Size might not matter but age definitely does

It’s ironic that politicians are so obsessed with creating jobs, given that many interventions – such as employers’ national insurance contributions and a politically determined minimum wage – achieve the diametric opposite. Yet it remains a key metric for determining political success and failure, and it drives much that passes for entrepreneurship and enterprise policy.

When it comes to job creation there is a debate about whether small or large businesses contribute more. Those representing small businesses can claim that micro businesses account for around 95% of all private sector companies, while those representing large businesses can counter that despite making up less than 0.1 per cent of the total private sector stock, large businesses account for more than half of all turnover and more than 40% of UK private sector employment.

It’s a complicated debate. Nesta research suggests a small proportion of businesses are responsible for the majority of job growth, with the data showing that “just 7% of businesses are responsible for half of the jobs created between 2007 and 2010.”

Elsewhere, Nesta suggests focussing government resources on supporting what was then “the vital 6%” . But it isn’t obvious that this is the right conclusion from the data. It’s entirely possible that current polices are limiting the size of this so-called vital 6% job-creating companies. If this were the case, instead of focussing on those businesses and sectors already succeeding, the right policy would be the exact opposite: focusing on increasing that 6% figure by targeting companies not in the 6%.

Although the ideal ratio of small to large businesses might be indeterminable, we do know one thing. Size might not matter but age definitely does: we want new businesses. As the Kaufman Foundation explains: “Policymakers often think of small business as the employment engine of the economy. But when it comes to job-creating power, it is not the size of the business that matters as much as it is the age.”

Therefore, politicians and policymakers should want the entrepreneurial process to happen quickly; they should want to make sure regulations don’t inhibit the process of business creation and destruction; they should, to paraphrase the lean startup, want entrepreneurs to start fast, grow fast and fail fast.

Philip Salter is director of The Entrepreneurs Network.

The tax system is the biggest barrier to growth

Outside of academic papers that too rarely see the light of day, most “research” is unremarkable in its optimism about the state of entrepreneurship in the UK. That’s why the RSA’s Growing Pains: How the UK became a nation of “micropreneurs” caught my eye. It paints a stark picture.

The UK, according to the report, has become a nation of micro businesses, while the proportion of high-growth businesses has plummeted: “UK businesses are becoming increasingly micro in size – reducing the overall potential for economic output and future growth, and increasing the economy’s reliance on a relatively small number of larger businesses.”

Since 2000, the proportion of businesses classified as micro (0-9 employees), as a share of all UK businesses has grown from 94.3 per cent of all private sector companies to 95.4%. This represents an additional 1.4 million micro firms and an increase over the same period of 43%.

“At the same time, the proportion of high-growth enterprises has declined sharply, falling by more than a fifth in the majority of regions since 2005.”

Although the number of high-growth firms is expected to rise over the coming years, the report cautions optimism: “performance is expected to remain below 2005 levels in all regions except London”.

So how can we solve the problem? According the entrepreneurs, the tax system (44%) is the biggest barrier to growth – ahead of a lack of bank lending (38%) and the cost of running a business (36%).

Another problem highlighted by the report is that entrepreneurs don’t know what the government is up to:

“Around three-quarters (73%) of small business leaders also say the Government must make it easier for SMEs to access the right information and support for growth. While several of the Government’s recent incentives to support SMEs are designed to address the top-cited barriers, perhaps this information is not reaching the people who need it the most.”

Two polices are put forward in the conclusion to help entrepreneurs. First, “continued reform of the apprenticeship scheme could help micro firms to grow out of this business size category”. Second, “more tax relief like the National Insurance holiday could also pay real dividends.” It would be worth exploring the former in detail (something I plan to work on), but I don’t think another NI holiday goes nearly far enough: Employers’ National Insurance should be scrapped entirely. And no just for small businesses.

Being an entrepreneur is tough. As the report points out, “the majority (55%) of new businesses don’t survive beyond five years.” Scrapping Employers’ NI is the logical place to start.

Philip Salter is director of The Entrepreneurs Network.

Tired of London?

Samuel Johnson famously pronounced: “when a man is tired of London, he is tired of life”. This isn’t the end of his statement though, he added: “for there is in London all that life can afford.” But what if you can’t afford life in London? Surely then it is time to up sticks and move to a cheaper city.

According to a poll from the Supper Club, the network for entrepreneurs turning over £1m or more, 40pc of London-based business owners have considered moving their operations.

More than a third claimed that the cost and inefficiency of London’s public transport system is holding back businesses, while 40pc said that the cost of housing is driving away the best talent. With house prices in London reaching an all-time peak, business owners have warned of a “brain drain”.

The Supper Club, which represents 330 entrepreneurs from a range of sectors, found that 79pc of respondents fear a skills crisis within five years.

Of course, for as long as London remains a leading world city – at the cutting edge of finance, business and culture – it will remain a pricey place to live. After all, there is a flipside of the economies of amalgamation – some stuff, like housing becomes more expensive. And yet, there can be no doubting that house prices are hitting crisis point. For Generation Y, many can’t foresee how they will ever be able to own property in the capital. London’s big divide is between the owners and the renters and successive governments’ failure in allowing more houses to be built is squarely to blame.

To give you a sense of the crisis, Shelter’s model predicts that fewer than 1 in 5 of London families will be able to become owners by the age of 65 if prices inflate as they have done in the past.

As the LSE’s Paul Cheshire points out, politicians haven’t stepped up to the plate. The coalitions’ Help to Buy policies are doing little (except pushing up prices), while Labour’s suggestion for partial controls on rents, increased security of tenure, and elimination of agent’s fees for finding housing for renters, will probably just decrease rental supply as fewer people want to become landlords.

Cheshire believes “nothing short of radical reform will improve housing affordability. But radical reform, like intelligently loosening restrictions on Greenbelt building, is frightening.” Affordable, more stable house prices should be the policy goals of all political parties. This requires a more liberalised system, whereby the demand for housing would impact its supply.

This generation of successful entrepreneurs may be able to live in London but their employees increasingly can’t. And crucially, for the wealth of this nation, the next generation of entrepreneurs may have already moved to a city where the cost of living isn’t prohibitively expensive – and my first pick wouldn’t be the UK.

The risk tolerant benefit more from entrepreneurship training

Policymaking always utilises a broad brush with which to redraw the lives of individuals. However, though broad, with the right evidence this brush can be narrowed by taking account of the heterogeneity of human behaviour.

Just consider the many and varied schemes designed to support entrepreneurs. Putting aside the debate over whether or not this is the best use of tax revenues, nobody could deny that if we are to spend money on promoting entrepreneurs we should do so in most efficient way.

In “Entrepreneurship Training, Risk Aversion and Other Personality Traits: Evidence from a Random Experiment”, Robert W. Fairlie and William Holleran from the University of California draw on data from Growing America through Entrepreneurship (Project GATE), the largest randomised control experiment on providing entrepreneurship training ever conducted in the United States. Fairlie and Holleran find that:

[I]ndividuals who are more risk tolerant benefit more from entrepreneurship training than individuals who are less risk tolerant. The estimated interaction effects are large: averaging our estimates across the three waves implies that individuals who have a one standard deviation higher level of risk tolerance experience a 2.9 percentage point larger increase in business ownership and a 3.7 percentage point larger increase in the likelihood of starting a business from receiving the treatment than individuals with the lower level of risk tolerance.

This is a useful insight and suggests that we should consider identifying specific groups that may benefit more or less from government programmes to help people start a business. There can be no sure-fire way for spotting the next Zuckerberg, but we can increase the odds. Interestingly, Fairlie and Holleran also find “no evidence that individuals who are more innovative benefit more from entrepreneurship training than individuals who are less innovative.”

As the paper states: “some of the most disadvantaged groups such as at-risk youth and individuals with a criminal background have high levels of risk tolerance, and thus might benefit more for entrepreneurship training than more traditional job training programs.” There might be something in this: John Timpson has found ex-offenders fit in well with his unique entrepreneurial, bottom-up model for running his high street retailer.

As things stand in the UK, we have a remarkably limited understanding whether the schemes used to support entrepreneurship are doing any good. According to Gov.uk, business owners have 278 schemes to choose from. With proper analysis it might turn out that this is the correct number and they are being targeted at exactly the right group in the most efficient way. But I doubt it.

Philip Salter is director of The Entrepreneurs Network.

Politics: It’s a funny old game

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Is there anything more off-putting to people outside the Westminster Bubble than witnessing the carnival of party conference season? If you don’t support a party, you’ll be as perplexed as an ornithologist at the Manchester derby. Everywhere you turn, discussions rage about the latest transfer news with rumours of the latest Conservative MPs to migrate to Ukip, and tactics discussed in intricate detail about how to defeat the opposition. You’ll even hear chanting: “Five more years!”

The football analogy can only be stretched so far though. While support for football clubs remains as popular as ever, people are becoming less interested in political parties – at least the top three:

“Membership of the three main political parties is at a historic low: less than 1% of the UK electorate is now a member of the Conservative, Labour or Liberal Democrat Party, compared to 3.8% in 1983. Latest estimates suggest that the Conservative Party claimed 134,000 members, the Labour Party 190,000 and the Liberal Democrat Party 44,000.”

And don’t expect this to change any time soon: Less than a third of young people express interest in politics, according to a recent ONS survey. It found that only 31% of 16 to 24-year-olds were fairly or very interested in the subject.

This decrease in interest in established parties and politics is offset by one trend though – a growing interest in small parties:

“[M]embership of smaller, often nationalist parties has risen markedly since the new millennium. In June 2014 membership of the UK Independence Party was around 39,000; in September 2014 membership of the Scottish National Party was around 64,000; in December 2013 membership of the Green Party was around 14,000. Though none of these parties can claim to equal either the Conservatives or Labour in size, their rise nonetheless represents a notable change in the make-up of the UK’s political landscape.”

There is plenty wrong with all major political parties, but there is a lot more wrong with these smaller parties. Ukip represents the worst of Little Englanders and the SNP the worst of Little Scotlanders. The Green Party has a more international outlook, but one in which the entire globe returns to a utopic state of nature; a time where our lives were very nasty, very brutish and all too short.”

In the long run, I don’t think this matters very much. In Britain, our lives – from money to morals – will increasingly become disconnected from political decisions. The next generation is more open to others doing what makes them happy, while Bitcoin and blockchain technology offers the prospect of capital accumulation and exchange without the state. This, in part, might be why so few young people care about politics. But whether or not tolerance and tech trumps politics, we have a few elections between now and then; elections where the result will greatly impact the wealth and happiness of us all.

So what can be done? You don’t necessarily need to rush out and join a political party, but I think we would benefit from smarter, more open-minded people in politics and the policy process. For example, we know immigration is a hot topic, but we should also know that removing all barriers to migration throughout the world is calculated to increase global GDP by between 67% and 147.3%. This isn’t going to happen, but it should be the sort of data to inspire a generation. Perhaps not Steven Woolfe’s generation though; Ukip’s spokesman on migration and financial affairs thinks we should cap net immigration at 50,000 per year.

It might not be rational or feel particularly empowering to vote but occasional elections aren’t the only way of engaging in politics and policy. For example, if you’re a student on a gap year, you could apply to work for the Adam Smith Institute.

The game of politics isn’t always beautiful but the key players influence the result – even if they aren’t sitting in the House of Commons.

Philip Salter is director of The Entrepreneurs Network.