Evolve or die: Innovative SMEs are the key to UK growth

Emily Thomas is former Treasury Special Adviser and Director of Aequitas Consulting. This is an edited version of a speech she gave at a Work Foundation Labour Party Fringe Event, Innovate or Fail – the UK’s only route to recovery, growth and prosperity, on 26th September 2011.

Innovation is at the heart of driving growth. This is what I was talking about last night at a Work Foundation Labour Party Fringe Event, entitled Innovate or Fail – the UK’s only route to recovery, growth and prosperity.

Innovation in the UK has accounted for 63 per cent of annual labour productivity growth since 2000, with investments in intangibles accounting for 23 per cent of productivity growth.

And government plays an important role in driving the demand for innovation, through their purchasing and procurement, investment in R&D and providing the capital required in our innovative institutions. Most importantly, however, government can create the environment for growth by playing their part in generating demand for British goods, services and creative endeavours.

Yet the current UK government is not recognised as an active player in the British and world economy, reluctant to take a prominent role in the economic recovery and choosing instead to leave others – whether governments in the rest of the G20, or the private sector – to pick up the slack.

In order for the government to become an active player in developing our innovative capacity, we need to consider which sectors of the economy have capacity for growth. In an increasingly competitive and mobilised world, economic growth will come from innovative ideas and the seeds of innovation tend to be planted around high worth services, small start-ups and some of our creative industries. For example, the UK has a world leading design industry worth £15 billion to the UK economy. An estimated 232,000 designers work in the UK (this is a 29 per cent increase on 2005) and the industry is mainly made up of SMEs.

The Government is right that small businesses will be where we see the greatest employment growth. But where the government is wrong is in failing to act to create an enabling environment for these small businesses. Small innovative businesses are not created in a vacuum; they need the right environment to flourish: they need a robust and easy to enforce intellectual property regime, they need support, not an opt out from employment and tax regulation, and most importantly, they need access to finance, markets and customers.

Access to finance is about more than just getting the banks lending again.  At a time when venture capital is declining, we need to consider what government can actively do to contribute to growth. This is about ideas like the small business investment bank that Ed Balls talked about this morning, which will help businesses make investment into their own growth.  It is also about making sure that programmes like the small business research initiative are used by government departments to drive their own innovation through small businesses.

But all of this is in vain if there are no customers for these products and services.  Therefore, the most important role government can play right now in driving innovation and growth is to ensure that there is demand in the economy by being an intelligent customer.

Procurement policy must be about finding the best, most innovative solutions for government purchasing which provide real value for money, not just lowest cost tenders.  For example, using tools like forward procurement to set out the problem so that UK businesses can develop innovative solutions, like HM prison services used to find a solution for their mattress problems. Or working with other sectors, both private and voluntary, to improve public service delivery, finding the budget savings instead of just cutting services.

And it is also about ensuring that we are working with our biggest export markets, Europe and America, to create a global economic plan for growth that generates the customers we all need.

Finally, it is essential to consider what impact could be had on growth and innovation if women were actively encouraged to start businesses.

There are roughly 620,000 majority women owned businesses in the UK generating around £130 billion turnover. But women are half as likely to be involved in start-up activity as men.

If women started businesses at the same rate as men, we would have 150,000 extra start-ups each year.

In the USA the Women’s Business Act 1988 put in place long-term infrastructure to support women’s enterprise development. Since then women’s business ownership has increased significantly.

If the UK could achieve the same levels of female entrepreneurship as the US, Britain would gain three quarters of a million more businesses.

See also:

Hopes of an export and manufacturing-led recovery recedeTony Dolphin, August 9th 2011

Government and Labour should demand more innovation in energy sectorCharles Samuda, July 27th 2011

Tory Right’s “deregulation zealots” threatening UK’s green growthJoss Garman, July 27th 2011

A budget for enterprise, if not jobsManos Schizas, March 25th 2010

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