Micro-entrepreneurs: creating enterprising communities. Introduction and overview. Andrea Westall, Peter Ramsden and Julie Foley

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1 Micro-entrepreneurs: creating enterprising communities Andrea Westall, Peter Ramsden and Julie Foley Institute for Public Policy Research. December, 2000 Introduction and overview Opportunity for all means a Britain where all have the opportunity not just to work, but to work their way up, to gain promotion, start a business, become self-employed, upgrade their skills, and rise as far as their talents and potential can take them; a Britain where there is not so much a narrow ladder of opportunity for the few, but a broad and expansive highway of opportunity for all. And too little attention has been given to deprived areas, to women and minority ethnic communities. There will be new initiatives, often web-based to help women entrepreneurs and the disabled. Source: Gordon Brown, Newham speech, February 2000 This quote by Gordon Brown summarises the Labour view of entrepreneurship a key part of any strategy aimed at promoting greater equality of opportunity. Starting up and running your own business is something to be encouraged and aspired to. It not only creates wealth and employment but also provides ways for people to fulfil their aspirations and lifestyle choices. Enterprise has now become a buzz-word for Labour, something of an about turn for a party historically harbouring a natural antipathy towards business. But an equivalent commitment by the centre-left to social justice also requires that barriers to starting and developing an enterprise are reduced so that everyone with potential and skill is able to achieve their aim. Perhaps the hardest challenge is to encourage entrepreneurship in areas and for people who have borne the brunt of severe deprivation and unemployment. However, there is often great enterprise potential in disadvantaged areas. Unfortunately it is often unfulfilled or outside the main economy. The real issues are therefore to support the formation and development of such businesses and to harness this enterprise activity so that it contributes to sustainable regeneration. 1

2 This joint project between the IPPR and the New Economics Foundation sought to find out just how these challenges could be tackled. We focused on micro-enterprises because they have been largely invisible and under-researched, often dismissed as lifestyle businesses. It has been strongly argued that policy should focus on high growth small companies because they disproportionately contribute to wealth and job creation the oft-quoted comment is that only 4 per cent of new firms contribute 50 per cent of net new jobs (Storey, 1994). But this analysis ignores the importance of the other 50 per cent of jobs created and also the sustainable contribution of micro-enterprises to local economies. What we hope to show is that micro-enterprises make valid contributions to wealth, job creation and personal fulfilment, whether or not they grow and that existing businesses should not be downplayed in favour of encouraging new enterprises. Micro-enterprise does not just mean for-profit business it can incorporate social enterprises and other parts of the social economy which play critical roles in providing opportunities for local people and for creating markets in areas where there is little economic activity. But supporting micro-enterprise in disadvantaged areas is more than just about creating jobs and opportunities for individuals and businesses. It is part of developing enterprising communities where people, resources and finance are brought together in order to support and catalyse permanent change. This agenda is therefore fundamentally about community-led regeneration as well as individual opportunity. It is clear that if appropriate strategies are created, micro-enterprises can be part of creating long-term change in disadvantaged areas, reversing the leakages of money and people out of an area and into a virtuous circle of growth and employment. Additionally, micro-enterprise formation and development have much broader outcomes for people living in disadvantaged areas than just business creation. Evidence from the US shows how involvement in creating micro-enterprises can increase people s employability in general (whether or not they start a business). It can also provide flexible working patterns, reduce poverty, create increased self-confidence and empowerment, build personal and business assets, and support the formation of community networks of people, businesses and institutions. In this way, support for enterprise also becomes support for promoting personal initiative and empowerment. Support for micro-enterprises is however no panacea: many very small businesses in disadvantaged areas struggle and self-employment is risky and does not necessarily pay any better than waged employment. Therefore any strategy towards micro-enterprise needs to engage the community and businesses themselves in order to create viable markets and supportive environments for a variety of enterprises to thrive and contribute to employment and growth. In short, the goal is to create enterprising communities where all available resources (whether government, finance, advice, corporate) can be harnessed to support the long-term economic development of disadvantaged areas. The key challenge for policy and government is how to work with and encourage this approach to sustainable regeneration. It is not about top-down initiatives but about creating an enabling framework which is able to work with individual and community initiative. The modernising local government agenda envisages that local authorities will 2

3 take on a local role as leader and catalyst and hence enable local initiatives. It also means that other local agencies such as the Small Business Service will also have to learn how to become more engaged with their locality and work in true partnership with community organisations to deliver and support appropriate initiatives. All of this implies a policy approach which is much more about taking risk and enabling a whole range of locally determined outcomes rather than creating big manifesto headlines. However, working in this way in true partnerships, is politically difficult since it is hard to know where responsibility for success or failure lies. They also pose great challenges for the nature of local democracy and the role of elected representatives in a situation where local people are more engaged in defining and delivering their own policies. The issue The regeneration of disadvantaged areas and the reduction of social exclusion are key elements of Labour s policy agenda. Business, and particularly new businesses or selfemployment, are seen as routes out of poverty and exclusion and as crucial to creating sustainable regeneration by increasing the wealth, employment and vitality of local areas. They are also seen, at a much more personal level, as ways for people to achieve their potential and personal aspirations. However, it is recognised that businesses in disadvantaged areas, and particularly very small businesses, find it hard to access appropriate finance and business advice. Also, many people are put off starting an enterprise because of perceived financial barriers and through lack of confidence and personal skills. Current policy has recognised these problems and is beginning to create appropriate initiatives. But even if we can find ways of addressing these issues, it is not enough. Do we really know whether this enterprise activity is helping to support sustainable development or is it just providing opportunities for some individuals and some businesses? It is clear from our research that a lot more could be done to understand the dynamics of enterprise and local regeneration and to attempt to embed the gains from employment and business activity within disadvantaged areas. What the Government is doing The Social Exclusion Unit s (SEU) final report: National Strategy for Neighbourhood Renewal: a framework for consultation (SEU, 2000) is the most recent government document to recognise enterprise as an intrinsic part of regeneration. It promotes the revival of local economies through encouraging new business activity whilst recognising that growth and job creation are also dependent on wider strategies at city and regional level. Their two key ideas to promote enterprise in disadvantaged areas are: Keeping money in the neighbourhood, by looking for ways to ensure more of the money spent by local people is used on local jobs and services; and by making use of the various New Deals to support local service jobs; and 3

4 Supporting and promoting business, by making quality business support services in deprived areas a high national priority, with the Small Business Service (SBS) in the lead; helping people move from benefits to business via an income bridge, and funding Community Finance Initiatives (CFIs) which provide funding and support to small businesses. Policy Action Team 3 (PAT 3), initiated by the Social Exclusion Unit and led by the Treasury, produced its report Enterprise and Social Exclusion (HM Treasury, 1999) from which some of these conclusions were drawn. They developed a whole range of initiatives designed to promote local entrepreneurship and support existing businesses. In some respects, therefore, our research comments on and develops this work. A whole host of activity has built on the work of the Social Exclusion Unit. For example, the Bank of England (2000) has published a report on Finance for Small Businesses in Deprived Communities. The Social Investment Taskforce (2000) presented proposals on how to encourage the development of community CDFIs (community development finance institutions) which support micro-enterprises, social enterprises and the voluntary sector who cannot gain finance from other sources. Ronnie Cohen, Apax Partners, the Chair of the Taskforce summarised the views of the group: Our central conclusion is that the potential now exists to achieve a transformation of investment flows to support entrepreneurial value creation in those communities which have been most deprived of capital and management expertise. And the new Small Business Service has been charged with addressing support provision in disadvantaged areas and for the socially excluded. It is also administering the Phoenix Fund, which is providing support for CFIs (community finance initiatives), and for pilot projects aimed at developing new and existing enterprise within disadvantaged areas. What more needs to be done Whilst the thrust of these developments is extremely positive, there is, however, remarkably little rigorous analysis or few practical examples of positive initiatives on which to base many of the policy conclusions or to promote the creation of successful strategies. Rather, what has been proposed is based on a fairly well reasoned leap of faith, which presumes that enterprise activity needs to be central to regeneration strategy. It is hard to dispute that conclusion although it is important to recognise the limits of promoting enterprise within disadvantaged areas. We particularly have to realise that the results of all this enterprise activity may not stick and certainly may not create sustainable and growing economic activity for local people. What we did In order to contribute to the development of this policy area, we decided to focus on micro-enterprise activity and attempt to answer the following questions: 4

5 What do we already know about the links between micro-enterprises, local economies and regeneration? What do we need to know in order to develop effective policy? How can we understand the diversity of micro-enterprises, and the role they play in reducing social exclusion for individuals. To what extent might such enterprise activity also be part of the problem? What schemes and proposals are already in existence which seem to work and which are making an impact on the sustained development of disadvantaged areas? What more could be done both to support people in embarking in enterprise or in helping to ensure that existing micro-enterprises contribute to sustainable regeneration. In addition to drawing on US research, we conducted a survey of all Local Authorities (LAs), Enterprise Agencies (EA), Training and Enterprise Councils (TECs) and Business Links in order to learn about the strategies and initiatives to be found in the UK aimed at micro-enterprises in disadvantaged areas. We also held a roundtable on women s microenterprise in disadvantaged areas in conjunction with the Women s Unit in the Cabinet Office. Whilst we generally adopt a broad view of enterprise which incorporates social enterprises and enterprising behaviour by communities and by local agencies, we have focused predominantly on standard businesses. Other work by IPPR and NEF is concentrating specifically on the role of social enterprises in regeneration. Outline of the book The first chapter sets out what we currently know about the links between microenterprises and local economies, their importance to disadvantaged areas and the nature of enterprise culture in different parts of the UK. It argues that, whilst it is clear that micro-enterprise development is an important part of regenerating disadvantaged areas, it cannot be successful without a thorough understanding of the nature of the area, its historical development, the current ecology of business activity and the potential for future market growth and development. This information can not only be used to guide the formation of appropriate policies but also to act as a baseline from which to measure whether change has occurred as a result of the initiatives that are implemented. It can also be used to tailor appropriate business support for a whole variety of different types of micro-enterprise and also to encourage self-help amongst businesses. Chapter 2 sets out current government policy and compares it with the approach developed in the US which adopts a much more holistic view of micro-enterprises and their importance in providing options for the socially excluded. It is not clear that enough attention is being paid in the UK to the broader outcomes of enterprise creation such as tackling poverty, increasing self-esteem and social capital and greater community activism. Neither is there an understanding of the ways in which self-employment and micro-enterprise can fit with different lifestyle needs or be part of poverty reduction strategies alongside paid employment. These less tangible results of promoting 5

6 enterprise activity should be acknowledged and reflected in any analysis of the success or otherwise of specific programmes targeted at disadvantaged areas. In Chapter 3, we suggest ways in which an entrepreneurial culture can be created within areas and for groups who may face the greatest barriers in starting a business. In Chapter 4 we argue that too much emphasis has been placed by recent policy on new enterprises in disadvantaged areas and not enough attention has been paid to the way in which microenterprises can become more sustainable through accessing new markets or linking with other companies (whether other micro-enterprises or larger corporates). There has also been insufficient attention to finding ways of embedding employment and wealth creation within disadvantaged areas. It is only through creating such strategies that go way beyond one-on-one business support that we can hope to move to a situation where enterprise activity in disadvantaged areas can contribute to sustainable local economic development. Chapter 5 explores the difficulties with access to finance by micro-entrepreneurs, and reviews the experience and types of initiatives around Europe that have sprung up to address these problems. It sets out a series of challenges and opportunities for both mainstream banking and government to consider in order to expand the availability of micro-credit. However, it argues that a great deal more research needs to be done to understand the extent and nature of demand for micro-finance but at the same time recognises that CFIs themselves, alongside appropriate advice and support, can increase demand by supporting people who otherwise would not have started a business, or developed their current enterprise. Chapter 6 focuses particularly on women since there has been little analysis of whether they face any particular barriers, which are different to those of men or require different kinds of advice and support. It is clear from our research that more work needs to be done by existing business support agencies to develop services which are responsive to women s needs, which understand the variety of enterprises which women might set up and which address the particular barriers facing women in disadvantaged areas. At the same time, the lessons from this chapter that of creating partnerships with community organisations and involving local people in their own service delivery are more broadly applicable to promoting enterprise in disadvantaged areas. Chapter 7 builds on IPPR s recent work on extending the notion of corporate involvement to that of corporate engagement, which focuses much more on the ways in which businesses can become more integrated with their communities through activities which are fundamental to the operations of an enterprise rather than being add-on activities. Here, we argue that there is scope to link corporates with local microenterprises in disadvantaged areas in order to create mutually beneficial new market opportunities. None of this can happen without the right partners. Chapter 8 brings the analysis together by stressing the importance of creating enterprising communities through harnessing the energy and resources of advice and finance providers alongside the community and local 6

7 business. There is also a need to develop community-led partnerships which can address micro-enterprise development. In this case, the government s role will need to be that of facilitator to enable self-help solutions rather than predelivered programmes. Recommendations Creating enterprising communities We suggest that the local authorities and Small Business Service work with the Local Strategic Partnerships (LSPs) to find ways of catalysing local partnerships and initiatives that can specifically address the agendas set out in this book and that these should fit with subregional and regional strategies aimed at economic and social development. We are concerned that the proposed model for the LSPs does not incorporate this model of community-led economic development since they are more focused on the most appropriate delivery of local services. The real need is to create and support innovative activities which focus much more on self-help initiatives by business and by the community. Ways of further creating community-led strategies might involve: Greater community involvement and control of business support services. Local business providers should see themselves as social enterprises (organisations that trade in order to achieve social aims) serving their local communities, and therefore seek much closer ties within their areas than most providers have shown in the past, including in their governance structure. The SBS should support such developments. Increased community ownership of assets, including property which can provide, for example, managed workspaces or diverse retail outlets. Such ownership can be structured in diverse ways from Development Trusts through to co-operatives and commercial but community-controlled businesses. Greater community engagement in developing strategies and implementing them. We have seen how initiatives that build on business networks or that facilitate self-help (such as Sorelli s enterprise facilitation model) are effective in harnessing people s energies and promoting development of new markets and opportunities. Raising the profile of micro-enterprises There is a need to develop a forum which brings together all organisations involved in supporting micro-enterprises in disadvantaged areas in order to increase understanding and exchange best practice. There could also be an award along the lines of the US Presidential Award for Excellence in Micro-enterprise Development to support and raise awareness of the most innovative programmes and initiatives. 7

8 Promoting an entrepreneurial culture in disadvantaged areas Because of the wide benefits of promoting micro-enterprise activity, we support the conclusion of the PAT 3 report on Enterprise and Social Exclusion (HM Treasury, 1999) that specific attention should be paid to enterprise in disadvantaged areas by the National Campaign for Enterprise Awareness, perhaps along the lines of a similar programme to Enterprise Insight. It could be called Raising Sights and should incorporate a relevant set of partner organisations who could engage with the worst disadvantaged areas, undertake research, implement approaches and spread best practice. Linking enterprise and citizenship in schools We recommend that the Department for Employment and Education (DfEE) and the Department for Trade and Industry (DTI) address the ways in which the promotion of the enterprise agenda within the school curriculum and outside can be understood in broader terms. We know that enterprise programmes promote life skills as well as interest in potential enterprise activity but such initiatives should also include the role of enterprise within the community, for example with respect to social enterprises which create local solutions to local problems. In this way the citizenship and enterprise agendas come together. For children in disadvantaged areas there is enough evidence to show the beneficial impact of enterprise skills to warrant perhaps more targeted resources to create extra-curricular activities and local projects. Creating a fact base The SBS in England, the Learning and Enterprise Councils (LECs) in Scotland and their equivalents in Wales and Northern Ireland, should have responsibility for purchasing licenses to business data bases from appropriate private sector providers such as Dunn and Bradstreet. This data can be used in conjunction with local business surveys and Geographical Information Systems (GIS) techniques to create comprehensive maps of regional, subregional and local enterprise activity. More in depth surveys can be justified in disadvantaged areas in order to determine what strategies might be best implemented at that level. It is also critically important that community organisations and local businesses are involved in the data collection and have access to it since there is a need to increase local understanding of micro-enterprises and motivate people to either start their own businesses or create business networks which can further enhance their contributions to employment and to growth. Relevant information could include: Data on turnover and employment of local businesses. It would be useful to have information from a sample of employers to determine who is employed and where they live in order to better ascertain local employment content. Occasional surveys of people s attitudes to starting a business in order to track changes in culture and also to investigate further the barriers which people face. 8

9 Information on local money flows. The diversity of micro-enterprise activity, and how it relates to personal circumstances (is it part-time, in addition to employment income or the sole activity). Other missing areas of knowledge relate to different forms of self-employment activity such as home-based work, the extent of different kinds of activities and their support needs. Information on the skills and employment of the local community. Where are local people employed and by who? What are the skills of the unemployed? Data on suppliers, markets and products of local businesses in order to analyse the potential for encouraging clusters and networks, supply chains and local purchasing. Data on financial services provided to the local business community particularly by banks and insurance companies. This data is normally made anonymous so that individual businesses cannot be identified. The banks should also be encouraged to make more use of their available data to undertake periodic analyses of money flows within disadvantaged areas and continue to make information available on their lending portfolios. Information on community assets and relevant community organisations and business networks. Data on housing, and their status as owner-occupied, private or public rented, and on commercial property, as well as on transport and other infrastructure. Embedding the gains from job creation and growth There should be a specific focus on creating coherent economic development strategies which include an analysis of how best to develop the market potential of microenterprises. The SBS should be involved in this agenda as catalysts for business networks that create new market opportunities and work together to access markets. Much of the motivation and impetus for this development should come from groups of businesses themselves alongside appropriate support. There should also be more effort devoted towards designing innovative ways to encourage more local employment and to demonstrate the benefits of doing so. A great deal more attention needs to be paid to outreach work by support providers in disadvantaged communities in conjunction with local trusted organisations. Indeed, all initiatives need to have community engagement and control if they are to succeed. It is not enough to promote the formation of incubator units. There is a need for more flexible premises which can accommodate growing businesses and hence help business to stay within the locality. Such managed workspaces could be social enterprises run as community assets and offering a range of services to the clients. Meeting demand for appropriate finance For Government, there are a number of key actions that will help develop finance for micro-enterprises: 9

10 Implement the recommendations of the Social Investment Task Force for a major new programme of community development financial institutions. Detailed research on the demand, needs and constraints of finance for microenterprises in disadvantaged areas based on bank services to business (both through business and personal banking), on-going review by the Bank of England, and detailed surveys of the finance needs of micro-enterprises (and potential microentrepreneurs) conducted by business networks and community organisations. Consider the creation of a national micro-guarantee fund to work alongside the Small Firm Loan Guarantee Scheme. Explore how to develop more consistent provision of micro-loans for business across the country. Support Regional Community Investment Partnerships along the lines of those working in Scotland, London and the East Midlands. Examine how credit scoring and other methodologies that determine access to microloans by unemployed and other excluded people might be adapted and develop innovative ways to enable people to develop a credit history. Understanding women s enterprise Business support agencies will need to tailor the delivery of their services to better reflect the backgrounds and motivations of women in disadvantaged areas. The SBS should ring fence some of the Phoenix Fund money for supporting initiatives designed to support women s micro-enterprise in disadvantaged areas. Strategies could involve: More outreach work for stimulating entrepreneurial attitudes amongst women in disadvantaged areas. Greater flexibility in the delivery of training that reflects women s caring responsibilities and transport constraints. Ensuring that support is available to people who work from home More partnerships with community organisations in the delivery of locally based enterprise training. Creation of peer group women s networks. In some areas and cases the provision of women s only business support may be appropriate to the personal circumstances and cultures of some women. In order to mainstream gender concerns, business support agencies will need more information about women s micro-enterprise in different disadvantaged areas so that they know where to target their limited resources. More data collection is needed on the nature and extent of women s participation as owner-managers, their motivations and constraints. This focus on women also highlights and underpins the need for support services in disadvantaged areas to be sensitive to the needs of different groups and to work through community organisations and involve local people actively in design and implementation of strategies. 10

11 To raise awareness and understanding about women s micro-enterprise amongst mainstream banks and share best practice, the Bank of England could produce a special report on the financing of women s micro-enterprise in the UK Banks should explore the potential of using peer lending groups to reach out effectively to women micro-entrepreneurs, probably through intermediary organisations. Both the peer lending group and the intermediary can effectively reduce the transaction costs and the risk faced by the banks. There is a need to look carefully at how the benefits system supports the move into enterprise. The following recommendations suggest some ways in which that transition might be made easier and hence become more of an encouragement to people to consider enterprise: Greater flexibility in the provision of in work benefits for people who want to combine some kind of enterprise activity with their caring and domestic responsibilities. Developing an income bridge to help people to move off welfare and into enterprise. A period of at least 52 weeks of protected benefits would enable more people to successfully start and maintain viable businesses and reduce the numbers of people returning to benefits. However, it must be recognised that for many women (and clearly for some men too) a more realistic period for support would be up to 2 years given the evidence presented here from existing women s support programmes. Extending the four-week period of protected housing benefits would help to smooth the transition from benefits to enterprise. The minimum of 18 months for entry onto the Self-employment option of the New Deal for over 25s should be shortened to enable more people to make use of this potential bridge into enterprise from unemployment. Corporate engagement In addition to the obvious roles for successful businesses in providing mentoring and/or infrastructure for micro-enterprises, or encouraging more local purchasing, there should also be a much more strategic and market-oriented approach. Local intermediaries such as the SBS should be used to help link micro-enterprises with corporates for mutually beneficial relationships in order to create new market opportunities. Lessons can be drawn from innovative work in the US. There should also be consideration of the possibility of creating community-owned property assets which would allow the development of a mixed ecology of corporate, local retail and social enterprise outlets by cross-subsidising the rents of local providers through the rents of commercial brand names. End. 11