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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17 Responses to “Evolve or die: Innovative SMEs are the key to UK growth”

  1. CAROLE JONES

    Evolve or die: Innovative SMEs are the key to UK growth: http://t.co/k2r4RH55 by Emily Thomas #labconf #lab11

  2. Darren Lewis

    Evolve or die: Innovative SMEs are the key to UK growth: http://t.co/k2r4RH55 by Emily Thomas #labconf #lab11

  3. Michael

    Evolve or die: Innovative SMEs are the key to UK growth http://t.co/oz24fn9a

  4. Legal Aware

    Evolve or die: Innovative SMEs are the key to UK growth http://t.co/oz24fn9a

  5. Political Planet

    Evolve or die: Innovative SMEs are the key to UK growth: Emily Thomas is former Treasury Special Adviser and Dir… http://t.co/CEI7J2dR

  6. BritishSME

    Evolve or die! Innovative #SMEs are the key to #UK #growth – http://t.co/4wCH064Y

  7. DannyJ

    I’m glad the Left are talking about this, because the basic premise of this argument is spot on. However, I disagree on the details here! Government procurement is a complete disaster zone and this is, unfortunately, a structural issue caused by the lack of a bottom line and a system within the civil service that doesn’t reward risk taking. The same applies to government funded research initiatives, which generally amount to a gross mis-allocation of capital because, again, the interests of funding committees and what actually might be useful are divergent. The end results is that tech-led small companies (like the one in which I work, which is a university spin-off company) have learnt from experience not to bother with government contracts – if you have limited resources you deploy them where they might be most profitable. I wish this was not the case, but I don’t see the structural issues with the public sector going away.

    The best thing the government can do is maintain the UK’s attractiveness as a place to do business (stable economy, low regulatory burden, stable/simple/competitive tax system) and encourage the flow of capital. Innovative companies need equity investment, not debt financing (due to the uncertainties in cash-flows) and anything that encourages capital flows in this area is a good thing. (Gordon Brown’s perverse move to penalise AIM shareholders via removal of tax incentives and continued prohibition of holding shares within ISAs is a good place to start making changes!).

  8. Easily Limited

    Evolve or die: Innovative SMEs are the key to UK growth http://ht.ly/6HQu0

  9. Big Innovation

    Emily Thomas (from Aequitas Consulting on @leftfootfwd): Evolve or die: Innovative SMEs are the key to UK growth – http://t.co/0Ir8FMJ7

  10. Kevin Fenning

    Emily Thomas (from Aequitas Consulting on @leftfootfwd): Evolve or die: Innovative SMEs are the key to UK growth – http://t.co/0Ir8FMJ7

  11. The Work Foundation

    Emily Thomas (from Aequitas Consulting on @leftfootfwd): Evolve or die: Innovative SMEs are the key to UK growth – http://t.co/0Ir8FMJ7

  12. Marketing Clout

    Innovate or fail, says former Treasury Special Advisor: http://t.co/3kzffgVk #B2B #marketing

  13. Anna Turley

    Good piece on @leftfootfwd by Emily Thomas on why SMEs are crucial to growth http://t.co/EPPn8TAJ

  14. neilrfoster

    Good piece on @leftfootfwd by Emily Thomas on why SMEs are crucial to growth http://t.co/EPPn8TAJ

  15. Andrew Melchior

    Evolve or die: Innovative SMEs are the key to UK growth | Left Foot Forward http://t.co/sgbWEItJ

  16. Andrew Melchior

    Evolve or die: Innovative SMEs are the key to UK growth | Left Foot Forward http://t.co/Js20QOif

  17. Dr David Hill

    As usual people think of innovation predominantly to be for add-ons to existing businesses. This strategy just will not work in the technological century that we now reside. What we need is to develop whole new technological global industries. For that to happen we have to open up innovation and allow all our people to contribute. Our universities and corporate R&D centres are not the best overall. Hundreds of billions have been invested over the last 30 years with very little return. Indeed I do not know of any new global technological industry that has been created from this vast investment and showing clearly that the present thinking and system just does not work for us economically. Indeed the history of the world has shown that the fundamental thinking that have created the modern world as we see it today is down to the independent inventor and to the level of 75%. The jet engine, WWW, email, integrated chip, penicillin and TV etc, etc…. are just a few of a limitless list of inventions that universities or corporate R&D centres did not fundamentally create. Indeed the chip by the late Jack Kilby is debatably the greatest wealth creator of all time and underpins a global industry turning over nearly $2 trillion a year. Until we put in place the creative infrastructure for our independent creative minds we shall not get far in this present century where China et al will take the high ground with our current thinking on innovation policy. Little known but the Germans and Japanese determined that 54% of the fundamental thinking that has created our modern world emanated from the independent minds/people of the UK (outside the confines of university and corporate R&D centres). Many had hard struggles with the establishment and vested-interests. We have a primary consideration to develop the creative infrastructure for them and where this would cost the nation a mere £400 million to do so. A small sum when compared to the overall picture, but where it would kick-start a new industrial/technological revolution for our nation. Will it happen, I fear not as politicians cannot see the woods for the trees and would rather building on greenbelt et al, which hasn’t a cat in hells chance to bring an economic success for the United Kingdom. We need new technological industries for our young to give sustainability in perpetuity. For this we need a new mindset in this country and a complete overhaul of our economic thinking and strategies.

    Dr David Hill
    World Innovation Foundation
    United Kingdom and Switzerland

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