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Firm Growth in Scotland – some policy conundrums

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Scottish Enterprise high growth firm presentation by the ERC. September 24th 2020

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Firm Growth in Scotland – some policy conundrums

  1. 1. Mark Hart1, Neha Prashar1 and Karen Bonner2 (1Enterprise Research Centre, Aston Business school and 2Ulster University Economic Policy Centre) Presentation to Scottish Enterprise, 24th September 2020
  2. 2. Background • Presentation based on a report to Scottish Enterprise (SE) in January 2020 – “Analysis and Benchmarking of Business High-Growth Performance in Scotland” • SE commissioned analysis to explore the high-growth dynamics of Scotland’s business base, benchmarking this against other regions of the UK. • The objective was to focus on the level to which Scottish businesses achieve and then sustain levels of high-growth, ultimately reaching the definition of becoming a High-Growth Firm (HGF) as defined by the OECD, and how this compares with elsewhere. • The analysis also presents a critique of the definition of a HGF and sets out some alternatives definitions and methodologies to allow policymakers to more accurately focus on business growth over time. • Data – ONS Business Structure Database (BSD)
  3. 3. 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
  4. 4. HGF Incidence Rate (%) in the UK Regions and Nations (2015-18) (OECD employment definition: average 20%+ employment growth per year over 3 year period and 10+ employees in base year)
  5. 5. HGFs incidence rate (%) in Scottish sub-regions, 2015-18 (OECD employment definition: average 20%+ employment growth per year over 3 year period and 10+ employees in base year)
  6. 6. HGFs incidence rate (%) in Scotland UK – Scotland Gap 2010- 2018 Sector 2010 - 2018
  7. 7. Small HGFs Incidence Rate (%), 2015-18 (OECD employment definition: average 20%+ employment growth per year over 3 year period and 10+ employees in base year + adding at least 8 employees if a micro-business – i.e., 1-9 employees)
  8. 8. HGFs in Scotland – Summary • Scotland has a ‘high-growth deficit’ according to the descriptive analysis presented in this report based on the OECD definition of a high-growth firm. • We can crudely estimate this ‘deficit’ in Scotland by calculating the number of HGFs there would have been in 2015-18 if the UK incidence rate of 6.2% is applied. There would have been an additional 128 HGFs (20% employment definition) in Scotland (or 81 if London excluded from the analysis). • We need to mindful of course that this simplistic ‘closing the gap’ type of analysis ignores the obvious fact that having more of these firms may well have negative effects on the performance of other established firms, including HGFs – a potential zero-sum game. • Further, irrespective of the HGF metric used in this analysis it is clear that Scotland under-performs when compared to other parts of the UK in terms of the proportion of its business base that can be categorised as a high-growth.
  9. 9. 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%
  10. 10. High-Growth Firms: Jobs Vs Productivity? • Only 20% of 10+ employee firms in the ‘green zone’ are HGFs (T/O definition) • Only 5% of 10+ employee firms in the ‘green zone’ are HGFs (Jobs definition) • So from a productivity perspective HGFs, as defined by the OECD, are not an important group of firms!! • But,………… should we be focusing on these firms anyway? – more useful is a life cycle approach and focus on drivers of high-growth episodes!!
  11. 11. High-Growth Episodes – a cohort perspective • The OECD HGF definitions and its variants are less than optimum and we urge SE not to base a scale-up strategy upon this sub-optimal metric. • A HGE is defined as firms with 10+ employees experiencing at least 20% or 10% growth in employment the following year. We compute the annual growth rate for each year (2010-11 to 2017-18) and place each year into three categories: – ‘High-growth’: ten or more employees and growth of 20% or 10% in that year. – Alive but not high-growth: firms that don’t meet the ‘high-growth’ threshold, which are growing more slowly, not growing at all or declining in that year and also firms that did grow by 20% or 10% but have fewer than 10 employees. – Not active or no employment: when a firm has no employment or disappears from the database. This could be for a number of reasons that don’t necessarily relate to the death or closure of a firm, such as, the firm could have been acquired and still be operating under another legal entity.
  12. 12. High-Growth Episodes - Scotland • Analysis of a cohort of start-ups in 2010 placed the concept of ‘high-growth’ within the life cycle of the business - ‘high-growth’ can occur at any stage. • Weakness of the arbitrary OECD definition by rendering invisible many firms as ‘high- growth’ because their rapid growth was not consistent year on year and took place in discrete one or two- year episodes over the decade. Scottish Start-ups in 2010: timing of ‘high-growth’ events (20% emp. def) 2010-18
  13. 13. Modelling High-Growth Episodes in Scotland 2010-18 • Compelling evidence from the descriptive analysis of Scotland having a lower proportion of HGFs as defined by the OECDs. • But, our econometric analysis indicates that when we control for the nature of the business population (size, age, sector, prior growth), together with environmental variables such as education, ethnicity and other macro variables such as growth and new venture formation. • …….. then the case for a ‘high-growth deficit’ in Scotland is severely weakened.
  14. 14. Operationalising a ‘Scaling’ Strategy • 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.
  15. 15. A tale of two ‘high-growth’ metrics • SE needs to adopt a more nuanced view about business growth and high- growth in particular. • Reliance upon a single definition (i.e., the OCED HGF) is less than optimal and as we have shown renders invisible much of the growth and indeed high-growth we observe in businesses across the Scottish economy. • OECD HGF definition? – arbitrary and leads to misdirection of policy - it is well past its sell-by date • High-growth episodes? – reflecting the reality of growth for those firms that do grow. • Research into the triggers of these episodes and to examine the role of the various interventions associated with the Account Managed system in Scotland would be an invaluable next steps project.
  16. 16. Policy Imperative • Step away from growth rates as the central concern towards ‘growth trajectories’ - our shorthand term for the dynamics of job creation over a firm’s life. • This better captures the interplay between growth and survival. • It provides a different approach to measuring the contribution of rapidly growing firms to job creation and economic growth.
  17. 17. 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”
  18. 18. 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.

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