation, Exporting and Growth

• Theme 6: Firm Dynamics, Job Creation and Productivity Growth

White Paper No 1 – Growth and growth intentions – Jonathan Levie and Erkko Autio

• White Paper summarises what we know about the connection between entrepreneurs’ growth intentions and realised enterprise growth.

• The paper draws on a technique known as meta-analysis which uses statistical analysis to summarise the strength of associations between specific factors as “effects” based on all the data available from a systematic review of the literature.

• The analysis suggests a positive link between entrepreneurial growth intentions and subsequent growth, with at least some of the effect working through innovativeness (and possibly pro-activeness and risk-taking propensity).

• But what determines growth intention? The paper provides some robust evidence.

• This focuses attention on the creation of a business environment which is conducive for growth. Future research will examine the determinants of growth intention in the UK in more detail.

White Paper No. 2 - Entrepreneurial leadership, capabilities and growth by Andy Lockett, James Hayton, Deniz Ucbasaran, Kevin Mole & Gerard Hodgkinson

• This paper focuses on small business leadership and those leadership capabilities which are related to growth.

• As the evidence base in this area is relatively under-developed, the paper adopts a more conceptual perspective than the other ERC White Papers drawing on insights from management science and psychology.

• The paper starts by noting that SME growth depends upon substantive growth capabilities which can support activities such as market penetration, innovation, new product development, new market development and internationalization. Dynamic capabilities are also central to the development of a sustainable growth path.

• The paper lays the foundation for future research on the role of entrepreneurial cognition, the development of dynamic capabilities and growth outcomes in SMEs. There are potential implications for management and leadership training for SMEs.

ERC White Paper No. 3 – Diversity and SMEs by Sara Carter, Monder Ram, Kiran Trehan and Trevor Jones

• This paper starts by noting the contribution of ethnic minority-owned businesses (EMBs) and women-led businesses to the UK economy.

• The paper stresses the similarity of the challenges facing EMBs and women-led businesses in terms of access to finance, access to markets, and the effects of resource constraints on business growth. Policy tensions are also identified.

• Future work within the diversity work-package aims:

– to understand the drivers and barriers of entrepreneurial growth in under-represented groups

– to understand the connection between households and the decision to finance and grow diverse businesses; and,

– to map and activate support for diverse business networks through the Enterprise Diversity Alliance (EDA)

White Paper No. 4 - What Do We Know About The Relationship Between Entrepreneurial Finance and Growth? By Stuart Fraser, Sumon Bhaumik & Mike Wright

• This paper aims to synthesise the extant evidence about the challenges involved in access to finance, and consequently highlight issues (including relationships between funding flows and their correlates) that are ambiguous and less well-understood.

• Both debt and equity financing are covered and the paper also highlights the potential role of alternative funding sources such as asset based lending, crowd funding, invoice finance, community funding etc.

• Future research will reflect both the diversity within the SME population and the role of entrepreneurial perception and decision making on firms’ financial resources. How do entrepreneurial cognition, different ownership and board configurations (e.g., family owned firms, management buyouts) influence the financing needs of firms at different stages in their life-cycle?

• Similarly, it is not well understood how choices are made between alternative forms of finance, and how these different forms of financing influence SME performance.

White Paper No. 5 – SME Innovation, Exporting and Growth by Jim Love and Stephen Roper

• This paper reviews the evidence on both the internal and external (eco-system) drivers of SME innovation and exporting noting that for SMEs specifically the evidence base remains limited in some areas. The relationship between innovation and exporting is also considered.

• In terms of internal enablers - there is strong evidence for the

importance of skills, R&D, capital investment and liquidity in shaping SME innovation and exports. The evidence base is weaker - particularly for SMEs – in terms of the value of design, intellectual property management, people management, employee engagement, workforce diversity and other firm characteristics such as family ownership.

• External enablers – ‘openness’ - purposive links formed between SMEs and their partners – also play a positive role in innovation and export growth, particularly in strong eco-systems.

• Future work in this research programme will explore the synergies between innovation and exporting in SMEs and aims to identify which eco-system characteristics are most important in influencing SMEs’ innovation and export success.

White Paper No. 6 – Firm Dynamics and Job Creation in the UK - Taking Stock and Developing New Perspectives by Michael Anyadike-Danes, Mark Hart and Jun Du

• This paper draws together the existing evidence on job creation in the UK. Alternative analytical approaches to job creation and destruction are used to propose new growth typologies and metrics.

• Accepted job creation and destruction approaches emphasise that the majority of jobs in the UK are created by small firms (i.e., less than 50 employees and including micro-enterprises).

• Since the late 1990s smaller firms have been increasing their share of total employment year on year and in 2010 their share was triple that of 1998.

• Small business demographics are governed by some ‘brutal facts’ relating

to growth, survival and churn. But what determines growth, productivity and survival?

• Alongside the other ERC research themes this will be the focus of future research with specific attention being paid to the determinants of churn and firms’ growth trajectories.

Cross-cutting themes

• Key objectives of ERC are:– To collate and assess the existing evidence base for SME growth– To identify areas where the evidence base for SME growth is strong,

and – To identify areas where there is more uncertainty and conduct further

research to resolve these uncertainties

• Our work to date suggests four broad areas in which the evidence base for SME growth can usefully be enriched:– Entrepreneurial cognition and its growth effects– SME diversity and understandings of growth – Growth and the business environment or eco-system– Contingencies in growth

Entrepreneurial cognition• How does entrepreneurial cognition influence SME behaviour and growth? The main focus of

the paper by Lockett et al. (2013).

• Levie (2013) emphasises the positive and statistically robust link between business leaders’ growth ambition and subsequent growth. But what determines growth intention or ambition? How does growth intention vary between different individuals with different social and ethnic backgrounds?

• Fraser et al. (2013), also, emphasise our lack of understanding of the role of entrepreneurial cognition and its impact on investment and financing decisions

• Misperceptions of discrimination may exist, for example, among EMBs accounting for higher levels of discouragement (Carter et al., 2013).

• Understanding the role of entrepreneurial cognition in financing and investment decisions is likely to be important both in terms of understanding discouragement but also firms’ take up of alternative funding mechanisms such as crowd funding, asset based lending or invoice finance.

Diversity of growth processes and SMEs

• This reflects heterogeneity within the population of SMEs and the diversity of growth strategies which they pursue.

• Fraser et al. (2013) emphasise the need for a better understanding of how different ownership and governance regimes (family firms, management buyouts, etc.) and their associated financing influence the nature of entrepreneurial growth.

• Gaps exist in our understanding of how SMEs with different ownership types vary in terms of their innovation and exporting behaviours (Love and Roper, 2013).

• Similar issues are reflected in Carter et al (2013) in terms of continuing uncertainty about the value and/or justification of specifically targeted public support for EMB and women-led firms.

Context and eco-system• ERC White Papers also emphasise the need for a better understanding of how aspects of the

business environment either constrain or enable growth.

• In terms of growth intention, Levie (2013) emphasises the importance of the business and regulatory climate within which firms operate arguing that growth intentions are a function of beliefs concerning the desirability and feasibility of achieving growth goals.

• Carter et al. (2013) also emphasise the potential role of individuals’ family and community setting in shaping aspiration, attitudes to risk etc.

• Fraser et al. (2013) also emphasise the need for a better understanding of how how different contextual factors (institutional, temporal, social, spatial, market) create different demands for finance to fuel firm growth.

• Love and Roper (2013), similarly, highlight the need for a better understanding of how eco-system factors contribute to SME innovation and exporting. In particular, it seems important to identify which eco-system characteristics are most important in influencing SMEs’ innovation and export success.

Contingencies• Contingencies - i.e. the interaction between the different factors which

influence SME growth.

• Contingencies may be internal to the firm – complementarities between the different factors contributing to innovation, for example, such as skills, R&D, capital investment and liquidity (Love and Roper, 2013).

• Or, contingencies may be external such the role of trade finance in acting as a signal for other potential SME financiers (Fraser et al., 2013).

• Other contingencies may reflect the impact of the context within which a firm is operating on the behaviours or strategies of the firm itself. Such effects may also be important at a much more micro-level such as the household and community level influences on entrepreneurial behaviours discussed by Carter et al. (2013).

A Closer Look at Theme 6: Firm Dynamics, Job Creation and Productivity

High growth v sustainable growth – the evidence

• Numerous empirical studies have demonstrated the importance of high growth SMEs in creating new jobs and introducing and commercialising radical innovations.

• The apparent contribution of high-growth firms to job creation depends very significantly on the measurement approach adopted

• Our best estimates are that high growth firms (c. 1 per cent of all firms) created 22 per cent of all jobs created in the UK in 2007-2010 (Anyadike-Danes et al. 2013)

• The evidence also suggests, however, that:– the contribution of high-growth firms to UK job creation has declined markedly

since 2005– high growth is episodic and rarely sustained

• Long-term evaluations of business support in the UK suggest the value for sustained growth of intensive mentoring and developmental support

UK Business Demography – 5 ‘brutal’ facts

1. every year a very large number of private sector firms are born in the UK ~ typically between 200,000 and 250,000 firms;

2. most new born firms are very small ~ around 90% have less than 5 employees;

3. a decade later between 70% and 80% of those new born firms are likely to be dead;

4. a cohort is born with about 1 million jobs ~ a decade later the survivors employ just half a million;

5. of those firms which have survived to age 10 ~ around 75% of those born with less than five employees will still have less than five employees.

An Alternative ‘Vital 6%’

• Focus on the 1998 cohort of births and looking at those job creating firms over 10 years

• 1,207 firms (6%) create 32% of jobs by 2008

Productivity and HGFs

• Does high productivity performance help firms to achieve high employment growth and sustain high growth performance?

• TFP and its growth are important in explaining high growth ‘events’ – growth of the fittest?

• Generally TFP growth is a consistent and strong predictor of HGF incidence and persistence of HGF – in the 2001-2010 period (UK).

Policy Discussion

• Missing from this set of ‘facts’ is an understanding of the processes which drive them, which is required if we are to develop a robust set of policy interventions.

• In the meantime what can we usefully say about the policy

implications? • There is an obvious tension in existing policy discussions between the

focus on developing the growth potential of a small number of existing firms and the promotion of start-ups.

• Our evidence suggests that both start-ups and established businesses

have rapid growth potential - it depends on the timescale.

Getting the Data Assembled

• ERC project in the UKDS – all researchers now accessing a common BSD (1998-2013) as the core business demography dataset – linked to other official business survey datasets (e.g., ARD; BERD; CIS)

• Sorting out the firm-level and ‘workplace’ ONS datasets – conversations with IDBR team in Newport

• Linking to non-ONS datasets – e.g., SME Finance Monitor; MBO and Family Business dataset; Barclays Bank data

Turning Fast Growth into a Habit – ERC White Paper 7

Defining the sustained growth problem…

• The UK has a sustained growth problem. How can we support sustained high-growth in our most ambitious SMEs?

• For small firms growing rapidly from say £2m to £5m turnover the business and leadership challenges are immense

• Growth means the nature of the business is transformed rapidly –this creates issues around finance, organisational structure, innovation and markets (to name just a few…)

• Leadership and management demands are also transformed, with rapid growth challenging the capabilities of the owner-manager and leadership team.

… and the solution

• These dual challenges – business transformation and leadership development – define the sustained growth problem at the level of the firm. To achieve sustained growth it helps to deliver: – Support business development – Support leadership development

• And, the international evidence is clear. Schemes which work in this way can deliver real benefits - 8-10 % a year increased and sustained growth

• So the problem is not ‘what’ we need to deliver to support sustained growth, the question is ‘how’ we best do this in the UK.

Supporting sustainable growth – what works?

ERC White Paper reviewed:

Systemic Approaches• Danish Growth Houses• U.S. Jobs and Innovation

Accelerator Challenge

Holistic Approaches• Sweden’s national incubator

program• Ontario's Medical and Related

Science Discovery District (MaRS)• The Dutch Growth Accelerator• Scotland's ‘Companies of Scale’

programme

Thematic measures• Germany's high-tech

grunderfonds• Commercialisation Australia• England's Growth Accelerator• Ireland's Management for Growth

Programme

• This leads to best practice guidelines for supporting sustainable growth relating to:

– Enabling effective self-selection into support schemes

– Firm selection criteria need to be strong, and reflect both the private and social benefits of supporting the development of specific businesses

– Schemes are likely to involve sustained engagement with a business over a period of years.

– Supporting sustained fast growth requires a dual focus on the development of the business and the capabilities of the entrepreneur.

– Measures should be partnership based - business schools perhaps in partnership with banks or Chambers.

– Delivery is likely to be regionally organised to facilitate attendance and peer-group learning.

Delivering support for sustained growth in the UK…

• The need: episodic high growth and a declining high growth contribution to new jobs

• The appetite: UK experience with programmes such as the GS10ksb, BIG, LEAD suggests ambitious firms are keen and would contribute

• The focus: delivering integrated business and leadership support over a sustained period with extensive peer group learning

• Existing resources: a resource rich but un-coordinated and unfocused UK eco-system of mentors, financiers, leadership training organisations

• One possible solution…. a National Growth College

A National Growth College

• Business school or university led regional delivery consortia involving banks, Chambers and other business support partners

• NGC would support ambitious businesses to grow turnover from £1-2m to £3-5m over 3 years – around 31,000 companies in this target group.

• Work through an intensive programme of leadership training, mentoring, growth planning, peer-group workshops and accredited personal development activities – a ‘growth MBA’

• Regional consortia could be supported by small national group to co-ordinate a ‘curriculum for growth’ and share best practice

• Public funding might be needed initially to support programme development and proof of concept

Recent Activity• Research projects:

– Localisation of Industrial Activity across England’s LEPs– Access to Finance - trends in lending to SMEs – Discouragement Project– Entrepreneurial motivations

• Insight Papers:– Growth Vouchers; MSBs and HGFs

• Research Papers:– family businesses; regulation; openness and innovation development;

entrepreneurial households• Events/Workshops:

– “Enterprising Regulation?” (8th Nov) – leading to World Bank project and work for BRDO

– “SME – large firm relationships and innovation” (29th Nov)

Growth Accelerator Collaboration

• Building a ‘Growth Dashboard’ for the English LEPs

• Key metrics:– Barriers to growth (GA diagnostic data)– % growing firms– % of firms £1-2m to £3-5m– % of start-ups getting to £1m in 3 years

Some Emerging Activity

• Local supply chains and clustering and implications for growth

• Micro-entrepreneurs and growth (CDFA link; RSA “Power of Small” project)

• MSBs – action research – early discussions with RBS and their MSB clients for a strategy clinic (ABS; WBS and BBS in the Midlands)

• Rural enterprise – barriers to growth

Contact us:

If you would like any more information about the ERC and any of its activities please contact the Director, Stephen Roper at stephen.roper@wbs.ac.uk or

the Deputy Director, Mark Hart at mark.hart@aston.ac.uk.

More details about the activities of the ERC and our latest events can be found at:

www.enterpriseresearch.ac.uk