The CBR SME surveys what have we learned?

Transcription

1 The CBR SME surveys what have we learned? Alan Hughes Centre for Business Research Judge Business School University of Cambridge

2 References and Acknowledgements Cosh, A. and Hughes, A. (eds). (2007), British Enterprise: thriving or surviving? SME growth, innovation and public policy Hughes, A. (1991), UK Small Businesses in the 1980s: Continuity and Change, Regional Studies, October, pp Rowthorn, R. & Coutts, K. (Updated May 2006), De-Industrialisation and the Balance of Payments in Advanced Economies, The Cambridge Journal of Economics, September PACEC (2006), Small Business Service: Mapping of Government Services for Small Businesses Final Report, PACEC for SBS.

3 A Sense of Proportion: UK SMEs in million enterprises 3.1 million no employees 1.2 million employees 0.8 million 1-4 employees Around 3,000 enterprises employ over 500 staff BUT they account for: 50% employment 65% turnover 1.2 million SMEs therefore account for 50% employment 35% turnover

4 The Context The ESRC funded 1991 CBR survey was the first major SME survey since the Bolton Report over 20 years previously The Bolton Report had painted a picture of an SME sector in long term decline By the early nineteen nineties it appeared that the sector was resurgent SMEs were to be the engine of employment generation By late nineties and several ESRC funded CBR surveys later they were to be the vanguard of technological innovation and cluster policy

5 Share of Employment by Size of Enterprise in UK Manufacturing, % Employment 25 Enterprises with less than 200 workers Enterprises with less than 100 workers Source: Hughes (1991) Years

6 Total Employment in UK Manufacturing by Size of Enterprise, Employment (000) All Manufacturing Less than 200 workers Less than 100 workers Years Source: Hughes (1991)

7 UK Enterprise Over Recent Time Periods Breaks in the data series in the early nineties, and increases in the VAT thresholds allow only broad comparisons Stock of VAT Based Enterprises grew at 2.0% p.a fell at 2.4% p.a grew at less than 1.0% p.a Movements in stock mirror instability/stability of macroeconomy in these periods Movements in stock dominated by exit/entry of microfirms employing less than 10 people (c. 84% business stock in 2004) and by business services expansion.

8 Levels and Changes in the Stock of UK VAT based Enterprises % 15% 10% 5% 0% -5% '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 ' % Percentage Change Total 1.2 Source: UK Business: Activity, Size and Location 2005 (ONS October 2005)

9 The Share of SMEs in UK Economic Activity Growth in business numbers confined to the micro-firms employing less than 10 people - Share of Businesses - Share of Employment - Share of Turnover Most of this increase over by 1997 Medium firms (10 < 100) stable or falling shares of activity. Some important business services and trade related structural shifts

10 The Stock of UK VAT-based Enterprises in Manufacturing and Finance, Property and Business Services Finance Property and Business Services most dynamic UK sector since 1990 Now three times as large numerically as manufacturing Millions Manufacturing Finance, property and business services Source: UK Business: Activity, Size and Location 2005 (ONS October 2005)

11 Invisibles Components of the UK Balance of Payments (shares in current prices) Source: Rowthorn & Coutts 2006 Trade Balances in % GDP (2004) Knowledge-Based Services (3.50) -Insurance (0.54) -Finance (1.20) -Selected Business Services: (1.13) of which Legal (0.15) Accounting & Business Mgmt (0.14) Advertising & Market Research (0.12) Research & Development (0.24) Arch. and Eng. Svcs (0.36) Traditional Services (-1.80) Transport, Travel, Government, Transfers of which Travel (-1.40) Income (2.50) Dividends Retentions and Other Income

12 The Pressure for Support 1 Training Reducing Taxes Capital market failures Support for Innovation and Collaboration

13 Supporting the Enterprise Economy Small Business Support Policy 2003/4 Tax Breaks 3.6 billion Government Support Expenditure 4.3 billion Skills learning 1.7bn DTI/OST 0.5bn Total Support 7.9bn c. 220 p.a. per person of working age in UK Central government departments alone were operating 267 separate programmes aimed at business support for small and medium-sized firms (SBS/PACEC (2006))

14 Support for Small Businesses in 2003/04, ms Learning and Skills Council (National) incl. Vocational Qualifications 1,672 Central /Regional Government Programme Budgets Department of Trade & Industry RDA / Local Authority Department of Culture, Media and Sport Department of Work & Pensions / Job Centre Plus Department of Environment, Food and Rural Affairs (excl. CAP) European Commission (Structural Funds) / European Investment Bank Small Business Service Department of Education and Skills UK Trade International Others Office of Science and Innovation Source: PACEC (2006) Mapping of Government Services for Small Firms: Final Report (SBS) TOTAL 4,286 Corporation Tax (20% Rate) 2,300 Tax Incentives VAT Small Traders Corporation Tax (Zero Rate) SME & R&D Tax Credit Enterprise Investment Scheme / Venture Capital Trusts / EMI TOTAL 3,615 COMBINED TOTAL 7,901 Note: Data are not available for Inland Revenue or HM Customs & Excise and the table excludes CAP subsidies amounting to 2,398 million

15 Some Key Questions Since 1991 have SMEs become more or less profitable? Innovative? fast growing? collaboratively linked to the science base? Is the UK SME sector less constrained in meeting its objectives now than in 1991? How have their policy concerns changed?

16 Economic Indicators and the CBR Survey Periods % GDP grow th (constant prices) %pa Short-term interest rate % RPI inflation %pa Unemployment % Source: Cosh and Hughes (2007)

17 Macro Economic Factors The first survey took place in the midst of a major recession with high interest rates and inflation 1997 survey occurred in more favourable circumstances and with a more stable macro-economic environment and the same was true for 2004 Some concern at low levels of demand, particularly in a manufacturing context Context must be borne in mind when we interpret changes especially in finance and growth performance

18 Longitudinal Comparison Dataset We make use of three of the CBR surveys carried out over this period CBR survey carried out in This covered around 2,000 firms in manufacturing and business services and reflected their experience in the three years up to and including CBR inclusion of Business Services in 1991 and in all later years reflected our recognition of the dynamism of this sector and the research of our geographical colleagues David Keeble and Peter Wood in particular. Second CBR survey we use is based on a new sample of 2,500 firms which was drawn in The final CBR survey on which we draw is the most recent carried out in This covers a third sample of over 2,000 firms.

19 The CBR Matched Sample The sample consists of 3,387 firms 1,165 firms drawn from each of the 1991, 1997 and 2004 CBR surveys Samples matched by size, age and 6 broad industrial sectors. In each year there are: 777 older and 388 newer (newer 10 years or less since startup) 276 firms with less than 10 people, 667 firms employing people, 222 medium-sized firms employing between employees 682 firms in manufacturing, 483 in business services

20 Method of business formation newer Firms 1991, 1997 and 2004 surveys New Start ups fell and spin offs rose in importance over the period directors more experienced? % 67.5% % of Firms 60% 50% 40% 30% 20% 10% 30.0% 24.7% 19.3 % 8.8% 11.7% 12.4 % 4.4% 7.4% 6.2% 56.1% 51.4% 0% Spin-off Management buyout Merger New start-up Source: Cosh and Hughes (2007)

21 Annual % employment growth 1991, 1997, 2004 surveys Despite worse growth prospects in 1991 for all but one age group growth rates were lower in the later periods mature slow growers 60 Median or less or older Source: Cosh and Hughes (2007)

22 Profit Margin on Sales by Size of Firm Profit margin rose and then fell for the sample as a whole between 1991 and By 2004 the median profit margin on sales was lower for all firms than it had been in Micro-firms exhibit the highest profit margin in each year in the survey and had higher margins than in The recovery of profit margins between 1991 and 1997 may reflect the general macro-economic improvement between those two survey dates. The relatively marked improvement for the micro-firms may reflect the relative severity of the impact of recession on these firms in 1991.

23 Median Profit Margin by Size Group % of Firms Micro Small Medium All Source: Cosh and Hughes (2007)

24 Factors limiting Ability to Grow (1) Focus on market demand, internal business skills and access to finance These were the most highly-rated barriers in each year Significant differences by size of firm and over time For all firms the major difference between 1991 and 2004 is the reduction in the significance of constraints arising from the availability of finance for expansion and overdrafts. In each year finance constraints were greater for micro-firms than for small firms, greater for small firms than for medium-sized firms In each size class the constraint arising from overall market growth also fell. Reflects changing macro-economic conditions between the surveys

25 Factors limiting ability to grow for micro, small and medium-sized firms MICRO A 50 SMALL 50 A MEDIUM 50 A G B G B G B F 0 C F 0 C F 0 C E D E D E D A=Overall market growth B=Management skills C=Marketing and sales skills D=Skilled labour shortage E=Availability/cost of overdraft F=Availability/cost of finance G=Increased competition Source: Cosh and Hughes (2007)

26 Factors limiting Ability to Grow (2) For small and medium-sized firms, barriers arising from management skills, marketing skills and skilled labour were higher in 2004 than in Small firms felt most constrained by these factors in each year. In all size classes barriers from competition were more important in 2004 than in 1991, especially for small and medium-sized firms. Increased competitive pressures may relate to the downward trend observed in the sales margin on profits The relatively low rating placed on increased competition in each year by micro-firms may relate to their ability to maintain higher margins on sales.

27 Sources of Competitive Advantage Stable ranking of highly significant factors Personal attention, reputation, quality, speed of service and specialisms are most highly valued in all years. Price and cost factors significantly lower in 1997 and 2004 than May reflect changing macro-economic circumstances between the survey periods Given the importance attached to product, quality and innovative capability in discussions of the productivity performance of the UK economy, it is noticeable that design and creativity are not regarded as highly significant factors for SME competitive advantage by the firms themselves.

28 Sources of competitive advantage % scoring these factors as highly significant % of Firms Personal attention Quality Specialism Product Reputation Speed range Of service Price Design Marketing Creativity Cost Source: Cosh and Hughes (2007)

29 Innovation, Training and Exporting Major areas of policy support BUT Little change in proportion of firms exporting over the period as a whole Percentage exporting rose, then fell in the period 1991 to Proportion of firms reporting formal training remained relatively steady throughout the period as a whole. Very little change in proportions of firms introducing new or significantly improved products, new or significantly improved processes, or innovations of any kind, including logistics and distribution activities.

30 Innovation, training and exporting (% of firms) % of Firms % exporters % trainers % product innovation % process innovation % any innovation Source: Cosh and Hughes (2007)

31 R&D Activity The proportion of firms reporting that they carried out R&D activity halved between 1991 and Decline was common across all size classes. Decline was most marked amongst micro-firms where the proportion fell from 68.4% to 22%. The proportion of staff involved full- or part-time on R&D remained stable between 1997 and 2004 in all size classes. It rose substantially from 1991 to 1997 for small firms, but this reflects the relatively small number of employees involved in the micro-category firms. Implication of these trends is that overall R&D activity is less frequent, but the typical number of employees involved in it has remained relatively stable since the 1990s. Is R&D per se capturing the full range of innovation inputs? Needs further work.

32 Firms carrying out R&D % of Firms Micro Small Medium All Source: Cosh and Hughes (2007)

33 Percentage of staff involved in R&D (median) % of Firms Micro Small Medium All Source: Cosh and Hughes (2007)

34 Collaborative Activities The frequency of collaborative activity has risen steadily since By 2004, 44% of the sample firms reported a collaborative arrangement with another organisation. The most frequent collaborations are with customers and suppliers. Collaborative arrangements with higher educational institutions rose rapidly between 1997 and 2004 from 14% to 22% of the sample firms. In 1991 collaborative activities with suppliers were over three times more frequent than those with higher educational institutions. By 2004, they were just over twice as frequent.

35 Percentage of firms collaborating by type of collaborator 1991 % of Firms Any collaboration With suppliers With customers With HEIs Source: Cosh and Hughes (2007)

36 Reasons for Collaborative Arrangements The most frequently cited reasons for collaborating in 1991, 1997 and 2004 were to expand the firms product range and to develop their specialist activities. The reason which increased most significantly in frequency was the need to collaborate to retain customers Reflects the importance of customer relationships in SME growth and development. Collaboration to gain access to overseas markets was the only factor to show a decrease in frequency Puzzling in view of increased intensity of competition and frequency of exporting over the period as a whole. Collaboration to share research and development was moderately important, but rose in significance over the period as a whole.

37 Reasons for collaboration arrangements % of firms Expand Product range Develop specialisms Access new UK markets Access Overse as markets Improve credibility Share R&D Retain customers Access equipment Improve management Source: Cosh and Hughes (2007)

38 Sources of external finance for firms (% of total finance raised) 70 SME finance (in addition to internal cashflows) is dominated by bank finance. % of total finance raised HP and leasing finance next most important. In the mid-1990s there was a switch from bank finance to HP leasing finance which was reversed by Banks HP/leasing Partners/ shareholders Other sources Venture capital Invoice finance Trade credit Private individuals Source: Cosh and Hughes (2007)

39 Bank Finance as Percent of Total Finance Raised by Size of Firm Switch from bank finance between 1991 and 1997 common to all firms. Recovery of bank finance by 2004 dominated by the switch in micro-firms. Both small and medium-sized firms significantly decreased reliance on bank finance over the period as a whole.

40 Bank Finance by Size of Firm 80 % of total finance raised All Micro Small Medium Source: Cosh and Hughes (2007)

41 Venture Capital finance as a % of total finance raised by size of firm 10 Use of venture finance remains small, but has increased in importance, especially for micro-firms between 1997 and % of total finance raised Venture all Venture - micro Venture - small Venture - medium Source: Cosh and Hughes (2007)

42 Desired Policy Changes 1 In 1991 and 2004 respondents were asked to write in the most significant policy changes they would like to see introduced. The five most frequently cited areas of policy change in 1991 and 2004 were: Tax reform, stable economy, less regulation, more regulation, better government support. Major changes occurred between 1991 and 2004.

43 Desired Policy Changes 2 The macro-economic stability of the past decade has significantly reduced the desire for policies to produce a stable economy. By far the most important area of concern in 2004 is the desire for less regulation, which has increased in frequency from 10% to nearly 35% of firms citing this as an area for desired policy change. Despite massive tax breaks firms were equally concerned in 2004 and 1991 about a variety of tax reforms to promote their performance and the returns from operating a business. The desire for better government support has increased between 1991 and The desire for more regulation to promote small business activity has fallen slightly over the period.

44 Desired policy changes 1991 and 2004 Tax reform Better government support Stable economy More regulation Source: Cosh and Hughes (2007) Less regulation

45 Conclusions 1 SME new start ups were lower and profit margins fell over the period despite policy support. The business population is still significantly below the levels reached in Constraints arising from the availability of finance for expansion and overdrafts fell significantly policy support or macroeconomic stability??...even in 1991 firms got nearly all the finance they sought. SME finance (in addition to internal cashflows) was dominated by bank finance throughout the period. Use of venture finance remains small, but increased in importance, esp. for micro-firms.

46 Conclusions 2 Collaborative activity rose steadily esp. with HEIs. In 1991 supplier collaborations were over three times more frequent than with HEIs, by 2004, they were only twice as frequent. Question of quality remains Collaboration to share R&D rose in significance over the period as a whole. The proportion of firms with R&D activity fell over the period, but the proportion of employees involved remained relatively stable. The incidence of innovation, training and exporting was no higher in 2004 than in 1991 despite sustained government support.

47 Conclusions 3 SMEs grew less fast in recent years despite better macroeconomic circumstances Reflecting constraints from management skills? Constraints from marketing skills and skilled labour all rose reinforcing the need for the substantial skills support expenditure to be focussed in these areas? Macro-economic stability has significantly reduced the desire for new policies to produce a stable economy. The desire for policies to reduce regulation has increased in frequency from 10% to nearly 35% of firms.

48 Conclusion 4 The huge expenditures on SME support and the large number of programmes suggest the need for a review of the overall impact of this expenditure. The question of overlap and depth rather than the width of support will be important in any such review.