Comment: Where Scottish business needs support

So Increasing The Vital 6 per cent – Designing Public Policy to Support High Growth Firms – a research document published last week by the National Endowment for Science, Technology and the Arts (Nesta), can hardly fail to stir public interest. It calls for a “major” overhaul of state support for firms with high-growth potential.

Researchers from the universities of St Andrews, Glasgow and Stirling claim to have found a mismatch between the true nature of Britain’s high-growth firms and the policies developed to support them. Their study concludes that the Westminster and Scottish governments have been over-subsidising technology firms, many of which are incapable of growing, while missing the target on businesses with genuine high-growth potential.

The belief that such firms are new or very young hi-tech businesses that emerge from university spin-offs and are venture capital funded is, say the academics, “mostly wrong”. In reality, most high-growth firms fund their businesses through bank loans or retained earnings.

One of its co-authors, Dr Suzanne Mawson, from the University of Stirling, says it is “frustrating that policy makers continue to push the same old support interventions. Simply providing funding is not the ultimate way of supporting growing firms”. What they need is a more flexible, responsive and relational support, she adds.

And Professor Colin Mason of the University of Glasgow, says that if bodies such as Scottish Enterprise genuinely wish to create more of these firms, “a significant overhaul of their activities is needed away from their dominant policy focus on transactional forms of R&D support and co-investment funding…”

The report has resonance because, despite years of earnest endeavour by business support agencies, our business stock – the number of businesses per 100,000 population – still trails the rest of the UK and our business formation rate, while it has shown an encouraging rise in recent years, also lags the UK.

The problem is not that Scotland lacks innovative or creative talent – success in fields as varied as bioscience and video games testify to this. But there have been persistent problems with the progression of a bright idea into commercial development. As Scotland does not have a venture capital sector of the scale and vibrancy evident south of the Border, young and start-up businesses are more reliant on bank finance, with its customary problems.

Arguably our biggest problem is the “squeezed middle” – thousands of micro-businesses at the bottom and a few giants at the top, with a marked absence of successful medium-sized firms. There is little in the report that directly addresses this.

Indeed, for all the big splash that the academics might have expected, their stone into the pond has created barely a ripple. Response so far has been muted. SE itself has not issued a formal public response.

This may be because there is little that is new in the analysis. Indeed, two of the academics have previously worked for SE and the research appears to be based on work that is several years old. Another is that it does not reflect changes to the agency’s enterprise promotion in recent years and the wide bandwidth of support – technical, advisory and informational – that is now available.

The Scottish Co-investment Fund and the Scottish Investment Bank form only part of a range of support services. And that range covers five distinct sectors as well as “technology”. It has moved on from the “proof of concept” mantra of several years ago, and to the extent that there remains a bias towards “hi-tech” entrepreneurialism, this may reflect the wishes of funding sources such as the EU. The agency does not have a totally free hand on where it invests.

Is there too narrow a focus? At the core of the agency’s three-year business plan is a portfolio of around 2,000 account-managed companies, employing in aggregate around 300,000. Its support covers areas such as leadership development, staff management, innovation and export development as well as access to finance. And of particular concern at present is the need to help Scots companies build their presence in export markets. Its aim is to increase turnover growth of £1.3 billion across these companies, particularly in international markets, and to boost the growth of sectors such as oil and gas, food and drink and engineering.

It is far from obsessed with “hi-tech” per se or on providing funding, stressing the importance of innovation, knowledge transfer and commercialisation, with a focus on getting more new products and services into global markets. And while the business plan acknowledges key assets and strengths in our universities, it also recognises that investment in business innovation and entrepreneurship activity lags behind other small northern EU regions. For instance, to reach the top quartile of EU economies, we need 5,000 more Scots firms to be active in innovation, developing new products, new processes and new ways of doing business.

Within the constraints imposed on it as an agency answerable to politicians, there is little it can do to change the macro climate in which business operates – radical tax cutting, for example, or greater out-sourcing of government functions.

Entrepreneurship is a relentless and unending process of discovery. It requires an intense focus on what customers require and the shifting moods of the market. This is the prime and guiding information source. Peer-to-peer support and crowd funding are increasingly important tools alongside cut-throat rivalry and a maniacal determination to succeed. Perhaps the academics could revisit and update their research to address how best to internationalise – and how today’s micro-businesses can develop into Scotland’s Mittlestat.

Twitter: @Bill_Jamieson