00Executive Summary

For countries like the UK, changes in innovation and technology have increased the importance of particular industries and particular places. These changes have created thousands of new jobs and businesses, from developers and programmers in tech startups to designers and global branding companies. Small and medium-sized businesses (SMEs) in professional services, digital and the creative industries (referred to throughout as ‘new work’) are becoming increasingly important – both in terms of employment and output. Employment in these ‘new work’ industries increased at over four times the average between 2009 and 2013. Output from the digital sector increased more than seven-fold (657 per cent) between 1990 and 2013 and by 286 per cent in the professional services and 196 per cent in the creative sector. These firms are overwhelmingly city-based, but they concentrate in some cities more than others.

This year’s Small Business Outlook looks at where in the UK ‘new work’ SMEs are concentrated, how their performance varies and why. Mapping SMEs in these industries enables us to build a better understanding of how city economies vary across the UK and the conditions that ‘new work’ sectors thrive in. The aim is not to encourage policymakers to try and replicate existing clusters, but to support them to take informed decisions to create, protect and foster conditions for growth that are relevant and appropriate for their place.

‘New work’ SMEs are not randomly or evenly distributed. They are much more highly concentrated in some cities than others, as they benefit from access to wide pools of talent and specialised expertise and from being in close proximity to other highly innovative businesses. In Aberdeen, Reading and Cambridge more than one in two SMEs operate in the professional, digital or creative industries. This compares to just one in five in cities such as Burnley, Doncaster and Grimsby.

‘New work’ SMEs create opportunities for firms operating in other industries. Cities that have a high proportion of SME employment in digital industries or professional services have also tended to see an increase in employment overall. This echoes Moretti’s findings in the US that for every job created in high tech industries, five jobs are created in other industries. Cities with high concentrations of these firms tend to be more productive and highly entrepreneurial with strong private job growth overall.

The shift towards ‘new work’ has created and reinforced the uneven economic geography in the UK, with SMEs in these highly innovative, productive sectors concentrating in cities predominantly in the South.

Both government and cities prioritise ‘new work’ industries in their economic strategies, but the geography of these industries is often ignored. National government needs to recognise the significance of place when making policy decisions, and cities themselves need to be realistic about the nature of their local business base and what they can do to support businesses to innovate.
The map of ‘new work’ SMEs provides an indication of the types of conditions these SMEs look for and thrive in. Cities with high concentrations of ‘new work’ SMEs tend to be highly skilled, as well as digitally and globally connected. SMEs in these sectors also benefit from being in dense urban locations. The creative industries in particular concentrate in densely populated city centres.
Cities with high concentrations of ‘new work’ SMEs must ensure they are able to maintain and grow their highly innovative SME base by being open to new residents and businesses. This means providing new housing to keep pace with demand as well as managing some of the other consequences of growth such as rising congestion and a supply of appropriate and affordable office space.

Other cities should not seek to be successful by replicating successful places such as Cambridge’s ‘Silicon Fen’ or London’s ‘Tech City’; successful clusters grow organically through the decisions of firms and individuals and the interactions between them. Instead cities should focus on the broader characteristics of these types of firms, what influences their location decisions and business interactions, and respond accordingly, adapting to the particular circumstances of their local economy.