State support for high-growth firms 'misconceived'
- 14 January 2014
- From the section Scotland business
State support for firms with high growth potential is misconceived and needs to be overhauled, a study has concluded.
Researchers from three Scottish universities found a mismatch between the nature of UK high-growth firms and the policies developed to support them.
They argued Westminster and Holyrood had been over-subsidising tech firms, many of which could not grow.
They were also missing the target on firms with real high-growth potential.
The study was carried out by researchers at the universities of St Andrews, Glasgow and Stirling and published by the charity, National Endowment for Science, Technology and the Arts (Nesta).
It claimed a number of myths had developed around the nature of high-growth firms, saying policy makers typically conceived them to be new or very young high-tech businesses which often emerged from university spin-offs.
These firms were also perceived to be funded largely by sources of entrepreneurial finance such as venture capital or business angel funding.
But the researchers argued that these perceptions were largely wrong, and that, in reality, most high-growth firms funded their businesses through bank loans or retained earnings, rather than venture capital.
They added that most of the current support instruments designed for such firms strongly focused on research and development (R&D) grants and public sector venture capital co-investment schemes.
But the study said the bulk of this support was aimed at technology-based firms, most of which do not grow.
Report author Dr Ross Brown of the University of St Andrews said: "Our research clearly shows that there is a mismatch between the nature of high-growth firms and the policies which have been developed to support them.
"The vast majority of high-growth firms are in fact well-established firms from traditional business sectors and do not equate with the hypothetical 'techie' view of these firms.
"At present, through their interventions, policy makers may be over-subsidising technology-based firms who are incapable of growing.
"In the main, public policy is largely ineffective in this area which could be undermining economic growth."
He added: "The UK has some fabulous growth-oriented firms (e.g. BrewDog and Skyscanner) but in the main these tend to be in consumer-oriented or service industries not R&D intensive sectors like life sciences.
"This is particularly the case for regions such as Northern Ireland and Scotland which have less well developed high-tech sectors than the south of England."
Report co-author Dr Suzanne Mawson, from the University of Stirling, said it was frustrating that policy makers continued "to push the same old support interventions".
"Simply providing funding is not the ultimate way of supporting growing firms," she said.
"What these firms really need is a more flexible, responsive and relational support, where peer-to-peer support and specialised advice (e.g. support for management buy-outs or acquisition of another company) are prioritised.
"Advice (often from peers), not cash, is paramount."
The researchers argued that in future, greater emphasis should be placed on "economic gardening", which tries to maximise the growth of existing small and medium enterprises rather than focusing support on generating new start-ups.
Responding to the report, a spokeswoman for the UK government's Department for Business, Innovation & Skills (BIS) said: "Our ambition is to make the UK the best place in the world to start and grow a business and we are determined to give entrepreneurs the support they need to achieve their growth goals.
"GrowthAccelerator, a government-backed high-growth business coaching service, was designed to address many of the findings presented in this research.
"The scheme has already helped over 11,000 businesses from a range of sectors who are spread nationwide, with manufacturing being one of the biggest sectors supported.
She added: "We know that high growth is not the preserve of start-ups and technology firms; the majority of businesses involved in the scheme are at least five years old."
The Scottish government said its recently published framework for entrepreneurship and innovation highlighted that entrepreneurial and innovative companies were found across all business sectors.
A spokeswoman said: "While many innovations are technology-based, other forms of innovation can provide a competitive advantage - it is the potential to create value and accelerate growth that is important.
"For example, we have supported innovative young companies such as brewers BrewDog to expand through Food Processing, Marketing and Cooperation Scheme and through export support."
The spokeswoman said the Government Economic Strategy also identified sectors that offered particular opportunities for growth, including the creative industries, energy, financial services, life sciences, tourism and the university sector.
"There will be no let-up in the Scottish government's commitment to securing economic growth or maintaining Scotland's position as the best place to do business," she added.