NUMBER OF NEW BUSINESSES PLUMMETS IN WALES

Last week, a new set of statistics were published on business demography i.e. the births, deaths and stock of firms in the UK.

This has replaced the VAT data that was previously used to examine new firm formation. The result is that the new dataset is more accurate as it includes those businesses currently not registered for VAT.

Having examined this new dataset last week, I was shocked by the data on new business births for Wales. It showed that during the period 2004-2008, the average decline in the number of new business births across the UK as a whole was 3.5 per cent.

In contrast, the decline in Wales was 19.4 per cent - the worst performance of any region of the UK, with the next worst result found in the South West of England with a decline of 12.8 per cent. The data also showed some regions had increased the number of new businesses. For example, the number of new firm starts in Scotland had actually increased over this five year period by 13.7 per cent.

The catastrophic decline in the rate of new business formation in Wales since 2004 could have serious consequences for the economy. In terms of employment, this decline has meant that 6,270 fewer businesses have been created in Wales since 2004, impacting directly upon the number of new jobs within the private sector economy.

If we assume that each of these ‘lost’ businesses only generates, on average £50,000 of sales every year then, taking survival rates into account, the lost turnover to the Welsh economy is around £600 million.

However, it is not only the wealth and employment-creating potential of new firms which has been affected by this decline. Last month, the UK innovation agency NESTA released a new report on innovation indicators which indicated that a dynamic enterprise culture is essential for innovation i.e. a high birth rate of new businesses will drive competitive markets.

Therefore, the catastrophic decline in the number of new business starts will have a serious knock on effect on the innovative capacity of the Welsh economy, regardless of the increased spending on research and development within the university sector.

Another worrying aspect is that the biggest decline in new business births in Wales has occurred within the poorest parts of the nation, namely West Wales and the Valleys. The statistics show that this area has experienced a decline of 22 per cent in the number of new firm being formed during the period 2004-2008, causing potential problems within these communities.

As a UK Treasury study reported, successful entrepreneurship has the potential to help deprived areas through lowering unemployment not only through residents creating their own employment, but also indirectly through multiplier effects in the community and via other social contributions. The decline in the number of new businesses across this region could impact upon the ability of these poorer communities to recover.

Given that we are in the throes of the worst recession since the Second World War, these statistics could not come at a worst time. They are a clear warning that Wales could lag behind the other parts of the UK when any recovery takes place unless policymakers re-examine the effectiveness of enterprise policy in Wales.

If we are to create a strong and vibrant economy, then we need to see an increase, not a decrease, in the number of entrepreneurs in Wales. The fact that the biggest fall in the number of new businesses has been within the Convergence Fund areas of Wales, despite the tens of millions of pounds of European funding spent on encouraging more start-ups during the last few years, shows that the Welsh Assembly Government (WAG) has failed to achieve its aims of stimulating new businesses within this region.

Surely, it cannot be a coincidence that the decline in the business start-up rate began after the abolition of the Entrepreneurship Action Plan (EAP) for Wales and the merger of the WDA into WAG’s Department of Economy and Transport. Whilst creating a more entrepreneurial Wales was at the heart of the WDA’s mission, predominantly through the successful implementation of the EAP and its promotion of an enterprise culture, it has been relegated to the fringes of economic policy by the new regime within WAG.

This is despite the proud fact that Wales was light years ahead of any other part of Europe in terms of developing an effective regional enterprise strategy, a competitive advantage that we then threw away because of the whims of politicians and policymakers who failed to understand the long term strategy needed to create an environment in which entrepreneurs are encouraged and supported to flourish and create wealth and employment.

One can only hope that with a new First Minister who will need to stamp his authority on plans for a rapid economic recovery, entrepreneurship will again form a key part of Welsh economic policy and that the creation of new firms is encouraged as part of the drive to bring Wales out of recession.