Ever wondered how governments come up with policies on growth? Well, on March 14th, M Institute co-founder Jyoti Banerjee got some insight on how this is done.
The UK Department of Business, Innovation and Skills, or BIS for short (nee BERR, even more nee DTI, if you have not been keeping up with the changing alphabet soup), invited a mix of policy-makers, academics and industry players to listen to some long-range views on growth policy. Long range? There were no announcements regarding policy, just an exchange of views on issues that might impact growth policy in the future.
Did I learn anything? Was I encouraged? Will UK growth policies change the growth opportunities for medium business in this country? In short: yes, no and probably not. In that order.
The received wisdom in policy-making, introduced by Blair’s Labour government and seemingly still holding its own in these days of coalition, is basing policy on evidence. Some of the evidence is quite basic, but worth recording anyway:
• Two-thirds of small and medium businesses want to grow but only about a third actually translate ambition into growth – many businesses have no intention of growing even in favourable economic conditions
• Less than 6% of businesses with more than ten employees end up being high growth, but these enterprises contribute 40-50% of new job creation
• High growth companies are exceptional and experience this growth as one transitory phase in their life, and are scattered across all sectors – no single sector can claim to be the spawning ground for high growth companies
• Issues that impact these organisations are wide-ranging, but it is difficult to step beyond correlation to causality
Much of the analysis of growth came from an OECD working party report which analysed high growth enterprises, defined as those that exceed 20% growth per annum for at least three years in a row.
So far, so good.
What was more worrying from my perspective were the conclusions and recommendations that can be drawn from the evidence. In fact, some of these seemed to go counter to the evidence, or were totally divorced from the evidence base. Let me give you one key example.
Financing of high growth enterprises
For one thing, all small and medium businesses rely more on debt financing than equity financing. This is partly because of the unreal returns and timetables that most equity investors seem to expect. More than ever, the current economic climate has put paid to the opportunity for most such businesses to raise debt finance. Sure, the government has announced schemes intended to help firms access such finance from banks, but the squeeze is on, and such money is generally not available.
Secondly, the OECD study itself claims that intellectual property is usually not possible to use as collateral for debt finance. So most knowledge businesses will struggle to raise growth finance, and these businesses are twice as likely to grow as a manufacturing business. Putting those two facts together, you or I likely reach the conclusion that credit rationing is a real challenge for growth companies.
But the OECD reaches the opposite conclusion. How come? Because they confuse correlation and causality. Sure, high growth enterprises have the funding to grow. But that’s not because there is no funding crisis. In fact, they can grow because they have found a solution to the funding problem that plagues most enterprises that wish to grow. It would be wrong for policy-makers to assume that just because high growth companies have dealt with their funding challenges, they don’t need to worry about the subject. For most companies seeking growth funding, the current system remains unworkable.
Other problems? Why the exclusive focus on high growth enterprises? After all, these are pretty rare animals in the jungle. I would prefer a focus on upping growth at the 94% of all companies that will never experience high growth. And I am concerned about evidence that consists of such large data sets that "common sense is put aside in favour of data," a view expressed by a noted academic from Cambridge's Judge Business School.
Management practices
Before I close, let me share some interesting findings I came across during the event, from a study of 9000 medium enterprises carried out by the London School of Economics and consultancy McKinsey. The key finding is this: there is a productivity gap in the UK, and this gap exists because of management practice. Although the UK has been catching up with France and Germany, across the period 1997-2007, the US has maintained a 13% lead on the UK in terms of productivity.
In a sense, that is not such a bad result, as this is the same period where the US is supposed to have driven productivity growth to new heights. But there’s no reason for complacency, and here are some key reasons why:
• Although the basic sciences are strong, UK universities fail to commercialise their research in the way their US counterparts do
• The US pulls ahead of the UK, not because its companies are better at management than their UK peers, but because it has less companies demonstrating poor management practice
• Firms with more degree-qualified staff are better managed. Unfortunately, the UK has less degree-qualified managers in the manufacturing sector than all the other countries in the survey, and less degree-qualified employees than all other countries.
• Family-owned, family-run firms and government-owned firms are the worst managed across all countries. Family owned, but professionally managed businesses do much better. The UK story? 40% of the UK under-performing"tail" firms are family-owned and government-owned
The LSE report is sufficiently interesting that it really deserves a longer discussion, which I hope to get to on a future occasion. Probably the most interesting thing from the perspective of M Institute is the fact that all 9000 companies analysed in the study are medium enterprises.
But even the combined brains trust of the LSE and McKinsey can get it wrong when it comes to policy. For example, dealing with the UK shortage of degree-qualified managers and staff is best done by scrapping the fee ceiling that the coalition government wishes to impose on universities. That just strikes me as pettiness caused by a conflict of interest. If anything, cheaper universities would get more people through them – a fact probably appreciated only in the first year economics class at the LSE.
The bottom line on management is that best practice management correlates well with sales growth and labour productivity. In fact, a 20% improvement in management capability is equivalent to a 25% increase in employment, or a 65% increase in return on capital employed.
As a long-range growth goal, it’s certainly one worth striving for.
Comments