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Our latest report, Small Business Outlook 2013, highlighted how SMEs in the UK’s weaker city economies have been hit hardest during the recession. The difference in business start-up rate between the five most and least economically successful cities increased by nearly 20% between 2008 and 2011.
This ‘enterprise gap’ has long been a concern of government. A lack of enterprise means a lack of jobs, and people in deprived communities are often disconnected from employment opportunities. But the approach to public policy in this area fundamentally changed when the new administration came into power in 2010. Out went New Labour’s focus on reducing spatial inequalities; and in came ‘localism’, and with it an emphasis on local variation in policy and delivery.
The current Government is committed to creating an economy that is “more evenly balanced across the country and between industries”. This approach has seen four rounds of the Regional Growth Fund (RGF); the return of Enterprise Zones (EZs); the creation of a Single Local Growth Fund (SLGF); and the allocation of the EU Structural Funds (ERDF and ESF) to Local Enterprise Partnerships for the 2014-2020 funding period.
These last two funds are not insignificant. At £5.3 billion, ERDF and ESF roughly equate to the total investment made through RGF, EZs and SLGF combined (note covering different time periods). The three C’s – competiveness, convergence and cooperation – remain central objectives at EU level. As a result, funding allocations in June saw less prosperous LEP areas receiving more (Figure 1). With SMEs as a priority area, the Funds are an important source of investment in business in more deprived parts of the country.
Figure 1: Levels of deprivation and allocations of ERDF/ ESF by LEP area
In addition, the Government has asked LEPs to identify their economic priorities in disadvantaged local areas to feed into the Assisted Areas Map for 2014-2020. Assisted Area status means that economically disadvantaged areas may be eligible for additional financial support for businesses.
As these programmes move forward, it’s important that partners look back to understand what types of interventions are likely to be most effective.
One of the Centre’s 2006 reports, City Markets: Business location in deprived areas, looked at how successful Government initiatives had been in promoting enterprise in deprived areas. It was published at a time when the Government was investing millions in area-based initiatives to help ensure that ‘within 10–20 years no-one is seriously disadvantaged by where they live’.
Overall, enterprise initiatives were found to have disappointing results in deprived areas. Nevertheless, the four area-based initiatives explored in the report – Enterprise Zones, Enterprise Areas, Local Enterprise Growth Initiative (LEGI), and Business Improvement Districts – provide important lessons for LEPs as they develop their European Structural and Investment Strategies in the run up to October 2013. The lessons are not just applicable to small areas but to any area-based intervention.
First, local areas need to identify their own assets and specific market failures before intervening. Not all deprived areas share the same problems, and the implications for policy are not always immediately clear. Lack of finance is often cited as a barrier by businesses in deprived areas, for example. But there are a range of potential market failures that could be causing this, including information asymmetries, lack of supply from lenders and low demand from businesses themselves. Any intervention should be underpinned by robust local economic intelligence, so it can target specific barriers.
Second, it is vital that policy makers intervene at the right spatial scale.Enterprise Areas (EAs) were perhaps one of the clearest reminders of how important this is.EAs, introduced in 2,000 wards in 2002, were too small scale to effectively address barriers to growth. The economic prospects of any area, from neighbourhood-level to city-level are dependent on the wider spatial context. It may be far more effective to link deprived communities to nearby employment centres rather than trying to bring jobs into that specific area. The fragmented nature of EAs also meant that businesses weren’t aware of them and take-up rates were very low – only 2% of businesses surveyed had made any use of the scheme.
Third, policy makers must rationalise business support and make it more demand-led. City Markets demonstrated that there were too many support initiatives (there were around 2,650 business grant and support schemes operating in England alone in 2006) and many were small and short-term. The most successful schemes entailed direct and real involvement with businesses. There have been a number of changes since, but the complexity of the current system means that many businesses still aren’t aware of support available to them, or how to access it. Arguably still more can be done to help businesses navigate support available.
Ultimately, as we re-iterated in our latest report, business activity is not dependent not any particular series of interventions, but on broader market factors – such as the availability of suitable premises, access to skilled workers and good transport connections.
These factors can have a strong bearing on business growth. Just as City Markets made clear in 2006, cities should focus on getting the basics right and Government should ensure cities are able to do so.
Policy and Research Manager
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