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The Progressive Policy Think Tank

It’s the Small Businesses that Count

If small business leaders in the North of England were to offer up a prayer, it might go something like this: ‘grant us the advice to manage the things we cannot change, the support to change the things we can, and the time to do any of it’.

In our report on SMEs and productivity in the Northern Powerhouse, published yesterday, we argue that support for firms with fewer than 250 employees must reflect the scale of their contribution to the economy – and their potential to contribute even more. In the North of England, these businesses make up over 99 per cent of companies, employ over 60 per cent of the workforce, and account for over half of private sector turnover.

Britain’s poor post-recession productivity performance is well-known, as is the ‘productivity gap’ between the North and the South. Less discussed is the gap between the productivity levels of small and large companies. Medium-sized businesses (with between 50 and 249 workers) are more productive than big corporations, but small and micro-enterprises trail some way behind.

Closing the productivity gap between small business performance in the north and the south could have a big impact on the Northern economy, and on wellbeing in the North of England. Better productivity – the ‘miles per gallon’ of a business, or the output it generates from its inputs – creates the headroom to provide higher wages and living standards. And productive SMEs are resilient SMEs that add value in ways other than economic output. They contribute to community resilience and vibrant places; they innovate and drive change across the economy.

Small businesses aren’t inherently unproductive. A number of firms of all sizes perform well by both national and international standards; size alone isn’t the issue. And although productivity overall is higher in some sectors than others, sector mix is less important in determining the productivity of an economy than the characteristics of individual firms within it.

The right kind of support for small businesses can help them to address those characteristics, raising awareness of ways to boost their productivity and giving them access to the resources – knowledge, mentoring, and funds – to make the changes they need.

Our recommendations for a transformed business support landscape reflect findings from our survey of over 500 Northern small businesses, as well as conversations with SME leaders and other stakeholders across the North. Northern SMEs are as diverse as the people who run them, and who use their goods and services. But they all want support that’s tailored to their local contexts and individual needs. And they want good ‘signposting’ that lets busy managers navigate what is inevitably a complex landscape.

Few politicians miss out on a chance to voice their support for small businesses, yet government funding for SME support is very modest – and some of it has an uncertain future post-Brexit. In many cases it’s also closely targeted at a small subset of ‘high growth’ businesses. As a result, SMEs which add different kinds of value can miss out on opportunities to grow and to work productively.

This isn’t an ‘either/or’ scenario. Every big business was once a small business, and if the next Google or Siemens is a twinkle in an entrepreneur’s eye somewhere in Tyneside or Cumbria, they need the cash to grow. But so do the innovators that will always stay small, nimble and specialised. So do the local businesses that make our places distinctive and welcoming.

That’s why we recommend a big increase in funds for business support, across sectors, business maturity, and growth ambitions. Institutions like the British Business Bank have a great track record of supporting SMEs, and could do so much more with budgets that reflect the scale of the opportunity – economic and social.

Even businesses with global ambitions start local, and they all seek support within their regional economy. So another funding priority is a well-resourced network of Growth Hubs, managed by LEPs, with the resources and expertise to take on strategic responsibility for shaping local support landscapes. Universities are an especially important part of those landscapes. We found many examples of good practice in knowledge transfer and skills support. Dedicated government funding could expand this considerably, with a big economic return.

We heard a lot about the kinds of support that better-funded Growth Hubs might seek out for their local SMEs. The precise mix, and its delivery, will vary from place to place. But universal themes include management and leadership training, technological and digital innovation with the skills to support it, and face-to-face support and mentoring.

Engagement with SMEs was vital for us in understanding how a rejuvenated and effective business support landscape might look. That’s why our final recommendation is for a bigger voice for small businesses in decision making by Local Enterprise Partnerships. However, this must be the start, rather than the end of the  conversation in the North.

Anna Round is a Senior Research Fellow at IPPR North. She tweets @annainnewcastle.