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SMEs drive the economy but huge regional variations exist

Small businesses continue to punch above their weight in terms of creating new jobs, despite regional variations in productivity, according to a new report.

The State of Small Businesses report by Nesta and the software firm Sage found that since 2010, small and medium businesses (SMEs) have created 73% of all the new private sector jobs created in the UK.

Of the 2.8 million jobs created in Britain since that date, 40% can be attributed to SMEs and up to 34% came from non-employers, like the self-employed, while 27% came from large firms.

The report also shows the number of SMEs in this country has grown by 23% since 2010.

But the study also reveals a ‘postcode lottery’ with large regional variations in SME productivity and growth.

While the number of SMEs in London has grown by 41% since 2010, the West Midlands saw an increase of only 16% in the same time period.

Northern Ireland saw the lowest rate of SME growth, at just 4% since 2010 but the region has seen one of the largest SME productivity gains, up 13% since 2007.

The report also looks at SME productivity at local authority level. It found there were ‘hotspots’ of productivity in areas such as Newport, Barnsley and South Derbyshire.

The most productive local authority area of the UK – the City of London – is 26 times more productive than the least productive area of West Somerset.

But a focus on ‘high growth’ does not necessarily create high productivity, the report says. ‘Our analysis finds no link between an area having many high growth firms and highly productive firms, suggesting that although the “scale-up” agenda is important, it is not necessarily the answer to productivity’.

It adds that productivity ‘is positively linked with the share of the local population with higher level qualifications’ and warns the skills gap is ‘particularly wide’ in the digital arena.

‘Digital skills matter for productivity as they enable firms to automate and work more efficiently,’ the report adds.

And the study also found ‘significant variations’ in attitudes towards SMEs from local authorities. Among the key issues raised by SMEs were business rates, Brexit and parking.

‘The larger challenges cannot be discounted, and the voice of business is important in helping local authority identify these obstacles,’ the report states.

It adds local and national decision-makers must push for a devolution settlement that is a ‘positive force for competition and productivity growth’ and not a ‘market distortion that hampers SMEs and drives wealth destruction’.

The report includes several interviews with SMEs around the country, including with Amanda Alexander, founder of Coaching Mums, which provides business coaching for working mothers. Coaching Mums was founded 15 years ago and delivers workshops, one-to-one training and online learning programmes.

‘Support for SMEs tends to be focussed on those with employees,’ said Ms Alexander.

‘It would be great to see more interest and acknowledgement of the many “hidden” micro-businesses in the UK,’ she added.

‘The government needs to support micro-businesses too, particularly women who are quietly boosting the UK economy, while also raising kids.’

The chief executive of Sage, Stephen Kelly, said the huge variations uncovered in the report at local authority level are a ‘real wake-up call’.

‘We can no longer afford to sleepwalk through the productivity problem by following a one-size-fits-all approach,’ said Mr Kelly.

‘Our call is for government to work with local authorities, mayors and MPs to deal with this current productivity log jam locally,’ he added.

‘This can be achieved by driving up standards in education and providing appropriate digital skills training and digital tools for our entrepreneurs.’

Nesta’s head of new technology and startup research, Christopher Haley, commented that ‘entrepreneurs are often agents of innovation’.

‘Understanding the conditions needed for new businesses to start and scale is therefore of great importance to us all,’ he added.

‘However, we also need to address the variance in productivity between established SMEs and between areas. Much of the answer is innovation. There is increasing evidence that innovation is essential for productivity growth and that this, in turn, is essential for rising living standards.’

  • Read the report here.

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