The perception of entrepreneurial opportunities and the capacity to exploit them are strongly associated with social norms that encourage venturing, such as the availability of risk capital, access to developing technologies, a quality diverse entrepreneurship education system and a sound professional infrastructure. This has considerable implications for the UK entrepreneurial economy.
Entrepreneurship education, at all levels, could very effectively prepare and train students to start and manage new businesses. This type of education is strong and getting stronger in business schools across the country, but it needs to proliferate outside of the business domain. Very few students undertake business subjects, and not every business school student is required to or chooses to take up an entrepreneurship course. Thus the number of people exposed to higher-level entrepreneurship education is relatively small in the UK. It is critical therefore that entrepreneurship education is expanded.
Engineering and other technology graduates have the capability to generate innovations that may be the basis for high-growth companies. They need to learn techniques for discerning whether or not such innovations have commercial potential. As such, universities need to encourage the integration of their degree requirements between entrepreneurship/management and engineering/technology.
There are often many hurdles to such collaboration, however, including issues of funding; credit allocations; faculty teaching loads; scheduling conflicts, and the lack of available facilities. While a handful of schools are facing and overcoming these issues, there is a real need to see more active collaboration on university campuses.
There also needs to be a more concentrated effort to introduce entrepreneurship and basic economic principles at the primary and secondary levels. At the primary level, these concepts could be integrated throughout the curriculum. At the secondary level, entrepreneurship skills and basic economic principles could be offered as stand-alone courses. Many people enter the workforce without a college education and have no responsibility for exposure to entrepreneurship training.
While not every school graduate has the capacity or desire for higher education, almost everybody has the potential to start a new business. The average high school graduate may not start a fast-growth, high-technology company, but he or she can start a landscaping business, a retail business or some other venture that will employ other people and contribute to economic adaptation. As such, it is critical to provide at least the basic instruction to ensure that these future entrepreneurs have the understanding of and a certain level of proficiency in the skills necessary to implement and manage a business.
To avoid problems of duplication, various national experts recommend the establishment of a ‘clearinghouse’ for government programmes. A clearinghouse, perhaps web-based, could provide an efficient means for entrepreneurs to gain knowledge of specific programmes and to access those programmes.
In addition, there is also the need to simplify compliance pressures on entrepreneurial firms. Simplifying compliance requirements would improve entrepreneurial efficiency at the most critical times in the venture’s life. Many new ventures report having a difficult time staying on top of all the reporting requirements. Furthermore, reducing the required paperwork would reduce manpower constraints on new ventures, thereby increasing their chances of surviving the early years.
There is also a reported ‘Gap’ in Seed Stage Financing. If the gap exists, it may be more pronounced in different industries, different geographic regions, or for distinct groups of entrepreneurs. The substantial amount of funding provided through informal channels, orders of magnitude greater than that provided by formal venture capital investments and hitherto unknown and unappreciated, suggests some mechanisms for filling the gap may have developed without recognition.
There may not be a gap in the availability of such capital but, rather, in the entrepreneur’s knowledge of where it resides and how to tap it. Experts may be split over whether a gap exists in seed capital because of the fact that many entrepreneurs choose not to endure the time, cost and bureaucracy involved in the search and seizure of such capital.
Increasing the visibility of entrepreneurs by highlighting their story could prove to be an attractive method of encouraging others to pursue their own entrepreneurial opportunities. It reflects widespread acceptance of entrepreneurship as a career option in the UK.
In the absence of a more comprehensive, long-term research programme on the entrepreneurial process, government policies in the UK regarding new and growth companies will continue to fluctuate in reaction to political whims and pressures from special interest groups. It is essential, therefore, that an increased understanding of the principles underlying entrepreneurship is secured in order to ensure that a sustained growth in the entrepreneurial sector is secured.
Thursday 27 March 2008
Friday 7 March 2008
The Importance Of Entrepreneurs
In the newly-elected New Labour Government which swept into power in 1997, the new mantra for economic renewal emanating from the then Iron Chancellor, Gordon Brown, was one of enterprise, enterprise and even more enterprise, to turn Britain into an economy driven by the entrepreneurial nature of its citizens well-versed in how to make money. In the government white paper, “Our Competitive Future: Building the Knowledge Driven Economy”, the economic aims of the new Labour administration were made absolutely clear: “Entrepreneurship and innovation are central to the creative process in the economy and to promoting growth, increasing productivity and creating jobs. Entrepreneurs sense opportunities and take risks in the face of uncertainty to open new markets, design products and develop innovative processes”.
Nowhere was this zeitgeist more clearly defined than in the advent of the dot.com revolution, with its young instant (New Labour-supporting) paper millionaires using technology to create the companies of tomorrow. The convergence of a new creative and innovative government, combined with the explosion in the possibilities for business and consumer use of the internet, was New Labour’s equivalent of Harold Wilson’s “White Heat of a second industrial revolution” thirty five years earlier. We had a Labour Administration introducing specific policy interventions to encourage enterprising behaviour, including programmes for spin-offs within the university sector, financial inducements for entrepreneurs to invest in smaller innovative ventures, and the encouragement of share ownership by employees within smaller firms. This overshadowed anything previously introduced under Howe, Lawson, Lamont or Clarke during the various Conservative budgets of the 1980s and 1990s.
The last few years has seen entrepreneurial behaviour becoming increasingly acceptable within business life in the UK. Today, entrepreneurs are no longer relegated to the caricatures of Mike Baldwin, Arthur Daley and Del-Boy. In enterprising Britain, the majority of school children wish to become an owner-manager at some stage of their lives, dream of fortunes to be made from the Internet and name Richard Branson, the UK’s premier entrepreneurial personality, as the person to whom they aspire.
There was, as there always had been, a suspicion of the term ‘enterprise’, given the long history of exploitation by the entrepreneurs of the slate, iron and coal industries, the legacy of which still lived on in the hearts and minds of many of the population of industrial Britain. The mere association of the term ‘enterprise culture’ with the Thatcher era meant that entrepreneurs, and their development, were anathema to many policy-makers and politicians. However, led by the current Government’s love affair with entrepreneurs, a number of significant events have occurred that have begun to change the previously hostile attitudes towards enterprise.
There was the realisation that we could not continue with the policy of concentrating much of our industrial expenditure on attracting inward investment. It has not been the actual policy of inward investment which has been problematic, rather the lack of targeting which meant that new jobs were more important than any other strategic consideration, such as the type of employment created, the sectors attracted, and the future of those industries in a quickly globalising economy.
While our neighbours in Ireland were busy attracting internationally-traded services in the financial and software sectors, we were begging companies in the maturing (and highly competitive) sectors such as automotive and consumer electronics to bring branch plant jobs, then repeated the same mistakes with call-centres. Whilst individuals spinning off from companies such as Microsoft and Intel were creating a vibrant indigenous Irish software sector, assembly workers in the UK continued to, well, assemble. All this while highly skilled (and highly paid workers) within the financial and software sectors in Dublin were demanding better restaurants, shops and leisure facilities, creating countless opportunities for local entrepreneurs.
Although we have previously looked to inward investors as the main source of new jobs, in many other regions the main contribution of the small firm to their economies lies in the creation of new employment opportunities. This began with work by David Birch in the United States during the late 1970s, who demonstrated that large firms, despite their influence on the volume and nature of world trade, could not be regarded as the major source of new jobs. Instead, this role had now fallen to the small firm, with Birch estimating that firms with less than 20 employees had generated 66 per cent of net new jobs in the United States.
At the time, these findings were hard to believe for a number of reasons. They contradicted the assumptions of most businesses and governments during the 1960s and 1970s that healthy big business meant a healthy economy, predominantly because of the assumed efficiency of large firms through the use of economies of scale to keep down costs. As a result, doubts were raised about the policies (pursued by Western governments of all political persuasion) of encouraging mergers between companies to form large corporations, keeping afloat large companies in trouble, and attracting large firms to economically depressed areas, all of which were seen as possibly an expensive and inefficient way of creating employment (although clearly this did not stop such policies being implemented in the UK during the last twenty years).
It was mainly as a result of the Birch study that many governments regarded small firms during the 1980s as the panacea for high unemployment during times of recession. This was illustrated most clearly in the United States: although 34 million jobs were lost in the period 1980 to 1986, 44.7 million new jobs were created, with 32 million of these being generated from the birth of new businesses. During the recessionary period of 1980-82, small firms provided almost all of the new jobs in the US economy.
Similarly, in the European Community, large firms experienced employment loss in nearly every member state, whilst employment by small firms grew considerably. According to data from the European Observatory, SMEs accounted for 68 million jobs in the European Community in 1995, with large firms employing approximately 35 million people. Many of the smaller businesses were set up with the considerable support of governments, which had moved towards abandonment of expensive policies aimed at propping up large firms in industrially depressed areas. Instead, various incentives were being targeted at the small firm sector to encourage new firm formation as the more cost-effective antidote to the shedding of jobs by larger organisations.
Apart from the creation of employment, small firms play another important role by providing a productive outlet for enterprising and independent individuals, some of whom may be frustrated under-achievers in a larger, more controlled environment. Companies as diverse as the Ford Motor Company and Microsoft were started by creative individuals who perceived an opportunity in the market-place and, using a small company as a vehicle for their ideas, grew rapidly into international giants.
Small firms also have close symbiotic relationships with larger companies. Although large firms, through their economies of scale in production and distribution, contribute greatly to a thriving market economy, many of them could not survive without the existence of small companies. As well as selling most of the products made by large manufacturers direct to consumers, small firms provide large businesses with many of the services and supplies they require to run a competitive business. It is estimated that about 500 small suppliers and distributors and about 3000 retailers support each major manufacturing firm in the US. The largest industrial company in the world, General Motors, buys from more than 30,000 suppliers, most of which are small companies, and spends more than half of each sales dollar on purchases from small firm suppliers. One of the main factors in the remarkable success of Japanese industry over the last decade has been the contribution of small businesses, with the high degree of international competitiveness being achieved through the creation of a strong subcontracting system, which has combined the flexibility of small firms with the economies of scale and market power of larger organisations. Without the close relationship that exists between small subcontractors and the large industrial conglomerates, the Japanese economy would not have progressed to its powerful industrial position today.
Small firms have also become important for technological innovation within developed economies, with research demonstrating their valuable contribution to technological innovation within a number of high technology industrial sectors, usually those characterised by fast changing markets, low capital intensity and small dependence on economies of scale. Such markets are thus better suited to smaller firms, due to the entrepreneurial nature and lack of bureaucracy in decision-making within such organisations. For example, comprehensive research into the relationship between firm size and the level of innovation in the UK has revealed that small firms' share of innovations had increased by over 50 per cent since 1945 and now accounts for over a quarter of the total number of innovations in the UK.
Moreover, in certain sectors, such as computing services and scientific instruments, their contribution is highly significant, with small companies developing the majority of innovative products and processes. Indeed, within such ‘knowledge-intensive’ sectors of the economy, small firms have accounted for nearly all of the employment growth during the 1980s and 1990s. In addition, a number of studies show that technologically innovative SMEs in the UK have a higher-than-average growth in assets, retained profits and exports, lower closure rates than businesses in other sectors and have demonstrated high degrees of resilience, especially in times of recession.
Clearly, while small firms have been important in the past, this seems set to continue and grow in the future. For example, many of our business and consumer markets have changed to essentially reflect the strengths of smaller firms. In today’s business climate, economies of scale are no longer important as 20th Century standardisation has disappeared in favour of 21st century consumer sophistication and business specialisation. In many cases, small firms, with faster reaction times and closeness to the market-place, are perfectly placed to deal with an environment where businesses require specialist support and consumers demand customized products and services. Clearly, the age of Ford’s ‘any colour of car as long as it’s black’ has been consigned to the dustbin of industrial history as the small firm, whose decline was forecast only thirty years ago, drives forward today’s economies.
But the short-term nature of much of the funding for business support initiatives without co-ordinated dissemination of best practice, and the fragmentation of business support services with limited entrepreneurial content, means that the time is right for an overall national strategy for entrepreneurship. We sincerely hope that Entrepreneur Secrets will be at the forefront of this strategy.
Nowhere was this zeitgeist more clearly defined than in the advent of the dot.com revolution, with its young instant (New Labour-supporting) paper millionaires using technology to create the companies of tomorrow. The convergence of a new creative and innovative government, combined with the explosion in the possibilities for business and consumer use of the internet, was New Labour’s equivalent of Harold Wilson’s “White Heat of a second industrial revolution” thirty five years earlier. We had a Labour Administration introducing specific policy interventions to encourage enterprising behaviour, including programmes for spin-offs within the university sector, financial inducements for entrepreneurs to invest in smaller innovative ventures, and the encouragement of share ownership by employees within smaller firms. This overshadowed anything previously introduced under Howe, Lawson, Lamont or Clarke during the various Conservative budgets of the 1980s and 1990s.
The last few years has seen entrepreneurial behaviour becoming increasingly acceptable within business life in the UK. Today, entrepreneurs are no longer relegated to the caricatures of Mike Baldwin, Arthur Daley and Del-Boy. In enterprising Britain, the majority of school children wish to become an owner-manager at some stage of their lives, dream of fortunes to be made from the Internet and name Richard Branson, the UK’s premier entrepreneurial personality, as the person to whom they aspire.
There was, as there always had been, a suspicion of the term ‘enterprise’, given the long history of exploitation by the entrepreneurs of the slate, iron and coal industries, the legacy of which still lived on in the hearts and minds of many of the population of industrial Britain. The mere association of the term ‘enterprise culture’ with the Thatcher era meant that entrepreneurs, and their development, were anathema to many policy-makers and politicians. However, led by the current Government’s love affair with entrepreneurs, a number of significant events have occurred that have begun to change the previously hostile attitudes towards enterprise.
There was the realisation that we could not continue with the policy of concentrating much of our industrial expenditure on attracting inward investment. It has not been the actual policy of inward investment which has been problematic, rather the lack of targeting which meant that new jobs were more important than any other strategic consideration, such as the type of employment created, the sectors attracted, and the future of those industries in a quickly globalising economy.
While our neighbours in Ireland were busy attracting internationally-traded services in the financial and software sectors, we were begging companies in the maturing (and highly competitive) sectors such as automotive and consumer electronics to bring branch plant jobs, then repeated the same mistakes with call-centres. Whilst individuals spinning off from companies such as Microsoft and Intel were creating a vibrant indigenous Irish software sector, assembly workers in the UK continued to, well, assemble. All this while highly skilled (and highly paid workers) within the financial and software sectors in Dublin were demanding better restaurants, shops and leisure facilities, creating countless opportunities for local entrepreneurs.
Although we have previously looked to inward investors as the main source of new jobs, in many other regions the main contribution of the small firm to their economies lies in the creation of new employment opportunities. This began with work by David Birch in the United States during the late 1970s, who demonstrated that large firms, despite their influence on the volume and nature of world trade, could not be regarded as the major source of new jobs. Instead, this role had now fallen to the small firm, with Birch estimating that firms with less than 20 employees had generated 66 per cent of net new jobs in the United States.
At the time, these findings were hard to believe for a number of reasons. They contradicted the assumptions of most businesses and governments during the 1960s and 1970s that healthy big business meant a healthy economy, predominantly because of the assumed efficiency of large firms through the use of economies of scale to keep down costs. As a result, doubts were raised about the policies (pursued by Western governments of all political persuasion) of encouraging mergers between companies to form large corporations, keeping afloat large companies in trouble, and attracting large firms to economically depressed areas, all of which were seen as possibly an expensive and inefficient way of creating employment (although clearly this did not stop such policies being implemented in the UK during the last twenty years).
It was mainly as a result of the Birch study that many governments regarded small firms during the 1980s as the panacea for high unemployment during times of recession. This was illustrated most clearly in the United States: although 34 million jobs were lost in the period 1980 to 1986, 44.7 million new jobs were created, with 32 million of these being generated from the birth of new businesses. During the recessionary period of 1980-82, small firms provided almost all of the new jobs in the US economy.
Similarly, in the European Community, large firms experienced employment loss in nearly every member state, whilst employment by small firms grew considerably. According to data from the European Observatory, SMEs accounted for 68 million jobs in the European Community in 1995, with large firms employing approximately 35 million people. Many of the smaller businesses were set up with the considerable support of governments, which had moved towards abandonment of expensive policies aimed at propping up large firms in industrially depressed areas. Instead, various incentives were being targeted at the small firm sector to encourage new firm formation as the more cost-effective antidote to the shedding of jobs by larger organisations.
Apart from the creation of employment, small firms play another important role by providing a productive outlet for enterprising and independent individuals, some of whom may be frustrated under-achievers in a larger, more controlled environment. Companies as diverse as the Ford Motor Company and Microsoft were started by creative individuals who perceived an opportunity in the market-place and, using a small company as a vehicle for their ideas, grew rapidly into international giants.
Small firms also have close symbiotic relationships with larger companies. Although large firms, through their economies of scale in production and distribution, contribute greatly to a thriving market economy, many of them could not survive without the existence of small companies. As well as selling most of the products made by large manufacturers direct to consumers, small firms provide large businesses with many of the services and supplies they require to run a competitive business. It is estimated that about 500 small suppliers and distributors and about 3000 retailers support each major manufacturing firm in the US. The largest industrial company in the world, General Motors, buys from more than 30,000 suppliers, most of which are small companies, and spends more than half of each sales dollar on purchases from small firm suppliers. One of the main factors in the remarkable success of Japanese industry over the last decade has been the contribution of small businesses, with the high degree of international competitiveness being achieved through the creation of a strong subcontracting system, which has combined the flexibility of small firms with the economies of scale and market power of larger organisations. Without the close relationship that exists between small subcontractors and the large industrial conglomerates, the Japanese economy would not have progressed to its powerful industrial position today.
Small firms have also become important for technological innovation within developed economies, with research demonstrating their valuable contribution to technological innovation within a number of high technology industrial sectors, usually those characterised by fast changing markets, low capital intensity and small dependence on economies of scale. Such markets are thus better suited to smaller firms, due to the entrepreneurial nature and lack of bureaucracy in decision-making within such organisations. For example, comprehensive research into the relationship between firm size and the level of innovation in the UK has revealed that small firms' share of innovations had increased by over 50 per cent since 1945 and now accounts for over a quarter of the total number of innovations in the UK.
Moreover, in certain sectors, such as computing services and scientific instruments, their contribution is highly significant, with small companies developing the majority of innovative products and processes. Indeed, within such ‘knowledge-intensive’ sectors of the economy, small firms have accounted for nearly all of the employment growth during the 1980s and 1990s. In addition, a number of studies show that technologically innovative SMEs in the UK have a higher-than-average growth in assets, retained profits and exports, lower closure rates than businesses in other sectors and have demonstrated high degrees of resilience, especially in times of recession.
Clearly, while small firms have been important in the past, this seems set to continue and grow in the future. For example, many of our business and consumer markets have changed to essentially reflect the strengths of smaller firms. In today’s business climate, economies of scale are no longer important as 20th Century standardisation has disappeared in favour of 21st century consumer sophistication and business specialisation. In many cases, small firms, with faster reaction times and closeness to the market-place, are perfectly placed to deal with an environment where businesses require specialist support and consumers demand customized products and services. Clearly, the age of Ford’s ‘any colour of car as long as it’s black’ has been consigned to the dustbin of industrial history as the small firm, whose decline was forecast only thirty years ago, drives forward today’s economies.
But the short-term nature of much of the funding for business support initiatives without co-ordinated dissemination of best practice, and the fragmentation of business support services with limited entrepreneurial content, means that the time is right for an overall national strategy for entrepreneurship. We sincerely hope that Entrepreneur Secrets will be at the forefront of this strategy.
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