To create the champion, entrepreneurial businesses of the future, we need to remember that productivity is important, but agility is critical, says James Sproule
Starting a business is one of those momentous decisions in life. Maybe not on a par with getting married or having children, but certainly up there with moving house or pursuing higher education. It is also a decision that increasing numbers of people have been taking in recent years, with a record 351,000 businesses launched in 2014. Napoleon famously called the British a nation of shopkeepers: he was right. In 2012 the UK had almost 2.1 million enterprises, against between 1.3 and 1.8 million in France, Germany, Italy or Spain. Even more encouragingly, surveys such as the Global Entrepreneurship Monitor consistently show the UK at or near the top of any measure of both entrepreneurial activity and attitudes towards entrepreneurs across Europe.
EU data confirms what we might expect: the UK scores well on the number of start-ups, at around 12 per cent of firms being new, with only some of the Nordic and eastern European member states proving more dynamic. And the UK has the most productive small firms in the EU; it is only the better productivity of large firms that pulls Germany (for example) above us as a whole.
As we argued in our October 2015 report, Balancing UK Productivity and Agility, we believe productivity is important, but agility is critical. Assuming European policymakers want to see more start-ups, they need to look at the three key elements: people, finance and entrepreneurs themselves.
Any business needs people to grow, and employment markets generally are a challenge across much of Europe. Research we published last autumn showed that many people are very reluctant to change employers. In the extreme case of Italy, over half the workforce has been with the same employer for more than a decade, compared with a third for the UK. This matters, as any business looking to expand needs to find people. If those in employment are protected to the degree that is common in much of the EU, people are reluctant to take the risk of changing employers. For new, particularly riskier businesses, this means a disproportionate dependence upon young people who have been excluded from the overly protected employment markets.
New business also needs financing. Here there are two challenges. For much of the EU – and the UK is not exempt – there is a proclivity to heavily tax high incomes. That appeals to egalitarians, but the effect of taxing people who are almost certain to save money, and diverting funds to governments who are certain to spend, has an obvious and unavoidable impact on the amount of capital available to invest in business. Secondly, experience from the US is that often the most risk-taking capital is from high-net-worth individuals. Once again, the cost of a large state has unintended consequences.
Happily, we do not lack for people willing to try. Talk to a young graduate today and the most desirable career choice for many is not consultancy or investment banking (as it was in my day), but starting your own company or working in a dynamic start-up. Across the country there are more than 2.5 million enterprises. Many are small, many will remain small, but there are going to be some future champions in there as well.
James Sproule is the IoD’s chief economist and director of policy