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Today marks the introduction of the first ever Small Business Bill in Parliament. The Bill puts forward proposals to support small businesses by making it easier for them to access finance and public procurement contracts, cutting red tape, strengthening UK employment law and making it easier for small business to expand overseas.
It’s crucial that policy makers support small businesses to thrive. With small and medium-sized businesses (SMEs) outpacing large businesses when it comes to productivity growth, SMEs have a fundamental part to play in getting the UK on a more sustainable road to recovery.
Without productivity growth, real wages will not rise. Not only does that matter to our standards of living, it also means people will have less money to spend. In an economy largely based on consumption, this threatens to stall the recovery.
Our latest report, Small Business Outlook 2014, supported by Zurich Insurance, finds that the success of cities and SMEs is increasingly interlinked. And one of the most effective ways to support small businesses to drive growth is to ensure cities across the country offer the best environment for business.
The success of a business is largely down to how it is managed and run. SMEs adopting ‘high-growth’ strategies – investing in innovation, tailoring products and services, competing on quality rather than price and operating in competitive markets – grow faster. And this means the cities in which they’re based are also likely to grow faster.
But the external environment matters too. Decisions over how to run a business, whether to invest for growth, expand or cut costs are influenced by the sector and orientation of a business, as well as the local environment. SMEs trading in international markets are more likely to adopt high-growth strategies, for example. The same is true of SMEs based in cities with a large pool of graduates. Transport, broadband and housing matter too.
Cities are increasingly the preferred location for SMEs, enabling businesses to exploit new opportunities by connecting them to markets and skilled workers. As a result, two-thirds of new businesses locate in cities and four fifths of SME growth took place in cities between 2011 and 2013. But not every city affords SMEs the same opportunities. There are some huge disparities.
Comparison between Cambridge and Chatham (two cities 75 miles apart) highlights the extent of the gap. Nearly a third of SMEs in Cambridge operate in international markets, more than 65 per cent of the population is qualified to at least degree level and two thirds of SMEs adopt high-growth strategies. By contrast, less than a quarter of the population in Chatham has a degree, just five per cent of SMEs operate in international markets and just over a third of SMEs adopt high-growth strategies. SMEs in Cambridge create more than two times more jobs than Chatham relative to the size of its population and output per worker is 14 per cent higher.
National government needs to work with cities to create environments that enable SMEs across the country to thrive. The focus should be on ensuring education and training systems deliver for business and that the appropriate infrastructure is in place to connect businesses and allow them to grow. Cities should also consider ways to incentivise SMEs to invest in skills development and better match them to sources of finance.
But what works in Cambridge won’t necessarily be right for Chatham. While we welcome the focus of the new Small Business Bill, national government must also direct its attention to enabling cities to respond to the specific challenges that SMEs in their area are facing. Allowing cities greater control over the things that fundamentally matter to business will not only help to reinvigorate cities but help achieve a more balanced and sustainable recovery in the UK overall.
For more information on the report, please see the Business Outlook 2014
Policy and Research Manager
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