SCOTLAND'S hi-tech firms must grow through mergers and acquisitions if they want to harness economies of scale and compete on the world stage, a senior economist has warned.
Gavin Reid, professor of economics and finance at St Andrews University, has concluded that organic growth is unlikely to be enough for small Scottish firms to reach a critical mass to expand their research and development.
After studying a snapshot of data gathered from 836 high technology firms in Scotland, Reid suggested that, if companies do not change their strategy, then they would reach a short-run equilibrium with just 100 staff and a turnover of roughly 10 million. To maximise the revenue generate per employee, the firms would need 1,000 employees in the long-run.
But to benefit from the "Schumpeterian effect" – in which companies enjoy marked scale economies in research and development – Scottish firms would need to go global and have more than 3,000 staff.
Reid, founder and director of St Andrews University's Centre for Research into Industry, Enterprise, Finance and the Firm (Crieff), told The Scotsman: "How can a Scottish firm get beyond the 1,000 employee mark to become a bigger player?
"We've seen it in the course of the credit crunch – the answer is through takeovers, mergers and acquisitions. You have to get a lot bigger. I don't think that can be fuelled by internal growth. The snag with getting from 1,000 to 3,000 staff is that, while you're doing it, your performance may be going down. That's why 1,000 is an optimum.
"If you try to go from 1,000 to 3,000 by internal growth then your shareholders are going to be angry with you because it's going to look like your performance is dipping."
Reid added: "We live now in a world of cross-border M&As and I think that's the reality of tomorrow. We have to think of ourselves as stakeholders in that larger picture, rather than being stay-at-home companies."
Looking ahead to the looming recession in the UK, Reid
thinks the UK government will lean heavily on the banks to start lending to businesses again.
A Scottish Enterprise spokeswoman said: "As the economy changes, it is even more important that companies look to the longer-term growth opportunities, and we are working to highlight potential areas where they can increase activity despite the current economic conditions.
"Growth through merger and acquisition is an important option as part of business growth strategies.
these may increase as the economy changes.
"A critical question is the role government agencies like Scottish Enterprise can play in supporting this process. Stimulating a stronger pipeline of growing indigenous companies is a key priority."