Thursday 12 April 2012

The vital n%: Why NESTA's vital 6% can mislead as well as inform

The vital n%: Why NESTAs 6% can mislead as well as inform

NESTA’s “The vital 6 per cent” shows that 6% of companies (in terms of growth rates) generate half of all new jobs created by business and that the majority of these companies were SMEs. This is not an easy figure to interpret.

The first, and easiest, thing to say is “wow, there really are just a small number of companies that drive job growth in the UK”. Which is fine, it’s a statement of fact there is a small number of firms generating a large number of jobs. In fact, its gets even more interesting:

In the UK, the top 1% of new firms generates 46% of all new firm jobs in the UK (WEF). Again, wow.

But as far as I can see it there is one really great use for these figures: driving home to policy makers that they have been victims of lobbying. Whilst big businesses have the resources to demonstrate their cases for job creation and contribution to UK productivity to policy makers, a significant number of UK jobs are generated by new, small and growing firms that have little or no voice at all.

What is less clear is what the figures actually mean for policy. Apart from going; “hey, that’s interesting, small businesses seem to be doing something really important” there is not much you can do with this piece of information.

That’s because this figure in isolation doesn’t tell you anything about whether the situation is any good or not. Is this concentration is a good thing? Will focusing resources on these companies (and trying to find them) really encourage growth? Without further thought, this is simply an FFO.

These figures tell you that there is high a concentration of job creation in a small number of firms. It does not tell you if it is good or bad, how you can do anything about it, or whether you want to. It is not as useful as it looks.

Here is a bit more of the picture:
·      The US’s top 1% of new firms generate 10% fewer jobs (as a proportion of new firm jobs) than the UK’s to 1%.
·      Job creation in the US is much broader and less concentrated than in the UK where it is in the hands of a smaller proportion of SMEs.
·      The US has a much more entrepreneurial economy – see the latest GEDI rankings, where the UK comes 14th and the US is number 1.

These figures give a clue about a distribution, and in which the UK’s distribution is more concentrated than the US. A different, and perhaps more accurate, interpretation would be that: There is a firm growth distributional problem in the UK. Too few of the UK’s new firms and small firms have the capability to grow significantly. This distribution has lead to job creation being concentrated in a relatively small number of successes compared to more entrepreneurial economies.

So far from being a potential starting point for policy, NESTA’s vital 6% shows that the UK has a problem: a narrow job growth base that has resulted from the UK not providing an environment that supports the broad base of companies that want, or have the potential, to grow.

Either way most of the 6% (or the 94%), are SMEs, that, because they are small and disbursed, can have less of a direct impact on policy (many voices) when compared large employers who generate fewer jobs (one strong voice).

So we should not interpret the 1% (or 6%) as – we must find these Gazelles and help them (single point of information).  This, I believe, is a misleading FFO.

Instead we should say there is something potentially wrong with the system, we have to broaden our job creation base to more than 6%.

With the credit squeeze, as fewer companies are able to generate jobs, the vital 6% may become the vital 4% - that is, if only those who are great can grow, concentration in the UK’s distribution will increase. If my interpretation is correct, the current credit squeeze will harm the firms who would benefit from support, and which could make smaller but significant contribution to job growth. A narrow base for growth is a cause for concern, and should be a call to action not a reason to celebrate the vital 6%.

** Updated for clarity, thanks to a few readers for their comments and suggestions**