During the summer, the new Minister for Business will be considering her policies very carefully in terms of what government can do to grow the Welsh economy over the next five years. In one of the rare statements made since her appointment, the Minister has hinted at continuing the efforts of her predecessor and focusing government funding on a number of key sectors in the economy.
Yet as the economy continues to stutter, should there be a different approach taken by the Welsh Government?
Certainly, there are those who believe that the no-brainer solution to kick starting the economy, both regionally and nationally, is to target policies at the small number of businesses that have the potential to grow and create jobs.
For example, the National Endowment for Science, Technology and the Arts (Nesta) has argued that high-growth businesses – those with 10 or more employees which experience employment growth averaging 20 per cent or more per year over a three year period – are the ones to be supported given they create real wealth and employment in the economy. A major study they commissioned showed that whilst such high growth firms make up only six per cent of all firms in the UK, they generated 49 per cent of all new jobs in the UK economy during the recession.
Yet policymakers have seemed reluctant to develop specific policies to help develop this small, but highly effective group of companies.
A decade ago, I wrote a paper for the Institute of Welsh Affairs – Creating an Entrepreneurial Wales - which argued that policies should be focused on supporting the small proportion of Welsh small and medium sized enterprises that have the potential to grow.
It argued that the vast majority of firms remain small and, individually, will contribute little to the economy beyond providing a living for their owner-managers. This is because many of the business owner-managers within the SME sector in the Wales, three quarters of whom do not employ anyone else, do not see the growth of their business as an objective. Despite the range of government assistance available, and regardless of the markets in which they operate, these ‘lifestyle’ businesses will resist the option of taking on new employees. For example, research has shown that even during times of favourable macro-economic conditions, the majority of firms have no aspirations to grow, with only a small proportion of small firms looking to expand further.
Of course, the overall contribution of microfirms employing less than 10 people should not be underestimated as they make up the vast majority of businesses in Wales, employ 191,000 people and generate £21 million for the economy annually.
Yet, if the focus of policymakers is on developing the economy over the next few years, especially with a reduced amount of public funding, then the focus must be on supporting businesses that have the potential for growth and employment.
Indeed, one can see why the limited resources within the new Department for Business makes the targeting of support to specific sectors very attractive and civil servants seem keen to continue to push the case to build up a number of companies working in the same sectors and markets. Yet, much of the research evidence suggests that growth can occur in almost any type of business, especially operating in mature markets that would attract very little public support.
So should the Welsh Government focus its efforts only on supporting those small to medium sized companies that have the potential for growth and what would be the impact for Wales?
Let’s update the data I first presented in 2001 and assume, for example, that the vast majority of businesses employing between 10-249 employees in Wales could, if provided with the right financial and business support, make a significant contribution to the Welsh economy.
According to the latest data available, there are currently about 8,000 such firms in Wales, employing around 236,000 people (an average of 30 employees per firm) and having a collective annual turnover of £24 billion. Clearly, a significant majority of such firms have the capability to grow further, even if incrementally, and make a significant contribution to the Welsh economy.
For example, let us assume that we could grow these companies by only an average of 4 per cent per annum over the next five years, well below what is expected of moderately growing businesses. The return to the Welsh economy by 2015 would be an additional 50,000 new jobs and an increase in turnover of £5 billion (or around 10 per cent of GDP), much of which would spent locally. That is a very attractive proposition for any government to consider.
Some would argue that this should not necessarily be the only approach but it is certainly one that has been missing from the minds of politicians and policymakers in Wales since devolution began. In fact, I would suggest that there is also a critical need to encourage greater entrepreneurship, especially amongst our young people, and improve innovation capacity. And the cluster-based approach could be focused specifically on this latter policy, and utilising the talent and technology that exists within higher education to improve key sectors such as creative industries, life sciences and clean technologies.
During the next 12 months, the debate on further borrowing powers for the Welsh Government will continue but given the current devolution settlement, there is nothing politicians in Cardiff Bay will be able to do about macro-economic policies such as interest rates or corporation tax.
However, devolution for economic development has given our leaders the opportunity to reconsider their slavish adherence to a cluster approach and instead put into place the best policies and structures to identify, support and grow those indigenous businesses within Wales, from any sector, that can create jobs and make a real difference to the prosperity of our nation.