Whilst looking for an article last week, I came across this 2001 piece from the BBC which reported on my IWA pamphlet "Creating an entrepreneurial Wales" which I wrote during my tenure as Professor of Enterprise at the University of Wales Bangor (as it was then).As it states:
"The Welsh Assembly has been urged to focus on supporting business entrepreneurs to meet their growth targets and help lift the economy.
In a report for the Institute of Welsh Affairs, Creating an Entrepreneurial Wales, the administration is advised to aid growing small and medium enterprises (SMEs), which make up a significant percentage of the business base in Wales.
Current assembly policy - particularly European Objective One strategy for regenerating deprived areas of Wales - "ignores the (entrepreneurial) sector completely", the IWA report concludes.
Its author Professor Dylan Jones-Evans, from the University of Wales, Bangor, said the assembly's targets under the National Economic Development Strategy would be "substantially" boosted by even moderate growth in the SME sector.
Prof Jones-Evans said the Welsh Development Agency and other business organisations should pinpoint SMEs which had the capacity to grow.
The professor forecast that a modest 10% growth by Wales's entrepreneurial businesses would create an extra 27,000 jobs by 2005/6 and a turnover of £1.8bn.
Current assembly policy focuses on supporting all types of small business, with many destined not to grow.
Aid for new firms - an area where four out of 10 are destined to fail - can also be misplaced, said Prof Jones-Evans, who is Professor of Enterprise and Regional Development.
Wales has 15,500 SMEs which are defined as employing between 5-250 workers. They employ a total of 270,000 people and have an annual turnover of £19bn.
Prof Jones-Evans admitted little could be done about fluctuations of interest rates, corporation tax or the strength of the pound.
The professor emphasised the pivotal role of the WDA and organisations such as Finance Wales, and ELWa (Education and Learning Wales).
He added: "They can take immediate action to develop the relevant policies and structures to identify, support and grow those indigenous businesses within Wales, which can make a real difference to the prosperity of our nation."
Substitute the "Economic Renewal Programme" for "European Objective One strategy" and you can see that nothing much has changed during the last decade.
Granted, I admit that I wasn't convinced that we should pour all of our public resources into start-ups in those days but I didn't need to be.
Wales didn't have a problem, like it does now, in starting businesses, only in growing them. Certainly, we didn't have statistics such as the 19.4 per cent decline in the number of new business births between 2004 and 2008 - the worst performance of any region of the UK. More importantly, it already had the Entrepreneurship Action Plan in place which focused specifically on encouraging new ventures.
My call was for an equal balance to ensure that those companies that did start and showed potential for growth after a number of years were given every encouragement to become the business stars of the future.
Unfortunately, the new ERP seems to have abandoned both the vast majority of start-ups and growth companies in Wales, and one has to seriously wonder where the jobs will come from over the next few years.
Comments
Er... how exactly would they do that pinpointing (aka picking winners)? Especially when several thousand SMEs form each year in Wales. Competitive markets and customers decide who grows. At least that's how it works in the most successful economies.
What wonderful faith in bureaucracy! In your world, businesses would become adept at hoodwinking flat-footed civil servants into believing they are going to grow.
And hasn't the Welsh government been doing this for years with precious little to show for it? Otherwise why are you complaining about them stopping doing it under the new economic programme.
Direct support for business breeds a kind of institutional favouritism (some would say corruption) - the inevitable formation of a cabal of 'insiders' nursed at the teat of government, feeding on the milk of political expediency. Ministers and officials endlessly tempted to reward friends and allies or repay favours. Firms exerting the subtle threat of negative media coverage ("Government refuses grant: Jones and co to close with 7 jobs lost") - turning business support into a kind of ransom demand.
When you encourage a clique culture, you inevitably make the environment more hostile to those outside the clique and to newcomers - the very people you might look to for innovation and entrepreneurialism.
But hey! Who said Wales was prone to the formation of self-serving cliques?
Believe it or not, there is a major difference between "picking winners" and "backing winners" i.e. those that have proved themselves in the market place.
Perhaps you should discuss this in more detail with the Singapore Government (i.e. a successful economy) which introduced a similar system to support local enterprises with the capacity to grow and develop.
I also clearly do not advocate choosing those companies which are start-ups - a policy which is now being pursued by WAG through their so-called high potential start-up programme.
Instead, there should be a focus on those firms that are already successfully growing but could grow further with the right access to capital and support.
In my world, as you so quaintly describe it, companies would be supported on the basis of the track record in the marketplace and their sound plans for the future, regardless of the sector in which they are based. If you think that consists of "hoodwinking" civil servants, then yet again you demonstrate an insulting disregard for the entrepreneurs that keep the Welsh economy where it is.
And no, WAG hasn't been doing for it years. The closest they have come to this is the failure known as the Knowledge Bank for Business programme which tended to ignore most Welsh companies with the potential for growth and consisted instead of a cabal of firms that will (again) largely benefit from the new ERP.
To quote those the words of the great Terry Hall, "it ain't what you do, but the way that you do it" and that is where WAG has largely failed miserably in economic development terms for a decade.
p.s. Read the article on growth companies by Churchill and Lewis if you want to understand why growth companies need support at certain stages of their lifecycle.
N. C. Churchill and V. L. Lewis, The five stages of small business growth, Harvard Business Review, May June (1983).
It may explain a lot to you about what is needed here in wales.
Secondly, I wouldn’t describe the Invest Wales team as flat-footed. Grants were not easy to get, applications were subject to a detailed appraisal and clients were given quite stringent conditional offers before being able to draw down the money. Moreover for the larger projects (over £75k) it was grant against capital expenditure and jobs in place for 5 years. The grant was taxable too, so not that free.
Thirdly, not all young entrepreneurs are able to offer sufficient security for loan funding and grants have provided invaluable support for a number of start-ups and early stage expansion. The grant also encourages businesses to think that little bit bigger and get where they want to that much quicker.
Have people learnt nothing from the past 3 years, too much borrowing is bad news!
Repayable Grants. As previously stated, I think repayable grant sounds good, but won’t work in practice and I predict the government will end up with a whacking toxic debt at the end of it.
Sometime in 2005/6, it was decided to bring in repayable grants for projects that forecasted high profits and high cash reserves. In such cases, grant offers were partly repayable with the trigger for repayment being turnover. To date, almost none of them have repaid any monies. Should we be surprised? Do we expect directors of companies enthusiastically rushing to hand back the government £100,000s of cash.
Doh! Of course not, let’s get back to the real world, businesses employ accountants to pay the minimum personal and corporation tax and they’ll do the same to try not to pay back the grant.
Any number of things can be done to side step it: put through the company and dump the debt, hold back invoicing to the following year, put turnover through another company or slowly and stealthily drain the company’s cash surpluses. To counter this WAG will have to set up forensic audit teams to catch clients out and so how much will this cost?
The other problem with repayable grant is that other countries competing for the large inward investment projects will be offering a straight grant. So it’s irrelevant if you think it works or not it, it’s a great negotiating tool.
Perhaps some people need to accept that the economy requires a permanent grant scheme to attract business and help them grow.
I also think limiting the sectors is a big mistake, some of my most profitable clients don’t do anything that sexy (and don’t fit into the targeted sectors), but are up there with the best and deserve the support.
You read any MBA dissertation or business report on ‘barriers to business’ that has ever been written and the main issue at the top of the list, is always ‘access to capital.’ So with bank lending down by 42% from last year, it’s obvious we still have a problem. So bring the grant scheme back!
Yes, that is why they have an organisation called the Small Business Administration to help small firm and why every state offers some sort of grant in the form of tax breaks to different types of business.
You simply don't know what you are talking about, do you.
I'm certainly not claiming the US as a model. The US is notorious for its pork-barrel politics (where grant culture so easily leads) so there are bound to be examples of grant/subsidy schemes won by interest groups - farmers would be the obvious case. The strength of the US economy is in its capitalism, not in its statism and pork-barrelling.
Again you demonstrate your ignorance of the system within the USA.
Yes, the SBA doesn't offer grants but it offers a comprehensive system of government backed loans (essentially a type of loan guarantee scheme).
The aim of this is to ensure that finance is made available to SMEs that normally wouldn't qualify for traditional lending from banks.
Indeed, the SBA and various states have a comprehensive system of different types of loans supported by government, ranging from start-up loans to energy efficiency loans to export loans.
As I have stated on various occasions and you have chosen to conveniently ignore to fit in with your view of the discussion, my belief is that government should be supporting businesses through the provision of finance and support but that does not necessarily need to be grants.
The strength of the US economy may be in its capitalism but it also supports the small firm sector through finance and advice, something which WAG has now chosen to abandon.
http://dylanje.blogspot.com/2008/12/supporting-welsh-business.html
Leviathan Inc: Governments seem to have forgotten that picking industrial winners nearly always fails
and...
Picking winners, saving losers: the global revival of industrial policy
The leader concludes:
That points to the first of three ideas that should guide a more sensible approach to securing the jobs of the future. Straightforward steps to improve the environment for business—less red tape, more flexible labour markets, simpler tax and bankruptcy regimes—will be more effective than handouts to favoured firms or sectors. Europeans ought to be seeking to strengthen the rules of their single market rather than pushing to dilute them; a long-overdue single European patent process would be a good start. Competition will do far more for jobs than coddling.
Second, governments should invest in the infrastructure that supports innovation, from modernised electricity grids (a smarter way to help green energy) to basic research and university education. The current fashion for raising barriers to the inflows of talented researchers and entrepreneurs hardly helps. Third, rather than the failed policy of picking winners, governments should encourage winners to emerge by themselves, for example through the sort of incentive prizes that are growing increasingly popular (see article).
None of this excites politicians as much as donning hard hats and handing out cash in front of the cameras. But the rich world has a clear choice: learn from the mistakes of the past, or else watch Leviathan Inc grow into a true monster.
I think this puts it quite well, even if not specifically about SMEs. Government should concentrate on getting the business environment, infrastructure and skills supply right for all business. Some imaginative approaches to public procurement to stimulate innovation wouldn't go amiss either.
The question is whether there is a happy medium between the two extremes of "no policy" and "a state approach", especially for a peripheral economy such as Wales?
The articles do seem more about backing large firms rather than SMEs (and I agree about such an approach) so there may need to be greater discussion on how the sector is supported to deal with market failure.
I am struck by the following point, namely ""Third, rather than the failed policy of picking winners, governments should encourage winners to emerge by themselves, for example through the sort of incentive prizes that are growing increasingly popular (see article)."
Exactly my point about "backing winners", as we try and do with the Fast Growth 50 every year. It is just a shame that WAG simply doesn't get involved in this programme in the way that could make a real difference.
May I ask a favour? Did you provide evidence to the Welsh Assembly Government to make the case for direct business support? If so, I would be really interested to see something concrete and empirical that suggests it works - if you did provide evidence, perhaps you could upload and post a link.
I take only an amateur interest in this field, but a lot of the claims made seem to be based on anecdote or assertion, or even on the opinions of the businesses that stand to benefit. Anyway, it would be good to see a rigorous argument based on real-world evaluation if such exists.
For Wales, it is unfortunate that very little of the work commissioned by WAG's Economic Research Advisory Panel has examined the impact of small business support in Wales, which is a major omission given that the economic strategy has changed so dramatically.
As for the evidence base for direct business support, the best source of this is from the old DTI site for the Small Business Service, which commissioned a number of academic studies into the evaluation of small business support, albeit in England.
For example, there is a detailed evaluation on the impact of Business Link on the economy that was commissioned from various business schools and is worth reading
http://www.proinno-europe.eu/appraisal/economic-impact-study-business-link-local-service
What you find from these reports is that the general consensus is over improving business support to firms, not its wholesale abolition.
You may also find the two papers from Kevin Mole, Mark Hart, Stephen Roper and David Saal of some interest. Both are available on the Warwick Centre for SMEs working paper website.
http://www2.warwick.ac.uk/fac/soc/wbs/research/csme/research/working_papers
A worthwhile contribution to the impact of grants is provided by Rob Blackburn and his team at Kingston University. The paper, which examines the impact of RSA grants, concludes by stating that
"both the RSA and SFIE Schemes are delivering benefits to the UK economy through net additional employment, higher value- added and a set of wider benefits that demonstrate linkage into other regional priorities such as regeneration, skill enhancement, supplier networks and broader environmental agenda".
http://www.bis.gov.uk/files/file45548.pdf