BBB Teach In presentation September 4 2024

Presentation by Mark Hart to the British Business Bank teach in session.

1. Professor Mark Hart Enterprise Matters Other Funders

2. Agenda Business Dynamism Trends in the UK since 1998 Job creation & destruction Productivity Heroes UK’s Entrepreneurial journey since 1999 Focus on gender and ethnicity Business Support Export support in Scotland Leadership & Management programmes Note: This presentation contains statistical data from ONS which is Crown copyright and reproduced with the permission of the controller of HMSO and Queen's Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. The analysis upon which this presentation is based uses research datasets which may not exactly reproduce National Statistics aggregates.

3. Business dynamism & firm growth

4. Firm-Level Growth Metrics Too often researchers ignore the importance of the inter-relationship between Churn; Age and Size of businesses Initial survival and scaling of start-ups a key concern – not interested in the volume of start-ups per se – the 2% rule of thumb Very few firms that can be categorised as ‘high-growth’ or have shown evidence of scaling Proportion of ‘young firms’ (<5 years) in business stock a vital metric Ignore micro-enterprises at your peril! Surviving Start-ups >£1m T/O after 3 years

5. Job Creation and Destruction Accounts We use our longitudinal firm-level ONS BSD dataset covering the years 1998 to 2022 to provide a summary of average annual rates of job creation and destruction, entry, exit and reallocation rates in the UK disaggregated by region and firm size (employment). The job creation and destruction rates presented below are defined in the conventional way 1 : Job Creation – employment changes summed over all businesses that expand or start up in a given year. Job Destruction – employment changes summed over all businesses that contract or exit in a year The sum of the job creation rate and the job destruction rate is referred to as the job reallocation rate . It summarises the overall volume of change and in essence represents the ‘ reshuffling of job opportunities across locations ’. Tracking the job reallocation rate allows us to arrive at a measure of business dynamism for the economy. 1 Davis et al., (1996) Job Creation and Destruction, MIT Press: Cambridge Mass.

6. Job Creation and Destruction UK (2021-22) Job Gains Job Losses Start-ups 885,004 Expansion 1,512,845 Closure/Exit -859,797 Contraction -1,390,564 Total 2,397,849 -2,250,361 Net Job Change Gross Job Churn 147,488 4,648,210 Opening end 2021: 21.59m jobs in the private sector Closing end 2022: 21.74m jobs in the private sector

7. Business Dynamism in the UK – a story of long-term decline Business Dynamism in long-term decline since 1998 - Job Allocation Rate (JAR) falling from 35% in 1998 to 22% in 2022 – clear evidence of the enduring productivity problem in the UK 400,000 more established SMEs (3 years +) since 2010 but proportion registering growth in employment falling from 20% to 13%

8. Scaling, HGFs and the like…….. Scaling’ is an important dynamic to nurture in the economy. Importance of interplay between firm size and age cannot be understated in our understanding of the scaling process/ Current discussions about ‘scale-ups’ profoundly unhelpful from a policy perspective – e.g., SUI current survey! Having started the ball rolling a decade ago with our work for NESTA (i.e., the Vital 6% - HGFs 2005-08 – 40% had exited the market by 2016!!) we now state: “There’s no such thing as a High-Growth Firm (or ‘scale-ups’) only firms that have high-growth episodes” To use, e.g., the OECD definition of a HGF renders invisible the actual growth that takes place in a firm over its life cycle and indeed the wider firm population! Hart, M; Prashar, N and Ri, A (2020) “From the Cabinet of Curiosities: The misdirection of research and policy debates on small firm growth”, International small Business Journal, 2020 (with Neha Prashar and Anastasia Ri) https://journals.sagepub.com/doi/10.1177/0266242620951718

9. Longitudinal Cohort Approach Scottish Start-ups in 2010: timing of ‘high-growth’ events (20% emp. def ) 2010-18 Analysis of a cohort of start-ups in 2008 placed the concept of ‘high-growth’ within the life cycle of the business - ‘high-growth’ can occur at any stage.

10. Jobs, Turnover and Productivity Developing a new focus for small business policy in the UK Previous research by the ERC showed that there was a very poor correlation between jobs growth, increases in revenues and productivity gains in the UK business population. Panel study of 250k employer enterprises (2008-15) - only 5% of the firms studied managed to significantly increase turnover, jobs and productivity at the same time – some 10,000 firms! The relationship between the growth of turnover and productivity was strong and positive, with 3 out of 4 firms that grew turnover also raising productivity.

11. Productivity or Jobs? Turnover Growth Job Growth Zero Zero Zero ‘Green Zone’ + + + - - - Only one ‘space’ where growth in T/O; Jobs and productivity are all + ve – the ‘green zone’ But sparsely populated with firms – 9% …and more than half of them where there is very little growth Rule of thumb – 74% of firms which grow turnover grow productivity; 21% of firms which grow jobs grow productivity Source: Anyadike-Danes, M and Hart, M (2016) “Seeing the trees for the wood: going with the grain of the extraordinary heterogeneity of firm-level productivity”, ERC WP, November 2016; Anyadike-Danes, M (2016) “Locating High Growth Firms in Productivity Growth Space” – Slide deck available from author. British Business Bank (2018) Productivity Growth 11% 6% 6% 27% 7% 9%

12. Moving on….focus on productivity From a productivity perspective HGFs, as defined by the OECD, are not an important group of firms!! Only 20% of 10+ employee firms that increased their productivity were HGFs (T/O definition) Only 5% of 10+ employee firms that increased their productivity were HGFs (Jobs definition) Single definitions of scaling using ONE metric not helpful for policy – so, we set out to investigate those firms that are registering productivity gains (i.e., turnover per employee) and are doing so while still creating jobs. These small businesses we call ‘Productivity Heroes’ - defined as SMEs aged 3 years and over that are growing both their revenues and headcount but their revenues at a faster rate. A small group of SMEs (8% or 36,298 of 453k firms that increased productivity) aged 3 years and over within this total that are: creating jobs by an average of 29%; but growing revenue even more rapidly by an average of 196%; increased productivity by 129%

13. Productivity Heroes We set out to investigate those firms that are registering productivity gains (i.e., turnover per employee) and are doing so while still creating jobs. These small businesses we call ‘Productivity Heroes’ are defined as SMEs aged 3 years and over that are growing both their revenues and headcount but their revenues at a faster rate. The base population used to identify the number of Productivity Heroes is all surviving private sector SME employer enterprises (1-249 emps) in the UK in 2021-22 which are at least 3 years of age - i.e., not start-ups – 1.22m enterprises. Hart, M and Bonner, K (2024) “Productivity Puzzles, Long Tails and Productivity Heroes: developing a new focus for small business policy in the UK”, ERC Insight Paper, February 2024.

14. Productivity Heroes - Trends So, out of a total of 453,231 firms that had increased their productivity we can see that there is a small group of SMEs (8% or 36,298 firms) aged 3 years and over within this total that are creating jobs by an average of 29% growth but growing revenue even more rapidly by an average of 196% Year No. of SMEs (3 years and over) No. and % of businesses achieving productivity growth No. and % of Productivity Heroes 1 2000-01 676k 347k - 51.3% 4.5% (15,622) 2007-08 825k 449k - 54.4% 8.8% (39,245) 2010-11 882k 358k - 40.7% 6.6% (23,740) 2018-19 1.13m 557k - 49.2% 6.7% (37,125) 2021-22 1.22m 453k - 37.0% 8.0% (36,298)

15. PH Episodes & Spells? PHs 2021-22: 36,298 firms - No. of Spells? 89% only once - 2021-22 10% had two spells: 75% in 2018-19 11% in 2010-11 11% in 2007-08 3% in 2000-01

16. Productivity Hero Characteristics 97% are UK-owned

17. Summary Growth is episodic - analysis of the scaling process must embrace longitudinal cohort analysis over long periods. Productivity is all that matters? – hence our focus on ‘Productivity Heroes’ – we are examining these now on a cohort basis over the last 25 years – over many crises. Business Support Policy: need to create a range of ‘scaling’ offers across the firm life cycle: Nascent entrepreneurs or start-ups growing (only 2% achieve £1m T/O in 3 years if they survive and half do not) Accelerating the growth of businesses already showing signs of ambition and growth (14% - Growth Flag data) Getting scaled businesses to scale again and more quickly (too many ‘one-off’ growth episodes)

18. GEM UK Entrepreneurial Trends

19. GEM’s Origin Story – a 25 Year Research & Policy Project In 1999, when Professor Bill Bygrave of Babson College and Professor Michael Hay of London Business School put their heads together and co-created Global Entrepreneurship Monitor (GEM), along with Professor Paul Reynolds did they dare to imagine that this research idea would one day have a 25-year (and counting) horizon? “The unique nature of the GEM methodology and data not only allows us to understand the current dynamics of entrepreneurship in various contexts but also enables us to provide scientifically based recommendations for improving regional or national entrepreneurship ecosystems through historical analysis. These are key GEM differentiators.” José Ernesto Amorós, Tecnológico de Monterrey, and GEM Mexico National Team Co-Leader (and the GEM/GERA Board Chair) “I am most proud of the fact that GEM has become the most frequently used data source on entrepreneurship among academic researchers, including those publishing in the most influential peer-reviewed journals.” Professor Donna Kelley, GEM founding organization, Babson College, GEM US National Team Co-leader, and GEM Saudi Arabia

20. Turbulent Times since 1999! The last 25 years has included events such as: the World Trade Centre disaster in September 2001 and subsequent turmoil in international finance markets and the collapse of the ‘high-tech boom’, the Great Financial Crisis, simultaneous exit from the EU and the COVID pandemic, war in Ukraine provoking rocketing energy costs, inflation and a cost-of-living crisis, war in the Middle East, stagnant growth bordering on recession and not forgetting the UK’s own political soap opera since 2022. Uncertainty became the new normal - against this background we ask the questions “how have attitudes to entrepreneurship evolved and what have been the key trends in entrepreneurial activity and aspirations?”

21. The State of Enterprise in the UK Start-ups at all all-time high but…….. Business Dynamism in long-term decline since 1998 - Job Allocation Rate (JAR) falling from 35% in 1998 to 22% in 2022 ERC analysis suggests that it has become even more difficult in the UK for small businesses to achieve fast growth. Despite rapidly growing numbers of established small businesses the number able to create new jobs and achieve productivity growth has actually fallen. 400,000 more established SMEs (3 years +) since 2010 but proportion registering growth in employment falling from 20% to 13%. And the number achieving productivity growth alone has flatlined.

22. 25 Years of ‘Picking Winners’? Over this period the emphasis has been on fast-growth, high-growth and scaling as the watch-words of business support policy. Yet these ‘high-growth’ firms represent a tiny proportion of the total number of people who successfully set up businesses or are self-employed or who expand existing businesses. It is this mass of “everyday entrepreneurs” who generate the employment, the productivity, the innovation and the economic growth and regeneration of their communities, their regions and their countries. Any commitment by governments to supporting this group of people simply reflects the vital role that these people play in the competitive future of any country.

23. The Entrepreneurial Process and GEM Operational Definitions

24. Our 25 Year Review – Key Questions

25. Entrepreneurial Attitudes Fear of failure remains a formidable obstacle to new startups, especially for women and addressing that persistent obstacle could involve both reducing the economic and social costs and stigma of failure.

26. Entrepreneurial Attitudes Perceived opportunities is broadly sensitive to cyclical movements in the macro economy and that adverse economic conditions tend to create a low perception of opportunities for start-up. The is corroborated with the data from the United States, France and Germany.

27. Participation in Entrepreneurship Just under 30% of working age individuals were either engaged in entrepreneurial activity or intended to start a business within the next three years. Despite the constant rise in the perception that the fear of failure would prevent people from starting their own business, as well as the poor growth record of the economy, the UK is a significantly more entrepreneurial society than it was at the start of the millennium.

28. TEA Rate – International Comparisons Men & Women Women

29. TEA Rate - Ratio of Women to Men Gap between women and men TEA rates have converged very sharply indeed. In 2023, the ratio of women to men early-stage entrepreneurs stood at 85% Common mantra that “Women in the UK are about half as likely as their male counterparts to begin new firms” is no longer valid.

30. UK in a European Context (2015-21) – TEA Rates European Regional Report (2022/23) file:///C:/Users/hartm1/Box/GEM%20Project/GEM%202023/Reports%202023_2024/Launch_2024/european-regional-report-final-2023-jan26-1706637833.pdf In densely populated areas, TEA rates tend to be higher than in surrounding areas that are less heavily populated but not rural. This is illustrated for instance in the urban regions of Paris and Mediterranean France, Berlin and Hamburg, the Western part of the Netherlands, the Helsinki area, various regions in England, Madrid, Catalunya and Athens.

31. TEA Rates and GDP in Europe? Successive GEM Global Reports have posited a negative association between GDP per capita and TEA, evidenced by high levels of TEA in the lowest income economies and lowest levels of TEA amongst the richest economies. However,….. A regional disaggregation of TEA rates reveals that, across these six economies, many of the better-off regions (in terms of GDP per capita) have the highest average TEA rates: The six highest regional levels of TEA across these six economies are in Alpes-Cote d’Azur (12.3% and France’s third richest region in terms of GDP/cap), South-East England (9.7%, UK’s second richest region), East of England (9.4%, UK’s third richest), London (9.2%, UK’s richest region), Ile-de-France (9.1%, France – and Europe’s – richest region) and in Bremen (8.9%, Germany’s second richest region). The six lowest levels of regional TEA, include both the poorest region of Germany (Mecklenburg-Vorpommern, 2.9%) and the poorest region in mainland Spain (Calabria, 3.4%).

32. Motivations are changing – embracing SDGs? Engagement in entrepreneurship will certainly be driven by a range of factors, including by general social and cultural attitudes towards entrepreneurship. Pro-social motivations have become more important in the 2020s with over half of entrepreneurs now citing making a difference in the world as an important driver of their engagement in entrepreneurship. Sensitivity to social and environmental issues has grown significantly over the last several decades, especially among the younger generations now establishing themselves as leaders in the economy.

33. A more diverse population of Entrepreneurs? The UK is composed of a highly diverse population and rates of entrepreneurial activity are influenced by this diversity. Despite changes in the demographic composition of migration, one statistic has remained relatively constant, immigrant and non-white ethnic populations continue to be the most entrepreneurial groups in the UK. TEA rates of immigrants although considerably higher than those of UK life-long residents (by 1.6 times on average over the period) is more volatile. Volatility in immigrant TEA rates is possibly subject to immigration policy and variation in all three groups is partially subject to shocks. Since 2010, immigration policy has included the “hostile environment” policy, culminating in Brexit and the fallout thereof. These will have had both complex and straightforward implications on TEA.

34. Building Entrepreneurial Ecosystems

35. UK’s Entrepreneurial Ecosystem UK has been part of an increasing group of high-income economies with a declining entrepreneurial environment that has slipped from sufficient to less than sufficient. There were declines in nine of the 13 Entrepreneurial Framework Conditions (EFCs). Most of these changes were small, but the net effect for the UK was an overall reduction. Estonia and Netherlands ranked significantly higher GEM NECI Score: Estonia and The Netherlands both 5.9 in 2023

36. UK’s EFCs 2023 Five conditions are insufficient with 95% of confidence meaning that these are areas that need significant improvement: easiness to get financing for entrepreneurs (4.16), government entrepreneurship programmes (4.1), R&D transfer (3.93), government policies regarding business support (3.66), entrepreneurial education at school age (3.01)

37. New Government, New Opportunities As the UK heralded in a new Government led by Sir Keir Starmer on 5th July 2024, he accepted that now is the time for action across his whole ministerial team: “Our work is urgent, and we begin it today.” So, what are the main action points for enterprise and entrepreneurship that we can suggest are top priority aligned with the analysis of the last 25 years of GEM data.

38. Policy Priorities Deficiencies identified with the UK’s entrepreneurial ecosystem at the start of the millennium remain today. Entrepreneurial education post-school continues to remain a challenge despite numerous public and private initiatives to address this important weakness in the UK. Since 2018, there has been a weakening in a number of the of the entrepreneurial framework conditions (EFCs) most notably in the availability of sufficient entrepreneurial finance, government policies in relation to business support and physical infrastructure. UK needs to engage with the home-grown nature of these deficiencies in these EFCs and address them as a matter of priority. Ethnic and immigrant entrepreneurship make a strong and vibrant contribution to total entrepreneurial activity in the UK. Immigration policy needs an urgent reset to ensure we can return to a society that welcomes individuals to enhance our entrepreneurial stock. Tackling the persistent obstacle to start-up of fear of failure, especially for women, could reduce the economic and social costs and stigma of failure. London dominates and, while early-stage entrepreneurial activity has increased in all regions and home nations since 2002, this imbalance is not sustainable - especially with respect to availability of finance, infrastructure and business support across the English regions.

39. Business support

40. Export Promotion Support Evaluation – Scotland (2023) Prof. Mark Hart, Prof. Jun Du, Eugenie Golubova, Dr. Neha Prashar

41. Context & Objectives Export Growth Plan – A Trading Nation (ATN) (2019) Scottish Government export promotion support evaluation (2018 – 2021) Project 1. II & EP evaluation (beneficiaries) Project 2. EP Data linking Project 4. EP Non-beneficiary survey Evaluation aims / questions : What is the impact of the support? “What works” - which support types work? How are impacts achieved? What are lessons for delivery?

42. Approach 1. Mixed-methods: beneficiary survey (email/phone), interviews with surveyed beneficiaries, supplemented by MI Sample stage Sample size Sample share MOE All firms supported in 2018/21 (export and wider business development support) 3,053 100% - Firms that opted into the evaluation survey 2,329 76% - Post-survey adjustment of the evaluation survey 2,118 69% - Firms that responded to the survey 463 22% 4% Firms interviewed 23 N/A N/A 2. Non-beneficiary survey (phone): surveyed 2,231 exporting firms , 135 responses (6% response rate) 3. Beneficiary data matching to administrative datasets (ON HOLD: SRS delays)

43. Econometric analysis Analysis of 310 firms over eight years (2015-2022): 175 beneficiary and 135 non-beneficiary firms Non-beneficiary firms are a suitable control group : they tend to be larger and older, but firm differences diminish when controlling for other characteristics and they are less evident prior to the support period We used and recommend staggered difference-in-differences method (Callaway and Sant’Anna 2021) but we also tested the conventional methods: Difference-in-Mean regression (by treating intervention as a dummy variable) Control Function regression (two models) Endogenous treatment-regression model Propensity Score Matching We estimated average treatment effect on the treated firms (ATT)

44. Econometric analysis (cont.) The export support has led to an increase in firms’ value of exports of 140% Models for homogenous treatment effects Heterogenous treatment effects   (1) (2) (3) (4) (5) (6) (7) Models Difference-In-Mean Control function-OLS homogenous response to treatment status Control function-OLS heterogenous response to treatment status Endogenous treatment-regression model Propensity score matching Staggered DID (unconditional parallel trends) Staggered DID (Conditional parallel trends) ATT on log of export value 2.3*** 2.5*** 2.7*** 6.7** 1.9 1.3*** 1.4*** Controls No Yes Yes Yes Yes No Yes We also find effects across all yearly cohorts with effects showing a progressive increase over time International support only and, i n the A-C-E model, C-Capability (incl. in combination) shows the most statistically significant and positive effects

45. Policy Reflections Review the A-C-E model of support and potentially expand the E-Exploitability offer Raising awareness of SG export support to reach firms that have not engaged with the support before Indirect effects of export support: review the links between the export support and R&D/innovation support to enable or strengthen export performance gains from innovations Monitor export sales over a longer period to capture anticipated export sales

46. Methodology recommendations Expand survey coverage (consider removing opting-in) & reduce survey drop-off due to not recognising support types Harmonise data collection practices among delivery partners and across different evaluation methods Collect KEY business characteristics, especially export status Collect qualitative data for “what works” support types Capture different outcomes depending on the original exporting status

47. Goldman Sachs 10,000 Small Businesses Programme, UK Driving Growth and Productivity Prof. Mark Hart (2021)

48. Overview 10,000 Small Businesse s (10KSB) UK was built in the wake of the 2008 Global Financial Crisis. Since launching the 10KSB UK programme in 2010 GS have worked with over 2,200 business owners. These business owners are from a wide range of sectors, right across the UK – what unites them is their desire for growth. Growth in terms of revenue, jobs, profit, impact, and productivity. Core to 10KSB UK’s success is a coalition of entrepreneurship experts representing the UK’s leading business schools (Saïd Business School and Aston Business School. 10KSB UK is delivered through a blend of online and in-person learning. The fully-funded programme runs two cohorts of 70 businesses each year Each cohort provides 100+ hours of high-quality tuition over a four-month period, including three in-person residential learning sessions

49. Programme Impact 10KSB UK has equipped participants in a peer-learning context with the skills and network to increase productivity and deliver sustainable business growth. Key learnings from the programme help them to stay ahead of the curve and outperform their peers. Measuring Impact: Participant data linked to an official ONS longitudinal firm-level dataset. We then estimated the impact of the programme over seven years (2013-2020) following participation in the programme for a group of participants who had completed the programme in the 2010-2013 period. Analysed against similarly fast-growth UK small businesses, 10KSB UK graduates have a 23% increase in productivity seven years after graduating in excess of what they would have achieved without participating in the programme . Significant behavioural impacts too – e.g., innovative activity; accelerating digital solutions; developing talent; combining purpose with profit; developing a global mindset; fostering diversity https://www.goldmansachs.com/citizenship/10000-small-businesses/UK/news-and-programme-information/pages/2021-impact-report/engines-of-growth.pdf

50. Building a Local Business Support Ecosystem A comprehensive review (Henley 2022) 1 of the literature on the links between the quality of small business leadership, productivity and the role of leadership development programmes concluded that: “ Although qualitative and participant evaluation evidence provides useful insights, quantitative evidence which assesses apparent productivity gains against a robust counterfactual case is scarce. ” Business school led leadership and management education programmes can have a positive impact on SME productivity – HtG:M impact evaluation imminent but too soon for productivity effects I would suggest!! A series of government-funded programmes have helped create a unique national network of over 60 business schools that has the potential to further boost university/business innovation and research collaboration as well as more general small business support. This new collaborative capacity will be an important component of any national industrial strategy seeking to address the UK’s productivity problem through policy interventions designed to increase firm-level productivity in the SME sector. 1 Henley, A (2022) “Is there a Link between Small Business Leadership and Productivity?”, SOTA Review No.55, September 2022, Enterprise Research Centre. https://www.enterpriseresearch.ac.uk/publications/is-there-a-link-between-small-business-leadership-and-productivity/

51. Small Business Leaders need practical tools “BetterTrack” https://www.bettertrack.org/ has developed a prototype platform as a service solution that has the potential to transform the way SMEs measure, manage & improve productivity. We need to review and embed tools like this in L&M programmes – private and public. Recent research shows that one of the barriers to better productivity is the UK SME management capability gap which includes performance measurement and continuous innovation (CMI). BetterTrack’s mission is to enable £1bn a year in measurable productivity growth by 2028. Their aim is to get 5,000 mid-sized SMEs using their system to enable a 10% improvement in productivity. The proposed experimental development project includes academic support and engagement with SME advisors, growth hubs, accelerators and national programmes (e.g. Help to grow and the Goldman Sachs 10,000 Small Businesses programme). The founder, Andrew Hudson BEng, has more than 20 years’ experience deploying strategy & value management systems to large corporates (e.g. Etihad) and with global advisors / integrators (e.g. KPMG and Accenture). In 2018 he won a competitive InnovateUK SBRI grant to design & test the feasibility of a productivity portal.

52. [email protected] Linkedin.com/company/enterprise-research-centre-uk- Contact us @ERC_UK www.enterpriseresearch.ac.uk Other Funders