In Wales, there are indications of yet another shake-up of policies to support businesses, the third such move in the last eight years of devolved government with responsibility for economic development.
Some have suggested that this new model will focus of resources on picking winners, with the majority of the small firm sector left to fend for itself. Indeed, it can be argued that this is only right within a free market economy, although the same could equally apply to the grants handed out under regional selective assistance to large firms that step over the border into Wales.
However, in drawing up this new grand plan, perhaps our policy-makers have forgotten that there are major areas of market failure that might justify the development of policies to support and promote small scale enterprise.
First of all, small firms are at a relative disadvantage compared to large firms in the collection and analysis of information about market opportunities, sources of finance and government regulations. This represents a major potential competitive disadvantage for the small firm sector that may constrain its development.
This is why Business Eye must remain as a source of signposting for the small firm sector but must not, under any circumstances, become an advisory body in areas such as finance, marketing, human resource management and strategic development, as this is best left to experts in these disciplines.
Secondly, although small firms have been recognised to be highly innovative, they are less able to absorb the risk and uncertainty associated with activities such as innovation, new product development and new market development. If government does not intervene, some of these activities may be lost to society as a whole.
During the last eight years, I believe that innovation has not been supported in the way that it should have, and we have lost countless opportunities to develop new businesses and new industries through policies that have failed to understand how innovation can be developed.
As the venture capitalist Michael Moritz noted at his Cardiff Business Club lecture last week, innovation can happen anywhere in the World and not just in Silicon Valley. We therefore need policies to encourage enterprise amongst our gifted young people, especially those in science and engineering, and give them the support to develop the businesses of the future.
Finally, small firms can experience considerable difficulties in attracting finance in the capital markets, predominantly because of higher level of risk to the lender, which can restrict small firms' access to finance and increase the cost of external finance, combined with the economies of scale in finance. This means that the cost to the lender of making a loan to a new or small business is much higher than for a large business.
That is why the development funds run by Finance Wales were established in the first place – to enable small businesses to gain access to funding at a cost that is affordable. Therefore, the decision to raise their interest rates which, I would assume has been approved by their sole shareholder - the Welsh Assembly Government, goes against the only rationale for government intervention in funding small firms as does any plan to remove small scale grant funding for new firms.
We must also remember that we are receiving £1.3 billion of funding from Europe to enable us to improve the poorest parts of the Welsh economy and to close the gap in prosperity with other parts of the UK and Europe. That funding is there to address a market failure within the region itself and therefore must be spent to give small firms a level playing field as compared to other richer regions.
That is the only reason we need the money and to create a situation where new businesses are actually paying exorbitant rates to borrow money, where innovators are refused support to develop new products and young people are not supported to develop their own businesses, is against the whole ethos of these funds.
There is market failure in Wales which needs to be addressed and there is a role for government in dealing with this, especially within the small firm sector.
If it does not, then the gap with the rest of Europe, despite the billions of additional funding, will continue to increase.
Some have suggested that this new model will focus of resources on picking winners, with the majority of the small firm sector left to fend for itself. Indeed, it can be argued that this is only right within a free market economy, although the same could equally apply to the grants handed out under regional selective assistance to large firms that step over the border into Wales.
However, in drawing up this new grand plan, perhaps our policy-makers have forgotten that there are major areas of market failure that might justify the development of policies to support and promote small scale enterprise.
First of all, small firms are at a relative disadvantage compared to large firms in the collection and analysis of information about market opportunities, sources of finance and government regulations. This represents a major potential competitive disadvantage for the small firm sector that may constrain its development.
This is why Business Eye must remain as a source of signposting for the small firm sector but must not, under any circumstances, become an advisory body in areas such as finance, marketing, human resource management and strategic development, as this is best left to experts in these disciplines.
Secondly, although small firms have been recognised to be highly innovative, they are less able to absorb the risk and uncertainty associated with activities such as innovation, new product development and new market development. If government does not intervene, some of these activities may be lost to society as a whole.
During the last eight years, I believe that innovation has not been supported in the way that it should have, and we have lost countless opportunities to develop new businesses and new industries through policies that have failed to understand how innovation can be developed.
As the venture capitalist Michael Moritz noted at his Cardiff Business Club lecture last week, innovation can happen anywhere in the World and not just in Silicon Valley. We therefore need policies to encourage enterprise amongst our gifted young people, especially those in science and engineering, and give them the support to develop the businesses of the future.
Finally, small firms can experience considerable difficulties in attracting finance in the capital markets, predominantly because of higher level of risk to the lender, which can restrict small firms' access to finance and increase the cost of external finance, combined with the economies of scale in finance. This means that the cost to the lender of making a loan to a new or small business is much higher than for a large business.
That is why the development funds run by Finance Wales were established in the first place – to enable small businesses to gain access to funding at a cost that is affordable. Therefore, the decision to raise their interest rates which, I would assume has been approved by their sole shareholder - the Welsh Assembly Government, goes against the only rationale for government intervention in funding small firms as does any plan to remove small scale grant funding for new firms.
We must also remember that we are receiving £1.3 billion of funding from Europe to enable us to improve the poorest parts of the Welsh economy and to close the gap in prosperity with other parts of the UK and Europe. That funding is there to address a market failure within the region itself and therefore must be spent to give small firms a level playing field as compared to other richer regions.
That is the only reason we need the money and to create a situation where new businesses are actually paying exorbitant rates to borrow money, where innovators are refused support to develop new products and young people are not supported to develop their own businesses, is against the whole ethos of these funds.
There is market failure in Wales which needs to be addressed and there is a role for government in dealing with this, especially within the small firm sector.
If it does not, then the gap with the rest of Europe, despite the billions of additional funding, will continue to increase.
Comments
- we live in hope
Why don't politicians remind themselves of this simply fact, which may help their focus:-
* Small firms create many more jobs than large firms;
* Jobs = Votes.